PRUDENTIAL MUNICIPAL BOND FUND, 485A24E, 1997-07-01

PRUDENTIAL MUNICIPAL BOND FUND
485A24E, 1997-07-01

Previous: GABELLI FUNDS INC ET AL, SC 13D/A, 1997-07-01

Next: KANSAS TAX EXEMPT TRUST SERIES 15, 485BPOS, 1997-07-01

<PAGE>

As filed with the Securities and Exchange Commission on July 1, 1997

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. 16 /X/

AND/OR

REGISTRATION STATEMENT UNDER THE

INVESTMENT COMPANY ACT OF 1940 / /

AMENDMENT NO. 20 /X/

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

PRUDENTIAL MUNICIPAL BOND FUND

(Exact name of registrant as specified in charter)

GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077

(Address of Principal Executive Offices) (Zip Code)

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

S. JANE ROSE, ESQ.

GATEWAY CENTER THREE

100 MULBERRY STREET

NEWARK, NEW JERSEY 07102-4077

(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)

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

/X/ 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....................... 10,535,992 $11.08 N/A $0
</TABLE>

* The calculation of the maximum offering price was made pursuant to Rule 24e-2
and was based on the offering price of $11.08 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, 1997 pursuant to Rule 457(d). The total number of shares
redeemed during the fiscal year ended April 30, 1997 amounted to 44,381,886
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 33,845,894 shares have been used for
reduction pursuant to paragraph (c) of Rule 24f-2 in all previous filings
during the current year. 10,535,992 ($115,237,570) of the redeemed shares for
the fiscal year ended April 30, 1997 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, 1997 on June 26, 1997.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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; Fund Highlights
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 5A. Management's Discussion of Fund
Performance............................. Financial Highlights
Item 6. Capital Stock and Other Securities...... Taxes, Dividends and Distributions;
General Information; Shareholder Guide
Item 7. Purchase of Securities Being Offered.... Shareholder Guide; How the Fund Values
its Shares; How the Fund is Managed
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; Supplement
Item 15. Control Persons and Principal Holders of
Securities.............................. Trustees and Officers; Supplement
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;
Supplement
Item 20. Tax Status.............................. Taxes, Dividends and Distributions
Item 21. Underwriters............................ Distributor
Item 22. Calculation of Performance Data......... Performance Information
Item 23. Financial Statements.................... Financial Statements

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

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND

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

PROSPECTUS DATED JULY 2, 1997

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

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 Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077, 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 (SEC) in a
Statement of Additional Information, dated July 2, 1997, 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 NOR HAS THE 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
18.

WHAT ARE THE SERIES' 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 18. 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 25. As
with an investment in any mutual fund, an investment in this Fund can decrease
in value and you can lose money.

WHO MANAGES THE FUND?

Prudential Investments Fund Management LLC (PIFM 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, 1997, PIFM served as manager or administrator to 62 investment
companies, including 40 mutual funds, with aggregate assets of approximately $56
billion. The Prudential Investment Corporation which does business under the
name Prudential Investments (PI, the Subadviser, or the investment adviser)
furnishes investment advisory services in connection with the management of the
Fund under a Subadvisory Agreement with PIFM. See "How the Fund is
Managed--Manager" at page 29.

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, Class C and Class Z 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 which is currently
being charged 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. Prudential Securities incurs
the expense of distributing the Fund's Class Z shares under a distribution
agreement with the Fund, none of which is reimbursed or paid for by the Fund.
See "How the Fund is Managed--Distributor" at page 29.

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 Class A, Class B and Class C shares. Class Z shares are not subject to any
minimum investment requirements. 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 37 and "Shareholder
Guide--Shareholder Services" at page 46.

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 LLC (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). Class Z shares are offered to a
limited group of investors at net asset value without any sales charge. See "How
the Fund Values its Shares" at page 32 and "Shareholder Guide--How to Buy Shares
of the Fund" at page 37.

WHAT ARE MY PURCHASE ALTERNATIVES?

The Fund offers four 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.
- - Class Z Shares: Sold without either an initial or contingent deferred sales
charge to a limited group of investors. Class Z shares are
not subject to any ongoing service or distribution expenses.
</TABLE>

See "Shareholder Guide--Alternative Purchase Plan" at page 38.

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 41.

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 33.

3
<PAGE>
FUND EXPENSES
(FOR EACH SERIES)

<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION
EXPENSES (a) CLASS A SHARES CLASS B SHARES (b) CLASS C SHARES CLASS Z SHARES (e)
-------------- ------------------------ ----------------------- -----------------------
<S> <C> <C> <C> <C>
Maximum Sales Load
Imposed on Purchases
(as a percentage of
offering price)..... 3% None None None
Maximum Sales Load
Imposed on
Reinvested
Dividends........... None None None None
Maximum Deferred
Sales Load (as a
percentage of
original purchase
price or redemption
proceeds, whichever
is lower)........... None 5% during the first 1% on redemptions None
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 None
Exchange Fee......... None None None None

<CAPTION>
ANNUAL FUND OPERATING
EXPENSES (c)
(as a percentage of
average net assets) CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES (e)
-------------- ------------------------ ----------------------- -----------------------
<S> <C> <C> <C> <C>
Management Fees
(Before Waiver):
High Yield
Series............ .50% .50% .50% .50%
Insured Series..... .50 .50 .50 .50%
Intermediate
Series............ .50 .50 .50 .50%
12b-1 Fees (After
Reduction):
High Yield
Series............ .10%(d) .50% .75%(d) None
Insured Series..... .10(d) .50 .75(d) None
Intermediate
Series............ .10(d) .50 .75(d) None
Other Expenses:
High Yield
Series............ .09% .09% .09% .09%
Insured Series..... .13 .13 .13 .13
Intermediate
Series............ .60 .60 .60 .60
Total Fund Operating
Expenses (Before
Waiver and After
Reduction):
High Yield
Series............ .69% 1.09% 1.34% .59%
Insured Series..... .73 1.13 1.38 .63
Intermediate
Series............ 1.20 1.60 1.85 1.10
<FN>
- ------------------
(a) 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."
(b) Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--
Class B Shares."
(c) Based on expenses incurred during the fiscal year ended April 30, 1997,
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, C
and Class Z shares would be .64%, 1.04%, 1.29% and .54%, respectively, for
the High Yield Series, .68%, 1.08%, 1.33% and .58%, respectively, for the
Insured Series and 1.15%, 1.55%, 1.80% and 1.05%, respectively, for the
Intermediate Series.
(d) 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, 1998. 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 1.40% and 2.10%,
respectively, of the Intermediate Series. See "How the Fund is
Managed--Distributor."
(e) Estimated based on expenses expected to have been incurred if Class Z
shares had been in existence throughout the fiscal year ended April 30,
1997.
</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
Class Z (a)............................................ $ 6 $19 $33 $ 74
Insured Series
Class A................................................ $37 $53 $69 $118
Class B................................................ $62 $66 $72 $121
Class C................................................ $24 $44 $76 $166
Class Z (a)............................................ $ 6 $20 $35 $ 79
Intermediate Series
Class A................................................ $42 $67 $94 $171
Class B................................................ $66 $80 $97 $174
Class C................................................ $29 $58 $100 $217
Class Z (a)............................................ $11 $35 $61 $134
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
Class Z (a)............................................ $ 6 $19 $33 $ 74
Insured Series
Class A................................................ $37 $53 $69 $118
Class B................................................ $12 $36 $62 $121
Class C................................................ $14 $44 $76 $166
Class Z (a)............................................ $ 6 $20 $35 $ 79
Intermediate Series
Class A................................................ $42 $67 $94 $171
Class B................................................ $16 $50 $87 $174
Class C................................................ $19 $58 $100 $217
Class Z (a)............................................ $11 $35 $61 $134
(a) Estimated based on expenses expected to have been incurred if Class Z shares had been in existence throughout
the fiscal year ended April 30, 1997.
The above examples are based on data for the Fund's fiscal year ended April 30, 1997. 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)
(HIGH YIELD SERIES - CLASS A SHARES)

The following financial highlights, for the fiscal year ended April 30, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and by
Deloitte & Touche LLP, independent auditors, for the four years ended April 30,
1996. Each of the respective reports by Price Waterhouse LLP and Deloitte &
Touche LLP on such financial highlights were 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>
HIGH YIELD SERIES
---------------------------------------------------------------------------------------------------
CLASS A
---------------------------------------------------------------------------------------------------
JANUARY
22,
1990(a)
YEARS ENDED APRIL 30, THROUGH
-------------------------------------------------------------------------------------- APRIL 30,
1997 1996 1995 1994 1993 1992 1991 1990
--------- --------- --------- --------- --------- --------- --------- ---------
PER SHARE OPERATING
PERFORMANCE:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period............. $10.70 $10.72 $10.74 $11.14 $10.68 $10.45 $10.33 $ 10.58
--------- --------- --------- --------- --------- --------- --------- ---------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income............. .70(d) .72(d) .72(d) .72 .77 .77(d) .79(d) .23(d)
Net realized and
unrealized gain
(loss) on
investment
transactions....... .14 (.02) (.02) (.39) .46 .23 .12 (.25)
--------- --------- --------- --------- --------- --------- --------- ---------
Total from
investment
operations....... .84 .70 .70 .33 1.23 1.00 .91 (.02)
--------- --------- --------- --------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
Dividends from net
investment
income............. (.70) (.72) (.72) (.72) (.77) (.77) (.79) (.23)
Distributions from
capital gains...... -- -- -- (.01) -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Total
distributions.... (.70) (.72) (.72) (.73) (.77) (.77) (.79) (.23)
--------- --------- --------- --------- --------- --------- --------- ---------
Net asset value, end
of period.......... $10.84 $10.70 $10.72 $10.74 $11.14 $10.68 $10.45 $10.33
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
TOTAL RETURN (b):... 8.03% 6.55% 6.90% 2.88% 11.90% 9.82% 9.14% (1.49)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
period (000)....... $334,062 $223,073 $115,501 $54,491 $43,529 $24,725 $15,089 $3,905
Average net assets
(000).............. $294,940 $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) 0.64%(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) 0.54%(d) 0.59%(d) 0.59% 0.64% 0.55%(d) 0.50%(d) 0.50%(c)(d)
Net investment
income........... 6.44%(d) 6.58%(d) 6.83%(d) 6.42% 7.04% 7.25%(d) 7.62%(d) 8.17%(c)(d)
Portfolio turnover
rate............... 26% 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 management fee waiver. See "Manager" in the Statement of Additional
Information.
</TABLE>

6
<PAGE>

FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(HIGH YIELD SERIES - CLASS B SHARES)

The following financial highlights, for the fiscal year ended April 30, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and by
Deloitte & Touche LLP, independent auditors, for the four years ended April 30,
1996. Each of the respective reports by Price Waterhouse LLP and Deloitte &
Touche LLP on such financial highlights were 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,
------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990
-------- -------- ------------ ------------ ------------ ------------ ------------ ------------
PER SHARE OPERATING
PERFORMANCE:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period............. $10.69 $10.72 $10.74 $ 11.14 $ 10.68 $ 10.45 $ 10.34 $ 10.56
-------- -------- ------ ------ ------ ------ ------ ------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income............. .66(d) .68(d) .68(d) .68 .73 .73(d) .75(d) .79(d)
Net realized and
unrealized gain
(loss) on
investment
transactions....... .15 (.03) (.02) (.39) .46 .23 .11 (.17)
-------- -------- ------ ------ ------ ------ ------ ------
Total from
investment
operations....... .81 .65 .66 .29 1.19 .96 .86 .62
-------- -------- ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends from net
investment
income............. (.66) (.68) (.68) (.68) (.73) (.73) (.75) (.79)
Distributions from
capital gains...... -- -- -- (.01) -- -- -- (.05)
-------- -------- ------ ------ ------ ------ ------ ------
Total
distributions.... (.66) (.68) (.68) (.69) (.73) (.73) (.75) (.84)
-------- -------- ------ ------ ------ ------ ------ ------
Net asset value, end
of period.......... $10.84 $10.69 $ 10.72 $ 10.74 $ 11.14 $ 10.68 $ 10.45 $ 10.34
-------- -------- ------ ------ ------ ------ ------ ------
-------- -------- ------ ------ ------ ------ ------ ------
TOTAL RETURN (b):... 7.71% 6.12% 6.37% 2.46% 11.47% 9.40% 8.59% 6.04%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
period (000)....... $665,525 $799,048 $934,725 $1,099,640 $1,028,480 $803,838 $701,483 $622,970
Average net assets
(000).............. $725,305 $900,115 $1,024,132 $1,132,653 $893,203 $759,779 $667,751 $549,485
Ratios to average
net assets:
Expenses,
including
distribution
fees............. 1.04%(d) 1.04%(d) 1.09%(d) 1.09% 1.14% 1.05%(d) 1.00%(d) 0.83%(d)
Expenses,
excluding
distribution
fees............. 0.54%(d) 0.54%(d) 0.59%(d) 0.58% .64% 0.55%(d) 0.50%(d) 0.33%(d)
Net investment
income........... 6.05%(d) 6.19%(d) 6.37%(d) 6.02% 6.66% 6.85%(d) 7.22%(d) 7.24%(d)
Portfolio turnover
rate............... 26% 35% 39% 36% 27% 34% 29% 44%

<CAPTION>
HIGH YIELD SERIES
-----------------------------

CLASS B

-----------------------------
SEPTEMBER 17,
1987(a) TO
APRIL 30,
1989 1988
------------ --------------
PER SHARE OPERATING
PERFORMANCE:
<S> <C> <C>
Net asset value,
beginning of
period............. $ 10.13 $ 10.00
------ -------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income............. .86(d) .53(d)
Net realized and
unrealized gain
(loss) on
investment
transactions....... .45 .13
------ -------
Total from
investment
operations....... 1.31 .66
------ -------
LESS DISTRIBUTIONS
Dividends from net
investment
income............. (.86) (.53)
Distributions from
capital gains...... (.02) --
------ -------
Total
distributions.... (.88) (.53)
------ -------
Net asset value, end
of period.......... $ 10.56 $ 10.13
------ -------
------ -------
TOTAL RETURN (b):... 13.40% 10.68%
RATIOS/SUPPLEMENTAL
Net assets, end of
period (000)....... $549,426 $48,546
Average net assets
(000).............. $185,367 $19,038
Ratios to average
net assets:
Expenses,
including
distribution
fees............. 0.27%(d) 0%(d)
Expenses,
excluding
distribution
fees............. 0.12%(d) 0%(d)
Net investment
income........... 7.26%(d) 7.13%(c)(d)
Portfolio turnover
rate............... 17% 21%

<FN>

- -----------------
(a) Commencement of offering of Class B 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, 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)
(HIGH YIELD SERIES - CLASS C SHARES)

The following financial highlights for the fiscal year ended April 30, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and by
Deloitte & Touche LLP, independent auditors, for the year ended April 30, 1996
and for the period from August 1, 1994 through April 30, 1995. Each of the
respective reports by Price Waterhouse LLP and Deloitte & Touche LLP on such
financial highlights were 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
------------------------------------
YEAR ENDED APRIL AUGUST 1,
30, 1994(a)
------------------- THROUGH
1997 1996 APRIL 30, 1995
-------- -------- --------------
PER SHARE OPERATING
PERFORMANCE:
<S> <C> <C> <C>
Net asset value, beginning of
period....................... $ 10.69 $ 10.72 $ 10.79
-------- -------- ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income (d)..... .63 .65 .49
Net realized and unrealized
gain (loss) on investment
transactions................. .15 (.03) (.07)
-------- -------- ------
Total from investment
operations................. .78 .62 .42
-------- -------- ------
LESS DISTRIBUTIONS
Dividends from net investment
income....................... (.63) (.65) (.49)
-------- -------- ------
Net asset value, end of
period....................... $10.84 $10.69 $10.72
-------- -------- ------
-------- -------- ------
TOTAL RETURN (b):............. 7.44% 5.86% 3.91%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $9,563 $6,471 $3,208
Average net assets (000)...... $8,060 $5,608 $1,385
Ratios to average net assets:
Expenses, including
distribution fees (d)...... 1.29% 1.29% 1.34%(c)
Expenses, excluding
distribution fees (d)...... 0.54% 0.54% 0.59%(c)
Net investment income (d)... 5.80% 5.93% 6.34%(c)
Portfolio turnover rate....... 26% 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 management fee waiver. See "Manager" in the Statement of Additional
Information.
</TABLE>

8
<PAGE>

FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
(HIGH YIELD SERIES - CLASS Z SHARES)

The following financial highlights for the Class Z shares for the period from
September 16, 1996 through April 30, 1997 have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and the
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class Z share of common stock
outstanding, total return, ratios to average net assets and other supplemental
data for the period indicated. This information has been determined 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 Z
-----------------
SEPTEMBER 16,
1996(a)
THROUGH
APRIL 30, 1997
-----------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $ 10.79
-------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (d)................................... .45
Net realized and unrealized gain (loss) on investment
transactions............................................... .04
-------
Total from investment operations........................ .49
-------
LESS DISTRIBUTIONS
Dividends from net investment income........................ (.45)
-------
Net asset value, end of period.............................. $ 10.83
-------
-------
TOTAL RETURN(b):............................................ 4.36%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............................. $2,719
Average net assets (000).................................... $704
Ratios to average net assets:
Expenses (d)............................................ 0.54%(c)
Net investment income (d)............................... 6.55%(c)
Portfolio turnover rate..................................... 26%
<FN>
- ------------
(a) Commencement of offering of Class Z 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 the 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 management fee waiver. See "Manager" in the Statement of Additional
Information.
</TABLE>

9
<PAGE>

FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(INSURED SERIES - CLASS A SHARES)

<TABLE>
<CAPTION>
INSURED SERIES
------------------------------------------------------------------------------------------------
CLASS A
------------------------------------------------------------------------------------------------
JANUARY 22,
1990(a)
YEARS ENDED APRIL 30, THROUGH APRIL
-------------------------------------------------------------------------------- 30,
1997 1996 1995 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- ----------- ----------- -------------
PER SHARE OPERATING
PERFORMANCE:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period............. $10.94 $10.83 $10.71 $11.44 $10.98 $10.76 $10.25 $10.51
-------- -------- -------- -------- -------- ----------- ----------- -------------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income............. .55(d) .58(d) .58(d) .58 .61 .66(d) .67(d) .18(d)
Net realized and
unrealized gain
(loss) on
investment
transactions....... .08 .11 .12 (.43) .73 .24 .54 (.26)
-------- -------- -------- -------- -------- ----------- ----------- -------------
Total from
investment
operations....... .63 .69 .70 .15 1.34 .90 1.21 (.08)
-------- -------- -------- -------- -------- ----------- ----------- -------------
LESS DISTRIBUTIONS
Dividends from net
investment
income............. (.55) (.58) (.58) (.58) (.61) (.66) (.67) (.18)
Distributions in
excess of net
investment
income............. (.01) -- -- -- -- -- -- --
Distributions from
capital gains...... (.11) -- -- (.30) (.27) (.02) (.03) --
-------- -------- -------- -------- -------- ----------- ----------- -------------
Total
distributions.... (.67) (.58) (.58) (.88) (.88) (.68) (.70) (.18)
-------- -------- -------- -------- -------- ----------- ----------- -------------
Net asset value, end
of period.......... $10.90 $10.94 $10.83 $10.71 $11.44 $10.98 $10.76 $10.25
-------- -------- -------- -------- -------- ----------- ----------- -------------
-------- -------- -------- -------- -------- ----------- ----------- -------------
TOTAL RETURN (b):... 5.74% 6.47% 6.73% 1.04% 12.68% 8.59% 11.86% (3.37)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
period (000)....... $208,411 $139,548 $75,800 $30,669 $30,098 $19,177 $7,630 $2,700
Average net assets
(000).............. $187,371 $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) 0.68%(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) 0.58%(d) 0.64%(d) 0.61% 0.62% 0.52%(d) 0.51%(d) 0.52%(c)(d)
Net investment
income........... 4.95%(d) 5.20%(d) 5.45%(d) 5.09% 5.46% 6.06%(d) 6.38%(d) 6.64%(c)(d)
Portfolio turnover
rate............... 110% 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 management fee waiver. See "Manager" in the Statement of Additional
Information.
</TABLE>

10
<PAGE>

FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(INSURED SERIES - CLASS B SHARES)

The following financial highlights, with respect to the fiscal year ended
April 30, 1997, have been audited by Price Waterhouse LLP, independent
accountants, and by Deloitte & Touche LLP, independent auditors, for the four
years ended April 30, 1996. Each of the respective reports by Price Waterhouse
LLP and Deloitte & Touche LLP on such financial highlights were 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,
----------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990
-------- -------- -------- -------- ----------- ------------ ------------ ------------
PER SHARE OPERATING
PERFORMANCE:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period............. $10.95 $10.84 $10.71 $ 11.44 $ 10.99 $ 10.76 $ 10.25 $ 10.54
-------- -------- -------- -------- ----------- ------ ------ ------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income............. .50(e) .54(e) .54(e) .54 .56 .62(e) .63(e) .67(e)
Net realized and
unrealized gain
(loss) on
investment
transactions....... .08 .11 .13 (.43) .72 .25 .54 (.22)
-------- -------- -------- -------- ----------- ------ ------ ------
Total from
investment
operations....... .58 .65 .67 .11 1.28 .87 1.17 .45
-------- -------- -------- -------- ----------- ------ ------ ------
LESS DISTRIBUTIONS
Dividends from net
investment
income............. (.50) (.54) (.54) (.54) (.56) (.62) (.63) (.67)
Distributions in
excess of net
investment
income............. (.01) -- -- -- -- -- -- --
Distributions from
capital gains...... (.11) -- -- (.30) (.27) (.02) (.03) (.07)
-------- -------- -------- -------- ----------- ------ ------ ------
Total
distributions.... (.62) (.54) (.54) (.84) (.83) (.64) (.66) (.74)
-------- -------- -------- -------- ----------- ------ ------ ------
Net asset value, end
of period.......... $10.91 $10.95 $10.84 $ 10.71 $ 11.44 $ 10.99 $ 10.76 $ 10.25
-------- -------- -------- -------- ----------- ------ ------ ------
-------- -------- -------- -------- ----------- ------ ------ ------
TOTAL RETURN (c):... 5.32% 6.04% 6.40% 0.63% 12.14% 8.24% 11.43% 4.36%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
period (000)....... $298,005 $443,391 $567,648 $740,447 $770,060 $638,451 $578,412 $497,139
Average net assets
(000).............. $365,891 $524,452 $660,237 $807,794 $705,846 $609,516 $537,275 $446,904
Ratios to average net assets:
Expenses,
including
distribution
fees............. 1.08%(e) 1.08%(e) 1.14%(e) 1.11% 1.12% 1.02%(e) 1.01%(e) 0.85%(e)
Expenses,
excluding
distribution
fees............. 0.58%(e) 0.58%(e) 0.64%(e) 0.61% 0.62% 0.52%(e) 0.51%(e) 0.35%(e)
Net investment
income........... 4.54%(e) 4.80%(e) 4.99%(e) 4.69% 5.06% 5.66%(e) 5.98%(e) 6.07%(e)
Portfolio turnover
rate............... 110% 68% 64% 105% 85% 56% 51% 82%

<CAPTION>
INSURED 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............. $ 10.18 $ 10.00
------ ------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income............. .76(e) .42(e)
Net realized and
unrealized gain
(loss) on
investment
transactions....... .42 .18
------ ------
Total from
investment
operations....... 1.18 .60
------ ------
LESS DISTRIBUTIONS
Dividends from net
investment
income............. (.76) (.42)
Distributions in
excess of net
investment
income............. -- --
Distributions from
capital gains...... (.06) --
------ ------
Total
distributions.... (.82) (.42)
------ ------
Net asset value, end
of period.......... $ 10.54 $ 10.18
------ ------
------ ------
TOTAL RETURN (c):... 11.97% 9.76%
RATIOS/SUPPLEMENTAL
Net assets, end of
period (000)....... $447,101 $45,058
Average net assets
(000).............. $160,158 $19,378
Ratios to average ne
Expenses,
including
distribution
fees............. 0.22%(e) 0%(e)
Expenses,
excluding
distribution
fees............. 0.13%(e) 0%(e)
Net investment
income........... 6.52%(e) 6.34%(d)(e)
Portfolio turnover
rate............... 87% 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>

11
<PAGE>

FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(INSURED SERIES - CLASS C SHARES)

The following financial highlights, for the fiscal year ended April 30, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and by
Deloitte & Touche LLP, independent auditors, for the year ended April 30, 1996
and the period August 1, 1994 through April 30, 1995. Each of the respective
reports by Price Waterhouse LLP and Deloitte & Touche LLP on such financial
highlights were 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>
INSURED SERIES
-------------------------------------------
CLASS C
-------------------------------------------
AUGUST 1,
1994(a)
YEAR ENDED APRIL 30, THROUGH APRIL
-------------------------- 30,
1997 1996 1995
------------ ------------ --------------
PER SHARE OPERATING PERFORMANCE:
<S> <C> <C> <C>
Net asset value, beginning of
period....................... $ 10.95 $ 10.84 $ 10.79
------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income (d)..... .48 .51 .39
Net realized and unrealized
gain (loss) on investment
transactions................. .08 .11 .05
------ ------ ------
Total from investment
operations................. .56 .62 .44
------ ------ ------
LESS DISTRIBUTIONS
Dividends from net investment
income....................... (.48) (.51) (.39)
Distributions in excess of net
investment income............ (.01) -- --
Distributions from capital
gains........................ (.11) -- --
------ ------ ------
Total distributions......... (.60) (.51) (.39)
------ ------ ------
Net asset value, end of
period....................... $10.91 $10.95 $10.84
------ ------ ------
------ ------ ------
TOTAL RETURN (b):............. 5.06% 5.78% 4.03%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $ 888 $ 1,137 $ 525
Average net assets (000)...... $ 973 $ 827 $ 224
Ratios to average net assets:
Expenses, including
distribution fees (d)...... 1.33% 1.33% 1.39%(c)
Expenses, excluding
distribution fees (d)...... 0.58% 0.58% 0.64%(c)
Net investment income (d)... 4.29% 4.56% 4.92%(c)
Portfolio turnover rate....... 110% 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 management fee waiver. See "Manager" in the Statement of Additional
Information.
</TABLE>

12
<PAGE>

FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
(INSURED SERIES - CLASS Z SHARES)

The following financial highlights for the Class Z shares have been audited by
Price Waterhouse LLP, independent accountants, whose report thereon was
unqualified. This information should be read in conjunction with the financial
statements and the notes thereto, which appear in the Statement of Additional
Information. The financial highlights contain selected data for a Class Z share
of common stock outstanding, total return, ratios to average net assets and
other supplemental data for the period indicated. This information has been
determined 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 Z
SEPTEMBER 16,
1996(a)
THROUGH
APRIL 30, 1997
-----------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $ 11.05
-------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (d)................................... .36
Net realized and unrealized gain (loss) on investment
transactions............................................... (.02)
-------
Total from investment operations........................ .34
-------
LESS DISTRIBUTIONS
Dividends from net investment income........................ (.36)
Distributions in excess of net investment income............ (.01)
Distributions from capital gains............................ (.11)
-------
Total distributions..................................... (.48)
-------
Net asset value, end of period.............................. $ 10.91
-------
-------
TOTAL RETURN (b):........................................... 2.86%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............................. $15
Average net assets (000).................................... $10
Ratios to average net assets:
Expenses (d)............................................ 0.58%(c)
Net investment income (d)............................... 4.18%(c)
Portfolio turnover rate..................................... 110%
<FN>
- ------------
(a) Commencement of offering of Class Z 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 the 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 management fee waiver. See "Manager" in the Statement of Additional
Information.
</TABLE>

13
<PAGE>

FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(INTERMEDIATE SERIES - CLASS A SHARES)

The following financial highlights, with respect to the fiscal year ended
April 30, 1997, have been audited by Price Waterhouse LLP, independent
accountants, and by Deloitte & Touche LLP, independent auditors, for the four
years ended April 30, 1996. Each of the respective reports by Price Waterhouse
LLP and Deloitte & Touche LLP on such financial highlights were 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
-------------------------------------------------------------------------------------------
JANUARY
22,
1990(a)
THROUGH
YEARS ENDED APRIL 30, APRIL
-------------------------------------------------------------------------------- 30,
1997 1996 1995 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- -------- -------- -------
PER SHARE OPERATING
PERFORMANCE:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period............. $ 10.65 $ 10.45 $ 10.67 $ 11.08 $ 10.59 $ 10.48 $ 9.98 $10.21
-------- -------- -------- -------- -------- -------- -------- -------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income............. .46(d) .47(d) .51(d) .53 .54(d) .57(d) .59(d) .18(d)
Net realized and
unrealized gain
(loss) on
investment
transactions....... (.05) .20 (.03) (.19) .60 .26 .50 (.23)
-------- -------- -------- -------- -------- -------- -------- -------
Total from
investment
operations....... .41 .67 .48 .34 1.14 .83 1.09 (.05)
-------- -------- -------- -------- -------- -------- -------- -------
LESS DISTRIBUTIONS
Dividends from net
investment
income............. (.46) (.47) (.51) (.53) (.54) (.57) (.59) (.18)
Distributions in
excess of net
investment
income............. (.01) -- (.01) -- -- -- -- --
Distributions from
capital gains...... -- -- (.18) (.22) (.11) (.15) -- --
-------- -------- -------- -------- -------- -------- -------- -------
Total
distributions.... (.47) (.47) (.70) (.75) (.65) (.72) (.59) (.18)
-------- -------- -------- -------- -------- -------- -------- -------
Net asset value, end
of period.......... $10.59 $10.65 $10.45 $ 10.67 $ 11.08 $ 10.59 $ 10.48 $ 9.98
-------- -------- -------- -------- -------- -------- -------- -------
-------- -------- -------- -------- -------- -------- -------- -------
TOTAL RETURN (b):... 3.86% 6.48% 4.52% 2.83% 11.13% 8.14% 11.20% (2.49)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
period (000)....... $13,740 $12,552 $10,507 $5,810 $3,594 $1,424 $397 $164
Average net assets
(000).............. $13,487 $12,604 $7,742 $4,981 $1,883 $ 599 $305 $80
Ratios to average
net assets:
Expenses,
including
distribution
fees............. 1.15%(d) 1.16%(d) 1.05%(d) 1.00% 1.06%(d) 1.06%(d) 0.92%(d) 0.63%(c)(d)
Expenses,
excluding
distribution
fees............. 1.05%(d) 1.06%(d) 0.95%(d) 0.90% 0.96%(d) 0.96%(d) 0.82%(d) 0.53%(c)(d)
Net investment
income........... 4.30%(d) 4.36%(d) 4.75%(d) 4.63% 5.09%(d) 5.41%(d) 5.92%(d) 6.26%(c)(d)
Portfolio turnover
rate............... 46% 35% 30% 55% 22% 78% 128% 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 management fee waiver. See "Manager" in the Statement of Additional
Information.
</TABLE>

14
<PAGE>

FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(INTERMEDIATE SERIES - CLASS B SHARES)

<TABLE>
<CAPTION>
INTERMEDIATE SERIES
------------------------------------------------------------------------------------------
CLASS B
------------------------------------------------------------------------------------------
YEARS ENDED APRIL 30,
------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990
------- ------- ------- ------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $10.65 $10.45 $10.68 $11.09 $ 10.60 $ 10.48 $ 9.98 $ 10.17
------- ------- ------- ------- ---------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income......... .42(e) .43(e) .45(e) .48 .50(e) .53(e) .56(e) .62(e)
Net realized and unrealized
gain (loss) on investment
transactions................. (.05) .20 (.04) (.19) .60 .27 .50 (.16)
------- ------- ------- ------- ---------- -------- -------- --------
Total from investment
operations................. .37 .63 .41 .29 1.10 .80 1.06 .46
------- ------- ------- ------- ---------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment
income....................... (.42) (.43) (.45) (.48) (.50) (.53) (.56) (.62)
Distributions in excess of net
investment income............ (.01) -- (.01) -- -- -- -- --
Distributions from capital
gains........................ -- -- (.18) (.22) (.11) (.15) -- (.03)
------- ------- ------- ------- ---------- -------- -------- --------
Total distributions......... (.43) (.43) (.64) (.70) (.61) (.68) (.56) (.65)
------- ------- ------- ------- ---------- -------- -------- --------
Net asset value, end of
period....................... $10.59 $10.65 $10.45 $10.68 $ 11.09 $ 10.60 $ 10.48 $ 9.98
------- ------- ------- ------- ---------- -------- -------- --------
------- ------- ------- ---------- -------- -------- --------
TOTAL RETURN (c):............. 3.44% 6.05% 3.99% 2.43% 10.62% 7.68% 10.82% 4.61%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $29,980 $40,550 $51,039 $65,215 $57,049 $45,401 $45,401 $47,838
Average net assets (000)...... $35,221 $46,127 $60,174 $59,811 $50,154 $44,439 $46,521 $46,246
Ratios to average net assets:
Expenses, including
distribution fees.......... 1.55%(e) 1.56%(e) 1.45%(e) 1.40% 1.46%(e) 1.46%(e) 1.32%(e) 0.83%(e)
Expenses, excluding
distribution fees.......... 1.05%(e) 1.06%(e) 0.95%(e) 0.90% 0.96%(e) 0.96%(e) 0.82%(e) 0.33%(e)
Net investment income....... 3.89%(e) 3.96%(e) 4.35%(e) 4.23% 4.69%(e) 5.01%(e) 5.52%(e) 6.03%(e)
Portfolio turnover rate....... 46% 35% 30% 55% 22% 78% 128% 91%

<CAPTION>
INTERMEDIATE SERIES
--------------------------

CLASS B
--------------------------
SEPTEMBER 17,
1987(a)
TO APRIL 30,
1989 1988(B)
--------- -------------
<S> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $ 10.14 $ 10.00
--------- ------
INCOME FROM INVESTMENT OPERATI
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>

15
<PAGE>

FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(INTERMEDIATE SERIES - CLASS C SHARES)

The following financial highlights, with respect to the fiscal year ended
April 30, 1997 have been audited by Price Waterhouse LLP, independent
accountants, and by Deloitte & Touche LLP, independent auditors, for the year
ended April 30, 1996 and the period August 1, 1994 through April 30, 1995. Each
of the respective reports by Price Waterhouse LLP and Deloitte & Touche LLP on
such financial highlights were 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>
INTERMEDIATE SERIES
-------------------------------------------
CLASS C
-------------------------------------------
YEAR ENDED APRIL 30, AUGUST 1,
1994(a)
-------------------------- THROUGH APRIL
1997 1996 30, 1995
------ ------ --------------
PER SHARE OPERATING PERFORMANCE:
<S> <C> <C> <C>
Net asset value, beginning of
period....................... $10.65 $10.45 $10.54
------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income (d)..... .39 .40 .35
Net realized and unrealized
gain (loss) on investment
transactions................. (.05) .20 (.08)
------ ------ ------
Total from investment
operations................. .34 .60 .27
------ ------ ------
LESS DISTRIBUTIONS
Dividends from net investment
income....................... (.39) (.40) (.35)
Distributions in excess of net
investment income............ (.01) -- (.01)
------ ------ ------
Total distributions......... (.40) (.40) (.36)
------ ------ ------
Net asset value, end of
period....................... $10.59 $10.65 $10.45
------ ------ ------
------ ------ ------
TOTAL RETURN (b):............. 3.17% 5.79% 2.14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $ 257 $ 225 $ 167
Average net assets (000)...... $ 149 $ 197 $ 28
Ratios to average net assets:
Expenses, including
distribution fees (d)...... 1.80% 1.81% 1.81%(c)
Expenses, excluding
distribution fees (d)...... 1.05% 1.06% 1.06%(c)
Net investment income (d)... 3.65% 3.71% 4.34%(c)
Portfolio turnover rate....... 46% 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 management fee waiver. See "Manager" in the Statement of Additional
Information.
</TABLE>

16
<PAGE>

FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
(INTERMEDIATE SERIES - CLASS Z SHARES)

<TABLE>
<CAPTION>
INTERMEDIATE
SERIES
CLASS Z
SEPTEMBER 16,
1996(a)
THROUGH
APRIL 30, 1997
-----------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $ 10.63
-------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (d)................................... .31
Net realized and unrealized gain (loss) on investment
transactions............................................... (.03)
-------
Total from investment operations........................ .28
-------
LESS DISTRIBUTIONS
Dividends from net investment income........................ (.31)
Distributions in excess of net investment income............ (.01)
-------
Total distributions......................................... (.32)
-------
Net asset value, end of period.............................. $ 10.59
-------
-------
TOTAL RETURN(b):............................................ 2.50%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............................. $246
Average net assets (000).................................... $63
Ratios to average net assets:
Expenses (d)............................................ 1.05%(c)
Net investment income (d)............................... 4.65%(c)
Portfolio turnover rate..................................... 46%
<FN>
- ------------
(a) Commencement of offering of Class Z 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 the 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 management fee waiver. See "Manager" in the Statement of Additional
Information.
</TABLE>

17
<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."

As with an investment in any mutual fund, an investment in any Series of this
Fund can decrease in value and you can lose money.

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

18
<PAGE>

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 FIFTEEN TO THIRTY YEAR RANGE. Subsequent to its purchase by the Series, a
municipal obligation may be assigned a lower rating or cease to be rated. Such
an 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

19
<PAGE>

ISSUER (MARKET RISK). Lower rated (I.E., high yield) securities or non-rated
securities of comparable quality are more likely to react to developments
affecting market and credit risk than are more highly rated securities, which
react primarily to movements in the general level of interest rates. The
investment adviser considers both credit risk and market risk in making
investment decisions for the Series. Investors should carefully consider the
relative risks of investing in high yield securities and understand that such
securities are not generally meant for short-term trading.

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

20
<PAGE>

During the year ended April 30, 1997, 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 23.72%
AA/Aa 5.35%
A/A 1.03%
BBB/Baa 9.60%
BB/Ba 4.21%
B/B 2.64%
CCC/Caa 0.0%
Unrated
AAA/Aaa 3.78%
AA/Aa 0.0%
A/A 0.31%
BBB/Baa 3.12%
BB/Ba 14.67%
B/B 27.88%
CCC/Caa 1.21%
D 2.47%
</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, 1997, APPROXIMATELY 93% 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.

21
<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.

22
<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.

BORROWING

Each Series may borrow an amount equal to no more than 33 1/3% 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
33 1/3% of the value of its total assets to secure these borrowings. If a
Series' asset coverage for borrowings falls below 300%, the Fund will take
prompt action to reduce its 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

23
<PAGE>

as "leverage." Money borrowed for leveraging will be subject to interest costs
which may or may not be recovered by appreciation of the securities purchased
and may exceed the income from the securities purchased. In addition, the Fund
may be required to maintain minimum average balances in connection with such
borrowing or pay a commitment fee to maintain a line of credit which would
increase the cost of borrowing over the stated interest rate.

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. A SERIES, AND THUS AN INVESTOR, MAY LOSE MONEY THROUGH
UNSUCCESSFUL USE OF THESE STRATEGIES. In that regard, the Intermediate Series
may sell futures contracts to create "synthetic positions" by partially hedging
longer-term obligation positions. See "Investment Objectives and Policies--The
Intermediate Series" above. The successful use of futures contracts and options
thereon by a Series involves additional transaction costs, is subject to various
risks and depends upon the investment adviser's ability to predict the direction
of the market and interest rates.

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

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

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

24
<PAGE>
a Series, the Series will continue to be required to make daily cash payments of
variation margin in the event of adverse price movements. In such a situation,
if the Series had insufficient cash, it might have to sell portfolio securities
to meet daily variation margin requirements at a time when it might be
disadvantageous to do so. The inability to close futures positions also could
have an adverse impact on the ability of a Series to hedge effectively. There is
also a risk of loss by a Series of margin deposits in the event of bankruptcy of
a broker with whom the Series has an open position in a futures contract.

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

THE FUND'S ABILITY TO ENTER INTO AND CLOSE OUT 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 A SERIES WOULD NOT BE SUBJECT ABSENT THE USE OF THESE
STRATEGIES. A SERIES, AND THUS AN INVESTOR, MAY LOSE MONEY THROUGH UNSUCCESSFUL
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

25
<PAGE>
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.

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.

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, U.S. Government
securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily, having a value equal to or greater than the Series'
purchase commitments.

26
<PAGE>
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.

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 PIFM
pursuant to an order of the Securities and Exchange Commission (SEC).

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. 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.

27
<PAGE>

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

SECURITIES LENDING

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

PORTFOLIO TURNOVER

The Series do not expect to trade in securities for short-term gain. It is
anticipated that the annual portfolio turnover rate will not exceed 150%. 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, 1997, the total expenses as a percentage
of average net assets were .64%, 1.04%, 1.29% and .54% of the Class A, Class B,
Class C and Class Z shares, respectively, of the High Yield Series, .68%, 1.08%,
1.33% and .58% of the Class A, Class B, Class C and Class Z shares,
respectively, of the Insured Series, and 1.15%, 1.55%, 1.80% and 1.05% of the
Class A, Class B, Class C and Class Z shares, respectively, of the Intermediate
Series. See "Financial Highlights."

28
<PAGE>
MANAGER

PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, 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. PIFM, which
changed its name from Prudential Mutual Fund Management LLC, effective May 1,
1997, is organized as a New York limited liability company. It is the successor
to Prudential Mutual Fund Management, Inc., which transferred its assets to PIFM
in September 1996. For the fiscal year ended April 30, 1997, PIFM 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.

PIFM may from time to time waive its management fee and subsidize operating
expenses of a Series. PIFM has agreed to waive 10% of its management fee of .50%
of average daily net assets (.05 of 1% of average net assets, as annualized).
See "Fund Expenses." The Fund is not required to reimburse PIFM 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, 1997, PIFM served as the manager to 40 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 $56 billion.

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

The current portfolio manager of the High Yield Series is Peter J. Allegrini,
a Managing Director of Prudential Investments, a business group 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, a Vice President of PIFM, 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.

PIFM and PIC are indirect 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, PSI OR THE
DISTRIBUTOR), 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.

29
<PAGE>

AGREEMENT (THE DISTRIBUTION AGREEMENT), PRUDENTIAL SECURITIES INCURS THE
EXPENSES OF DISTRIBUTING THE CLASS A, CLASS B AND CLASS C SHARES. Prudential
Securities incurs the expenses of distributing the Fund's Class Z shares under
the Distribution Agreement, none of which is reimbursed by or paid for by the
Fund. 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.

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, 1998.

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, 1998. 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, 1997, 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 Class A, Class B and Class C
shares of each Series will be allocated to each such class based upon the ratio
of sales of each such class to the sales of Class A, Class B and Class C 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.

30
<PAGE>
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 (including Prudential Securities)
and other persons who distribute shares of the Fund (including Class Z shares).
Such payments may be calculated by reference to the net asset value of shares
sold by such persons or otherwise.

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

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

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

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

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

31
<PAGE>
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 LLC (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 PIFM. 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.

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 declare dividends daily, the NAV of the Class A, Class B,
Class C and Class Z shares will generally be the same. It is expected, however,
that the Series' dividends will differ by approximately the amount of any
distribution and/or service fee 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, CLASS C AND CLASS Z SHARES. THESE FIGURES ARE NOT INTENDED TO INDICATE FUTURE
PERFORMANCE. The "yield" refers to the income generated by an investment in a
Series over a 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

32
<PAGE>
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 NET 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 ARE TAXABLE TO THE SERIES. See "Taxes, Dividends and
Distributions" in the Statement of Additional Information.

To the extent a Series invests in taxable obligations, it will earn taxable
investment income. Also, to the extent a Series sells securities or engages in
hedging transactions in futures contracts and options thereon, it may earn both
short-term and long-term capital gain or loss. Capital gain or loss may also
arise upon the sale of municipal securities, as well as taxable obligations.
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."

33
<PAGE>

and regardless of the length of time a shareholder has owned his or her shares.
The maximum long-term capital gains rate for individuals is currently 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, exchange 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 loss, however, with
respect to the sale, exchange or redemption of shares that are held for six
months or less will be disallowed to the extent of any exempt interest dividends
received by the shareholder with respect to such shares, and otherwise will be
treated as long-term capital loss to the extent of any capital gain
distributions received by the shareholder with respect to such shares.

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.

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.

Distributions relating to interest on all municipal obligations will be
included in a corporate shareholder's current earnings for purposes of 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 any
class of the Fund's shares for any other class of its 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, local or foreign 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 generally is also required on taxable dividends and
capital gains distributions made by a Series.

34
<PAGE>

Dividends of net investment income and distributions of net short-term capital
gains paid to a shareholder (including a shareholder acting as a nominee or
fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends unless the
dividends are effectively connected with a U.S. trade or business conducted by
the foreign shareholder. Capital gain dividends paid to a foreign shareholder
are generally not subject to withholding tax. A foreign shareholder will,
however, be required to pay U.S. income tax on any dividends and capital gain
distributions which are effectively connected with a U.S. trade or business of
the foreign shareholder.

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
(other than Class Z) will bear its own distribution charges, generally resulting
in lower dividends for Class B and Class C shares in relation to Class A shares
and lower dividends for Class A shares in relation to Class Z 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 LLC, Attention: Account Maintenance, P.O. Box 15015, New
Brunswick, New Jersey 08906-5015. If you hold shares through Prudential
Securities, you should contact your financial adviser to elect to receive
dividends and distributions in cash. The Fund will notify each shareholder after
the close of the Fund's taxable year both of the dollar amount and the taxable
status of that year's dividends and distributions on a per share basis.

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

GENERAL INFORMATION

DESCRIPTION OF SHARES

THE FUND IS AN OPEN-END, MANAGEMENT INVESTMENT COMPANY COMPRISED OF THREE
SERIES WHICH WAS ORGANIZED UNDER THE LAWS OF MASSACHUSETTS ON NOVEMBER 3, 1986
AS AN UNINCORPORATED BUSINESS TRUST, A FORM OF ORGANIZATION THAT IS COMMONLY
CALLED A MASSACHUSETTS BUSINESS TRUST. THE FUND IS AUTHORIZED TO ISSUE AN
UNLIMITED NUMBER OF SHARES, DIVIDED INTO 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
(except for Class Z shares, which are not subject to any sales charges or
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, (iv) only
Class B shares

35
<PAGE>

have a conversion feature and (v) Class Z shares are offered exclusively to a
limited group of investors. 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.

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 (with the exception of Class Z shares,
which are not subject to any distribution or service fees) 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 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 and to Class Z shareholders, whose shares are not subject to any
distribution and/or service fees. 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.

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.

36
<PAGE>
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 LLC (PMFS OR THE TRANSFER AGENT) ATTENTION:
INVESTMENT SERVICES, P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020.
Participants in programs sponsored by Prudential Retirement Services should
contact their client representative for more information about Class Z shares.
The purchase price is the NAV per share next determined following receipt of an
order in proper form 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). Class
Z shares are offered to a limited group of investors at net asset value without
any sales charge. Payment may be made by wire, check or through your brokerage
account. 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 is $1,000 for Class A and Class B shares and
$5,000 for Class C shares except that the minimum initial investment for Class C
shares may be waived from time to time. There is no minimum investment
requirement for Class Z shares. The minimum subsequent investment is $100 for
all classes, except for Class Z shares, for which there is no minimum. 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
or a selected dealer (Class A only). 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 class in which you are eligible to invest
(Class A, Class B, Class C or Class Z 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.

37
<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, Class C or Class Z 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 FOUR CLASSES OF SHARES (CLASS A, CLASS
B, CLASS C AND CLASS Z 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
CLASS Z None None Sold to a limited group of investors
</TABLE>

The four 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
is subject to different sales charges and distribution and/or service fees (with
the exception of Class Z shares, which are not subject to any distribution 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, and (iii) only Class B shares have a conversion feature. The
four 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 (if any) 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 and Class Z shares.

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

38
<PAGE>
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Series:

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

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

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

If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class C shares, you would have to hold your investment for more than 4
years in the case of Class C shares for the higher cumulative annual
distribution-related fee on those shares to exceed the initial sales charge plus
cumulative annual distribution-related fee on Class A shares. This does not take
into account the time value of money, which further reduces the impact of the
higher Class C distribution-related fee on the investment, fluctuations in net
asset value, the effect of the return on the investment over this period of time
or redemptions 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
UNLESS THE PURCHASER IS ELIGIBLE TO PURCHASE CLASS Z SHARES. See "Reduction and
Waiver of Initial Sales Charges" and "Class Z Shares" 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>

The Distributor may reallow the entire initial sales charge to dealers.
Selling dealers may be deemed to be underwriters, as that term is defined in the
Securities Act of 1933.

In connection with the sale of Class A shares at NAV (without payment of an
initial sales charge), the Manager, the Distributor or one of their affiliates
will pay dealers, financial advisers and other persons which distribute shares a
finders' fee from its own resources based on a percentage of the net asset value
of shares sold by such persons.

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

39
<PAGE>
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 PIFM 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 of subadvisers of the Prudential Mutual Funds provided that the
purchases at NAV are permitted by such person's employer, (d) Prudential
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, (e) registered representatives and employees of dealers who have
entered into a selected dealer agreement with Prudential Securities provided
that purchases at NAV are permitted by such person's employer and (f) 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 or within one year in the case of benefit plans, (ii) the
purchase is made with proceeds of a redemption of shares of any open-end
non-money market fund sponsored by the financial adviser's previous employer
(other than a fund which imposes a distribution or service fee of .25 of 1% or
less) and (iii) the financial adviser served as the client's broker on the
previous purchase.

You must notify the 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." The Distributor will pay sales
commissions of up to 4% of the purchase price of Class B shares to dealers,
financial advisers and other persons who sell Class B shares at the time of sale
from its own resources. This facilitates the ability of the Fund to sell the
Class B shares without an initial sales charge being deducted at the time of
purchase. The Distributor anticipates that it will recoup its advancement of
sales commissions from the combination of the CDSC and the distribution fee. See
"How the Fund is Managed--Distributor." In connection with the sale of Class C
shares, the Distributor will pay dealers, financial advisers and other persons
which distribute Class C shares a sales commission of up to 1% of the purchase
price at the time of the sale.

CLASS Z SHARES

Class Z shares of the Fund are available for purchase by the following
categories of investors:

(i) pension, profit-sharing or other employee benefit plans qualified under
Section 401 of the Internal Revenue Code, deferred compensation plans and
annuity plans under Sections 457 and 403(b)(7) of the Internal Revenue Code, and
non-qualified plans for which the Fund is an available option (collectively,
Benefit Plans), provided that such Benefit Plans (in combination with other
plans sponsored by the same employer or group of related employers) have at
least $50 million in defined contribution assets; (ii) participants in any
fee-based program or trust program sponsored by Prudential Securities, The
Prudential Savings Bank, F.S.B. (or any affiliate) which includes mutual funds
as investment options and for which the Fund is an available option; (iii)
certain participants in the MEDLEY Program (group variable annuity contracts)
sponsored by Prudential for whom Class Z

40
<PAGE>

shares of the Prudential Mutual Funds are an available investment option; (iv)
Benefit Plans for which Prudential Retirement Services serves as record keeper
and, as of September 20, 1996, (a) were Class Z shareholders of the Prudential
Mutual Funds, or (b) executed a letter of intent to purchase Class Z shares of
the Prudential Mutual Funds; (v) current and former Directors/Trustees of the
Prudential Mutual Funds (including the Fund); and (vi) employees of Prudential
and/or Prudential Securities who participate in a Prudential-sponsored employee
saving plan.

In connection with the sale of Class Z shares, the Manager, the Distributor or
one of their affiliates may pay dealers, financial advisers and other persons
which distribute shares a finders' fee based on a percentage of the net asset
value of shares sold by such persons.

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 THROUGH PRUDENTIAL SECURITIES. PLEASE CONTACT 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 LLC, 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 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 CASHIER'S CHECK.

41
<PAGE>
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 may affect the federal tax
treatment of any gain or loss realized upon redemption. See "Taxes, Dividends
and Distributions" in the Statement of Additional Information.

CONTINGENT DEFERRED SALES CHARGES

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

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

42
<PAGE>
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.

43
<PAGE>

SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12% of
the total dollar amount subject to the CDSC may be redeemed without charge. The
Transfer Agent will calculate the total amount available for this waiver
annually, on the earlier of March 1, 1997 or the anniversary date of your
purchase. The CDSC will be waived (or reduced) on redemptions until this
threshold 12% amount is reached.

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, Class C and Class Z
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.

44
<PAGE>
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, CLASS C AND
CLASS Z SHARES MAY BE EXCHANGED FOR CLASS A, CLASS B, CLASS C AND CLASS Z
SHARES, RESPECTIVELY, OF THE OTHER SERIES OF THE FUND AND OF ANOTHER FUND ON THE
BASIS OF THE RELATIVE NAV. No sales charge will be imposed at the time of the
exchange. Any applicable CDSC payable upon the redemption of shares exchanged
will be calculated from the first day of the month after the initial purchase,
excluding the time shares were held in a money market fund. Class B and Class C
shares may not be exchanged into money market funds other than Prudential
Special Money Market Fund, Inc. For purposes of calculating the holding period
applicable to the Class B conversion feature, the time period during which Class
B shares were held in a money market fund will be excluded. See "Conversion
Feature--Class B Shares" above. An exchange will be treated as a redemption and
purchase for tax purposes. See "Shareholder Investment Account--Exchange
Privilege" in the Statement of Additional Information.

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

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

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

You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, 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 LLC AT THE ADDRESS NOTED ABOVE.

SPECIAL EXCHANGE PRIVILEGES. 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) and for shareholders who qualify to purchase Class Z shares (see
"Alternative Purchase Plan--Class Z Shares" 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 for shareholders who qualify to purchase Class A
shares at NAV, on a quarterly basis, unless the shareholder elects otherwise.
Similarly, shareholders who qualify to purchase Class Z shares will have their
Class B and Class C shares which are not subject to a CDSC and their Class A
shares exchanged for Class Z shares on a quarterly basis. 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

45
<PAGE>
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.

Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares when
they elect to have those assets become a part of the fee-based program. Upon
leaving the program (whether voluntarily or not), such Class Z shares (and, to
the extent provided for in the program, Class Z shares acquired through
participation in the program) will be exchanged for Class A shares at net asset
value. Similarly, participants in PSI's 401(k) Plan for which the Fund's Class Z
shares is an available option and who wish to transfer their Class Z shares out
of the PSI 401(k) Plan following separation from service (I.E., voluntary or
involuntary termination of employment or retirement) will have their Class Z
shares exchanged for Class A shares at NAV.

The Fund reserves the right to reject any exchange order including exchanges
(and market timing transactions) which are of the size and/or frequency engaged
in by one or more accounts acting in concert or otherwise, that have or may have
an adverse effect on the ability of the Subadviser to manage the portfolio. The
determination that such exchanges or activity may have an adverse effect and the
determination to reject any exchange order shall be in the discretion of the
Manager and the Subadviser.

The Exchange Privilege is not a right and may be suspended, modified or
terminated on 60 days' notice to shareholders.

SHAREHOLDER SERVICES

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

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

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

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

-REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at Gateway Center
Three, Newark, New Jersey 07102. In addition, monthly unaudited financial data
is available upon request from the Fund.

-SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at Gateway
Center Three, Newark, New Jersey 07102, 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.

46
<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 Investments 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
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 Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
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 Dryden Fund
Prudential Active Balance Fund
Prudential Stock Index Fund
Prudential Emerging Growth Fund
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Jennison Series Fund, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Multi-Sector Fund, Inc.
Prudential Small Company Value 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
Liquid Assets 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
What are the Series' Risk Factors and Special Characteristics?..... 2
FUND EXPENSES........................................................ 4
FINANCIAL HIGHLIGHTS................................................. 6
HOW THE FUND INVESTS................................................. 18
Investment Objectives and Policies................................. 18
Hedging Strategies................................................. 24
Other Investments and Policies..................................... 25
Investment Restrictions............................................ 28
HOW THE FUND IS MANAGED.............................................. 28
Manager............................................................ 29
Distributor........................................................ 29
Portfolio Transactions............................................. 31
Custodian and Transfer and Dividend Disbursing Agent............... 32
HOW THE FUND VALUES ITS SHARES....................................... 32
HOW THE FUND CALCULATES PERFORMANCE.................................. 32
TAXES, DIVIDENDS AND DISTRIBUTIONS................................... 33
GENERAL INFORMATION.................................................. 35
Description of Shares.............................................. 35
Additional Information............................................. 36
SHAREHOLDER GUIDE.................................................... 37
How to Buy Shares of the Fund...................................... 37
Alternative Purchase Plan.......................................... 38
How to Sell Your Shares............................................ 41
Conversion Feature--Class B Shares................................. 44
How to Exchange Your Shares........................................ 45
Shareholder Services............................................... 46
DESCRIPTION OF SECURITY RATINGS...................................... A-1
THE PRUDENTIAL MUTUAL FUND FAMILY.................................... B-1
</TABLE>

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

MF133A 4441470

CUSIP Nos.:
Class A: 74435L103; Class B: 74435L202
High Yield Series Class C: 74435L707 Class Z: 74435L871
Class A: 74435L301; Class B: 74435L400
Insured Series Class C: 74435L806 Class Z: 74435L863
Class A: 74435L509; Class B: 74435L608
Intermediate Series Class C: 74435L889 Class Z: 74435L855

PRUDENTIAL

MUNICIPAL BOND
FUND

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

[PROSPECTUS]

JULY 2,
1997

HIGH YIELD SERIES
INSURED SERIES
INTERMEDIATE SERIES

[LOGO]
<PAGE>
Prudential Municipal Bond Fund
(Intermediate Series)
(Intermediate Series)

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

PROSPECTUS DATED JULY 2, 1997

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

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. Each Series operates as a separate fund with its own investment
objectives. Only shares of the Intermediate Series (the Series) are offered
through this Prospectus. 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. Although the Series
will seek income that is eligible for exclusion from federal income taxes, a
portion of the dividends and distributions paid by the Series may be treated as
a preference item for purposes of the alternative minimum tax. The Series seeks
to achieve its objective through the 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, the 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."

The Fund's address is Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077, and its telephone number is (800) 225-1852.

This Prospectus sets forth concisely the information about the Fund and the
Series that a prospective investor should know before investing. Additional
information about the Fund has been filed with the Securities and Exchange
Commission (SEC) in a Statement of Additional Information, dated July 2, 1997,
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.
- --------------------------------------------------------------------------------

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. Only shares of the Intermediate Series are offered through this
Prospectus.
WHAT IS THE SERIES' INVESTMENT OBJECTIVE?
The investment objective of the 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 the Series' objective
will be achieved. See "How the Fund Invests--Investment Objectives and Policies"
at page 9.
WHAT ARE THE SERIES' RISK FACTORS AND SPECIAL CHARACTERISTICS?
In seeking to achieve its objective, the Series will under normal
circumstances 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. 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 9. The 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 Series. See "How the Fund Invests--Hedging Strategies--Risks of
Hedging Strategies" at page 12. As with an investment in any mutual fund, an
investment in this Series can decrease in value and you can lose money.
WHO MANAGES THE FUND?
Prudential Investments Fund Management LLC (PIFM 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 the Series up to $1 billion and .45 of
1% of the average daily net assets of the Series in excess of $1 billion. As of
May 31, 1997, PIFM served as manager or administrator to 62 investment
companies, including 40 mutual funds, with aggregate assets of approximately $56
billion. The Prudential Investment Corporation, which does business under the
name Prudential Investments (PI, the Subadviser, or the investment adviser),
furnishes investment advisory services in connection with the management of the
Fund under a Subadvisory Agreement with PIFM. See "How the Fund is
Managed--Manager" at page 15.
WHO DISTRIBUTES THE SERIES' SHARES?
Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Series' 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 the Series, is paid an annual
distribution and service fee which is currently being charged at the rate of .50
of 1% of the average daily net assets of the Class B shares of the 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
the Series. Prudential Securities incurs the expense of distributing the Series'
Class Z shares under a distribution agreement with the Fund, none of which is
reimbursed or paid for by the Fund. See "How the Fund is Managed--Distributor"
at page 16.

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 Class A, Class B and Class C shares. Class Z shares are not subject to any
minimum investment requirements. 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 23 and "Shareholder
Guide--Shareholder Services" at page 33.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Series through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund through its transfer
agent, Prudential Mutual Fund Services LLC (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). Class Z shares are offered to a
limited group of investors at net asset value without any sales charge. See "How
the Fund Values its Shares" at page 19 and "Shareholder Guide--How to Buy Shares
of the Fund" at page 23.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Series offers four classes of shares through this Prospectus:

See "Shareholder Guide--Alternative Purchase Plan" at page 25.
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 28.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Series 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 the 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 20.

3
<PAGE>
FUND EXPENSES
(INTERMEDIATE SERIES)
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
(a) CLASS A SHARES CLASS B SHARES (b) CLASS C SHARES CLASS Z SHARES (e)
-------------- ------------------------ ----------------------- -----------------------
<S> <C> <C> <C> <C>
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price)............... 3% None None None
Maximum Sales Load Imposed on
Reinvested Dividends.......... None None None None
Maximum Deferred Sales Load (as
a percentage of original
purchase price or redemption
proceeds, whichever is
lower)........................ None 5% during the first 1% on redemptions None
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 None
Exchange Fee................... None None None None

<CAPTION>
ANNUAL FUND OPERATING EXPENSES (c)
(as a percentage of average net
assets) CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES (e)
-------------- ------------------------ ----------------------- -----------------------
<S> <C> <C> <C> <C>
Management Fees (Before
Waiver): .50 .50 .50 .50%
12b-1 Fees (After Reduction): .10(d) .50 .75(d) None
Other Expenses: .60 .60 .60 .60
Total Fund Operating Expenses
(Before Waiver and After
Reduction): 1.20 1.60 1.85 1.10
<FN>
- ------------------
(a) 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 the 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 Series 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."
(b) Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--
Class B Shares."
(c) Based on expenses incurred during the fiscal year ended April 30, 1997,
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 the Series and Total Fund Operating Expenses for Class A, B, C,
and Class Z shares would be 1.15%, 1.55%, 1.80% and 1.05%, respectively.
(d) Although the Class A and Class C Distribution and Service Plans provide
that the Series 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 the 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, 1998. Total Fund
Operating Expenses of the Class A and Class C shares without such
limitation would be 1.40% and 2.10%, respectively. See "How the Fund is
Managed--Distributor."
(e) Estimated based on expenses expected to have been incurred if Class Z
shares had been in existence throughout the fiscal year ended April 30,
1997.
</TABLE>

<TABLE>
<CAPTION>
EXAMPLE 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:
Class A................................................ $42 $67 $94 $171
Class B................................................ $66 $80 $97 $174
Class C................................................ $29 $58 $100 $217
Class Z (a)............................................ $11 $35 $61 $134
You would pay the following expenses on the same investment,
assuming no redemption:
Class A................................................ $42 $67 $94 $171
Class B................................................ $16 $50 $87 $174
Class C................................................ $19 $58 $100 $217
Class Z (a)............................................ $11 $35 $61 $134
(a) Estimated based on expenses expected to have been incurred if Class Z shares had been in existence throughout
the fiscal year ended April 30, 1997.
The above example is based on data for the Fund's fiscal year ended April 30, 1997. THE EXAMPLE 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 Series 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>

4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS A SHARES)

<TABLE>
<CAPTION>
INTERMEDIATE SERIES
-------------------------------------------------------------------------------------------------
CLASS A SHARES
-------------------------------------------------------------------------------------------------
JANUARY 22,
1990(a)
YEARS ENDED APRIL 30, THROUGH
---------------------------------------------------------------------------------- APRIL 30,
1997 1996 1995 1994 1993 1992 1991 1990
---------- ---------- ---------- ------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $ 10.65 $ 10.45 $ 10.67 $11.08 $10.59 $10.48 $ 9.98 $10.21
---------- ---------- ---------- ------- --------- --------- --------- ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income.... .46(d) .47(d) .51(d) .53 .54(d) .57(d) .59(d) .18(d)
Net realized and
unrealized gain (loss)
on investment
transactions............ (.05) .20 (.03) (.19) .60 .26 .50 (.23)
---------- ---------- ---------- ------- --------- --------- --------- ------
Total from investment
operations............ .41 .67 .48 .34 1.14 .83 1.09 (.05)
---------- ---------- ---------- ------- --------- --------- --------- ------
LESS DISTRIBUTIONS
Dividends from net
investment income....... (.46) (.47) (.51) (.53) (.54) (.57) (.59) (.18)
Distributions in excess
of net investment
income.................. (.01) -- (.01) -- -- -- -- --
Distributions from
capital gains........... -- -- (.18) (.22) (.11) (.15) -- --
---------- ---------- ---------- ------- --------- --------- --------- ------
Total distributions.... (.47) (.47) (.70) (.75) (.65) (.72) (.59) (.18)
---------- ---------- ---------- ------- --------- --------- --------- ------
Net asset value, end of
period.................. $ 10.59 $10.65 $10.45 $10.67 $11.08 $10.59 $10.48 $ 9.98
---------- ---------- ---------- ------- --------- --------- --------- ------
---------- ---------- ---------- ------- --------- --------- --------- ------
TOTAL RETURN (b):........ 3.68% 6.48% 4.52% 2.83% 11.13% 8.14% 11.20% (2.49)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)................... $13,740 $12,552 $10,507 $5,810 $3,594 $1,424 $397 $164
Average net assets
(000)................... $13,487 $12,604 $7,742 $4,981 $1,883 $ 599 $305 $80
Ratios to average net
assets:
Expenses, including
distribution fees..... 1.15%(d) 1.16%(d) 1.05%(d) 1.00% 1.06%(d) 1.06%(d) 0.92%(d) 0.63%(c)(d)
Expenses, excluding
distribution fees..... 1.05%(d) 1.06%(d) 0.95%(d) 0.90% 0.96%(d) 0.96%(d) 0.82%(d) 0.53%(c)(d)
Net investment
income................ 4.30%(d) 4.36%(d) 4.75%(d) 4.63% 5.09%(d) 5.41%(d) 5.92%(d) 6.26%(c)(d)
Portfolio turnover
rate.................... 46% 35% 30% 55% 22% 78% 128% 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 management fee waiver. See "Manager" in the Statement of Additional
Information.
</TABLE>

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

The following financial highlights, with respect to the fiscal year ended
April 30, 1997 have been audited by Price Waterhouse LLP, independent
accountants, and by Deloitte & Touche LLP, independent auditors, for the four
years ended April 30, 1996. Each of the respective reports by Price Waterhouse
LLP and Deloitte & Touche LLP on such financial highlights were 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 SHARES
----------------------------------------------------------------------------------------
YEARS ENDED APRIL 30,
----------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991
---------- ---------- ---------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period............................ $ 10.65 $ 10.45 $ 10.68 $ 11.09 $ 10.60 $ 10.48 $ 9.98
---------- ---------- ---------- -------- ---------- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.............. .42(e) .43(e) .45(e) .48 .50(e) .53(e) .56(e)
Net realized and unrealized gain
(loss) on investment
transactions...................... (.05) .20 (.04) (.19) .60 .27 .50
---------- ---------- ---------- -------- ---------- ----------- -----------
Total from investment
operations...................... .37 .63 .41 .29 1.10 .80 1.06
---------- ---------- ---------- -------- ---------- ----------- -----------
LESS DISTRIBUTIONS
Dividends from net investment
income............................ (.42) (.43) (.45) (.48) (.50) (.53) (.56)
Distributions in excess of net
investment income................. (.01) -- (.01) -- -- -- --
Distributions from capital gains... -- -- (.18) (.22) (.11) (.15) --
---------- ---------- ---------- -------- ---------- ----------- -----------
Total distributions.............. (.43) (.43) (.64) (.70) (.61) (.68) (.56)
---------- ---------- ---------- -------- ---------- ----------- -----------
Net asset value, end of period..... $ 10.59 $ 10.65 $ 10.45 $ 10.68 $ 11.09 $ 10.60 $ 10.48
---------- ---------- ---------- -------- ---------- ----------- -----------
---------- ---------- ---------- -------- ---------- ----------- -----------
TOTAL RETURN (c):.................. 3.44% 6.05% 3.99% 2.43% 10.62% 7.68% 10.82%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).... $29,980 $40,550 $51,039 $65,215 $57,049 $45,401 $45,401
Average net assets (000)........... $35,221 $46,127 $60,174 $59,811 $50,154 $44,439 $46,521
Ratios to average net assets:
Expenses, including distribution
fees............................ 1.55%(e) 1.56%(e) 1.45%(e) 1.40% 1.46%(e) 1.46%(e) 1.32%(e)
Expenses, excluding distribution
fees............................ 1.05%(e) 1.06%(e) 0.95%(e) 0.90% 0.96%(e) 0.96%(e) 0.82%(e)
Net investment income............ 3.89%(e) 3.96%(e) 4.35%(e) 4.23% 4.69%(e) 5.01%(e) 5.52%(e)
Portfolio turnover rate............ 46% 35% 30% 55% 22% 78% 128%

INTERMEDIATE SERIES

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

CLASS B

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

YEARS ENDED

APRIL 30,
SEPTEMBER 17,
1987(a)
------------------------- TO APRIL 30,
1990 1989 1988(b)
----------- ----------- --------------
<S> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period............................ $ 10.17 $ 10.14 $ 10.00
----------- ----------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.............. .62(e) .70(e) .43(e)
Net realized and unrealized gain
(loss) on investment
transactions...................... (.16) .09 .14
----------- ----------- ------
Total from investment
operations...................... .46 .79 .57
----------- ----------- ------
LESS DISTRIBUTIONS
Dividends from net investment
income............................ (.62) (.70) (.43)
Distributions in excess of net
investment income................. -- -- --
Distributions from capital gains... (.03) (.06) --
----------- ----------- ------
Total distributions.............. (.65) (.76) (.43)
----------- ----------- ------
Net asset value, end of period..... $ 9.98 $ 10.17 $ 10.14
----------- ----------- ------
----------- ----------- ------
TOTAL RETURN (c):.................. 4.61% 8.21% 9.07%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).... $47,838 $45,362 $17,102
Average net assets (000)........... $46,246 $30,515 $6,298
Ratios to average net assets:
Expenses, including distribution
fees............................ 0.83%(e) 0.15%(e) 0%(e)
Expenses, excluding distribution
fees............................ 0.33%(e) 0.05%(e) 0%(e)
Net investment income............ 6.03%(e) 6.59%(e) 6.16%(d)(e)
Portfolio turnover rate............ 91% 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>

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

The following financial highlights, with respect to the fiscal year ended
April 30, 1997 have been audited by Price Waterhouse LLP, independent
accountants, and by Deloitte & Touche LLP, independent auditors, for the year
ended April 30, 1996, and the period August 1, 1994 through April 30, 1995. Each
of the respective reports by Price Waterhouse LLP and Deloitte & Touche LLP on
such financial highlights were 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>
INTERMEDIATE SERIES
------------------------------------------------
CLASS C SHARES
------------------------------------------------
YEAR ENDED APRIL 30, AUGUST 1,
1994(a)
----------------------------- THROUGH APRIL
1997 1996 30, 1995
------ ------ --------------
PER SHARE OPERATING PERFORMANCE:
<S> <C> <C> <C>
Net asset value, beginning of
period....................... $ 10.65 $10.45 $10.54
------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income (d)..... .39 .40 .35
Net realized and unrealized
gain (loss) on investment
transactions................. (.05) .20 (.08)
------ ------ ------
Total from investment
operations................. .34 .60 .27
------ ------ ------
LESS DISTRIBUTIONS
Dividends from net investment
income....................... (.39) (.40) (.35)
Distributions in excess of net
investment income............ (.01) -- (.01)
Distributions from capital
gains........................ -- -- --
------ ------ ------
Total distributions......... .40 (.40) (.36)
------ ------ ------
Net asset value, end of
period....................... $10.59 $10.65 $10.45
------ ------ ------
------ ------ ------
TOTAL RETURN (b):............. 3.17% 5.79% 2.14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $ 257 $ 225 $ 167
Average net assets (000)...... $ 149 $ 197 $ 28
Ratios to average net assets:
Expenses, including
distribution fees (d)...... 1.80% 1.81%(d) 1.81%(c)(d)
Expenses, excluding
distribution fees (d)...... 1.05% 1.06%(d) 1.06%(c)(d)
Net investment income (d)... 3.65% 3.71%(d) 4.34%(c)(d)
Portfolio turnover rate....... % 46 % 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 management fee waiver. See "Manager" in the Statement of Additional
Information.
</TABLE>

7
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
(CLASS Z SHARES)

<TABLE>
<CAPTION>
INTERMEDIATE
SERIES
CLASS Z SHARES
SEPTEMBER 13,
1996(a)
THROUGH
APRIL 30, 1997
-----------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $ 10.63
-------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (d)................................... .31
Net realized and unrealized gain (loss) on investment
transactions............................................... (.03)
-------
Total from investment operations........................ .28
-------
LESS DISTRIBUTIONS
Dividends from net investment income........................ .31
Distributions in excess of net investment income............ (.01)
-------
Total distributions..................................... (.32)
-------
Net asset value, end of period.............................. $ 10.59
-------
-------
TOTAL RETURN(b):............................................ 2.50%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............................. $246
Average net assets (000).................................... $63
Ratios to average net assets:
Expenses (d)............................................ 1.05%(c)
Net investment income(d)................................ 4.65%(c)
Portfolio turnover rate..................................... 46%(c)
<FN>
- ------------
(a) Commencement of offering of Class Z 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 the 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 management fee waiver. See "Manager" in the Statement of Additional
Information.
</TABLE>

8
<PAGE>
HOW THE FUND INVESTS

INVESTMENT OBJECTIVES AND POLICIES

THE INVESTMENT OBJECTIVE OF THE 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 OBJECTIVE WILL BE
ACHIEVED. See "Investment Objectives and Policies" in the Statement of
Additional Information. Although the Series will seek income that is eligible
for exclusion from federal income taxes, a portion of the dividends and
distributions paid by the Series may be treated as a preference item for
purposes of the alternative minimum tax. See "Taxes, Dividends and
Distributions."

As with an investment in any mutual fund, an investment in this Series can
decrease in value and you can lose money.

THE 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.

THE 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 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 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 SERIES WILL BE RATED AT LEAST BAA BY MOODY'S INVESTORS SERVICE
(MOODY'S) OR BBB BY STANDARD & POOR'S RATINGS GROUP (S&P) OR A SIMILAR
NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION (NRSRO) AT THE TIME OF
PURCHASE OR BE NON-RATED OBLIGATIONS OF COMPARABLE QUALITY IN THE OPINION OF THE
FUND'S INVESTMENT ADVISER. Securities rated Baa by Moody's or BBB by S&P have
speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with high grade bonds. 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.

9
<PAGE>
that the security will be called, refunded or redeemed. If the municipal
security includes the right to demand payment, the maturity of the security for
purposes of determining the Series' dollar-weighted average portfolio maturity
will be the period remaining until the principal amount of the security can be
recovered by exercising the right to demand payment.

GENERALLY, THE YIELD EARNED ON LONGER-TERM MUNICIPAL OBLIGATIONS IS GREATER
THAN THAT EARNED ON SIMILAR OBLIGATIONS WITH SHORTER MATURITIES. HOWEVER,
OBLIGATIONS WITH LONGER MATURITIES ARE SUBJECT TO GREATER MARKET RISK. Given a
specific change in the level of interest rates, the value of longer-term
obligations will fluctuate relatively more than the value of shorter-term
obligations. For example, 30-year municipal obligations typically yield 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 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 Series' 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.

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.

BORROWING

The Series may borrow an amount equal to no more than 33 1/3% 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. The Series may pledge up to
33 1/3% of the value of its total assets to secure these borrowings. If the
Series' asset coverage for borrowings falls below 300%, the Series will take
prompt action to reduce its borrowings. If the Series borrows to

10
<PAGE>
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." Money
borrowed for leveraging will be subject to interest costs which may or may not
be recovered by appreciation of the securities purchased and may exceed the
income from the securities purchased. In addition, the Fund may be required to
maintain minimum average balances in connection with such borrowing or pay a
commitment fee to maintain a line of credit which would increase the cost of
borrowing over the stated interest rate.

HEDGING STRATEGIES

FUTURES CONTRACTS AND OPTIONS THEREON

THE 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. THE SERIES, AND THUS THE INVESTOR, MAY LOSE MONEY THROUGH
ANY UNSUCCESSFUL USE OF THESE STRATEGIES. In that regard, the Series may sell
futures contracts to create "synthetic positions" by partially hedging
longer-term obligation positions. See "Investment Objectives and Policies"
above. The successful use of futures contracts and options thereon by the 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.
The 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.

THE 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. The Series may purchase and
sell futures contracts and options thereon for bona fide hedging transactions,
except that the 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, the 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 the 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 the 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. The 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.

11
<PAGE>
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
the 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 the Series to hedge effectively. There
is also a risk of loss by the 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 THE SERIES IS
SUBJECT TO VARIOUS ADDITIONAL RISKS. Any use of futures transactions involves
the risk of imperfect correlation in movements in the price of futures contracts
and movements in interest rates and, in turn, the prices of the securities that
are the subject of the hedge. If the price of the futures contract moves more or
less than the price of the security that is the subject of the hedge, the Series
will experience a gain or loss that will not be completely offset by movements
in the price of the security. The risk of imperfect correlation is greater where
the securities underlying futures contracts are taxable securities (rather than
municipal securities), are issued by companies in different market sectors or
have different maturities, ratings or geographic mixes than the security being
hedged. In addition, the correlation may be affected by additions to or
deletions from the index which serves as the basis for a futures contract.
Finally, if the price of the security that is subject to the hedge were to move
in a favorable direction, the advantage to the Series would be partially offset
by the loss incurred on the futures contract.

THE SERIES' ABILITY TO ENTER INTO AND CLOSE OUT 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 SERIES WOULD NOT BE SUBJECT ABSENT THE USE OF
THESE STRATEGIES. THE SERIES, AND THUS THE INVESTOR, MAY LOSE MONEY THROUGH ANY
UNSUCCESSFUL 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 Series may leave the Series 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 Series 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 Series to sell a portfolio security at a disadvantageous time, due to the
need for the Series 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

12
<PAGE>
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.

THE 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.

The 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.

The 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.

DURING NORMAL MARKET CONDITIONS, THE ASSETS OF THE SERIES WILL BE INVESTED SO
THAT IT WILL HAVE AT LEAST 80% OF ITS NET ASSETS INVESTED IN MUNICIPAL
OBLIGATIONS. However, when the Series' investment adviser believes that market
conditions warrant a temporary defensive investment posture or when necessary to
meet large redemptions, the 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. The
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. The 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

The 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
the 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, the 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 the 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. The Series will establish a segregated
account with its Custodian in which it will maintain cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily, having a value equal to or greater than the Series'
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 the Series may be required to accept on the settlement date may be less
than the market value of the obligation on that date.

13
<PAGE>
The 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

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

LIQUIDITY PUTS

The 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

The 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. The Series participates in a
joint repurchase account with other investment companies managed by PIFM
pursuant to an order of the Securities and Exchange Commission (SEC).

ILLIQUID SECURITIES

The 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. The 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. 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 Series' 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

14
<PAGE>
municipal lease obligations, the investment adviser also considers: (1) the
willingness of the municipality to continue, annually or biannually, to
appropriate funds for payment of the lease; (2) the general credit quality of
the municipality and the essentiality to the municipality of the property
covered by the lease; (3) in the case of unrated municipal lease obligations, an
analysis of factors similar to that performed by nationally recognized
statistical rating organizations in evaluating the credit quality of a municipal
lease obligation, including (i) whether the lease can be cancelled; (ii) if
applicable, what assurance there is that the assets represented by the lease can
be sold; (iii) the strength of the lessee's general credit (E.G., its debt,
administrative, economic and financial characteristics); (iv) the likelihood
that the municipality will discontinue appropriating funding for the leased
property because the property is no longer deemed essential to the operations of
the municipality (E.G., the potential for an event of nonappropriation); (v) the
legal recourse in the event of failure to appropriate; and (4) any other factors
unique to municipal lease obligations as determined by the investment adviser.

SECURITIES LENDING

The Series 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 does not expect to trade in securities for short-term gain. It is
anticipated that the annual portfolio turnover rate will not exceed 150%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the Series'
portfolio securities, excluding securities having a maturity at the date of
purchase of one year or less.

INVESTMENT RESTRICTIONS

The 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 the
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

For the fiscal year ended April 30, 1997, the total expenses as a percentage
of average net assets were 1.15%, 1.55%, 1.80% and 1.05% of the Class A, Class
B, Class C and Class Z shares, respectively, of the Series. See "Financial
Highlights."

MANAGER

PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, NEWARK, NEW JERSEY 07102, 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 THE SERIES UP TO $1 BILLION AND .45 OF 1% OF THE AVERAGE DAILY NET
ASSETS OF THE SERIES IN EXCESS OF $1 BILLION. PIFM, which changed its name from
Prudential Mutual Fund Management LLC, effective May 1, 1997, is organized as a
New York limited liability company. It is the successor to Prudential Mutual
Fund Management, Inc., which transferred its assets to PIFM in September 1996.
For the fiscal year ended April 30, 1997, PIFM received a management fee of .45%
of average daily net assets on behalf of the Series. See "Manager" in the
Statement of Additional Information.

15
<PAGE>
PIFM may from time to time waive its management fee and subsidize operating
expenses of the Series. PIFM 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 PIFM for such fee waiver. Fee waivers and expense
subsidies will increase the Series' yield and total return. See "How the Fund
Calculates Performance."

The current portfolio manager of the Series is Marie Conti, a Vice President
of PIFM, who has responsibility for the day-to-day management of the Series'
portfolio. Ms. Conti has managed the Series' portfolio since 1990 and has been
employed by PIC as a portfolio manager since September 1989 and prior thereto
was employed in an administrative capacity at PIC since August 1988.

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

DISTRIBUTOR

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. Prudential
Securities incurs the expenses of distributing the Series' Class Z shares under
the Distribution Agreement, none of which is reimbursed by or paid for by the
Fund. 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.

Under the Plans, the Series 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, THE 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. The
Class A

16
<PAGE>
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, 1998.

UNDER THE CLASS B AND CLASS C PLANS, THE 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, 1998. 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, 1997, the 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 records 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 Class A, Class B and Class C
shares of the Series will be allocated to each such class based upon the ratio
of sales of each such class to the sales of Class A, Class B and Class C 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 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 Series 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 (including Prudential
Securities) and other persons who distribute shares of the Series (including
Class Z shares). Such payments may be calculated by reference to the net asset
value of shares sold by such persons or otherwise.

17
<PAGE>
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.

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 (800) 225-1852.

PORTFOLIO TRANSACTIONS

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 the 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.

18
<PAGE>
HOW THE FUND VALUES ITS SHARES

THE 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.

The 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.

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 the Class A, Class B,
Class C and Class Z shares will generally be the same. It is expected, however,
that the Series' dividends will differ by approximately the amount of any
distribution and or service fee 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 THE SERIES IN ADVERTISEMENTS OR SALES LITERATURE. YIELD, TAX
EQUIVALENT YIELD AND TOTAL RETURN ARE CALCULATED SEPARATELY FOR CLASS A, CLASS
B, CLASS C AND CLASS Z 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 the 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 the Series. The "total return" shows how much an
investment in the 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 Series also may
include comparative performance information in advertising or marketing its
shares. Such performance information may include data from Lipper Analytical
Services, Inc.,

19
<PAGE>
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

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

To the extent the Series invests in taxable obligations, it will earn taxable
investment income. Also, to the extent the Series sells securities or engages in
hedging transactions in futures contracts and options thereon, it may earn both
short-term and long-term capital gain or loss. Capital gain or loss may also
arise upon the sale of municipal securities, as well as taxable obligations.
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.

TAXATION OF SHAREHOLDERS

In general, the character of tax-exempt interest distributed by the 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 the 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 currently is 28%. The
maximum long-term capital gains rate for corporate shareholders is currently the
same as the maximum tax rate for ordinary income.

20
<PAGE>
Any gain or loss realized upon a sale, exchange or redemption of the 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 loss, however, with
respect to the sale, exchange or redemption of shares that are held for six
months or less will be disallowed to the extent of any exempt interest dividends
received by the shareholder with respect to such shares, and otherwise will be
treated as long-term capital loss to the extent of any capital gain
distributions received by the shareholder with respect to such shares.

Any loss realized on a sale, redemption or exchange of shares of the Series 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 Series 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
Series.

CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE SERIES. 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 Series 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, the Series could be
liable for the alternative minimum tax for items of tax preference attributed to
it.

The Series intends to minimize its investment in municipal obligations of the
type that will produce items of tax preference.

WITHHOLDING TAXES

Under the Internal Revenue Code, the Series 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 generally is also required on taxable dividends and
capital gains distributions made by the Series.

21
<PAGE>
paid to a foreign shareholder are generally not subject to withholding tax. A
foreign shareholder will, however, be required to pay U.S. income tax on any
dividends and capital gain distributions which are effectively connected with a
U.S. trade or business of the foreign shareholder.

DIVIDENDS AND DISTRIBUTIONS

THE SERIES 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 the 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 (other than Class Z) will bear its own distribution charges,
generally resulting in lower dividends for Class B and Class C shares in
relation to Class A shares and lower dividends for Class A shares in relation to
Class Z 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 THE 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 LLC, 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 the Series, an investor should carefully consider the
impact of taxable dividends and capital gains distributions which are expected
to be or have been announced.

GENERAL INFORMATION

DESCRIPTION OF SHARES

THE FUND IS AN OPEN-END, MANAGEMENT INVESTMENT COMPANY COMPRISED OF THREE
SERIES WHICH WAS ORGANIZED UNDER THE LAWS OF MASSACHUSETTS ON NOVEMBER 3, 1986
AS AN UNINCORPORATED BUSINESS TRUST, A FORM OF ORGANIZATION THAT IS COMMONLY
CALLED A MASSACHUSETTS BUSINESS TRUST. THE FUND IS AUTHORIZED TO ISSUE AN
UNLIMITED NUMBER OF SHARES, DIVIDED INTO FOUR CLASSES, DESIGNATED CLASS A, CLASS
B, CLASS C AND CLASS Z. Each class of shares represents an interest in the same
assets of each Series and is identical in all respects except that (i) each
class is subject to different sales charges and distribution and/or service fees
(except for Class Z shares, which are not subject to any sales charges or
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, (iv) only
Class B shares have a conversion feature and (v) Class Z shares are offered
exclusively to a limited group of investors. 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.

22
<PAGE>
Shares of the Series, 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 Series 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 (with the exception of Class Z shares,
which are not subject to any distribution or service fees) 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 the Series is entitled to its portion of all of the Series' assets
after all debt and expenses of the Series 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 and to Class Z shareholders, whose shares are not
subject to any distribution and/or service fees. The Series' shares do not have
cumulative voting rights for the election of Trustees.

ADDITIONAL INFORMATION

SHAREHOLDER GUIDE

HOW TO BUY SHARES OF THE FUND

YOU MAY PURCHASE SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES LLC (PMFS OR THE TRANSFER AGENT) ATTENTION: INVESTMENT SERVICES, P.O.
BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. Participants in programs
sponsored by Prudential Retirement Services should contact their client
representative for more information about Class Z shares. The purchase price is
the NAV per share next determined following receipt of an order in proper forms
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). Class Z shares are
offered to a limited group of investors at net asset value without any sales
charge. Payment may be made by wire, check or through your brokerage account.
See "Alternative Purchase Plan" below. See also "How the Fund Values its
Shares."

23
<PAGE>
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 Fund reserves the right to reject any purchase order (including an
exchange into the Series) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.

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 Series 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 (Intermediate Series), specifying on the wire the account
number assigned by PMFS and your name and identifying the class in which you are
eligible to invest (Class A, Class B, Class C or Class Z shares).

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 the Series as of that day. See "Net Asset Value" in the
Statement of Additional Information.

In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Municipal Bond
Fund (Intermediate Series), Class A, Class B, Class C or Class Z 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.

24
<PAGE>
ALTERNATIVE PURCHASE PLAN

THE SERIES OFFERS THROUGH THIS PROSPECTUS FOUR CLASSES OF SHARES (CLASS A,
CLASS B, CLASS C AND CLASS Z 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).

The four classes of shares represent an interest in the same portfolio of
investments of the Series and have the same rights, except that (i) each class
is subject to different sales charges and distribution and/or service fees (with
the exception of Class Z shares, which are not subject to any distribution 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, and (iii) only Class B shares have a conversion feature. The
four 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 (if any) 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 and Class Z shares.

25
<PAGE>
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Series:

If you intend to hold your investment in the 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.

CLASS A SHARES

The Distributor may reallow the entire initial sales charge to dealers.
Selling dealers may be deemed to be underwriters, as that term is defined in the
Securities Act of 1933.

In connection with the sale of Class A shares at NAV (without payment of an
initial sales charge), the Manager, the Distributor or one of their affiliates
will pay dealers, financial advisers and other persons which distribute shares a
finders' fee based on a percentage of the net asset value of shares sold by such
persons.

26
<PAGE>
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 PIFM 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 of Subadvisers of the Prudential Mutual Funds provided that the
purchases at NAV are permitted by such person's employer, (d) Prudential
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, (e) registered representatives and employees of dealers who have
entered into a selected dealer agreement with Prudential Securities provided
that purchases at NAV are permitted by such person's employer and (f) 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 or within one year in the case of benefit plans, (ii) the
purchase is made with proceeds of a redemption of shares of any open-end
non-money market fund sponsored by the financial adviser's previous employer
(other than a fund which imposes a distribution or service fee of .25 of 1% or
less) and (iii) the financial adviser served as the client's broker on the
previous purchase.

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." The Distributor will pay sales
commissions of up to 4% of the purchase price of Class B shares to dealers,
financial advisers and other persons who sell Class B shares at the time of sale
from its own resources. This facilitates the ability of the Fund to sell the
Class B shares without an initial sales charge being deducted at the time of
purchase. The Distributor anticipates that it will recoup its advancement of
sales commissions from the combination of the CDSC and the distribution fee. See
"Distributor." In connection with the sale of Class C shares, the Distributor
will pay dealers, financial advisers and other persons which distribute Class C
shares a sales commission of up to 1% of the purchase price at the time of the
sale.

CLASS Z SHARES

Class Z shares of the Series are available for purchase by the following
categories of investors:

(i) pension, profit-sharing or other employee benefit plans qualified under
Section 401 of the Internal Revenue Code, deferred compensation plans and
annuity plans under Sections 457 and 403(b)(7) of the Internal Revenue Code, and
non-qualified plans for which the Series is an available option (collectively,
Benefit Plans), provided that such Benefit Plans (in combination with other
plans sponsored by the same employer or group of related employers) have at
least $50 million in defined contribution assets; (ii) participants in any
fee-based program or trust program sponsored by Prudential Securities, The
Prudential Savings Bank, F.S.B. (or any affiliate) which includes mutual funds
as investment options and for which the Series is an available option; (iii)
certain participants in the MEDLEY Program (group variable annuity contracts)
sponsored by Prudential for whom Class Z

27
<PAGE>
shares are an available investment option; (iv) Benefit Plans for which
Prudential Retirement Services serves as record keeper and, as of September 20,
1996, (a) were Class Z shareholders of the Prudential Mutual Funds, or (b)
executed a letter of intent to purchase Class Z shares of the Prudential Mutual
Funds; (v) current and former Directors/Trustees of the Prudential Mutual Funds
(including the Fund); and (vi) employees of Prudential and/or Prudential
Securities who participate in a Prudential-sponsored employee saving plan.

HOW TO SELL YOUR SHARES

YOU CAN REDEEM YOUR SHARES OF THE SERIES 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 SERIES THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM YOUR SHARES THROUGH PRUDENTIAL SECURITIES. PLEASE CONTACT 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 LLC, Attention: Redemption Services, P.O. Box
15010, New Brunswick, New Jersey 08906-5010.

28
<PAGE>
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Series 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
the 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
Series during any 90-day period for any one shareholder.

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 the Series 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 may affect the federal tax treatment of any gain or
loss realized upon redemption. See "Taxes, Dividends and Distributions" in the
Statement of Additional Information.

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 the Series 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.

29
<PAGE>
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:

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 Series 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 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.

30
<PAGE>
SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12% of
the total dollar amount subject to the CDSC may be redeemed without charge. The
Transfer Agent will calculate the total amount available for this waiver
annually, on the earlier of March 1, 1997 or the anniversary date of your
purchase. The CDSC will be waived (or reduced) on redemptions until this
threshold 12% amount is reached.

CONVERSION FEATURE--CLASS B SHARES

31
<PAGE>
HOW TO EXCHANGE YOUR SHARES

AS A SHAREHOLDER OF THE SERIES, 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, CLASS C AND
CLASS Z SHARES MAY BE EXCHANGED FOR CLASS A, CLASS B, CLASS C AND CLASS Z
SHARES, RESPECTIVELY, OF THE OTHER SERIES OF THE FUND AND OF ANOTHER FUND ON THE
BASIS OF THE RELATIVE NAV. No sales charge will be imposed at the time of the
exchange. Any applicable CDSC payable upon the redemption of shares exchanged
will be calculated from the first day of the month after the initial purchase,
excluding the time shares were held in a money market fund. Class B and Class C
shares may not be exchanged into money market funds other than Prudential
Special Money Market Fund, Inc. 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.

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 LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.

32
<PAGE>
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.

Participants in any fee-based program for which the Series is an available
option will have their Class A shares, if any, exchanged for Class Z shares when
they elect to have those assets become a part of the fee-based program. Upon
leaving the program (whether voluntarily or not), such Class Z shares (and, to
the extent provided for in the program, Class Z shares acquired through
participation in the program) will be exchanged for Class A shares at net asset
value. Similarly, participants in PSI's 401(k) Plan for which the Series' Class
Z shares is an available option and who wish to transfer their Class Z shares
out of the PSI 401(k) Plan following separation from service (I.E., voluntary or
involuntary termination of employment or retirement) will have their Class Z
shares exchanged for Class A shares at NAV.

The Exchange Privilege is not a right and may be suspended, modified or
terminated 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 Series at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
Prudential Securities, you should contact your financial adviser.

-AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP, you may make regular
purchases of the Series' 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.

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

33
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY

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
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 Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
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 Dryden Fund
Prudential Active Balance Fund
Prudential Stock Index Fund
Prudential Emerging Growth Fund
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Jennison Series Fund, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Multi-Sector Fund, Inc.
Prudential Small Company Value 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
Liquid Assets Series

A-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
What are the Series' Risk Factors and Special Characteristics?..... 2
FUND EXPENSES........................................................ 4
FINANCIAL HIGHLIGHTS................................................. 5
HOW THE FUND INVESTS................................................. 9
Investment Objectives and Policies................................. 9
Hedging Strategies................................................. 11
Other Investments and Policies..................................... 12
Investment Restrictions............................................ 15
HOW THE FUND IS MANAGED.............................................. 15
Manager............................................................ 15
Distributor........................................................ 16
Portfolio Transactions............................................. 18
Custodian and Transfer and Dividend Disbursing Agent............... 18
HOW THE FUND VALUES ITS SHARES....................................... 19
HOW THE FUND CALCULATES PERFORMANCE.................................. 19
TAXES, DIVIDENDS AND DISTRIBUTIONS................................... 20
GENERAL INFORMATION.................................................. 22
Description of Shares.............................................. 22
Additional Information............................................. 23
SHAREHOLDER GUIDE.................................................... 23
How to Buy Shares of the Fund...................................... 23
Alternative Purchase Plan.......................................... 25
How to Sell Your Shares............................................ 28
Conversion Feature--Class B Shares................................. 31
How to Exchange Your Shares........................................ 32
Shareholder Services............................................... 33
THE PRUDENTIAL MUTUAL FUND FAMILY.................................... A-1
</TABLE>

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

<TABLE>
<CAPTION>
MF133A 4441470
<S> <C>
CUSIP Nos.:
Class A: 74435L509; Class B: 74435L608
Class C: 74435L889 Class Z: 74435L855
</TABLE>

PRUDENTIAL
MUNICIPAL BOND
FUND
- -------------------

[PROSPECTUS]

JULY 2, 1997

INTERMEDIATE SERIES

[LOGO]
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND

Statement of Additional Information
dated July 2, 1997

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 Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077, 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 July 2, 1997, a copy of
which may be obtained from the Fund upon request.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
CROSS-REFERENCE
TO
PAGE IN
PRUDENTIAL
CROSS-REFERENCE MUNICIPAL BOND
TO PAGE IN FUND
PRUDENTIAL INTERMEDIATE
MUNICIPAL BOND SERIES
PAGE FUND PROSPECTUS PROSPECTUS
---- --------------- ---------------
<S> <C> <C> <C>
General Information.................................. B-2 35 22
Investment Objectives and Policies................... B-2 18 9
Investment Restrictions.............................. B-9 28 15
Trustees and Officers................................ B-10 28 15
Manager.............................................. B-15 29 15
Distributor.......................................... B-17 29 16
Portfolio Transactions and Brokerage................. B-19 31 18
Purchase and Redemption of Fund Shares............... B-20 37 23
Shareholder Investment Account....................... B-23 37 23
Net Asset Value...................................... B-26 32 19
Taxes, Dividends and Distributions................... B-26 33 20
Performance Information.............................. B-30 32 19
Organization and Capitalization...................... B-33 35 22
Custodian, Transfer and Dividend Disbursing Agent and
Independent Accountants............................ B-34 32 18
Financial Statements................................. B-36 --
Independent Auditors' Report......................... B-77 --
Appendix I -- General Investment Information......... I-1 --
Appendix II -- Historical Performance Data........... II-1 --
Appendix III -- Information Relating to The
Prudential......................................... III-1 --
</TABLE>

<PAGE>

GENERAL INFORMATION

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 15
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 an 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

B-2
<PAGE>
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), doing business as Prudential
Investments (PI, the Subadviser or the investment adviser), 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 Fund's 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.

B-3
<PAGE>
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 water and sewer utilities systems,
obligations of municipal electric and gas 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.

B-4
<PAGE>
A portion of the dividends and distributions paid on the shares of each
Series of the Fund may be treated as a preference item for purposes of the
alternate minimum tax for individuals and corporations. Such treatment may cause
certain investors, depending upon other aspects of their individual tax
situation, to incur some federal income tax liability. The Fund's Subadviser
intends (except with respect to the High Yield Series) to invest in securities
so as to minimize the portion of such dividends or distributions that are
treated as a tax preference item. In addition, corporations are subject to an
alternative minimum tax which treats as a tax preference item 75% of a
corporation's adjusted current earnings. A corporation's adjusted current
earnings would include interest paid on municipal obligations and dividends paid
on shares of the Fund. See "Taxes, Dividends and Distributions."

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

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

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

MUNICIPAL SECURITIES

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

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

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

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

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.

B-5
<PAGE>
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 or obtains a letter of credit 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

B-6
<PAGE>
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, U.S. Government securities, equity securities or other liquid,
unencumbered assets 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 a similar put option. In instances involving the purchase of a call
option on a futures contract, the Fund will deposit in a segregated

B-7
<PAGE>

account with the Fund's Custodian an amount in cash, U.S. Government Securities,
equity securities or other liquid, unencumbered assets, 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 Investments Fund Management LLC (PIFM) 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.

SECURITIES OF OTHER INVESTMENT COMPANIES

Each Series may invest up to 10% of its total assets in securities of other
investment companies. Generally, no Series intends to invest more than 5% of
their total assets in such securities. To the extent that a Series does invest
in securities of other investment companies, shareholders of the Series may be
subject to duplicate management and advisory fees.

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 33 1/3% 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 33 1/3% 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

B-9
<PAGE>
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).

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 the open
market involving only customary brokerage commissions and as a result of which
no more than 10% of its total assets (determined at the time of investment)
would be invested in such securities or except in connection with a merger,
consolidation, reorganization or acquisition of assets.

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

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

12. 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.

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

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.

TRUSTEES AND OFFICERS

B-10
<PAGE>

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE(1) POSITION WITH FUND DURING PAST FIVE YEARS
- --------------------------- ----------------------- -------------------------------------------------------------------
<S> <C> <C>
Delayne Dedrick Gold (58) Trustee Marketing and Management Consultant; Director of The High Yield
Income Fund, Inc.
*Robert F. Gunia (50) Trustee Comptroller (since May 1996), Prudential Investments; Executive
Vice President and Treasurer (since December 1996), Prudential
Investments Fund Management LLC (PIFM); Senior Vice President
(since March 1987) of Prudential Securities Incorporated
(Prudential Securities); formerly Chief Administrative Officer
(July 1990-September 1996), Director (January 1989-September 1996)
and Executive Vice President, Treasurer and Chief Financial
Officer (June 1987-September 1996) of Prudential Mutual Fund
Management, Inc.; Vice President and Director of The Asia Pacific
Fund, Inc. (since May 1989); Director of The High Yield Income
Fund, Inc.
*Harry A. Jacobs, Jr. (75) Trustee Senior Director (since January 1986) of Prudential Securities;
One Seaport Plaza formerly Interim Chairman and Chief Executive Officer of PMF
New York, NY 10292 (June-September 1993); formerly Chairman of the Board of
Prudential Securities (1982-1985) and Chairman of the Board and
Chief Executive Officer of Bache Group Inc. (1977-1982); Trustee
of The Trudeau Institute; Director of The First Australia Fund,
Inc., The First Australia Prime Income Fund, Inc. and The High
Yield Income Fund, Inc.
Donald D. Lennox (78) Trustee Chairman (since February 1990) and Director (since April 1989) of
International Imaging Materials, Inc. (thermal transfer ribbon
manufacturer); Retired Chairman, Chief Executive Officer and
Director of Shlegel Corporation (industrial manufacturing) (March
1987-February 1989); Director of Gleason Corporation, Personal
Sound Technologies, Inc. and The High Yield Fund, Inc.
*Mendel A. Melzer CFA (36) Trustee Chief Investment Officer (since October 1996) of Prudential Mutual
751 Broad Street Funds; formerly Chief Financial Officer of Prudential Investments
Newark, NJ 07102 (November 1995-September 1996), Senior Vice President and Chief
Financial Officer of Prudential Preferred Financial Services
(April 1993-November 1995), Managing Director of Prudential
Investment Advisors (April 1991-April 1993) and Senior Vice
President of Prudential Capital Corporation (July 1989-April
1991); Chairman and Director of Prudential Series Fund, Inc;
Director of the High Yield Income Fund, Inc.
Thomas T. Mooney (55) Trustee President of the Greater Rochester Metro Chamber of Commerce;
former Rochester City Manager; Trustee of Center for Governmental
Research, Inc.; Director of Blue Cross of Rochester, Monroe County
Water Authority, Rochester Jobs, Inc., Northeast-Midwest
Institute, Executive Service Corps of Rochester, Monroe County
Industrial Development Corporation, First Financial Fund, Inc. and
The High Yield Income Fund, Inc.
<FN>
- ------------------------
*"Interested" Trustee, as defined in the Investment Company Act, by reason of his affiliation with Prudential Securities,
Prudential or PIFM.
</TABLE>

B-11
<PAGE>

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE(1) POSITION WITH FUND DURING PAST FIVE YEARS
- --------------------------- ----------------------- -------------------------------------------------------------------
<S> <C> <C>
Thomas H. O'Brien (72) Trustee President, O'Brien Associates (financial and management
consultants) (since April 1984); formerly President of Jamaica
Water Securities Corp. (holding company) (February 1989-August
1990); Chairman and Chief Executive Officer (September
1987-February 1989) and Director (September 1987-August 1990) of
Jamaica Water Supply Company; Director of Ridgewood Savings Bank;
Trustee of Hofstra University.
*Richard A. Redeker (53) Trustee and President Employee of Prudential Investments; formerly President, Chief
751 Broad Street Executive Officer and Director (October 1993-September 1996),
Newark, N.J. 07102 Prudential Mutual Fund Management, Inc.; Executive Vice President,
Director and Member of the Operating Committee (October
1993-September 1996), Prudential Securities; Director (October
1993-September 1996) of Prudential Securities Group, Inc.
Executive Vice President, The Prudential Investment Corporation
(July 1994-September 1996); Director (January 1994-September 1996)
of Prudential Mutual Fund Distributors, Inc. (PMFD) and Prudential
Mutual Fund Services, Inc.; formerly Senior Executive Vice
President and Director of Kemper Financial Services, Inc.
(September 1978-September 1993); Director and President of The
Global Yield Fund, Inc.
Nancy H. Teeters (66) Trustee Economist; formerly Vice President and Chief Economist of
International Business Machines Corporation (March 1986-June
1990); Director of Inland Steel Industries (since July 1991) and
the High Yield Income Fund, Inc.
Louis A. Weil, III (55) Trustee President and Chief Executive Officer (since January 1996) and
Director (since September 1991) of Central Newspapers, Inc.;
Chairman (since January 1996), Publisher and Chief Executive
Officer of Phoenix Newspapers, Inc. (August 1991-December 1995).
Director of Central Newspapers, Inc. (since September 1991),
formerly, Publisher of Time Magazine (May 1989-March 1991);
formerly President, Publisher and Chief Executive Officer of the
Detroit News (February 1986-August 1989); formerly member of the
Advisory Board, Chase Manhattan Bank-Westchester.
Susan C. Cote (42) Vice President Vice President (since February 1997) of Prudential Mutual Funds &
Annuities (PMF&A); Executive Vice President (since February 1997)
and Chief Financial Officer (since May 1996) of PIFM; formerly
Managing Director of Prudential Investments and Vice President,
The Prudential Investment Corporation (February 1995-May 1966),
Senior Vice President (January 1989-January 1995) of Prudential
Mutual Fund Management, Inc., and Senior Vice President (January
1992-January 1995) of Prudential Securities.
Thomas A. Early (42) Vice President Vice President and General Counsel (since March 1997) of PMF&A);
Executive Vice President, Secretary and General Counsel of PIFM
(since December 1996); formerly Vice President and General
Counsel, Prudential Retirement Services (March 1994-March 1997),
Associate General Counsel and Chief Financial Services Officer,
Frank Russell Company (1988-1994).
<FN>
- ------------------------
*"Interested" Trustee, as defined in the Investment Company Act, by reason of affiliation with Prudential Securities,
Prudential or PIFM.
</TABLE>

B-12
<PAGE>

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

(1) Unless otherwise noted the address for each of the above persons is c/o:
Prudential Investments Fund Management LLC, Gateway Center Three, 100
Mulberry Street, 9th Floor, Newark, New Jersey 07102-4077.

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.

Pursuant to the terms of 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 Trustees of the Fund who are affiliated persons of the Manager.
The Fund pays each of its Trustees who is not an affiliated person of PIFM or
Prudential Investments annual compensation of $5,500, in addition to certain
out-of-pocket expenses. The amount of annual compensation paid to each Director
may change as a result of the introduction of additional funds upon which the
Director will be asked to serve.

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.

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, 1997 and the aggregate compensation paid to such Trustees for
service on the Fund's Board and that of all other funds managed by PIFM (Fund
Complex) for the calendar year ended December 31, 1996. In October 1996,
shareholders elected a new Board of Trustees. Below are listed all Trustees who
have served the Fund during its most recent fiscal year as well as new Trustees
who took office after the shareholders' meeting in October.

B-13
<PAGE>
COMPENSATION TABLE

<TABLE>
<CAPTION>
PENSION OR
RETIREMENT TOTAL COMPENSATION
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FROM FUND AND FUND
COMPENSATION AS PART OF FUND BENEFITS UPON COMPLEX PAID TO
NAME OF TRUSTEE FROM FUND@ EXPENSES RETIREMENT DIRECTORS
- ----------------------------------------------------- ------------- ----------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Edward D. Beach, Trustee $ 7,833 None N/A $ 166,000(21/39)*
Eugene C. Dorsey, Trustee** -- None N/A $ 98,583(12/36)*
Delayne Dedrick Gold, Trustee $ 1,833 None N/A $ 175,308(21/42)*
Robert F. Gunia, Trustee+ -- None N/A --
Harry A. Jacobs, Jr., Trustee+ -- None N/A --
Donald D. Lennox, Trustee $ 7,833 None N/A $ 90,000(10/22)*
Douglas H. McCorkindale, Former Trustee $ 6,000 None N/A --
Mendel A. Melzer, Trustee+ -- None N/A --
Thomas T. Mooney, Trustee** $ 7,833 None N/A $ 135,375(18/36)*
Thomas H. O'Brien, Trustee $ 1,833 None N/A $ 32,250(5/20)*
Richard A. Redeker, Trustee and President+ -- None N/A --
Nancy H. Teeters, Trustee $ 1,833 None N/A $ 103,583(11/28)*
Louis A. Weil, III, Trustee $ 7,833 None N/A $ 91,250(13/18)*
</TABLE>

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

@ Effective January 1997, the annual compensation paid to Trustees was reduced
to $5,500 in addition to certain out-of-pocket expenses.

* Indicates number of funds/portfolios in Fund Complex (including the Fund) to
which aggregate compensation relates.

+ Robert F. Gunia, Harry A. Jacobs, Jr., Mendel A. Melzer and Richard A.
Redeker, who are each interested Trustees, do not receive compensation from
the Fund or any fund in the Fund Complex.

** Total compensation from all of the funds in the Fund Complex for the calendar
year ended December 31, 1996, includes amounts deferred at the election of
Trustees under the Fund's deferred compensation plans. Including accrued
interest, total compensation amounted to $111,535 and $139,869 for Eugene C.
Dorsey and Thomas T. Mooney, respectively.

As of June 6, 1997, 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 6, 1997, Prudential Securities was record holder for other
beneficial owners of 21,533,624 Class A shares (or 70% of the outstanding Class
A shares) of the High Yield Series, 9,173,571 Class A shares (or 49% of the
outstanding Class A shares) of the Insured Series and 784,777 Class A shares (or
61% of the outstanding Class A shares) of the Intermediate Series; 46,948,796
Class B shares (or 76% of the outstanding Class B shares) of the High Yield
Series, 9,913,692 Class B shares (or 37% of the outstanding Class B shares) of
the Insured Series and 1,396,276 Class B shares (or 50% of the outstanding Class
B shares) of the Intermediate Series, and 869,843 Class C shares (or 95% of the
outstanding Class C shares) of the High Yield Series, 42,185 Class C shares (or
55% of the outstanding Class C shares) of the Insured Series and 20,636 Class C
shares (or 85% of the outstanding Class C shares) of the Intermediate Series and
303,743 Class Z shares (or 99% of the outstanding Class Z shares) of the High
Yield Series, 1,645 Class Z shares (or 99% of the outstanding Class Z shares) of
the Insured Series and 25,404 Class Z shares (or 99% of the outstanding Class Z
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 6, 1997, the beneficial owners, directly or indirectly, of more
than 5% of the outstanding shares of any class of beneficial interest of a
Series were: Mr. Stephen J. Charms, 2787 Sulgrave Rd, Beachwood, OH 44122-2343
who held 46,491 Class Z shares of the High Yield Series (15.3%); Mrs. June
Adelson, 2662 Cranlyn Rd, Shaker Hts, OH 44122-2002 who held 26,218 Class Z
shares of the High Yield Series (8.6%); Brian Forrest Cooke, Account 2, 7999
Evanston Rd, Indianapolis, IN 46240-2731 who held 21,338 Class Z shares of the
High Yield Series (7.0%); John D. Cooke, 13665 E. 114th St, Fishers, IN
46038-9712 who held 116,897 Class Z shares of the High Yield Series (38.5%);
Gary Oliver, Patricia Oliver Cons, Property of Laura Lee Oliver, 43553 SE Marmot
Rd, Sandy, OR 97055-8715 who held 67,390 Class A shares of the Intermediate
Series (5.3%); Mr. Edward R. Liscak and Mrs. Leonora A. Liscak, 24 Ridge Road,
Clark, NJ 07066-2916 who held 1,804 Class C shares of the Intermediate Series
(7.4%); Lance E. Radbill, Ruth M. Radbill, 444 Saint Annes Dr., Birmingham, AL
35244-3267 who held 14,055 Class C shares of the Intermediate Series (57.7%);
Frank R. Grabenhofer, Loretta M. Grabenhofer JT TEN, 15606 Plum Tree Dr, Orland
Park, IL 60462-5987, who held 3,697 Class C shares of the Intermediate Series
(15.2%); Mr. Ben L. Danna, 6261 Inwood Dr, Houston, TX 77057-3507, who held
2,366 Class C shares of the Intermediate Series (9.7%); Richard A. Reed MD,

B-14
<PAGE>

Mary E. Reed JT TEN, 14 Latigo Ln, Rolling Hills, CA 90274-1520 who held 1,444
Class C shares of the Intermediate Series (5.9%); Ms. Ruth Harris, 772 Hilltop
Ct, Coram, NY 11727-3652, who held 1,282 Class Z shares of the Intermediate
Series (5.0%); Mrs. Eleanor C. Larochelle, Eleanor C. Larochelle UA, DTD
11/21/96, 35 Redbay Ct, Homosassa, FL 34446-5121, who held 5,684 Class Z shares
of the Intermediate Series (22.4%); Ms. Jennifer Nan, Kitchens Successor TTEE,
UA DTD 8/2/96, 705 Greenbrook Cir, St. Joseph, MI 49085-9312, who held 2,826
Class Z shares of the Intermediate Series (11.1%); Ms. Ethel Marshall TTEE,
Ethel Marshall Survivors Trust, UA DTD 4/18/96, 4302 N Stowell Ave, Shorewood,
WI 53211-1747, who held 1,631 Class Z shares of the Intermediate Series (6.4%);
Ms. Linda Lappin, Marshall Family Trust, UA DTD 4/18/96, 4302 N. Stowell Ave,
Shorewood, WI 53211-1747, who held 7,849 Class Z shares of the Intermediate
Series (30.9%); David R. Hopkins, Trustee, David R. Hopkins Revocable Trust, DTD
4/5/97, P.O. Box Drawer 4345, St. Augustine, FL 32085-4345, who held 6,402 Class
C shares of the Insured Series (8.3%); Valarie J. Ragland, 701 N James, Sparta,
IL 62286-1152, who held 5,313 Class C shares of the Insured Series (6.9%);
Bervia R. Gordon TTEE, UA DTD 6/11/86, 4 Meadow Pass, Huntington, IN 46750-1314,
who held 6,578 Class C shares of the Insured Series (8.5%); Mr. Ben L. Danna,
6261 Inwood Dr, Houston, TX 77057-3507, who held 4,593 Class C shares of the
Insured Series (5.9%); Keith M. Benedict, Rose Benedict CO-TTEES, UA DTD
11/17/93, 7939 Neva Avenue, Burbank, IL 60459-1614, who held 4,112 Class C
shares of the Insured Series (5.3%); and Mr. Eugene E. Poirot, Mrs. Patricia F.
Poirot TEN COM ACCT#2, 130 N Burnet Dr, Baytown, TX 77520-1104, who held 1,645
Class Z shares of the Insured Series (99%).

MANAGER

The manager of the Fund is Prudential Investments Fund Management LLC (PIFM
or the Manager) (formerly Prudential Mutual Fund Management LLC) as successor to
Prudential Mutual Fund Management, Inc., Gateway Center Three, Newark, 100
Mulberry Street, New Jersey 07102-4077. PIFM 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, 1997, PIFM managed and/or administered open-end
and closed-end management investment companies with assets of approximately $56
billion and, according to the Investment Company Institute, as of December 31,
1996, the Prudential Mutual Funds were the 15th largest family of mutual funds
in the United States.

PIFM is a subsidiary of Prudential Securities Incorporated and The
Prudential Insurance Company of America (Prudential). Prudential Mutual Fund
Services LLC (PMFS or the Transfer Agent), a wholly owned subsidiary of PIFM,
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), PIFM, 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, PIFM is obligated to keep certain books and records of the
Fund. PIFM 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 PIFM for the
Fund are not exclusive under the terms of the Management Agreement and PIFM is
free to, and does, render management services to others.

For its services, PIFM 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. PIFM 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 PIFM, 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 PIFM will be reduced by the amount of such
excess. Reductions in excess of the total compensation payable to PIFM will be
paid by PIFM to the Fund. No such reductions were required during the fiscal
year ended April 30, 1997. No jurisdiction currently limits the Fund's expenses.

In connection with its management of the business affairs of the Fund, PIFM
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 PIFM or the
Fund's investment adviser;

B-15
<PAGE>

(b) all expenses incurred by PIFM 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,
doing business as Prudential Investments (PI or the Subadviser) pursuant to the
subadvisory agreement between PIFM 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, and the states under state securities laws,
including the preparation and printing of the Fund's registration statements and
prospectuses for such purposes, (k) allocable communications expenses with
respect to investor services and all expenses of shareholders' and Trustees'
meetings and of preparing, printing and mailing reports, proxy statements and
prospectuses to shareholders in the amount necessary for distribution to the
shareholders, (l) litigation and indemnification expenses and other
extraordinary expenses not incurred in the ordinary course of the Fund's
business and (m) distribution fees.

The Management Agreement provides that PIFM 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 22, 1997 and by the
shareholders of each Series on February 19, 1988.

For the fiscal year ended April 30, 1997, PIFM received a management fee of
$4,614,964 (net of waiver of $514,371), $2,494,083 (net of waiver of $277,120)
and $220,036 (net of waiver of $24,449) on behalf of the High Yield Series,
Insured Series and Intermediate Series, respectively. For the fiscal year ended
April 30, 1996, PIFM 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, PIFM 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.

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

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

The Subadvisory Agreement was last approved by the Trustees, including a
majority of the Trustees who are not parties to the contract or interested
persons of any such party as defined in the Investment Company Act, on May 22,
1997, 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, PIFM or PI 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.

B-16
<PAGE>
DISTRIBUTOR

Prudential Securities Incorporated (Prudential Securities, PSI or the
Distributor), 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 incurs the expenses of
distributing the Fund's Class A, Class B and Class C shares. Prudential
Securities incurs the expenses of distributing the Fund's Class Z shares under
the Distribution Agreement, none of which are reimbursed or paid for by the
Fund. See "How the Fund is Managed--Distributor" in the Prospectus.

Prior to January 22, 1990, the Fund offered only one class of shares (the
existing Class B shares). On October 11, 1989, the Trustees, including a
majority of the Trustees who are not interested persons of the Fund and who have
no direct or indirect 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 22, 1997. 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, 1997, PSI received
payments of $294,940, $187,371 and $13,487 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, 1997, PSI also received approximately $210,200, $88,800 and $4,500 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, 1997, the Distributor
received $3,626,526, $1,829,455 and $176,107 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, 1997, 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 $ 7,100 $ 1,441,000 $1,535,200 $ 286,000 $ 3,269,300
Insured Series $ 27,600 $ 391,200 $ 85,000 $ 254,700 $ 758,500
Intermediate Series $ 0 $ 69,200 $ 60,700 $ 191,800 $ 321,700
<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

B-17
<PAGE>

Prospectus. For the fiscal year ended April 30, 1997, Prudential Securities
received approximately $1,200,100, $649,000 and $87,000 on behalf of the High
Yield Series, Insured Series and Intermediate Series, respectively, in
contingent deferred sales charges attributable to Class B shares.

CLASS C PLAN. For the fiscal year ended April 30, 1997, the Distributor
received $60,452, $7,299 and $1,121 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 $ 600 $ 44,400 $ 23,600 $ 1,300 $ 69,900
Insured Series $ 900 $ 4,400 $ 600 $ 700 $ 6,600
Intermediate Series $ 0 $ 1,500 $ 1,290 $ 10 $ 2,800
<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, 1997, Prudential
Securities received approximately $4,100 and $600 on behalf of the High Yield
Series and Insured Series, respectively, in contingent deferred sales charges
attributable to Class C shares and did not receive any contingent deferred sales
charges with respect to the Intermediate Series.

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 federal securities laws. The amended Distribution Agreement
was approved by the Trustees, including a majority of the Rule 12b-1 Trustees,
on May 22, 1997. 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

B-18
<PAGE>
funds, if necessary, for that purpose. PSI's settlement with the state
securities regulators included an agreement to pay a penalty of $500,000 per
jurisdiction. PSI consented to a censure and to the payment of a $5,000,000 fine
in settling the NASD action. In settling the above referenced matters, PSI
neither admitted nor denied the allegations asserted against it.

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

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

B-19
<PAGE>
brokerage houses customarily provide to institutional investors and include
statistical and economic data and research reports on particular companies and
industries. These services are used by the Manager in connection with all of its
investment activities, and some of these services obtained in connection with
the execution of transactions for the Fund may be used in managing other
investment accounts. Conversely, brokers, dealers or futures commission
merchants furnishing these services may be selected for the execution of
transactions of these other accounts, whose aggregate assets may be far larger
than the Fund, and the services furnished by the brokers, dealers or futures
commission merchants may be used by the Manager in providing investment
management for the Fund. Commission rates are established pursuant to
negotiations with the broker, dealer or futures commission merchant based on the
quality and quantity of execution services provided by the broker in the light
of generally prevailing rates. The policy of the Manager is to pay higher
commissions to brokers, other than Prudential Securities, for particular
transactions than might be charged if a different broker had been selected, on
occasions when, in the Manager's opinion, this policy furthers the objective of
obtaining best price and execution. In addition, the Manager is authorized to
pay higher commissions on brokerage transactions for the Fund to brokers other
than Prudential Securities in order to secure research and investment services
described above, subject to review by the Fund's Trustees from time to time as
to the extent and continuation of this practice. The allocation of orders among
brokers and the commission rates paid are reviewed periodically by the Fund's
Trustees. Portfolio securities may not be purchased from any underwriting or
selling syndicate of which Prudential Securities (or any affiliate), during the
existence of the syndicate, is a principal underwriter (as defined in the
Investment Company Act), except in accordance with rules of the SEC. This
limitation, in the opinion of the Fund, will not significantly affect the Series
ability to pursue their present investment objectives. However, in the future in
other circumstances, the Series may be at a disadvantage because of this
limitation in comparison to other funds with similar objectives but not subject
to such limitations.

Subject to the above considerations, Prudential Securities may act as a
securities broker or futures commission merchant for the Fund. In order for
Prudential Securities (or any affiliate) to effect any portfolio transactions
for the Fund, the commissions, fees or other remuneration received by Prudential
Securities (or any affiliate) must not exceed certain rates set forth in the
Investment Company Act and must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other brokers or futures
commission merchants in connection with comparable transactions involving
similar securities or futures being purchased 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, 1997, 1996 and 1995 the Fund paid
$163,500, $263,800 and $34,125, 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). Class
Z shares of the Fund are offered to a limited group of investors at net asset
value without any sales charges. 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 the Fund and has the same rights, except that (i) each class is
subject to different sales charges and distribution and/or service fees (except
for Class Z shares, which are not subject to any 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, (iv) only Class B shares have a conversion feature and (v) Class Z
shares are offered exclusively for sale to a limited group of investors. See
"Distributor" and "Shareholder Investment Account--Exchange Privilege."

B-20
<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* Class C* and Class Z shares are sold at net asset value. Using the Fund's net
asset value at April 30, 1997, 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.............................. $10.84 $ 10.90 $10.59
Maximum sales charge (3% of offering
price)..................................... .34 .34 .33
----------- --------- ------
Offering price to public..................... $11.18 $ 11.24 $10.92
----------- --------- ------
----------- --------- ------

CLASS B
Net asset value, redemption price and
offering price to public per Class B
share*..................................... $10.84 $ 10.91 $10.59
----------- --------- ------
----------- --------- ------

CLASS C
Net asset value, redemption price and
offering price to public per Class C
share*..................................... $10.84 $ 10.91 $10.59
----------- --------- ------
----------- --------- ------

CLASS Z
Net asset value, offering price and
redemption price per Class Z share......... $10.83 $ 10.91 $10.59
----------- --------- ------
----------- --------- ------
</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

B-21
<PAGE>
reduced sales charge. However, the value of shares held directly with the
Transfer Agent and through Prudential Securities will not be aggregated to
determine the reduced sales charge. All shares must be held either directly with
the Transfer Agent or through Prudential Securities. The value of existing
holdings for purposes of determining the reduced sales charge is calculated
using the maximum offering price (net asset value plus maximum sales charge) as
of the previous business day. See "How the Fund Values its Shares" in the
Prospectus.

The Distributor must be notified at the time of purchase that the
shareholder is entitled to a reduced sales charge. The reduced sales charges
will be granted subject to confirmation of the investors' holdings. 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.

B-22
<PAGE>
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES

The contingent deferred sales charge is waived under circumstances described
in the Prospectus. See "Shareholder Guide--How to Sell Your Shares--Waiver of
the Contingent Deferred Sales Charges--Class B Shares" in the Prospectus. In
connection with these waivers, the Transfer Agent will require you to submit the
supporting documentation set forth below.
<TABLE>
<S> <C>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
Death A copy of the shareholder's death certificate
or, in the case of a trust, a copy of the
grantor's death certificate, plus a copy of
the trust agreement identifying the grantor.

Disability - An individual will be considered A copy of the Social Security Administration
disabled if he or she is unable to engage in award letter or a letter from a physician on
any substantial gainful activity by reason of the physician's letterhead stating that the
any medically determinable physical or mental shareholder (or, in the case of a trust, the
impairment which can be expected to result in grantor) is permanently disabled. The letter
death or to be of long-continued and must also indicate the date of disability.
indefinite duration.

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

B-23
<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-24
<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. (Class A shares)
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.

CLASS Z Class Z shares may be exchanged for Class Z shares of other
Prudential Mutual Funds.

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 sixty 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

B-25
<PAGE>
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 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.

B-26
<PAGE>
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
marketed with an 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.

Net asset value is calculated separately for each class. As long as long as
the Series declare dividends daily, the net asset value of the Class A, Class B,
Class C and Class Z shares will generally be the same. Series' dividends will
differ by approximately the amount any distribution and/or service fee expense
accrual differential among the classes.

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 (including market discount on municipal obligations) 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

B-27
<PAGE>

item for purposes of the alternative minimum tax. Each Series 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 interest on all municipal obligations for purposes of 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 $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 interest, dividends, payments with respect to securities loans 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 each of (i) its net tax-exempt
interest income and (ii) 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 as of April 30,
1997 of approximately $16,993,000 of which $2,024,000 expires in 2002,
$5,361,000 expires 2003, $6,383,000 expires in 2004, and $3,225,000 expires in
2005. No capital gains distribution is expected to be paid to shareholders until
net gains have been realized in excess of the aggregate of such amounts. In
addition, the High Yield Series elected to treat net realized capital losses of
approximately $931,000 incurred in the six month period ended April 30, 1997, as
having been incurred in the following year. The Insured Series and Intermediate
Series utilized their capital loss carryforwards of approximately $631,000 and
$338,000 respectively, to partially offset each Series' net taxable gains
realized and recognized in the fiscal year ended April 30, 1997.

Each Series may purchase debt securities (such as zero coupon bonds) that
contain original issue discount. Original issue discount that accrues in a
taxable year is treated as income earned by the Series and therefore is subject
to the distribution requirements of the Internal Revenue Code. Because the
original issue discount income earned by the Series in a taxable year may not be
represented by cash income, the Series may have to dispose of other securities
and use the proceeds to make distributions to satisfy the Internal Revenue
Code's distribution requirements.

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

B-28
<PAGE>
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.

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 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.

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

B-29
<PAGE>
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.

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.

Dividends of net investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a nominee
or fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends unless the
dividends are effectively connected with a U.S. trade or business conducted by
the foreign shareholder. Capital gain dividends paid to a foreign shareholder
are generally not subject to withholding tax. A foreign shareholder will,
however, be required to pay U.S. income tax on any dividends and capital gain
distributions which are effectively connected with a U.S. trade or business of
the foreign shareholder.

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 each Class of shares. The per share dividends on Class A shares will
be lower than the per share dividends on Class Z shares, since Class Z shares
bear no distribution-related fee.

B-30
<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, Class
C and Class Z 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, 1997 was 5.60%, 4.84% and 3.95%
for Class A shares of the High Yield Series, Insured Series and Intermediate
Series, respectively. The yield for the 30 days ended April 30, 1997 was 5.38%,
4.59% 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,
1997 was 5.13%, 4.34% and 3.42% for Class C shares of the High Yield Series,
Insured Series and Intermediate Series, respectively. The yield for the 30 days
ended April 30, 1997 was 5.88%, 5.10% and 4.17% for Class Z 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, 1997, the tax equivalent yield
for the Class A shares of the High Yield Series, Insured Series and Intermediate
Series was 9.27%, 8.01% and 6.54%, respectively. For the 30 days ended April 30,
1997, the tax equivalent yield for the Class B shares of the High Yield Series,
Insured Series and Intermediate Series was 8.91%, 7.60% and 6.08%, respectively.
For the 30 days ended April 30, 1997, the tax equivalent yield for the Class C
shares of the High Yield Series, Insured Series and Intermediate Series was
8.49%, 7.19% and 5.66%, respectively. For the 30 days ended April 30, 1997, the
tax equivalent yield for the Class Z shares of the High Yield Series, Insured
Series and Intermediate Series was 9.74%, 8.44% and 6.90%, 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, Class C and Class Z shares. See "How the Fund
Calculates Performance" in the Prospectus.

B-31
<PAGE>
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.

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, 1997 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 1997 1997 INCEPTION 1997 1997
- ---------------------- ----------- ----------- ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
High Yield Series 7.0 % 6.6 % 4.8 % 7.0 % 6.5% 4.7 %
Insured Series 6.7 % 5.8 % 2.6 % 6.6 % 5.8% 2.5 %
Intermediate Series 6.0 % 5.1 % 0.7 % 5.9 % 5.1% 0.6 %
</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
one and five year periods ended April 30, 1997 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 1997 1997 INCEPTION 1997 1997
- ---------------------- ------------- ----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
High Yield Series 8.1 % 6.6 % 2.7 % 8.0 % 6.6 % 2.6 %
Insured Series 7.5 % 5.9 % 0.3 % 7.4 % 5.8 % 0.2 %
Intermediate Series 6.6 % 5.1 % (1.6) % 6.3 % 5.1 % (1.7) %
</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, 1997 were as follows:

<TABLE>
<CAPTION>
SUBSIDY/WAIVER
ADJUSTED
YEAR ---------------------------
ENDED YEAR ENDED
FROM APRIL 30, FROM APRIL 30,
SERIES INCEPTION 1997 INCEPTION 1997
- ---------------------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
High Yield Series 6.3 % 6.4 % 6.2 % 6.3 %
Insured Series 5.4 % 4.1 % 5.4 % 4.0 %
Intermediate Series 4.0 % 2.2 % 4.0 % 2.1 %
</TABLE>

Due to the fact that Class Z shares have not been in operations for more
than one full year, no average annual total returns are provided.

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

B-32
<PAGE>
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.

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, 1997 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 1997 1997 INCEPTION 1997 1997
- ---------------------- ------------- ---------- ---------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
High Yield Series 69.1 % 41.6 % 8.0 % 68.6 % 41.5 % 7.9 %
Insured Series 65.0 % 36.8 % 5.7 % 64.1 % 36.5 % 5.6 %
Intermediate Series 57.8 % 32.1 % 3.9 % 56.3 % 31.9 % 3.8 %
</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, 1997 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 1997 1997 INCEPTION 1997 1997
- ---------------------- ------------- ----------- ---------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
High Yield Series 111.4 % 38.8 % 7.7 % 109.6 % 38.7 % 7.6 %
Insured Series 100.7 % 34.1 % 5.3 % 98.3 % 33.8 % 5.2 %
Intermediate Series 84.6 % 29.4 % 3.4 % 78.5 % 29.1 % 3.3 %
</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 period ended April 30, 1997 were as follows:

<TABLE>
<CAPTION>
SUBSIDY/WAIVER
ADJUSTED
---------------------------
YEAR ENDED YEAR ENDED
FROM APRIL 30, FROM APRIL 30,
SERIES INCEPTION 1997 INCEPTION 1997
- ---------------------- ------------- ---------- ------------- -----------
<S> <C> <C> <C> <C>
High Yield Series 18.2 % 7.4 % 18.1 % 7.3 %
Insured Series 15.6 % 5.1 % 15.5 % 5.0 %
Intermediate Series 11.5 % 3.2 % 11.4 % 3.1 %
</TABLE>

B-33
<PAGE>

The aggregate total return and subsidy/waiver adjusted aggregate total
return from inception of the Class Z shares (September 16, 1996) through April
30, 1997 were as follows:

<TABLE>
<CAPTION>
SUBSIDY/
WAIVER
ADJUSTED
-------------
FROM FROM
SERIES INCEPTION INCEPTION
- ---------------------- ------------- -------------
<S> <C> <C> <C>
High Yield Series 4.4 % 4.4 %
Insured Series 2.9 % 2.9 %
Intermediate Series 2.5 % 2.5 %
</TABLE>

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)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C> <C>
Performance
Comparison of
Different
Types of Investments
Over the Long Term
(1/192603/1997)
Long-Term Govt.
Common Stocks Bonds Inflation
10.70% 5.00% 3.10%
</TABLE>

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

(1)Source: Ibbotson Associates, "Stocks, Bonds, Bills and Inflation--1997
Yearbook" (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). 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.

B-34
<PAGE>
The Declaration of Trust further provides that no Trustee, officer, employee
or agent of the Fund is liable to the Fund or to a shareholder, nor is any
Trustee, officer, employee or agent liable to any third persons in connection
with the affairs of the Fund, except as this liability may arise from his or her
own bad faith, willful misfeasance, gross negligence, or reckless disregard of
his or her duties. It also provides that all third parties shall look solely to
the Fund property or the property of the appropriate Series of the Fund for
satisfaction of claims arising in connection with the affairs of the Fund or of
the particular Series of the Fund, respectively. With the exceptions stated, the
Declaration of Trust permits the Trustees to provide for the indemnification of
Trustees, officers, employees or agents of the Fund against all liability in
connection with the affairs of the Fund.

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

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

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

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

Pursuant to the Declaration of Trust, the Trustees may authorize the
creation of additional series of shares (the proceeds of which would be invested
in separate, independently managed portfolios with distinct investment
objectives and policies and share purchase, redemption and net asset valuation
procedures) with such preferences, privileges, limitations and voting and
dividend rights as the Trustees may determine. All consideration received by the
Fund for shares of any additional series, and all assets in which such
consideration is invested, would belong to that series (subject only to the
rights of creditors of such series) and would be subject to the liabilities
related thereto.

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

CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT
AND INDEPENDENT ACCOUNTANTS

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

B-35
<PAGE>

Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer and Dividend Disbursing Agent. It is a
wholly-owned subsidiary of PIFM. 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 of $13.00 per shareholder account, a new
account set-up fee of $2.00 for each manually established account and a monthly
inactive zero balance account fee of $20.00 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, 1997, the Fund incurred fees of
approximately $653,000 ($370,500-High Yield Series, $252,100-Insured Series and
$30,400-Intermediate Series) for the services of PMFS.

Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York 10036,
serves as the Fund's independent accountants and in that capacity audits the
Fund's annual financial statements.

B-36
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
PORTFOLIO OF INVESTMENTS AS OF APRIL 30, 1997 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--96.9%
- ---------------------------------------------------------------------------------------------------------------------------------
ALABAMA--0.5%
Ft. Payne Ind. Dev. Brd. Rev., Gametime Inc. NR 10.25% 8/01/09 $ 4,119 (c) $ 4,669,628
- ---------------------------------------------------------------------------------------------------------------------------------
ARIZONA--1.7%
Coconino Cnty. Pol. Ctrl. Corp. Rev.
Tucson Elec. Pwr., Navajo A B2 7.125 10/01/32 5,000 5,097,000
Tucson Elec. Pwr., Navajo B B2 7.00 10/01/32 1,700 1,728,781
Ft. Mojave Indian Tribe Wtr. & Swr. Rev. NR 10.25 9/01/19 3,000 (e) 1,500,000
Pima Cnty. Ind. Dev. Auth., Multifam. Mtge. Rev., La
Cholla Proj. NR 8.50 7/01/20 9,835 8,630,212
--------------
16,955,993
- ---------------------------------------------------------------------------------------------------------------------------------
CALIFORNIA--11.3%
California Hsg. Fin. Agcy. Rev., Home Mtge., Ser. G Aa 8.15 8/01/19 885 916,763
Corona Ctfs. of Part., Vista Hosp. Sys. Inc., Ser. C NR 8.375 7/01/11 10,000 10,729,400
Delano Ctfs. of Part., Regl. Med. Ctr., Ser. A NR 9.25 1/01/22 6,735 7,534,781
Folsom Spec. Tax Dist. No. 2 NR 7.70 12/01/19 3,130 3,263,275
Long Beach Redev. Agcy. Hsg.,
Multifam. Hsg. Rev., Pacific Court Apts., Issue B NR 6.80 9/01/13 3,805 (e) 2,473,250
Multifam. Hsg. Rev., Pacific Court Apts. NR 6.95 9/01/23 6,195 (e) 4,026,750
Los Angeles Regl. Arpts. Impvt. Corp., Cont. Air
Sublease NR 9.25 8/01/24 10,345 12,241,342
Orange Cnty. Cmnty. Loc. Trans. Auth., Reg. Linked
Savrs. & Ribs Aa 6.20 2/14/11 7,000 7,384,720
Richmond Redev. Agcy. Rev., Multifam. Bridge Affordable
Hsg. NR 7.50 9/01/23 10,000 9,632,700
Roseville Joint Union H.S. Dist.,
Ser. B, F.G.I.C. Aaa Zero 8/01/09 1,740 895,004
Ser. B, F.G.I.C. Aaa Zero 8/01/11 1,890 855,433
Ser. B, F.G.I.C. Aaa Zero 8/01/14 2,220 825,085
Sacramento City Fin. Auth. Rev., Tax Alloc., M.B.I.A. Aaa Zero 11/01/15 5,695 1,956,005
Sacramento Cnty. Spec. Tax Rev.,
Dist. No. 1, Elliot Ranch NR 8.20 8/01/21 3,750 3,899,212
Dist. No. 1, Laguna Creek Ranch NR 8.25 12/01/20 4,500 4,795,650
San Joaquin Hills Trans. Corr. Agcy.,
Toll Rd. Rev. NR Zero 1/01/11 12,900 5,123,880
Toll Rd. Rev. NR Zero 1/01/14 8,420 2,998,951
Toll Rd. Rev. NR Zero 1/01/22 25,000 5,234,250
Toll Rd. Rev. NR Zero 1/01/25 10,000 1,731,100
Santa Margarita/Dana Point Auth., Impvt. Dist.,
Ser. A, M.B.I.A. Aaa 7.25 8/01/13 1,990 2,336,439
Ser. B, M.B.I.A. Aaa 7.25 8/01/12 3,000 3,518,820

- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Financial Statements. B-37

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
PORTFOLIO OF INVESTMENTS AS OF APRIL 30, 1997 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.)
So. California Pub. Pwr. Auth. Trans., Cap. Apprec. Aa Zero 7/01/14 $ 8,500 $ 3,200,845
So. San Francisco Redev. Agcy., Tax Alloc., Gateway
Redev. Proj. NR 7.60% 9/01/18 2,375 2,509,639
So. Tahoe Joint Pwrs. Fin. NR 8.00 10/01/01 5,795 5,917,912
Turlock Irrigation Dist. Rev., Ser. A Aaa 6.25 1/01/12 5,000 5,389,450
Victor Valley Union H.S. Dist.,
Gen. Oblig., M.B.I.A. Aaa Zero 9/01/12 3,605 1,522,536
Gen. Oblig., M.B.I.A. Aaa Zero 9/01/14 4,740 1,753,279
Gen. Oblig., M.B.I.A. Aaa Zero 9/01/16 3,990 1,291,363
--------------
113,957,834
- ---------------------------------------------------------------------------------------------------------------------------------
COLORADO--3.3%
Denver Urban Ren. Auth. Tax,
Inc. Rev. NR 7.50 9/01/04 3,000 3,001,380
Inc. Rev. NR 7.75 9/01/16 4,000 4,014,160
Eagle Cnty. Co., Lake Creek Affordable Hsg., Ser. A NR 8.00 12/01/23 11,505 11,915,959
San Miguel Cnty., Mountain Vlge. Met. Dist. NR 8.10 12/01/11 3,200 3,540,928
Superior Met. Dist. No. 1, Wtr. & Swr.,
Rev. NR 7.50 12/01/98 1,600 1,645,344
Rev. NR 8.50 12/01/13 8,900 9,709,188
--------------
33,826,959
- ---------------------------------------------------------------------------------------------------------------------------------
CONNECTICUT--0.9%
Connecticut St. Dev. Auth. Swr., Netco Waterbury Ltd. NR 9.375 6/01/16 8,000 9,134,960
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRICT OF COLUMBIA--0.9%
Dist. of Columbia Rev., Nat'l. Public Radio NR 7.625 1/01/18 8,800 9,302,920
- ---------------------------------------------------------------------------------------------------------------------------------
FLORIDA--4.5%
Crossings At Fleming Island Cmnty. Dev. Dist., Clay City NR 8.25 5/01/16 7,860 8,353,765
Escambia Cnty. Hlth. Facs. Auth. Rev., Baptist Hosp.
Ref., Ser. A BBB+(b) 8.60 10/01/02 3,900 4,164,927
Florida Hsg. Fin. Agcy., Palm Aire Proj., Multifam.
Mtge. Rev. NR 10.00 1/01/20 9,448 (e) 6,613,944
No. Springs Impvt. Dist. Wtr. Mgt.,
Ser. A NR 8.20 5/01/24 1,960 2,087,419
Ser. A NR 8.30 5/01/24 1,720 1,843,118
Orlando Util. Comm., Wtr. & Elec. Rev., Ser. D Aa 6.75 10/01/17 2,000 2,282,920
Palm Beach Cnty. Hsg. Auth., Banyan Club Apts. NR 7.75 3/01/23 4,530 4,855,209
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Financial Statements. B-38

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
PORTFOLIO OF INVESTMENTS AS OF APRIL 30, 1997 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.)
Sarasota Hlth. Facs., Kobernick Hsg. Meadow Park Proj. Aaa 10.00% 7/01/22 $ 6,920 (c) $ 8,542,117
Seminole Cnty. Ind. Dev. Auth. Rev., Fern Park NR 9.25 4/01/12 5,990 6,373,420
--------------
45,116,839
- ---------------------------------------------------------------------------------------------------------------------------------
GEORGIA--3.2%
Atlanta Urban Res. Fin. Auth., Clark Atlanta Univ. Dorm.
Proj. NR 9.25 6/01/10 4,440 5,078,694
Effingham Cnty. Dev. Auth., Ft. Howard Corp. B1 7.90 10/01/05 10,000 10,414,800
Fulton Cnty. Wtr. & Swr. Rev., F.G.I.C. Aaa 6.375 1/01/14 6,000 6,546,960
Rockdale Cnty. Dev. Auth., Solid Wste. Disp. Rev. NR 7.50 1/01/26 10,100 10,435,926
--------------
32,476,380
- ---------------------------------------------------------------------------------------------------------------------------------
HAWAII--0.7%
Hawaii Cnty. Impvt. Dist. No. 17 NR 9.50 8/01/11 6,790 6,790,000
- ---------------------------------------------------------------------------------------------------------------------------------
ILLINOIS--9.5%
Chicago Brd. Edl., Lease Ctfs., Ser. A, M.B.I.A. Aaa 6.00 1/01/20 10,000 10,326,400
Chicago O'Hare Int'l. Arpt.,
Amer. Airlines Proj., Ser. B Baa2 8.20 12/01/24 1,000 1,167,790
United Airlines, Ser. B Baa2 8.45 5/01/07 6,000 6,528,000
United Airlines, Ser. B Baa2 8.50 5/01/18 6,500 7,080,775
United Airlines, Ser. B Baa2 8.85 5/01/18 2,700 3,034,800
United Airlines, Ser. B Baa2 8.95 5/01/18 2,320 2,603,110
Chicago Pub. Bldg. Comm. Rev., Ser. A Aaa 7.00 1/01/20 6,530 7,493,501
Hennepin Ind. Dev. Rev., Exolon-Esk Co. Proj. NR 8.875 1/01/18 8,000 8,759,040
Illinois St. Hlth. Facs. Auth. Rev.,
Adventist Living Ctr. NR 11.00 12/01/15 2,245 (e) 202,010
Beacon Hill Proj., Ser. A NR 9.00 8/15/19 7,240 7,723,704
Midwest Physician Group Ltd. Proj. BBB-(b) 8.10 11/15/14 3,135 3,437,966
Midwest Physician Group Ltd. Proj. BBB-(b) 8.125 11/15/19 3,285 3,607,259
Illinois, Ser. K, A.M.B.A.C. Aaa 6.25 1/01/13 6,825 7,320,085
Kane And De Kalb Cntys. Sch.,
Dist. No. 301, Cap. Apprec. A.M.B.A.C. Aaa Zero 12/01/11 3,360 1,465,565
Dist. No. 301, Cap. Apprec. A.M.B.A.C. Aaa Zero 12/01/13 4,065 1,557,098
Vlge. of Robbins, Cook Cnty. Robbins Res. Rec. NR 8.375 10/15/16 19,000 19,775,580
Winnebago Cnty. Hsg. Auth., Park Tower Assoc., Sec. 8 NR 8.125 1/01/11 4,124 4,311,395
--------------
96,394,078
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Financial Statements. B-39

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
PORTFOLIO OF INVESTMENTS AS OF APRIL 30, 1997 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>
- ---------------------------------------------------------------------------------------------------------------------------------
INDIANA--2.2%
Bluffton Econ. Dev. Rev., Kroger Co. Proj. Baa3 7.85% 8/01/15 $ 7,500 $ 8,335,725
Indianapolis Int'l. Arpt. Auth. Rev., Federal Express
Corp. Proj. Baa2 7.10 1/15/17 6,000 6,456,000
Wabash Econ. Dev. Rev. Bonds, Connell Ltd. NR 8.50 11/24/17 7,250 7,804,262
--------------
22,595,987
- ---------------------------------------------------------------------------------------------------------------------------------
IOWA--2.6%
City of Cedar Rapids Rev.,
1st Mtge., Cottage Grove Place Proj. NR 9.00 7/01/18 9,375 10,199,156
1st Mtge., Cottage Grove Place Proj. NR 9.00 7/01/25 4,435 4,796,808
Iowa St. Fin. Auth., Hlth. Care Facs. Rev., Mercy Hlth.
Initiatives Proj. NR 9.25 7/01/25 10,000 11,688,900
--------------
26,684,864
- ---------------------------------------------------------------------------------------------------------------------------------
KENTUCKY--0.8%
Kentucky St. Tpke. Auth. Rev., F.G.I.C. Aaa Zero 1/01/10 8,250 4,113,120
Owensboro Elec. Lt. & Pwr. Rev.,
Ser. B, A.M.B.A.C. Aaa Zero 1/01/14 5,000 1,937,150
Ser. B, A.M.B.A.C. Aaa Zero 1/01/16 6,650 2,258,008
--------------
8,308,278
- ---------------------------------------------------------------------------------------------------------------------------------
LOUISIANA--3.4%
Hodge Util. Rev., Stone Container Corp. NR 9.00 3/01/10 7,000 7,453,670
New Orleans Home Mtge. Auth. Rev., Sngl. Fam. Mtge.,
Ser. A, G.N.M.A. Aaa 8.60 12/01/19 1,670 1,742,027
New Orleans Ind. Dev. Rev. BB+(b) 8.75 10/01/19 3,600 4,095,288
New Orleans, Gen Oblig., Cap. Apprec., A.M.B.A.C. Aaa Zero 9/01/18 3,090 880,774
St. Charles Parish Poll. Ctrl. Rev.,
Pwr. & Lt. Co. Baa3 8.25 6/01/14 10,000 10,838,000
Pwr. & Lt. Co., Ser. 1989 Baa3 8.00 12/01/14 3,500 3,816,435
West Feliciana Parish Poll. Ctrl. Rev., Gulf St. Util.
Co. Proj. NR 9.00 5/01/15 5,250 5,806,657
--------------
34,632,851
- ---------------------------------------------------------------------------------------------------------------------------------
MARYLAND--1.9%
Anne Arundel Cnty. 1st Mtge. Rev., Pleasant Living Conv. NR 8.50 7/01/13 3,325 3,536,669
Northeast Wste. Disp. Auth.,
Sludge Comp. Fac. NR 7.25 7/01/07 4,330 4,489,301
Sludge Comp. Fac. NR 8.50 7/01/07 3,200 3,371,008
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Financial Statements. B-40

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
PORTFOLIO OF INVESTMENTS AS OF APRIL 30, 1997 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 (cont'd.)
Washington Sub. San. Dist.
Ref., Gen. Const. Aa1 6.00% 6/01/18 $ 3,705 $ 3,920,001
Ref., Gen. Const. Aa1 6.00 6/01/19 3,940 4,169,072
--------------
19,486,051
- ---------------------------------------------------------------------------------------------------------------------------------
MASSACHUSETTS--4.5%
Boston Ind. Dev. Fin. Auth. Ind. Rev., 1st Mtge.
Springhouse Proj. NR 9.25 7/01/15 8,000 8,665,600
Mass. Bay Trans. Auth., Gen. Trans. Sys., Ser. A,
F.G.I.C. Aaa 7.00 3/01/21 7,500 8,805,375
Mass. St. Coll. Bldg. Proj. and Ref. Bonds A1 7.50 5/01/14 1,750 2,115,925
Mass. St. Hlth. & Edl. Facs. Auth. Rev.,
Cardinal Cushing Gen. Hosp. NR 8.875 7/01/18 7,500 8,106,450
St. Josephs Hosp., Ser. C NR 9.50 10/01/20 5,735 (c) 6,392,690
Mass. St. Ind. Fin. Agcy. Cont. Res., Ser. A NR 9.50 2/01/00 1,650 1,716,165
Mass. St. Ind. Fin. Agcy. Rev., Glenmeadow Proj. NR 7.00 2/15/06 3,700 3,700,888
Randolph Hsg. Auth., Multifam. Hsg., Liberty Place Proj.
A, Ser. A NR 9.00 12/01/21 5,955 6,161,817
--------------
45,664,910
- ---------------------------------------------------------------------------------------------------------------------------------
MICHIGAN--4.3%
Grand Rapids Dev. Auth.
Cap. Apprec., M.B.I.A. Aaa Zero 6/01/10 3,000 1,445,160
Cap. Apprec., M.B.I.A. Aaa Zero 6/01/11 3,160 1,429,774
Cap. Apprec., M.B.I.A. Aaa Zero 6/01/12 3,000 1,273,710
Gratiot Cnty. Econ. Dev. Corp., Danley Die Proj. Connell
L.P. NR 7.625 4/01/07 3,200 3,358,048
Holland Sch. Dist., Cap. Apprec., A.M.B.A.C. Aaa Zero 5/01/17 2,950 911,255
Lowell Area Sch., F.G.I.C. Aaa Zero 5/01/14 5,000 1,872,700
Michigan St. Hosp. Fin. Auth. Rev., Saratoga Cmnty.
Hosp. NR 8.75 6/01/10 6,345 7,089,268
Michigan Strategic Fund Ltd. Oblig. Rev., Great Lakes
Pulp & Fibre Proj. NR 10.25 12/01/16 20,000 (e) 9,399,800
Michigan Strategic Fund, Solid Wste. Disp., Gennese Pwr.
Station NR 7.50 1/01/21 10,000 10,215,300
Wayne Cnty. Bldg. Auth., Ser. A Baa2 8.00 3/01/17 3,500 (c) 4,009,040
West Ottawa Sch. Dist.,
F.G.I.C. Aaa Zero 5/01/15 4,825 1,693,865
F.G.I.C. Aaa Zero 5/01/18 3,000 873,840
--------------
43,571,760
- ---------------------------------------------------------------------------------------------------------------------------------
MINNESOTA--0.4%
Minneapolis St. Paul Hsg. Fin. Brd., Multifam. Mtge.
Rev., Riverside Plaza, G.N.M.A. AAA(b) 8.25 12/20/30 4,000 4,172,320
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Financial Statements. B-41

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
PORTFOLIO OF INVESTMENTS AS OF APRIL 30, 1997 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>
- ---------------------------------------------------------------------------------------------------------------------------------
MISSISSIPPI--1.8%
Claiborne Cnty. Poll. Ctrl. Rev.,
Mid. So. Engy. Sys. Ba1 9.875% 12/01/14 $ 6,100 $ 6,668,703
Mid. So. Engy. Sys., Ser. A Ba1 9.50 12/01/13 10,350 11,279,223
--------------
17,947,926
- ---------------------------------------------------------------------------------------------------------------------------------
MISSOURI--2.2%
Sikeston Elec. Rev. Ref., M.B.I.A. Aaa 6.00 6/01/15 9,250 9,710,002
St. Louis Cnty. Ind. Dev. Auth. Rev.,
Soemm Proj. NR 10.25 7/01/08 1,635 1,638,761
Soemm Proj. NR 10.25 7/01/08 620 621,426
St. Louis Cnty. Reg. Conv. & Sports Comp., Ser. C Aaa 7.90 8/15/21 8,820 10,179,074
--------------
22,149,263
- ---------------------------------------------------------------------------------------------------------------------------------
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 1,940 2,018,473
- ---------------------------------------------------------------------------------------------------------------------------------
NEW HAMPSHIRE--1.4%
New Hampshire Higher Edl. & Hlth. Facs. Auth. Rev.,
Antioch College NR 7.875 12/01/22 5,405 5,849,345
Havenwood/Heritage Heights NR 9.75 12/01/19 7,595 (c) 8,725,288
--------------
14,574,633
- ---------------------------------------------------------------------------------------------------------------------------------
NEW JERSEY--6.4%
New Jersey Econ. Dev. Corp. Rev., Ref. Newark Arpt.
Marriot Hotel NR 7.00 10/01/14 3,800 3,917,876
New Jersey Hlthcare Facs., Fin. Auth. Rev. NR 8.00 7/01/27 5,000 4,983,850
New Jersey St. Econ. Dev. Auth. Rev., 1st Mtge.,
Fellowship Vlge., Proj. A NR 9.25 1/01/25 11,500 13,353,685
Keswick Pines Proj. NR 7.75 1/01/01 3,095 3,148,265
New Jersey St. Ref., Ser. E Aa1 6.00 7/15/10 10,000 10,667,800
New Jersey St. Tpke. Auth. Rev., Ser. C, M.B.I.A. Aaa 6.50 1/01/16 11,000 12,149,830
New Jersey St. Trans. Trust Fund Auth., Trans. Sys.,
M.B.I.A. Aaa 6.50 6/15/11 14,500 16,091,375
--------------
64,312,681
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Financial Statements. B-42

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
PORTFOLIO OF INVESTMENTS AS OF APRIL 30, 1997 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 YORK--4.7%
Met. Trans. Auth. Facs. Rev., Ser. N, F.G.I.C. Aaa Zero 7/01/13 $ 8,340 $ 3,403,721
New York City Ind. Dev. Agcy.,
Amer. Airlines Inc. Baa2 8.00% 7/01/20 3,320 3,510,269
Mesorah Pub. Ltd. NR 10.25 3/01/19 1,886 2,046,970
Visy Paper Inc. Proj. NR 7.95 1/01/28 9,500 10,199,390
New York City,
Ser. F Baa1 5.875 8/01/24 10,500 10,026,135
Ser. H Baa1 6.00 8/01/17 1,000 981,510
Ser. I Baa1 6.25 4/15/27 5,000 4,979,700
New York Hosp. Rev., Newark Wayne Cmnty. Hosp. Inc.,
Ser. A NR 7.60 9/01/15 2,425 2,348,176
New York St. Dorm. Auth. Rev., Colgate Univ., M.B.I.A. Aaa 6.00 7/01/21 3,350 3,498,707
New York St. Engy. Res. & Dev. Auth. Rev., B.U.G. Co.,
Ser. D, M.B.I.A. Aaa 7.214 7/08/26 2,000 (d) 1,740,000
Port Auth. of New York & New Jersey, USAir LaGuardia
Arpt. B3 9.125 12/01/15 4,000 4,513,480
--------------
47,248,058
- ---------------------------------------------------------------------------------------------------------------------------------
NORTH DAKOTA--1.2%
Mercer Cnty., Antelope Valley Station, A.M.B.A.C Aaa 7.20 6/30/13 10,000 11,768,600
- ---------------------------------------------------------------------------------------------------------------------------------
OHIO--3.0%
Cleveland Pub. Pwr. Sys. Rev.,
1st Mtge., M.B.I.A. Aaa Zero 11/15/12 1,000 421,300
1st Mtge., M.B.I.A. Aaa Zero 11/15/13 1,500 592,965
1st Mtge., Ser. A, M.B.I.A. Aaa Zero 11/15/09 3,000 1,522,830
Mahoning Valley San. Dist. Wtr. Rev. NR 7.75 5/15/19 8,000 8,534,480
Montgomery Cnty. Hlthcare. Facs. Rev., Friendship Vlge.
Dayton, Proj. B NR 9.25 2/01/16 4,500 4,732,605
Ohio St. Solid Wste. Rev., Rep. Eng. Steels Inc. NR 9.00 6/01/21 2,250 2,269,282
Ohio St. Wtr. Dev. Auth. Poll. Ctrl. Facs., 1st Mtge.,
Toledo Edison Ba2 8.00 10/01/23 5,500 5,944,400
Stark Cnty. Hlthcare. Facs. Rev., Rose Lane Inc. Proj. NR 9.00 12/01/23 6,135 6,627,886
--------------
30,645,748
- ---------------------------------------------------------------------------------------------------------------------------------
OKLAHOMA--1.1%
Grand River Dam Auth. Rev., A.M.B.A.C. Aaa 6.25 6/01/11 7,500 8,153,700
Tulsa Ind. Dev. Auth., Univ. Tulsa, Ser. A, M.B.I.A. Aaa 6.00 10/01/16 3,250 3,398,590
--------------
11,552,290
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Financial Statements. B-43

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
PORTFOLIO OF INVESTMENTS AS OF APRIL 30, 1997 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>
- ---------------------------------------------------------------------------------------------------------------------------------
PENNSYLVANIA--5.3%
Allegheny Cnty. Hosp. Rev., West Penn. Hosp. Hlth. Ctr. NR 8.50% 1/01/20 $ 2,800 $ 3,036,796
Berks Cnty. Mun. Auth. Rev.,
Adventist Living Ctrs. Proj. NR 11.00 12/01/15 367 (e) 33,072
Alvernia Coll. Proj. NR 7.75 11/15/16 5,240 5,593,857
Dauphin Cnty. Gen. Auth. Hosp. Rev., NW Med. Ctr. Proj. BBB-(b) 8.625 10/15/13 6,605 7,515,631
Lancaster Cnty. Solid Wste. Mgmt., Res. Rec. Auth. Sys.
Rev.,
Ser. A A 8.50 12/15/10 5,965 6,222,151
Pennsylvania Econ. Dev. Fin. Auth. Recyc. Rev. NR 9.25 1/01/22 7,000 6,015,730
Philadelphia Auth., Ind. Dev. Rev. NR 7.75 12/01/17 5,000 5,332,650
Philadelphia Wtr. & Wstewtr. Auth. Rev.,
M.B.I.A. Aaa 6.25 8/01/10 2,500 2,703,975
M.B.I.A. Aaa 6.25 8/01/12 3,000 3,236,400
Somerset Cnty. Hosp. Auth. Rev.,
Hlthcare 1st Mtge. NR 8.40 6/01/09 2,415 2,617,111
Hlthcare 1st Mtge. NR 8.50 6/01/24 8,805 9,538,985
Wilkes Barre Gen. Mun. Auth. Coll. Rev., Misericordia
Coll.,
Ser. A NR 7.75 12/01/12 1,245 1,326,411
--------------
53,172,769
- ---------------------------------------------------------------------------------------------------------------------------------
RHODE ISLAND--1.6%
Rhode Island Hsg. & Mtge. Fin. Corp., Homeownership
Opport., Ser. 1A Aa2 8.20 10/01/17 4,620 4,739,889
Rhode Island Redev. Agcy., Ser. A NR 8.00 9/01/24 10,750 11,194,512
--------------
15,934,401
- ---------------------------------------------------------------------------------------------------------------------------------
SOUTH CAROLINA--0.5%
So. Carolina St. Hsg. Fin. & Dev. Auth., Homeownership
Mtge. Aa2 7.75 7/01/22 4,345 4,556,471
- ---------------------------------------------------------------------------------------------------------------------------------
SOUTH DAKOTA--0.5%
So. Dakota Econ. Dev. Fin. Auth., Dakota Park NR 10.25 1/01/19 5,000 5,291,400
- ---------------------------------------------------------------------------------------------------------------------------------
TENNESSEE--1.4%
Knox Cnty. Hlth. & Edl. Facs. Rev., Baptist Hlth. Hosp. Aaa 8.50 4/15/04 5,905 (c) 6,440,584
Rutherford Cnty. Hlth. & Edl. Facs., Brd. 1st Mtge. Rev. NR 9.50 12/01/19 7,300 8,013,502
--------------
14,454,086
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Financial Statements. B-44

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
PORTFOLIO OF INVESTMENTS AS OF APRIL 30, 1997 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>
- ---------------------------------------------------------------------------------------------------------------------------------
TEXAS--3.4%
Beaumont Hsg. Fin. Corp., Sngl. Fam. Mtge. Rev. A1 9.20% 3/01/12 $ 1,575 $ 1,748,691
Houston Arpt. Sys. Rev. Ba2 6.125 7/15/27 5,200 4,961,268
Houston Wtr. & Swr. Sys. Rev., Ser. C, A.M.B.A.C. Aaa Zero 12/01/10 5,000 2,339,250
Keller Ind. Sch. Dist., Cap. Apprec. Ref., Ser. A,
P.S.F.G. Aaa Zero 8/15/17 4,075 1,235,133
New Braunfels Ind. Sch. Dist.,
Cap. Apprec. Aaa Zero 2/01/08 2,365 1,318,251
Cap. Apprec. Aaa Zero 2/01/09 2,365 1,234,317
Cap. Apprec. Aaa Zero 2/01/12 2,365 1,021,822
Cap. Apprec. Aaa Zero 2/01/13 1,365 552,907
Port Corpus Christi Ind. Dev. Corp., Valero Ref. & Mfg.
Co.,
Ser. A Baa3 10.25 6/01/17 1,300 1,345,799
Round Rock Ind. Sch. Dist., Gen. Oblig., M.B.I.A. Aaa Zero 8/15/11 4,385 1,958,516
San Antonio Elec. & Gas Rev., F.G.I.C. Aaa Zero 2/01/09 5,000 2,609,550
Ser. B, F.G.I.C. Aaa Zero 2/01/12 7,500 3,240,450
Tarrant Cnty. Hlth. Facs. Dev. Corp. Rev., Foundation
Proj. NR 10.25 9/01/19 5,000 5,273,850
Texas Mun. Pwr. Agcy. Rev., M.B.I.A. Aaa Zero 9/01/15 16,300 5,602,473
--------------
34,442,277
- ---------------------------------------------------------------------------------------------------------------------------------
VIRGINIA--1.5%
Norfolk Redev. & Hsg. Auth., Multifam. Rental Hsg. Fac.
Rev. NR 5.25 9/01/26 6,000 6,014,100
Pittsylvania Cnty. Ind. Dev. Auth. Rev. Multitrade NR 7.55 1/01/19 9,000 9,462,240
--------------
15,476,340
- ---------------------------------------------------------------------------------------------------------------------------------
WASHINGTON--2.9%
Bellevue Conv. Ctr. Auth.,
King City, Oblig. Rev., M.B.I.A. Aaa Zero 2/01/10 870 423,803
King City, Oblig. Rev., M.B.I.A. Aaa Zero 2/01/11 1,200 548,820
King City, Oblig. Rev., M.B.I.A. Aaa Zero 2/01/12 1,300 557,674
King City, Oblig. Rev., M.B.I.A. Aaa Zero 2/01/14 1,385 521,176
Chelan Cnty. Pub. Util., Dist. No. 1, Columbia River
Rock, Hydro Elec. Sys. Rev. Aaa Zero 6/01/15 7,585 2,622,134
Thurston Cnty. Sch. Dist. 333, F.G.I.C. Aaa Zero 12/01/12 6,830 2,814,370
Ser. B, F.G.I.C. Aaa Zero 12/01/11 6,415 2,817,981
Washington St. Ref., Ser R, 97A Aa Zero 7/01/16 7,000 2,262,330
Washington St. Pub. Pwr. Supply Sys. Rev.,
Nuclear Proj. No. 1, Ser. B Aa1 7.25 7/01/09 5,000 5,725,150
Nuclear Proj. No. 3, M.B.I.A. Aaa Zero 7/01/16 10,000 3,178,200
Nuclear Proj. No. 3, M.B.I.A. Aaa Zero 7/01/17 5,000 1,482,250
Nuclear Proj. No. 3, Ser. B, M.B.I.A. Aaa 7.125 7/01/16 5,000 5,817,400
--------------
28,771,288
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Financial Statements. B-45

See Notes to Financial Statements. B-46

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
STATEMENT OF ASSETS AND LIABILITIES HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
ASSETS APRIL 30, 1997
--------------
<S> <C>
Investments, at value (cost $949,207,739)................................................................... $ 980,628,714
Interest receivable......................................................................................... 20,085,956
Receivable for investments sold............................................................................. 14,753,647
Receivable for Series shares sold........................................................................... 1,471,150
Other assets................................................................................................ 17,758
--------------
Total assets............................................................................................. 1,016,957,225
--------------
LIABILITIES
Bank overdraft.............................................................................................. 848,399
Dividends payable........................................................................................... 1,689,491
Payable for Series shares reacquired........................................................................ 1,659,863
Management fee payable...................................................................................... 372,844
Distribution fee payable.................................................................................... 305,461
Accrued expenses............................................................................................ 212,324
--------------
Total liabilities........................................................................................ 5,088,382
--------------
NET ASSETS.................................................................................................. $1,011,868,843
--------------
--------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................... $ 933,657
Paid-in capital in excess of par......................................................................... 998,001,465
--------------
998,935,122
Accumulated net realized loss on investments............................................................. (18,487,254)
Net unrealized appreciation of investments............................................................... 31,420,975
--------------
Net assets, April 30, 1997.................................................................................. $1,011,868,843
--------------
--------------
Class A:
Net asset value and redemption price per share
($334,061,835 / 30,821,253 shares of beneficial interest issued and outstanding)...................... $10.84
Maximum sales charge (3% of offering price).............................................................. .34
--------------
Maximum offering price to public......................................................................... $11.18
--------------
--------------
Class B:
Net asset value, offering price and redemption price per share
($665,524,650 / 61,411,036 shares of beneficial interest issued and outstanding)...................... $10.84
--------------
--------------
Class C:
Net asset value, offering price and redemption price per share
($9,562,939 / 882,442 shares of beneficial interest issued and outstanding)........................... $10.84
--------------
--------------
Class Z:
Net asset value, offering price and redemption price per share
($2,719,419 / 251,085 shares of beneficial interest issued and outstanding)........................... $10.83
--------------
--------------

- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Financial Statements. B-47

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
HIGH YIELD SERIES
STATEMENT OF OPERATIONS
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
NET INVESTMENT INCOME April 30, 1997
<S> <C>
Income
Interest.................................. $ 72,933,887
--------------
Expenses
Management fee............................ 5,129,335
Distribution fee--Class A................. 294,940
Distribution fee--Class B................. 3,626,526
Distribution fee--Class C................. 60,452
Transfer agent's fees and expenses........ 479,000
Reports to shareholders................... 196,000
Custodian's fees and expenses............. 149,000
Registration fees......................... 64,000
Insurance expense......................... 29,000
Legal fees and expenses................... 18,000
Audit fee................................. 15,000
Trustees' fees and expenses............... 15,000
Miscellaneous............................. 8,448
--------------
Total expenses......................... 10,084,701
Less: Management fee waiver............... (514,371)
Custodian fee credit................... (4,554)
--------------
Net expenses........................... 9,565,776
--------------
Net investment income........................ 63,368,111
--------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on:
Investment transactions................... (5,055,767)
Financial futures contract transactions... 783,950
--------------
(4,271,817)
--------------
Net change in unrealized appreciation of:
Investments............................... 18,105,192
--------------
Net gain on investments...................... 13,833,375
--------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS.................... $ 77,201,486
--------------
--------------
</TABLE>

PRUDENTIAL MUNICIPAL BOND FUND
HIGH YIELD SERIES
STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------------
<TABLE>
<CAPTION>
INCREASE (DECREASE) Year Ended April 30,
IN NET ASSETS 1997 1996
<S> <C> <C>
Operations
Net investment income....... $ 63,368,111 $ 66,724,584
Net realized gain (loss) on
investment
transactions............. (4,271,817) 7,874,332
Net change in unrealized
appreciation
(depreciation) of
investments.............. 18,105,192 (9,899,503)
-------------- --------------
Net increase in net assets
resulting from
operations............... 77,201,486 64,699,413
-------------- --------------
Dividends and distributions
(Note 1):
Dividends from net
investment income
Class A.................. (18,998,681) (10,686,945)
Class B.................. (43,873,295) (55,704,885)
Class C.................. (467,478) (332,754)
Class Z.................. (28,657) --
-------------- --------------
(63,368,111) (66,724,584)
-------------- --------------
Distributions in excess of
net investment income
Class A.................. (39,610) (21,756)
Class B.................. (82,405) (103,384)
Class C.................. (965) (746)
Class Z.................. (28) --
-------------- --------------
(123,008) (125,886)
-------------- --------------
Series share transactions (net of
share conversions) (Note 5):
Net proceeds from shares
subscribed............... 116,459,010 125,110,592
Net asset value of shares
issued in reinvestment of
dividends................ 28,109,609 30,125,436
Cost of shares reacquired... (175,001,590) (177,927,248)
-------------- --------------
Net decrease in net assets
from Series share
transactions............. (30,432,971) (22,691,220)
-------------- --------------
Total decrease................. (16,722,604) (24,842,277)
NET ASSETS
Beginning of year.............. 1,028,591,447 1,053,433,724
-------------- --------------
End of year.................... $1,011,868,843 $1,028,591,447
-------------- --------------
-------------- --------------
</TABLE>
- --------------------------------------------------------------------------------

See Notes to Financial Statements. B-48

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
PORTFOLIO OF INVESTMENTS AS OF APRIL 30, 1997 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--95.6%
- ---------------------------------------------------------------------------------------------------------------------------------
ALABAMA--0.7%
Huntsville Solid Wste. Disp. Auth., F.G.I.C. Aaa 7.00% 10/01/08 $ 2,000 $ 2,147,500
Jefferson Cnty. Swr. Rev. Wste., Ser. D, F.G.I.C. Aaa 5.75 2/01/22 1,200 1,187,376
------------
3,334,876
- ---------------------------------------------------------------------------------------------------------------------------------
ALASKA--2.1%
Alaska St. Engy. Auth. Pwr. Rev., Bradley Lake Hydro, 1st
Ser., A.M.B.A.C. Aaa 7.25 7/01/16 2,000 (h) 2,142,160
Anchorage Hosp. Rev., Sisters of Providence, A.M.B.A.C. Aaa 7.125 10/01/05 5,000 5,530,350
No. Slope Boro., Cap. Apprec., Ser. A, M.B.I.A. Aaa Zero 6/30/06 5,000 3,067,950
------------
10,740,460
- ---------------------------------------------------------------------------------------------------------------------------------
ARIZONA--3.2%
Arizona St. Trans. Brd. Excise Tax Rev., Maricopa Cnty.
Reg'l. Area Rd., A.M.B.A.C. Aaa 5.60 7/01/03 6,950 7,179,698
Maricopa Cnty. Ind. Dev. Auth. Rev.,
Hosp. Facs., John C. Lincoln Hosp., F.S.A. Aaa 7.00 12/01/00 2,265 2,439,065
Hosp. Facs., John C. Lincoln Hosp., F.S.A. Aaa 7.50 12/01/13 1,045 (c) 1,160,734
Hosp. Facs., John C. Lincoln Hosp., F.S.A. Aaa 7.50 12/01/13 1,205 1,317,065
Maricopa Cnty. Unified Sch. Dist. No. 69, Paradise
Valley, Ser. E, F.G.I.C. Aaa 6.80 7/01/12 3,700 4,221,478
------------
16,318,040
- ---------------------------------------------------------------------------------------------------------------------------------
CALIFORNIA--11.6%
California St. Pub. Wks. Brd.,
Comm. Coll. Proj., Ser. A, A.M.B.A.C. Aaa 5.625 3/01/16 2,000 1,973,560
Dept. of Corrections, A.M.B.A.C. Aaa 5.75 1/01/12 2,000 2,017,280
California St., Gen. Oblig., F.G.I.C. Aaa 6.60 2/01/11 2,010 2,245,954
Contra Costa Wtr. Dist. Wtr. Rev., Ser. E, A.M.B.A.C. Aaa 6.25 10/01/12 1,455 1,572,113
Inland Empire Solid Wste. Fin. Auth., Landfill Impvt.
Fin., Proj. B, F.S.A. Aaa 6.00 8/01/16 2,000 2,003,020
Los Angeles Cnty. Pub. Wks. Fin. Auth.,
Lease Rev., M.B.I.A. Aaa 5.20 9/01/09 6,500 6,404,190
Lease Rev., M.B.I.A. Aaa 5.25 9/01/13 5,000 4,772,700
Los Angeles Dept. Wtr. & Pwr. Elec. Plant Rev., F.G.I.C. Aaa 4.75 11/15/19 6,400 5,460,352
Roseville Joint Union H.S. Dist., Ser. B, F.G.I.C. Aaa Zero 8/01/13 2,015 799,391

- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Financial Statements. B-49

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
PORTFOLIO OF INVESTMENTS AS OF APRIL 30, 1997 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.)
San Diego Cnty. Wtr. Auth. Wtr. Rev., Ctfs. of Part.,
F.G.I.C Aaa 7.24% 4/26/06 $ 5,800 (d) $ 6,061,000
Santa Margarita/Dana Point Auth.,
Impvt. Dist., M.B.I.A. Aaa 7.25 8/01/10 2,180 2,557,314
Impvt. Dist., M.B.I.A. Aaa 7.25 8/01/11 1,750 2,051,158
So. Orange Cnty. Pub. Fin. Auth.,
Foothill Area Proj., F.G.I.C Aaa 8.00 8/15/08 2,500 (h) 3,091,875
Foothill Area Proj., F.G.I.C. Aaa 6.50 8/15/10 2,725 3,028,347
Univ. California Reg'l. Ref., Multi. Purp. Proj.,
A.M.B.A.C. Aaa 4.75 9/01/16 9,075 7,880,095
Victor Valley Element. Sch. Dist.,
Cap. Apprec., Ser. A, M.B.I.A. Aaa Zero 6/01/17 3,550 1,093,364
Cap. Apprec., Ser. A, M.B.I.A. Aaa Zero 6/01/18 3,700 1,074,665
Victor Valley Union H.S. Dist.,
Gen. Oblig., 1995 Elec., M.B.I.A. Aaa Zero 9/01/10 2,635 1,264,800
Gen. Oblig., 1995 Elec., M.B.I.A. Aaa Zero 9/01/11 3,780 1,702,928
Gen. Oblig., 1995 Elec., M.B.I.A. Aaa Zero 9/01/13 4,450 1,757,082
------------
58,811,188
- ---------------------------------------------------------------------------------------------------------------------------------
COLORADO--1.1%
Denver City & Cnty. Arpt. Rev., Ser. C, M.B.I.A. Aaa 5.60 11/15/11 5,000 4,916,950
Jefferson Cnty. Sngl. Fam. Mtge. Rev., Ser. A, M.B.I.A. Aaa 8.875 10/01/13 585 625,464
------------
5,542,414
- ---------------------------------------------------------------------------------------------------------------------------------
CONNECTICUT--1.0%
Connecticut St. Res. Rec. Auth., Mid. Connecticut Sys.,
Ser. A, M.B.I.A. Aaa 5.25 11/15/08 5,000 4,974,250
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRICT OF COLUMBIA--4.8%
Dist. of Columbia Hosp. Rev. Medlantic Hlthcare Grp.,
M.B.I.A. Aaa 5.875 8/15/19 3,500 3,475,990
M.B.I.A. Aaa 5.75 8/15/26 3,000 (h) 2,921,010
Dist. of Columbia Met. Area Trans. Auth.,
Gross Rev., F.G.I.C. Aaa 6.00 7/01/09 2,400 2,553,504
Gross Rev., F.G.I.C. Aaa 6.00 7/01/10 1,500 1,591,185
Dist. of Columbia Ref., Ser. B, F.S.A. Aaa 5.50 6/01/10 7,565 (h) 7,419,525
Dist. of Columbia Rev., Ser. A, M.B.I.A. Aaa 6.50 6/01/10 6,000 6,524,940
------------
24,486,154

- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Financial Statements. B-50

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
PORTFOLIO OF INVESTMENTS AS OF APRIL 30, 1997 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--9.9%
Brevard Hlth. Facs. Auth. Rev., Holmes Reg'l. Med. Ctr.,
M.B.I.A. Aaa 5.60% 10/01/10 $ 6,000 (h) $ 6,014,700
Dade Cnty. Edl. Facs. Auth. Rev. Ref., Ser. A, M.B.I.A. Aaa 5.625 4/01/06 5,000 5,167,900
Dade Cnty. Res. Rec., Facs. Rev. Ref., A.M.B.A.C. Aaa 5.10 10/01/04 3,355 3,344,633
Dade Cnty. Sch. Brd. Ctfs. of Part., Ser. B, A.M.B.A.C. Aaa 5.70 8/01/16 5,475 5,461,750
Dade Cnty. Spec. Oblig., Ref., Ser. B, A.M.B.A.C. Aaa 5.00 10/01/35 8,140 7,209,517
No. Broward Hosp. Dist. Rev., Ref. & Impvts., M.B.I.A. Aaa 5.25 1/15/17 1,800 1,694,520
Orange Cnty. Hlth. Facs. Auth. Rev. Hosp., Orlando Reg'l.
Hlthcare, Ser. A, M.B.I.A. Aaa 6.25 10/01/07 3,160 3,413,590
Palm Beach Cnty. Solid Wste. Auth. Rev., Ref., Ser. A,
A.M.B.A.C. Aaa 6.00 10/01/09 2,500 2,641,300
So. Miami Hlth. Facs. Auth.,
Baptist Hlth. Sys. Oblig. Grp., M.B.I.A. Aaa 5.375 10/01/16 6,555 6,261,991
Baptist Hlth. Sys. Oblig. Grp., M.B.I.A. Aaa 5.50 10/01/20 4,435 4,249,085
Tampa Occ. License Tax, Ser. B, F.G.I.C. Aaa 5.50 10/01/27 5,000 4,786,550
------------
50,245,536
- ---------------------------------------------------------------------------------------------------------------------------------
GEORGIA--2.3%
Atlanta Arpt. Facs. Rev., A.M.B.A.C. Aaa 6.50 1/01/10 2,000 2,209,480
Georgia Mun. Elec. Auth., Pwr. Rev., M.B.I.A. Aaa 6.20 1/01/10 3,495 (e) 3,755,482
Mun. Elec. Auth., Proj. No. 1, A.M.B.A.C. Aaa 6.00 1/01/06 5,570 5,869,388
------------
11,834,350
- ---------------------------------------------------------------------------------------------------------------------------------
ILLINOIS--2.3%
Chicago Midway Arpt. Rev., Ser. B, M.B.I.A. Aaa 5.75 1/01/22 2,400 2,326,032
Chicago O' Hare Int'l. Arpt. Rev., Pass. Facs. Chrg.,
Ser. A, A.M.B.A.C. Aaa 5.625 1/01/15 2,000 1,959,280
Onterie Ctr. Hsg. Fin. Corp. Mtge. Rev.,
Ser. A, M.B.I.A. Aaa 7.00 7/01/12 1,575 1,665,704
Ser. A, M.B.I.A. Aaa 7.05 7/01/27 5,400 5,680,962
------------
11,631,978
- ---------------------------------------------------------------------------------------------------------------------------------
INDIANA--2.8%
Indiana Trans. Fin. Auth. Arpt. Facs., Lease Rev.,
A.M.B.A.C. Aaa 5.00 11/01/14 5,005 4,630,626
Marion Cnty. Hosp. Auth. Facs. Rev., A.M.B.A.C. Aaa 8.625 10/01/12 8,500 (c)(h) 9,440,780
------------
14,071,406
- ---------------------------------------------------------------------------------------------------------------------------------
LOUISIANA--0.4%
New Orleans, Gen. Oblig., Cap. Apprec., A.M.B.A.C. Aaa Zero 9/01/09 4,000 2,021,360

- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Financial Statements. B-51

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
PORTFOLIO OF INVESTMENTS AS OF APRIL 30, 1997 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>
- ---------------------------------------------------------------------------------------------------------------------------------
MARYLAND--0.1%
Maryland St. Hlth. & Higher Edl. Facs. Auth. Rev., Loyola
College, Ser. A, M.B.I.A. Aaa 5.375% 10/01/26 $ 750 $ 715,380
- ---------------------------------------------------------------------------------------------------------------------------------
MASSACHUSETTS--1.8%
Massachusetts Mun. Whsl. Elec. Co., Pwr. Supply Sys.
Rev., M.B.I.A. Aaa 4.75 7/01/10 2,000 1,823,800
Massachusetts St. Hlth. & Edl. Facs. Auth. Rev.,
Baystate Med. Ctr., Ser. E, F.S.A. Aaa 6.00 7/01/26 2,475 2,482,747
Mass. Gen. Hosp., Ser. F, A.M.B.A.C. Aaa 6.25 7/01/12 1,500 1,612,980
Massachusetts St. Wtr. Res. Auth., Ser. B, M.B.I.A. Aaa 6.25 12/01/13 2,905 3,139,898
------------
9,059,425
- ---------------------------------------------------------------------------------------------------------------------------------
MICHIGAN--3.5%
Detroit Swr. Disp. Rev., Ser. 1993A, F.G.I.C. Aaa 7.212 7/01/23 6,500 (d)(h) 5,931,250
Michigan St. Hosp. Fin. Auth. Rev.,
Mid. Michigan Oblig., M.B.I.A. Aaa 7.50 6/01/15 2,350 2,546,460
Sisters Of Mercy, M.B.I.A. Aaa 5.25 8/15/21 1,650 1,502,457
Monroe Cnty. Poll. Ctrl. Rev., Detroit Edison Co., Proj.
1, Ser. I, A.M.B.A.C. Aaa 7.30 9/01/19 3,250 3,500,218
Saginaw Hosp. Fin. Auth., St. Luke's Hosp., Ser. C,
M.B.I.A. Aaa 6.50 7/01/11 4,000 4,263,120
------------
17,743,505
- ---------------------------------------------------------------------------------------------------------------------------------
MISSISSIPPI--0.5%
Harrison Cnty. Wste. Wtr. Mgmt. Dist. Rev., Wste. Wtr.
Treatmt., Facs. Auth., F.G.I.C. Aaa 6.50 2/01/06 2,400 2,567,424
- ---------------------------------------------------------------------------------------------------------------------------------
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 1,554,525
- ---------------------------------------------------------------------------------------------------------------------------------
MONTANA--0.4%
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 2,169,080

- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Financial Statements. B-52

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
PORTFOLIO OF INVESTMENTS AS OF APRIL 30, 1997 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--6.2%
Jersey City Swr. Auth.,
A.M.B.A.C. Aaa 6.00% 1/01/10 $ 2,585 $ 2,737,954
A.M.B.A.C. Aaa 6.25 1/01/14 4,255 4,575,785
New Jersey Econ. Dev. Auth.,
Mkt. Trans. Facs. Rev., M.B.I.A. Aaa 5.875 7/01/11 9,990 10,256,034
Mkt. Trans. Facs. Rev., Sr. Lien, M.B.I.A. Aaa 5.80 7/01/09 3,340 3,426,105
New Jersey St. Tpke. Auth. Rev., Ser. A, A.M.B.A.C. Aaa 5.80 1/01/02 5,000 5,181,200
Salem Cnty. Ind. Poll. Fin. Auth. Rev., M.B.I.A. Aaa 6.20 8/01/30 5,000 5,177,300
------------
31,354,378
- ---------------------------------------------------------------------------------------------------------------------------------
NEW MEXICO--0.9%
Santa Fe Util. Rev., Ser. A, A.M.B.A.C. Aaa 8.00 6/01/07 3,695 4,482,626
- ---------------------------------------------------------------------------------------------------------------------------------
NEW YORK--10.9%
Erie Cnty. Wtr. Auth. Rev., A.M.B.A.C. Aaa Zero 12/01/17 770 176,484
Hempstead Ind. Dev. Agcy. Res., Rec. Rev., M.B.I.A. Aaa 5.00 12/01/09 5,000 4,805,550
Islip Res. Rec., Ser. B, A.M.B.A.C. Aaa 7.20 7/01/10 1,750 2,018,853
Met. Trans. Auth. Trans. Facs. Rev., F.S.A. Aaa 5.75 7/01/11 5,000 5,052,950
New York City,
Ser. B, F.G.I.C. Aaa 5.875 8/15/12 7,000 7,111,930
Ser. D, M.B.I.A. Aaa 6.20 2/01/07 8,520 9,070,562
Ser. G, M.B.I.A. Aaa 5.75 2/01/14 3,000 2,980,590
New York St. Dorm. Auth. Rev., Montefiore Med. Ctr.,
A.M.B.A.C. Aaa 6.00 8/01/08 3,400 3,596,486
New York St. Envir. Facs. Corp.,
Poll. Ctrl. Rev. Aaa 5.70 7/15/12 3,375 3,412,429
Poll. Ctrl. Rev. Aaa 5.75 7/15/13 1,060 1,071,723
Poll. Ctrl. Rev. Aaa 5.80 7/15/14 3,755 3,801,224
Port Auth. New York & New Jersey Cons., Ser. 99, F.G.I.C. Aaa 5.90 11/01/11 7,665 7,855,782
Port Auth. New York & New Jersey Spec. Oblig. Rev., JFK
Int'l. Arpt. Term. No. 6, M.B.I.A. Aaa 5.75 12/01/25 4,750 (g) 4,623,270
------------
55,577,833
- ---------------------------------------------------------------------------------------------------------------------------------
OHIO--0.8%
Franklin Cnty. Children's Hosp. Proj., M.B.I.A. Aaa 5.875 11/01/25 1,000 1,002,720
Hamilton Cnty. Swr. Sys. Rev. & Impvt., Ser. A, F.G.I.C. Aaa 5.50 12/01/17 3,000 2,924,130
------------
3,926,850

- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Financial Statements. B-53

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
PORTFOLIO OF INVESTMENTS AS OF APRIL 30, 1997 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--1.3%
Grand Rvr. Dam Auth., A.M.B.A.C. Aaa 6.25% 6/01/11 $ 6,000 $ 6,522,960
- ---------------------------------------------------------------------------------------------------------------------------------
PENNSYLVANIA--2.0%
No. Umberland Cnty. Lease Auth. Rev., Correctional Facs.,
M.B.I.A. Aaa Zero 10/15/10 7,500 3,575,850
Pennsylvania St. Ind. Dev. Auth. Rev., Econ. Dev.,
A.M.B.A.C. Aaa 6.00 7/01/06 3,000 3,184,260
Philadelphia Mun. Auth. Rev., Criminal Justice Ctr., Ser.
A, M.B.I.A. Aaa 6.90 11/15/03 3,000 3,305,220
------------
10,065,330
- ---------------------------------------------------------------------------------------------------------------------------------
PUERTO RICO--4.8%
Puerto Rico Gen. Oblig.,
M.B.I.A. Aaa 5.50 7/01/01 7,450 7,669,924
M.B.I.A. Aaa 6.25 7/01/13 1,250 1,357,863
Pub. Impvt., Ser. B, A.M.B.A.C. Aaa 5.50 7/01/03 5,700 5,873,679
Puerto Rico Pub. Bldgs. Auth. Rev., Gov't. Facs., Ser. A,
A.M.B.A.C. Aaa 6.25 7/01/13 1,700 1,846,693
Puerto Rico Tel. Auth. Rev.,
Ser. I, M.B.I.A. Aaa 6.667 1/25/07 4,100 (d) 4,115,375
Ser. I, M.B.I.A. Aaa 6.56 1/16/15 3,800 (d) 3,581,500
------------
24,445,034
- ---------------------------------------------------------------------------------------------------------------------------------
RHODE ISLAND--0.5%
Rhode Island St. Hlth. & Edl. Bldg. Corp., Rev., M.B.I.A. Aaa 5.625 6/01/26 2,500 2,401,450
- ---------------------------------------------------------------------------------------------------------------------------------
SOUTH CAROLINA--0.7%
So. Carolina Pub. Serv. Auth. Rev., Ser. A, A.M.B.A.C. Aaa 6.25 1/01/03 3,390 3,601,807
- ---------------------------------------------------------------------------------------------------------------------------------
TENNESSEE--1.0%
Metro. Gov't. Nashville & Davidson Cnty. Wtr. & Swr.
Rev., A.M.B.A.C. Aaa 8.124 1/01/22 5,000 (c) 5,056,250
- ---------------------------------------------------------------------------------------------------------------------------------
TEXAS--10.3%
Austin Comb. Util. Sys. Rev., Ser. A, M.B.I.A. Aaa 4.875 11/15/10 5,500 5,134,745
Austin Util. Sys. Rev., M.B.I.A. Aaa Zero 5/15/03 8,000 5,918,720
Bexar Cnty. Hlth. Facs. Dev. Corp. Rev., F.S.A. Aaa 6.10 11/15/23 12,230 12,362,207
Brazos Rvr. Auth. Rev., Houston Lt. & Pwr., Ser. B, 1st.
Mtge, F.G.I.C. Aaa 7.20 12/01/18 1,000 1,074,340
Houston Arpt. Sys. Rev. Aaa 7.20 7/01/13 3,900 4,462,575

- --------------------------------------------------------------------------------
</TABLE>

See Notes to Financial Statements. B-54

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
PORTFOLIO OF INVESTMENTS AS OF APRIL 30, 1997 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.)
Houston Arpt. Sys. Rev., Spec. Facs. People Mover, Ser.
A, F.S.A. Aaa 6.00% 7/15/05 $ 3,255 $ 3,395,974
Keller Ind. Sch. Dist., P.S.F.G. Aaa Zero 8/15/15 4,945 1,704,047
New Braunfels Ind. Sch. Dist., Gen. Oblig., P.S.F.G Aaa Zero 2/01/07 2,000 1,188,300
Round Rock Ind. Sch. Dist., Gen. Oblig., M.B.I.A. Aaa Zero 8/15/11 4,300 1,920,552
San Antonio Hotel Occ. Rev., Henry B. Gonzalez Conv.,
F.G.I.C. Aaa 5.70 8/15/26 2,100 2,064,552
Texas St. Mun. Pwr. Agcy. Rev.,
M.B.I.A. Aaa Zero 9/01/13 12,300 4,818,279
M.B.I.A. Aaa Zero 9/01/14 10,000 3,667,800
Texas St. Pub. Fin. Auth. Bldg. Rev., M.B.I.A. Aaa Zero 2/01/14 6,900 2,617,653
Texas Wtr. Res. Fin. Auth. Rev., A.M.B.A.C. Aaa 7.50 8/15/13 1,985 2,106,442
------------
52,436,186
- ---------------------------------------------------------------------------------------------------------------------------------
VIRGINIA--2.9%
Chesapeake Bay Brdg. & Tunn. Comm., Dist. Rev., F.G.I.C. Aaa 5.875 7/01/10 5,000 5,165,750
Riverside Reg'l. Jail Auth. Rev., M.B.I.A. Aaa 6.00 7/01/25 6,750 6,846,795
Virginia Beach Hosp. Facs. Rev.,
1st Mtge., A.M.B.A.C. Aaa 6.00 2/15/10 1,220 1,288,027
1st Mtge., A.M.B.A.C. Aaa 6.00 2/15/13 1,455 1,523,123
------------
14,823,695
- ---------------------------------------------------------------------------------------------------------------------------------
WASHINGTON--4.5%
Clark Cnty. Pub. Util. Dist., F.G.I.C. Aaa 6.00 1/01/08 3,000 3,169,200
Washington St. Hlthcare Facs. Auth. Rev., Yakima Valley
Memorial Hosp. Assoc. AAA(b) 5.25 12/01/20 2,500 2,288,400
Washington St. Pub. Pwr. Supply Sys.,
Nuclear Proj. No. 1, Ser. A, M.B.I.A. Aaa 5.75 7/01/10 7,000 7,051,030
Nuclear Proj. No. 2, Ser. A, M.B.I.A. Aaa Zero 7/01/11 5,210 2,311,000
Nuclear Proj. No. 2, Ser. B, F.G.I.C. Aaa 7.25 7/01/03 3,000 3,266,010
Nuclear Proj. No. 3, Ser. B, F.G.I.C. Aaa 7.00 7/01/05 2,000 2,144,600
Nuclear Proj. No. 3, Ser. B, F.G.I.C. Aaa Zero 7/01/08 4,500 2,425,635
------------
22,655,875
------------
Total long-term investments (cost $475,346,078) 485,171,625
------------
SHORT-TERM INVESTMENTS--3.2%
- ---------------------------------------------------------------------------------------------------------------------------------
NEVADA--0.6%
Washoe Cnty. Wtr. Facs. Rev., Sierra Pac. Pwr. Co., Ser.
90, F.R.D.D. P1 4.10 5/01/97 2,800 2,800,000

- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Financial Statements. B-55

(b) Standard & Poor's rating.
(c) Prerefunded issues are secured by escrowed cash and direct U.S.
guaranteed obligations.
(d) Inverse floating rate bond. The coupon is inversely indexed to a floating
interest rate. The rate shown is the rate at year end.
(e) Principal amount pledged as initial margin on financial futures contracts.
(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) When-issued security.
(h) Segregated as collateral for when-issued security.

The Fund's current Prospectus contains a description of Moody's and Standard &
Poor's ratings.
- --------------------------------------------------------------------------------

See Notes to Financial Statements. B-56

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
STATEMENT OF ASSETS AND LIABILITIES INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
ASSETS APRIL 30, 1997
--------------
<S> <C>
Investments, at value (cost $491,496,078)................................................................... $501,321,625
Cash........................................................................................................ 49,165
Interest receivable......................................................................................... 7,089,171
Receivable for investments sold............................................................................. 5,401,394
Receivable for Series shares sold........................................................................... 99,460
Other assets................................................................................................ 9,995
--------------
Total assets............................................................................................. 513,970,810
--------------
LIABILITIES
Payable for investments purchased........................................................................... 4,655,893
Dividends payable........................................................................................... 676,849
Payable for Series shares reacquired........................................................................ 520,587
Accrued expenses............................................................................................ 289,470
Management fee payable...................................................................................... 189,854
Due to broker - variation margin............................................................................ 178,749
Distribution fee payable.................................................................................... 140,990
--------------
Total liabilities........................................................................................ 6,652,392
--------------
NET ASSETS.................................................................................................. $507,318,418
--------------
--------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................... $ 465,017
Paid-in capital in excess of par......................................................................... 491,427,700
--------------
491,892,717
Accumulated net realized gain on investments............................................................. 5,791,841
Net unrealized appreciation of investments............................................................... 9,633,860
--------------
Net assets, April 30, 1997.................................................................................. $507,318,418
--------------
--------------
Class A:
Net asset value and redemption price per share
($208,410,644 / 19,114,835 shares of beneficial interest issued and outstanding)...................... $10.90
Maximum sales charge (3.0% of offering price)............................................................ .34
--------------
Maximum offering price to public......................................................................... $11.24
--------------
--------------
Class B:
Net asset value, offering price and redemption price per share
($298,004,619 / 27,304,141 shares of beneficial interest issued and outstanding)...................... $10.91
--------------
--------------
Class C:
Net asset value, offering price and redemption price per share
($888,071 / 81,368 shares of beneficial interest issued and outstanding).............................. $10.91
--------------
--------------
Class Z:
Net asset value, offering price and redemption price per share
($15,084 / 1,383 shares of beneficial interest issued and outstanding)................................ $10.91
--------------
--------------

- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements. B-57

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
INSURED SERIES
STATEMENT OF OPERATIONS
- ------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
NET INVESTMENT INCOME APRIL 30, 1997
<S> <C>
Income
Interest.................................. $ 31,173,544
--------------
Expenses
Management fee............................ 2,771,203
Distribution fee--Class A................. 187,371
Distribution fee--Class B................. 1,829,455
Distribution fee--Class C................. 7,299
Transfer agent's fees and expenses........ 359,000
Reports to shareholders................... 149,000
Custodian's fees and expenses............. 96,000
Registration fees......................... 81,000
Insurance expense......................... 16,000
Audit fee................................. 15,000
Trustees' fees and expenses............... 15,000
Legal fees and expenses................... 11,000
Miscellaneous............................. 4,952
--------------
Total expenses......................... 5,542,280
Less: Management fee waiver............... (277,120)
Custodian fee credit................... (3,508)
--------------
Net expenses........................... 5,261,652
--------------
Net investment income........................ 25,911,892
--------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on:
Investment transactions................... 13,420,738
Financial futures contract transactions... (1,289,716)
--------------
12,131,022
--------------
Net change in unrealized
depreciation on:
Investments............................... (7,246,767)
Financial futures contracts............... (466,687)
--------------
(7,713,454)
--------------
Net gain on investments...................... 4,417,568
--------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS.................... $ 30,329,460
--------------
--------------
</TABLE>

PRUDENTIAL MUNICIPAL BOND FUND
INSURED SERIES
STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------------

<TABLE>
<CAPTION>
INCREASE (DECREASE) YEAR ENDED APRIL 30,
IN NET ASSETS 1997 1996
<S> <C> <C>
Operations
Net investment income........ $ 25,911,892 $ 30,538,085
Net realized gain on
investment transactions... 12,131,022 14,627,600
Net change in unrealized
depreciation of
investments............... (7,713,454) (6,381,895)
------------- -------------
Net increase in net assets
resulting from
operations................ 30,329,460 38,783,790
------------- -------------
Dividends and distributions
(Note 1):
Dividends from net investment
income
Class A................... (9,267,489) (5,328,224)
Class B................... (16,602,381) (25,172,135)
Class C................... (41,775) (37,726)
Class Z................... (247) --
------------- -------------
(25,911,892) (30,538,085)
------------- -------------
Dividends in excess of net
investment income
Class A................... (117,523) (34,680)
Class B................... (180,111) (153,181)
Class C................... (467) (265)
Class Z................... -- --
------------- -------------
(298,101) (188,126)
------------- -------------
Distributions from net
capital gains
Class A................... (2,135,002) --
Class B................... (3,272,015) --
Class C................... (8,473) --
Class Z................... (2) --
------------- -------------
(5,415,492) --
------------- -------------
Series share transactions (net
of
share conversions) (Note 5):
Net proceeds from shares
subscribed................ 201,450,948 50,187,534
Net asset value of shares
issued in reinvestment of
dividends and
distributions............. 17,841,830 17,105,830
Cost of shares reacquired.... (294,754,828) (135,247,446)
------------- -------------
Net decrease in net assets
from Series share
transactions.............. (75,462,050) (67,954,082)
------------- -------------
Total decrease.................. (76,758,075) (59,896,503)
NET ASSETS
Beginning of year............... 584,076,493 643,972,996
------------- -------------
End of year..................... $ 507,318,418 $ 584,076,493
------------- -------------
------------- -------------
</TABLE>
- --------------------------------------------------------------------------------

See Notes to Financial Statements. B-58

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
PORTFOLIO OF INVESTMENTS AS OF APRIL 30, 1997 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--97.6%
- ---------------------------------------------------------------------------------------------------------------------------------
ALASKA--4.6%
Alaska Ind. Dev. & Expt. Auth., Revolving Loan Fund A(b) 5.40% 4/01/01 $ 1,000 $ 1,003,380
No. Slope Boro., Gen. Oblig., Ser. C Baa1 8.35 6/30/98 1,000 1,045,640
------------
2,049,020
- ---------------------------------------------------------------------------------------------------------------------------------
ARIZONA--2.3%
Pima Cnty. Ind. Dev. Auth., Ref. Insrd. Hlthpart., Ser. A,
M.B.I.A. Aaa 5.125 4/01/05 1,000 1,000,280
- ---------------------------------------------------------------------------------------------------------------------------------
CONNECTICUT--2.5%
Conn. Spec. Tax Oblig. Rev., Ser. A A1(b) 7.00 6/01/03 1,000 (c) 1,089,710
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRICT OF COLUMBIA--1.6%
Dist. of Columbia Rev., America Geophysical Union, Ser.
199 BBB-(b) 5.50 9/01/03 700 695,149
- ---------------------------------------------------------------------------------------------------------------------------------
FLORIDA--5.7%
Dade Cnty. Pub. Facs. Rev., Jackson Mem. Hosp., Ser. A,
M.B.I.A. Aaa 4.75 6/01/08 1,000 944,670
Dade Cnty. Sch. Dist., Gen. Oblig., M.B.I.A. Aaa 6.00 7/15/06 1,500 1,599,225
------------
2,543,895
- ---------------------------------------------------------------------------------------------------------------------------------
GEORGIA--2.5%
Burke Cnty. Dev. Auth., Oglethorpe Pwr. Co., M.B.I.A. Aaa 7.50 1/01/03 1,000 1,090,040
- ---------------------------------------------------------------------------------------------------------------------------------
ILLINOIS--1.0%
Illinois Hlth. Facs. Auth. Rev., Edward Hosp., Ser. A A(b) 5.75 2/15/09 450 440,541
- ---------------------------------------------------------------------------------------------------------------------------------
MARYLAND--2.3%
Maryland St. Stadium Auth. Lease Rev., Conv. Ctr.
Expansion, A.M.B.A.C. Aaa 5.375 12/15/00 1,000 1,023,870
- ---------------------------------------------------------------------------------------------------------------------------------
MASSACHUSETTS--2.2%
Mass. St. Spec. Oblig. Rev., Ser. A, A.M.B.A.C. Aaa 5.25 6/01/09 1,000 992,010

- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Financial Statements. B-59

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
PORTFOLIO OF INVESTMENTS AS OF APRIL 30, 1997 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>
- ---------------------------------------------------------------------------------------------------------------------------------
MICHIGAN--3.3%
Battle Creek Wtr. Supp. Sys. Rev. Ref., A.M.B.A.C. Aaa 4.75% 9/01/10 $ 1,000 $ 915,530
Michigan Mun. Bond Auth. Rev., Wayne Cnty. Proj., M.B.I.A. Aaa 7.40 12/01/02 500 545,730
------------
1,461,260
- ---------------------------------------------------------------------------------------------------------------------------------
NEW JERSEY--15.7%
Brick Twnshp., Mun. Util. Auth. Rev., F.G.I.C. Aaa 5.50 12/01/03 1,295 1,333,824
New Jersey Econ. Dev. Auth. Rev.,
Mkt. Trans. Facs. Rev., M.B.I.A. Aaa 5.75 7/01/06 950 986,242
Mkt. Trans. Facs. Rev., M.B.I.A. Aaa 5.80 7/01/07 1,000 1,044,870
Performing Arts Ctr., A.M.B.A.C. Aaa 6.00 6/15/08 1,410 1,504,287
So. Reg'l. High Sch. Dist., M.B.I.A. Aaa 5.50 9/01/06 1,010 1,041,906
West Windsor Plainsboro Sch., F.G.I.C. Aaa 5.25 12/01/05 1,000 1,016,540
------------
6,927,669
- ---------------------------------------------------------------------------------------------------------------------------------
NEW YORK--14.4%
Hempstead Twn. Ind. Dev. Agcy. Res., Rec. Rev., M.B.I.A. Aaa 5.00 12/01/09 1,000 961,110
Met. Trans. Auth. N.Y. Trans. Facs. Rev., F.S.A. Aaa 5.75 7/01/11 675 682,148
Nassau Cnty., Gen. Impvt., Ser. U, A.M.B.A.C. Aaa 5.125 11/01/03 2,000 2,015,940
New York St. Env. Facs. Corp., Poll. Ctrl. Rev. Aaa 5.80 1/15/14 1,280 1,295,757
New York St. Urban Dev. Corp. Rev. Baa1 5.25 1/01/11 1,500 1,405,245
------------
6,360,200
- ---------------------------------------------------------------------------------------------------------------------------------
OHIO--3.4%
Cuyahoga Cnty. Hosp. Rev., Ref. & Impt. Met. Hlth. Sys.
Proj., M.B.I.A. Aaa 5.375 2/15/12 1,000 973,560
Ohio St. Bldg. Auth., Admin. Bldg. Fund Proj., M.B.I.A. Aaa 5.60 10/01/06 500 516,980
------------
1,490,540
- ---------------------------------------------------------------------------------------------------------------------------------
OKLAHOMA--5.3%
Oklahoma St. Ind. Auth. Rev. Hlth. Sys., Integris Bapt.,
A.M.B.A.C. Aaa 6.00 8/15/09 2,240 2,347,050
- ---------------------------------------------------------------------------------------------------------------------------------
OREGON--2.3%
Multnomah Cnty. Sch. Dist. No.3, Park Rose, F.G.I.C. Aaa 5.60 12/01/07 1,000 1,031,560

- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Financial Statements. B-60

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
PORTFOLIO OF INVESTMENTS AS OF APRIL 30, 1997 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>
- ---------------------------------------------------------------------------------------------------------------------------------
PENNSYLVANIA--7.4%
Montgomery Cnty. Redev. Auth., Multifam. Hsg. Rev., Ser. A NR 5.75% 7/01/99 $ 780 $ 783,237
Pennsylvania St. Ctfs. of Part., Ser. A, F.S.A. Aaa 6.25 11/01/06 600 635,766
Pennsylvania St. Higher Edl. Facs. Auth., Hlth. Svs. Rev.,
M.B.I.A. Aaa 5.70 11/15/11 755 764,672
Philadelphia Hosp. Auth. & Higher Edl. Auth., Childrens
Seashore House, Ser. A A-(b) 7.00 8/15/03 1,000 1,083,180
------------
3,266,855
- ---------------------------------------------------------------------------------------------------------------------------------
PUERTO RICO--1.8%
Puerto Rico, Gen. Oblig., Ser. A, M.B.I.A. Aaa 6.25 7/01/10 750 792,457
- ---------------------------------------------------------------------------------------------------------------------------------
RHODE ISLAND--2.4%
Rhode Island St., Ref. Cons. Cap. Dev. Loan, M.B.I.A. Aaa 6.00 8/01/06 1,000 1,061,850
- ---------------------------------------------------------------------------------------------------------------------------------
TEXAS--7.8%
Austin Util. Sys. Rev. Comb., Ser. A, M.B.I.A. Aaa 4.875 11/15/10 1,830 1,708,469
Gulf Coast Wste. Disp. Auth. Rev., Bayport Area Sys.,
F.S.A. Aaa 5.50 10/01/10 1,075 1,068,905
San Antonio Elec. & Gas Rev., Ser. A, F.G.I.C. Aaa Zero 2/01/05 1,000 669,130
------------
3,446,504
- ---------------------------------------------------------------------------------------------------------------------------------
UTAH--2.4%
Utah St. Brd. of Regents, Student Loan Rev., Ser. F,
A.M.B.A.C. Aaa 7.00 11/01/01 1,000 (e) 1,071,440
- ---------------------------------------------------------------------------------------------------------------------------------
WASHINGTON--6.7%
Wash. St. Pub. Pwr. Supp. Sys.,
Nuclear Proj. No. 2, Ser. A Aa1 4.90 7/01/05 2,000 1,932,960
Nuclear Proj. No. 3, Ser. B Aa1 7.00 7/01/99 1,000 1,046,190
------------
2,979,150
------------
Total long-term investments (cost $42,725,811) 43,161,050
------------

- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Financial Statements. B-61

(b) Standard & Poor's Rating.
(c) Prerefunded issues are secured by escrowed cash and direct U.S.
guaranteed obligations.
(d) 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.
(e) 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-62

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
STATEMENT OF ASSETS AND LIABILITIES INTERMEDIATE SERIES
- --------------------------------------------------------------------------------
<TABLE>
ASSETS APRIL 30, 1997
--------------
<S> <C>
Investments, at value (cost $43,325,811).................................................................... $ 43,761,050
Interest receivable......................................................................................... 804,103
Receivable for Series shares sold........................................................................... 465
Other assets................................................................................................ 936
--------------
Total assets............................................................................................. 44,566,554
--------------
LIABILITIES
Bank overdraft.............................................................................................. 13,996
Payable for Series shares reacquired........................................................................ 148,479
Accrued expenses............................................................................................ 84,773
Dividends payable........................................................................................... 49,611
Management fee payable...................................................................................... 16,538
Due to broker - variation margin............................................................................ 16,200
Distribution fee payable.................................................................................... 13,705
--------------
Total liabilities........................................................................................ 343,302
--------------
NET ASSETS.................................................................................................. $ 44,223,252
--------------
--------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................... $ 41,764
Paid-in capital in excess of par......................................................................... 43,580,830
--------------
43,622,594
Accumulated net realized gain on investments............................................................. 152,513
Net unrealized appreciation on investments............................................................... 448,145
--------------
Net assets, April 30, 1997.................................................................................. $ 44,223,252
--------------
--------------
Class A:
Net asset value and redemption price per share
($13,740,343 / 1,297,928 shares of beneficial interest issued and outstanding)........................ $10.59
Maximum sales charge (3% of offering price).............................................................. .33
--------------
Maximum offering price to public......................................................................... $10.92
--------------
--------------
Class B:
Net asset value, offering price and redemption price per share
($29,979,941 / 2,830,936 shares of beneficial interest issued and outstanding)........................ $10.59
--------------
--------------
Class C:
Net asset value, offering price and redemption price per share
($257,180 / 24,285 shares of beneficial interest issued and outstanding).............................. $10.59
--------------
--------------
Class Z:
Net asset value, offering price and redemption price per share
($245,788 / 23,211 shares of beneficial interest issued and outstanding).............................. $10.59
--------------
--------------

- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Financial Statements. B-63

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
INTERMEDIATE SERIES
STATEMENT OF OPERATIONS
- ------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
NET INVESTMENT INCOME APRIL 30, 1997
<S> <C>
Income
Interest.................................. $2,661,312
--------------
Expenses
Management fee............................ 244,485
Distribution fee--Class A................. 13,487
Distribution fee--Class B................. 176,107
Distribution fee--Class C................. 1,121
Reports to shareholders................... 83,000
Custodian's fees and expenses............. 69,000
Registration fees......................... 54,000
Transfer agent's fees and expenses........ 41,000
Trustees' fees and expenses............... 15,000
Audit fee................................. 15,000
Legal fees and expenses................... 10,000
Miscellaneous............................. 6,289
--------------
Total expenses......................... 728,489
Less: Management fee waiver............... (24,449)
Custodian fee credit................... (957)
--------------
Net expenses........................... 703,083
--------------
Net investment income........................ 1,958,229
--------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on:
Investment transactions................... 641,986
Financial futures contract transactions... (163,950)
--------------
478,036
--------------
Net change in unrealized
appreciation (depreciation) on:
Investments............................... (713,512)
Financial futures contracts............... 13,843
--------------
(699,669)
--------------
Net loss on investments...................... (221,633)
--------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS.................... $1,736,596
--------------
--------------
</TABLE>

PRUDENTIAL MUNICIPAL BOND FUND
INTERMEDIATE SERIES
STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------------
<TABLE>
<CAPTION>
INCREASE (DECREASE) YEAR ENDED APRIL 30,
IN NET ASSETS 1997 1996
<S> <C> <C>
Operations
Net investment income........... $ 1,958,229 $ 2,384,372
Net realized gain on investment
transactions................. 478,036 636,281
Net change in unrealized
appreciation
(depreciation) of
investments.................. (699,669) 613,155
----------- ------------
Net increase in net assets
resulting from operations.... 1,736,596 3,633,808
----------- ------------
Dividends and distributions (Note
1):
Dividends from net investment
income
Class A...................... (579,475) (549,044)
Class B...................... (1,371,478) (1,828,010)
Class C...................... (5,456) (7,318)
Class Z...................... (1,820) --
----------- ------------
(1,958,229) (2,384,372)
----------- ------------
Distributions in excess of net
investment income
Class A...................... (9,615) --
Class B...................... (22,423) --
Class C...................... (75) --
Class Z...................... (3) --
----------- ------------
(32,116) --
----------- ------------
Series share transactions (net of
share conversions) (Note 5):
Net proceeds from shares
subscribed................... 5,261,896 5,139,324
Net asset value of shares issued
in reinvestment of
dividends.................... 1,242,265 1,485,489
Cost of shares reacquired....... (15,354,228) (16,260,658)
----------- ------------
Net decrease in net assets from
Series share transactions.... (8,850,067) (9,635,845)
----------- ------------
Total decrease..................... (9,103,816) (8,386,409)
NET ASSETS
Beginning of year.................. 53,327,068 61,713,477
----------- ------------
End of year........................ $44,223,252 $ 53,327,068
----------- ------------
----------- ------------
</TABLE>
- --------------------------------------------------------------------------------

See Notes to Financial Statements. B-64

<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. Investment operations for Class A,
Class B, Class C and Class Z shares of each series commenced on January 22,
1990, September 17, 1987, August 1, 1994 and September 16, 1996, 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.
- -----------------------------------------------------------------------------
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 with respect to securities 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 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. The Fund amortizes premiums and accretes original issue discount
on portfolio securities as adjustments to interest income. Net investment
income, other than distribution fees, and realized and unrealized gains or
losses are allocated daily to each class of shares based upon the relative
proportion of net assets of each class at the
- --------------------------------------------------------------------------------

B-65

<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
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, 1997, the effect of applying this statement was
to increase undistributed net investment income by $123,008, increase
accumulated net realized loss by $131,486 and increase paid-in capital in excess
of par by $8,478 for the High Yield Series. For the Insured Series, the effect
of applying this statement was to increase undistributed net investment income
and decrease accumulated net realized gain by $298,101. The effect of applying
this statement for the Intermediate Series was to increase undistributed net
investment income by $32,116, decrease accumulated net realized gain by $32,022
and decrease paid-in capital in excess of par by $94. The current year effect of
applying the Statement of Position was due to the sale of securities purchased
with market discount. Net investment income, net realized gains and net assets
were not affected by this change.

CUSTODY FEE CREDITS: The Fund has an arrangement with its custodian bank,
whereby uninvested monies earn credits which reduce the fees charged by the
custodian.
- ------------------------------------------------------------
NOTE 2. AGREEMENTS

The Fund has a management agreement with Prudential Investments Fund Management
LLC ("PIFM"). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM 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. PIFM 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 PIFM 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 assets of each series in excess
of $1 billion. PIFM has agreed to voluntarily waive a portion of each Series'
management fee, which amounted to $514,371, $277,120, and $24,449 for the High
Yield Series, Insured Series, and Intermediate Series, respectively for the year
ended April 30, 1997. Such amounts represented .05 of 1% of average daily net
assets for each Series or $.006 per share.

The Fund has a distribution agreement with Prudential Securities Incorporated
("PSI"), which acts as the distributor of the Class A, Class B, Class C and
Class Z shares of the Fund. The Fund compensates 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 PSI. The distribution fees are accrued daily and payable monthly. No
distribution or service fees are paid to PSI as distributor of the Class Z
shares of the Fund.

Pursuant to the Class A, B and C Plans, the Fund compensates PSI 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, 1997.

PSI has advised the Fund that it received approximately $303,500 ($210,200-High
Yield Series; $88,800-Insured Series; $4,500-Intermediate Series) in front-end
sales charges resulting from sales of Class A shares during the year ended April
30, 1997. From these fees, PSI paid such sales charges to affiliated
broker-dealers which in turn paid commissions to salespersons and incurred other
distribution costs.

PSI has advised the Fund that for the year ended April 30, 1997, it received
approximately $1,940,800 ($1,204,200-High Yield Series; $649,600-Insured Series;
$87,000-Intermediate Series) in contingent deferred sales charges imposed upon
certain redemptions by Class B and C shareholders.

PSI, PIC and PIFM are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America.
- --------------------------------------------------------------------------------

B-66

<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
The Fund, along with other affiliated registered investment companies (the
"Funds"), entered into a credit agreement (the "Agreement") on December 31, 1996
with an unaffiliated lender. The maximum commitment under the Agreement is
$200,000,000. The Agreement expires on December 30, 1997. Interest on any such
borrowings outstanding will be at market rates. The purpose of the Agreement is
to serve as an alternative source of funding for capital share redemptions. The
Fund has not borrowed any amounts pursuant to the Agreement as of April 30,
1997. The Funds pay a commitment fee at an annual rate of .055 of 1% on the
unused portion of the credit facility. The commitment fee is accrued and paid
quarterly on a pro-rata basis by the Funds.
- -----------------------------------------------------------------------------
NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES

Prudential Mutual Fund Services LLC ("PMFS"), a wholly-owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended April 30, 1997, the
Fund incurred fees of approximately $653,000 ($370,500-High Yield Series;
$252,100-Insured Series; $30,400-Intermediate Series) for the services of PMFS.
As of April 30, 1997, approximately $53,200 ($30,700-High Yield Series;
$20,100-Insured Series; $2,400-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, 1997, were as follows:
<TABLE>
<CAPTION>
SERIES PURCHASES SALES
- -------------------------------- ------------ ------------
<S> <C> <C>
High Yield...................... $264,933,180 $305,927,926
Insured......................... 565,764,484 624,083,328
Intermediate.................... 21,414,325 30,041,885
</TABLE>

At April 30, 1997, the Insured Series and the Intermediate Series sold 517,000
and 47,000 financial futures contracts, respectively of U.S. Treasury Bonds
expiring in June 97.

The values of these financial futures contracts at April 30, 1997 were as
follows:
<TABLE>
<CAPTION>
FINANCIAL FUTURES
CONTRACTS SOLD
---------------------------
INSURED INTERMEDIATE
SERIES SERIES
----------- ------------
<S> <C> <C>
Value at disposition............... $56,306,719 $ 5,149,125
Value at April 30, 1997............ 56,498,406 5,136,219
----------- ------------
Unrealized gain (loss)............. $ (191,687) $ 12,906
----------- ------------
----------- ------------
</TABLE>

The federal income tax basis of the Fund's investments, at April 30, 1997 was
$949,808,490-High Yield Series; $491,614,379-Insured Series; and
$43,325,811-Intermediate Series and, accordingly, net unrealized appreciation of
investments for federal income tax purposes was as follows:
<TABLE>
<CAPTION>
GROSS GROSS
NET UNREALIZED UNREALIZED UNREALIZED
SERIES APPRECIATION APPRECIATION DEPRECIATION
- -------------------- -------------- ----------- -----------
<S> <C> <C> <C>
High Yield.......... $ 30,820,223 $54,840,506 $24,020,283
Insured............. 9,707,246 12,814,010 3,106,764
Intermediate........ 435,239 834,266 399,027
</TABLE>

The High Yield Series has a net capital loss carryforward as of April 30, 1997
of approximately $16,993,000, of which $2,024,000 expires in 2002, $5,361,000
expires in 2003, $6,383,000 expires in 2004 and $3,225,000 expires in 2005. No
capital gains distribution is expected to be paid to shareholders until net
gains have been realized in excess of the aggregate of such amounts. In
addition, the High Yield Series elected to treat net realized capital losses of
approximately $931,000 incurred in the six month period ended April 30, 1997, as
having been incurred in the following year. The Insured Series and Intermediate
Series utilized their capital loss carryforwards of approximately $631,000 and
$338,000, respectively, to partially offset each Series' net taxable gains
realized and recognized in the fiscal year ended April 30, 1997.
- -----------------------------------------------------------------------------
NOTE 5. CAPITAL

Each series offers Class A, Class B, Class C and Class Z 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 qualify to purchase Class A shares at net asset value.

Effective September 16, 1996, the Fund commenced offering Class Z shares. Class
Z shares are not subject to any sales or redemption charge and are offered
exclusively for sale to a limited group of investors.
- --------------------------------------------------------------------------------

B-67

<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, 1997 SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
- -------------------------------- ----------- ------------- ----------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Shares issued................... 2,690,433 $ 29,194,209 17,268,103 $ 190,281,225 146,988 $ 1,570,573
Shares issued in reinvestment of
dividends and
distributions................ 816,257 8,853,738 562,530 6,209,882 33,834 360,674
Shares reacquired............... (5,951,712) (64,552,270) (20,358,917) (224,259,104) (505,221) (5,381,606)
----------- ------------- ----------- ------------- ---------- ------------
Net decrease in shares
outstanding before
conversion................... (2,445,022) (26,504,323) (2,528,284) (27,767,997) (324,399) (3,450,359)
Shares issued upon conversion
from Class B................. 12,411,968 133,842,041 8,887,896 97,509,503 443,554 4,710,903
----------- ------------- ----------- ------------- ---------- ------------
Net increase in shares
outstanding.................. 9,966,946 $ 107,337,718 6,359,612 $ 69,741,506 119,155 $ 1,260,544
----------- ------------- ----------- ------------- ---------- ------------
----------- ------------- ----------- ------------- ---------- ------------
<CAPTION>
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 B CLASS B CLASS B
---------------------------- ---------------------------- --------------------------
YEAR ENDED APRIL 30, 1997 SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
- -------------------------------- ----------- ------------- ----------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Shares issued................... 7,261,475 $ 78,657,488 991,206 $ 10,920,454 293,960 $ 3,134,459
Shares issued in reinvestment of
dividends and
distributions................ 1,747,161 18,927,857 1,049,549 11,593,012 82,134 875,459
Shares reacquired............... (9,901,712) (107,242,000) (6,341,050) (69,974,266) (909,089) (9,694,638)
----------- ------------- ----------- ------------- ---------- ------------
Net decrease in shares
outstanding before
conversion................... (893,076) 9,656,655 (4,300,295) (47,460,800) (532,995) (5,684,720)
Shares reacquired upon
conversion into Class A...... (12,411,968) (133,842,041) (8,879,800) (97,509,503 (443,243) (4,710,903)
----------- ------------- ----------- ------------- ---------- ------------
Net decrease in shares
outstanding.................. (13,305,044) $(143,498,696) (13,180,095) $(144,970,303) (976,238) $(10,395,623)
----------- ------------- ----------- ------------- ---------- ------------
----------- ------------- ----------- ------------- ---------- ------------
<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)
----------- ------------- ----------- ------------- ---------- ------------
----------- ------------- ----------- ------------- ---------- ------------

- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

B-68

<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, 1997 SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
- -------------------------------- ----------- ------------- ----------- ------------- ---------- ------------
Shares issued................... 505,330 $ 5,472,765 21,265 $ 234,063 28,931 $ 311,189
<S> <C> <C> <C> <C> <C> <C>
Shares issued in reinvestment of
dividends and
distributions................ 28,059 304,264 3,510 38,759 436 4,639
Shares reacquired............... (256,031) (2,781,902) (47,234) (521,343) (26,221) (277,703)
----------- ------------- ----------- ------------- ---------- ------------
Net increase (decrease) in
shares outstanding........... 277,358 $ 2,995,127 (22,459) $ (248,521) 3,146 $ 38,125
----------- ------------- ----------- ------------- ---------- ------------
----------- ------------- ----------- ------------- ---------- ------------
<CAPTION>
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 Z CLASS Z CLASS Z
SEPTEMBER 16, 1996(A) THROUGH ---------------------------- ---------------------------- --------------------------
APRIL 30, 1997 SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
- -------------------------------- ----------- ------------- ----------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Shares issued................... 287,958 $ 3,134,548 1,377 $ 15,206 23,097 $ 245,675
Shares issued in reinvestment of
dividends and
distributions................ 2,192 23,750 16 177 140 1,493
Shares reacquired............... (39,065) (425,418) (10) (115) (27) (281)
----------- ------------- ----------- ------------- ---------- ------------
Net increase in shares
outstanding.................. 251,085 $ 2,732,880 1,383 $ 15,268 23,210 $ 246,887
----------- ------------- ----------- ------------- ---------- ------------
----------- ------------- ----------- ------------- ---------- ------------
</TABLE>
- ---------------
(a) Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------

B-69

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------
YEARS ENDED APRIL 30,
----------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.70 $ 10.72 $ 10.74 $ 11.14 $ 10.68
-------- -------- -------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................... .70 .72(b) .72(b) .72 .77
Net realized and unrealized gain (loss) on
investment transactions.......................... .14 (.02) (.02) (.39) .46
-------- -------- -------- ------- -------
Total from investment operations................. .84 .70 .70 .33 1.23
-------- -------- -------- ------- -------
LESS DISTRIBUTIONS
Dividends from net investment income................ (.70) (.72) (.72) (.72) (.77)
Distributions from capital gains.................... -- -- -- (.01) --
-------- -------- -------- ------- -------
Total distributions.............................. (.70) (.72) (.72) (.73) (.77)
-------- -------- -------- ------- -------
Net asset value, end of year........................ $ 10.84 $ 10.70 $ 10.72 $ 10.74 $ 11.14
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
TOTAL RETURN(a):.................................... 8.03% 6.55% 6.90% 2.88% 11.90%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $334,062 $223,073 $115,501 $54,491 $43,529
Average net assets (000)............................ $294,940 $162,329 $ 65,207 $52,982 $31,658
Ratios to average net assets:
Expenses, including distribution fees............ 0.64%(b) 0.64%(b) 0.69%(b) 0.69% 0.74%
Expenses, excluding distribution fees............ 0.54%(b) 0.54%(b) 0.59%(b) 0.59% 0.64%
Net investment income............................ 6.44%(b) 6.58%(b) 6.83%(b) 6.42% 7.04%
For Class A, B, C and Z shares:
Portfolio turnover rate.......................... 26% 35% 39% 36% 27%
</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. Total returns for periods of less than a full year are not
annualized.
(b) Net of management fee waiver.
- --------------------------------------------------------------------------------

See Notes to Financial Statements. B-70

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B
------------------------------------------------------------------
YEARS ENDED APRIL 30,
------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.69 $ 10.72 $ 10.74 $ 11.14 $ 10.68
-------- -------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................... .66(b) .68(b) .68(b) .68 .73
Net realized and unrealized gain (loss) on
investment transactions.......................... .15 (.03) (.02) (.39) .46
-------- -------- ---------- ---------- ----------
Total from investment operations................. .81 .65 .66 .29 1.19
-------- -------- ---------- ---------- ----------
LESS DISTRIBUTIONS
Dividends from net investment income................ (.66) (.68) (.68) (.68) (.73)
Distributions from capital gains.................... -- -- -- (.01) --
-------- -------- ---------- ---------- ----------
Total distributions.............................. (.66) (.68) (.68) (.69) (.73)
-------- -------- ---------- ---------- ----------
Net asset value, end of year........................ $ 10.84 $ 10.69 $ 10.72 $ 10.74 $ 11.14
-------- -------- ---------- ---------- ----------
-------- -------- ---------- ---------- ----------
TOTAL RETURN(a):.................................... 7.71% 6.12% 6.37% 2.46% 11.47%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $665,525 $799,048 $ 934,725 $1,099,640 $1,028,480
Average net assets (000)............................ $725,305 $900,115 $1,024,132 $1,132,653 $ 893,203
Ratios to average net assets:
Expenses, including distribution fees............ 1.04%(b) 1.04%(b) 1.09%(b) 1.09% 1.14%
Expenses, excluding distribution fees............ 0.54%(b) 0.54%(b) 0.59%(b) 0.58% 0.64%
Net investment income............................ 6.05%(b) 6.19%(b) 6.37%(b) 6.02% 6.66%
</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. Total returns for periods of less than a full year are not
annualized.
(b) Net of management fee waiver.
- --------------------------------------------------------------------------------

See Notes to Financial Statements. B-71

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS C CLASS Z
-------------------------------------- -------------
AUGUST 1, SEPTEMBER 16,
1994(c) 1996(d)
YEARS ENDED APRIL 30, THROUGH THROUGH
----------------------- APRIL 30, APRIL 30,
1997 1996 1995 1997
--------- --------- ---------- -------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.69 $ 10.72 $10.79 $ 10.79
--------- --------- ----- -----
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b)........................... .63 .65 .49 .45
Net realized and unrealized gain (loss) on
investment transactions.......................... .15 (.03) (.07) .04
--------- --------- ----- -----
Total from investment operations................. .78 .62 .42 .49
--------- --------- ----- -----
LESS DISTRIBUTIONS
Dividends from net investment income................ (.63) (.65) (.49) (.45)
--------- --------- ----- -----
Net asset value, end of year........................ $ 10.84 $ 10.69 $10.72 $ 10.83
--------- --------- ----- -----
--------- --------- ----- -----
TOTAL RETURN(a):.................................... 7.44% 5.86% 3.91% 4.36%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $ 9,563 $ 6,471 $3,208 $ 2,719
Average net assets (000)............................ $ 8,060 $ 5,608 $1,385 $ 704
Ratios to average net assets:
Expenses, including distribution fees(b)......... 1.29% 1.29% 1.34%(e) 0.54%(e)
Expenses, excluding distribution fees(b)......... 0.54% 0.54% 0.59%(e) 0.54%(e)
Net investment income(b)......................... 5.80% 5.93% 6.34%(e) 6.55%(e)
</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. Total returns for periods of less than a full year are not
annualized.
(b) Net of management fee waiver.
(c) Commencement of offering of Class C shares.
(d) Commencement of offering of Class Z shares.
(e) Annualized.
- --------------------------------------------------------------------------------

See Notes to Financial Statements. B-72

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------
YEARS ENDED APRIL 30,
---------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.94 $ 10.83 $ 10.71 $ 11.44 $ 10.98
-------- -------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................... .55(b) .58(b) .58(b) .58 .61
Net realized and unrealized gain (loss) on
investment transactions.......................... .08 .11 .12 (.43) .73
-------- -------- ------- ------- -------
Total from investment operations................. .63 .69 .70 .15 1.34
-------- -------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends from net investment income................ (.55) (.58) (.58) (.58) (.61)
Distributions in excess of net investment income.... (.01) -- -- -- --
Distributions from capital gains.................... (.11) -- -- (.30) (.27)
-------- -------- ------- ------- -------
Total distributions.............................. (.67) (.58) (.58) (.88) (.88)
-------- -------- ------- ------- -------
Net asset value, end of year........................ $ 10.90 $ 10.94 $ 10.83 $ 10.71 $ 11.44
-------- -------- ------- ------- -------
-------- -------- ------- ------- -------
TOTAL RETURN(a):.................................... 5.74% 6.47% 6.73% 1.04% 12.68%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $208,411 $139,548 $75,800 $30,669 $30,098
Average net assets (000)............................ $187,371 $102,456 $39,471 $32,309 $24,589
Ratios to average net assets:
Expenses, including distribution fees............ 0.68%(b) 0.68%(b) 0.74%(b) 0.71% 0.72%
Expenses, excluding distribution fees............ 0.58%(b) 0.58%(b) 0.64%(b) 0.61% 0.62%
Net investment income............................ 4.95%(b) 5.20%(b) 5.45%(b) 5.09% 5.46%
For Class A, B, C and Z shares:
Portfolio turnover rate.......................... 110% 68% 64% 105% 85%
</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. Total returns for periods of less than a full year are not
annualized.
(b) Net of management fee waiver.
- --------------------------------------------------------------------------------

See Notes to Financial Statements. B-73

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B
------------------------------------------------------------
YEARS ENDED APRIL 30,
------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.95 $ 10.84 $ 10.71 $ 11.44 $ 10.99
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................... .50(b) .54(b) .54(b) .54 .56
Net realized and unrealized gain (loss) on
investment transactions.......................... .08 .11 .13 (.43) .72
-------- -------- -------- -------- --------
Total from investment operations................. .58 .65 .67 .11 1.28
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment income................ (.50) (.54) (.54) (.54) (.56)
Distributions in excess of net investment income.... (.01) -- -- -- --
Distributions from capital gains.................... (.11) -- -- (.30) (.27)
-------- -------- -------- -------- --------
Total distributions.............................. (.62) (.54) (.54) (.84) (.83)
-------- -------- -------- -------- --------
Net asset value, end of year........................ $ 10.91 $ 10.95 $ 10.84 $ 10.71 $ 11.44
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN(a):.................................... 5.32% 6.04% 6.40% 0.63% 12.14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $298,005 $443,391 $567,648 $740,447 $770,060
Average net assets (000)............................ $365,891 $524,452 $660,237 $807,794 $705,846
Ratios to average net assets:
Expenses, including distribution fees............ 1.08%(b) 1.08%(b) 1.14%(b) 1.11% 1.12%
Expenses, excluding distribution fees............ 0.58%(b) 0.58%(b) 0.64%(b) 0.61% 0.62%
Net investment income............................ 4.54%(b) 4.80%(b) 4.99%(b) 4.69% 5.06%
</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. Total returns for periods of less than a full year are not
annualized.
(b) Net of management fee waiver.
- --------------------------------------------------------------------------------

See Notes to Financial Statements. B-74

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS C CLASS Z
-------------------------------------- -------------
AUGUST 1, SEPTEMBER 16,
1994(c) 1996(d)
YEARS ENDED APRIL 30, THROUGH THROUGH
----------------------- APRIL 30, APRIL 30,
1997 1996 1995 1997
--------- --------- ---------- -------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.95 $ 10.84 $10.79 $ 11.05
--------- --------- ----- -----
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b)........................... .48 .51 .39 .36
Net realized and unrealized gain (loss) on
investment transactions.......................... .08 .11 .05 (.02)
--------- --------- ----- -----
Total from investment operations................. .56 .62 .44 .34
--------- --------- ----- -----
LESS DISTRIBUTIONS
Dividends from net investment income................ (.48) (.51) (.39) (.36)
Distributions in excess net investment income....... (.01) -- -- (.01)
Distributions from capital gains.................... (.11) -- -- (.11)
--------- --------- ----- -----
Total distributions.............................. (.60) (.51) (.39) (.48)
--------- --------- ----- -----
Net asset value, end of year........................ $ 10.91 $ 10.95 $10.84 $ 10.91
--------- --------- ----- -----
--------- --------- ----- -----
TOTAL RETURN(a):.................................... 5.06% 5.78% 4.03% 2.86%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $ 888 $ 1,137 $ 525 $ 15
Average net assets (000)............................ $ 973 $ 827 $ 224 $ 10
Ratios to average net assets:
Expenses, including distribution fees(b)......... 1.33% 1.33% 1.39%(e) 0.58%(e)
Expenses, excluding distribution fees(b)......... 0.58% 0.58% 0.64%(e) 0.58%(e)
Net investment income(b)......................... 4.29% 4.56% 4.92%(e) 4.18%(e)
</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. Total returns for periods of less than a full year are not
annualized.
(b) Net of management fee waivers.
(c) Commencement of offering of Class C shares.
(d) Commencement of offering of Class Z shares.
(e) Annualized.
- --------------------------------------------------------------------------------

See Notes to Financial Statements. B-75

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS INTERMEDIATE SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------
YEARS ENDED APRIL 30,
------------------------------------------------------
1997 1996 1995 1994 1993
-------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.65 $ 10.45 $ 10.67 $11.08 $10.59
-------- ------- ------- ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................... .46(b) .47(b) .51(b) .53 .54(b)
Net realized and unrealized gain (loss) on
investment transactions.......................... (.05) .20 (.03) (.19) .60
-------- ------- ------- ------ ------
Total from investment operations................. .41 .67 .48 .34 1.14
-------- ------- ------- ------ ------
LESS DISTRIBUTIONS
Dividends from net investment income................ (.46) (.47) (.51) (.53) (.54)
Distributions in excess of net investment income.... (.01) -- (.01) -- --
Distributions from capital gains.................... -- -- (.18) (.22) (.11)
-------- ------- ------- ------ ------
Total distributions.............................. (.47) (.47) (.70) (.75) (.65)
-------- ------- ------- ------ ------
Net asset value, end of year........................ $ 10.59 $ 10.65 $ 10.45 $10.67 $11.08
-------- ------- ------- ------ ------
-------- ------- ------- ------ ------
TOTAL RETURN(a):.................................... 3.86% 6.48% 4.52% 2.83% 11.13%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $ 13,740 $12,552 $10,507 $5,810 $3,594
Average net assets (000)............................ $ 13,487 $12,604 $ 7,742 $4,981 $1,883
Ratios to average net assets:
Expenses, including distribution fees............ 1.15%(b) 1.16%(b) 1.05%(b) 1.00% 1.06(b)
Expenses, excluding distribution fees............ 1.05%(b) 1.06%(b) 0.95%(b) 0.90% 0.96(b)
Net investment income............................ 4.30%(b) 4.36%(b) 4.75%(b) 4.63% 5.09(b)
For Class A, B, C and Z shares:
Portfolio turnover rate.......................... 46% 35% 30% 55% 22%
</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. Total returns for periods of less than a full year are not
annualized.
(b) Net of management fee waiver.
- --------------------------------------------------------------------------------

See Notes to Financial Statements. B-76

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS INTERMEDIATE SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B
--------------------------------------------------------
YEARS ENDED APRIL 30,
--------------------------------------------------------
1997 1996 1995 1994 1993
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.65 $ 10.45 $ 10.68 $ 11.09 $ 10.60
-------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................... .42(b) .43(b) .45(b) .48 .50(b)
Net realized and unrealized gain (loss) on
investment transactions.......................... (.05) .20 (.04) (.19) .60
-------- ------- ------- ------- -------
Total from investment operations................. .37 .63 .41 .29 1.10
-------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends from net investment income................ (.42) (.43) (.45) (.48) (.50)
Distributions in excess of net investment income.... (.01) -- (.01) -- --
Distributions from capital gains.................... -- -- (.18) (.22) (.11)
-------- ------- ------- ------- -------
Total distributions.............................. (.43) (.43) (.64) (.70) (.61)
-------- ------- ------- ------- -------
Net asset value, end of year........................ $ 10.59 $ 10.65 $ 10.45 $ 10.68 $ 11.09
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
TOTAL RETURN(a):.................................... 3.44% 6.05% 3.99% 2.43% 10.62%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $ 29,980 $40,550 $51,039 $65,215 $57,049
Average net assets (000)............................ $ 35,221 $46,127 $60,174 $59,811 $50,154
Ratios to average net assets:
Expenses, including distribution fees............ 1.55%(b) 1.56%(b) 1.45%(b) 1.40% 1.46%(b)
Expenses, excluding distribution fees............ 1.05%(b) 1.06%(b) 0.95%(b) 0.90% 0.96%(b)
Net investment income............................ 3.89%(b) 3.96%(b) 4.35%(b) 4.23% 4.69%(b)
</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. Total returns for periods of less than a full year are not
annualized.
(b) Net of management fee waiver.
- --------------------------------------------------------------------------------

See Notes to Financial Statements. B-77

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS INTERMEDIATE SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS C CLASS Z
-------------------------------------- -------------
AUGUST 1, SEPTEMBER 16,
1994(c) 1996(d)
YEARS ENDED APRIL 30, THROUGH THROUGH
----------------------- APRIL 30, APRIL 30,
1997 1996 1995 1997
--------- --------- ---------- -------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.65 $ 10.45 $10.54 $ 10.63
--------- --------- ----- -----
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b)........................... .39 .40 .35 .31
Net realized and unrealized gain (loss) on
investment transactions.......................... (.05) .20 (.08) (.03)
--------- --------- ----- -----
Total from investment operations................. .34 .60 .27 .28
--------- --------- ----- -----
LESS DISTRIBUTIONS
Dividends from net investment income................ (.39) (.40) (.35) (.31)
Distributions in excess of net investment income.... (.01) -- (.01) (.01)
--------- --------- ----- -----
Total distributions.............................. (.40) (.40) (.36) (.32)
--------- --------- ----- -----
Net asset value, end of year........................ $ 10.59 $ 10.65 $10.45 $ 10.59
--------- --------- ----- -----
--------- --------- ----- -----
TOTAL RETURN(a):.................................... 3.17% 5.79% 2.14% 2.50%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $ 257 $ 225 $ 167 $ 246
Average net assets (000)............................ $ 149 $ 197 $ 28 $ 63
Ratios to average net assets:
Expenses, including distribution fees(b)......... 1.80% 1.81% 1.81%(e) 1.05%(e)
Expenses, excluding distribution fees(b)......... 1.05% 1.06% 1.06%(e) 1.05%(e)
Net investment income(b)......................... 3.65% 3.71% 4.34%(e) 4.65%(e)
</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. Total returns for periods of less than a full year are not
annualized.
(b) Net of management fee waiver.
(c) Commencement of offering of Class C shares.
(d) Commencement of offering of Class Z shares.
(e) Annualized.
- --------------------------------------------------------------------------------

See Notes to Financial Statements. B-78

<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS PRUDENTIAL MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
To the Shareholders and Trustees of
Prudential Municipal Bond Fund

In our opinion, the accompanying statements of assets and liabilities, including
the portfolios of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial positions of the High Yield Series, Insured
Series and Intermediate Series (constituting Prudential Municipal Bond Fund,
hereafter referred to as the "Fund") at April 30, 1997 and the results of each
of their operations, the changes in each of their net assets and the financial
highlights for the year then ended, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit, which included
confirmation of securities at April 30, 1997 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where confirmations from brokers were not received, provides a reasonable basis
for the opinion expressed above.

PRICE WATERHOUSE LLP

1177 Avenue of the Americas
New York, New York
June 25, 1997

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

B-79

<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 responsilbity 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 statemnts 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

See Notes to Financial Statements. B-80

<PAGE>

APPENDIX I--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.

I-1
<PAGE>

APPENDIX II--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 $1,000.00 Invested on 1/1/26 through 12/31/96

[CHART]

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

Source: Stocks, Bonds, Bills and Inflation 1996 Yearbook, Ibbotson Associates',
Chicago, Illinois (annually updates work by Roger G. Ibbotson and Rex A.
Singlefield). Used with permission. This chart is for illustrative purposes only
and is not indicative of the past, present, or future performance of any asset
class of any Prudential Mutual Fund.

Generally, stock returns are due to capital appreciation and reinvesting any
gains. Bond returns are due mainly to reinvesting interest. Also, stock prices
are usually more volatile than bond prices over the long-term.

Small stock returns for 1926-1980 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.

II-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 1996. The total returns of the indices include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Fund or of any sector in which the
Fund invests.

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

HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS

<TABLE>
<CAPTION>
'87 '88 '89 '90 '91 '92 '93 '94 '95 '96
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT
TREASURY
BONDS(1) 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 18.4% 2.7%
U.S. GOVERNMENT
MORTGAGE
SECURITIES(2) 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8% 5.4%
U.S. INVESTMENT GRADE
CORPORATE
BONDS(3) 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3% 3.3%
U.S.
HIGH YIELD
CORPORATE
BONDS(4) 5.0% 12.5% 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2% 11.4%
WORLD
GOVERNMENT
BONDS(5) 35.2% 2.3% (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1%
DIFFERENCE BETWEEN HIGHEST
AND LOWEST RETURN PERCENT 33.2 10.2 18.8 24.9 30.9 11.0 10.3 9.9 5.5 8.7%
</TABLE>

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

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

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

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

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

II-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 (1926-1996)

[CHART]

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

Source: Stocks, Bonds, Bills, and Inflation 1996 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 1926-1996. 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.

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
THE RANGE OF ANNUAL TOTAL RETURNS FOR MAJOR STOCK &
<S> <C> <C> <C>
BOND INDICES OVER THE PAST 20 YEARS
(12/31/75-12/31/95)*
S&P 500 EAFE Lehman Aggregate
37.6% 69.9% 32.6%
-7.2% -23.2% -2.9%
Best Returns Zone
With a Diversified Blend
1/3 S&P 500 Index
1/3 EAFE Index
1/3 Lehman Aggregate Index
</TABLE>

- ------------------------
*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.

II-3
<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 PIC(1) 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. Prudential provides auto insurance for more than 1.7 million
cars and insures more than 1.4 million homes.

MONEY MANAGEMENT. 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, 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
Prudential, has nearly $3 billion in assets and serves nearly 1.5 million
customers across 50 states.

INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS

Prudential Investments Fund Management is the fifteenth largest mutual fund
company 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) The Prudential Investments,a business group 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 the subadviser to
Nicholas-Applegate Fund, Inc., Jennison Associates Capital Corp. as the
subadviser to Prudential Jennison Series Fund, Inc. and Prudential Active
Balanced Fund, a portfolio of Prudential Dryden Fund, Mercator Asset
Management LP as the subadvisor to International Stock Series, a portfolio
of Prudential World Fund, Inc. and BlackRock Financial Management, Inc. as
the 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 incorporated by reference from the Prospectus
constituting Part A of the Post-Effective Amendment to the Registration
Statement filed June 30, 1997

Financial Highlights

(2) The following financial statements incorporated by reference from
the Statement of Additional Information constituting Part B of the
Post-Effective Amendment to the Registration Statement filed June 30, 1997:

Portfolios of Investments at April 30, 1997

Statements of Assets and Liabilities at April 30, 1997

Statements of Operations for the year ended April 30, 1997

Statements of Changes in Net Assets for the years ended April 30,
1997 and April 30, 1996

Notes to Financial Statements

Financial Highlights

Independent Auditors' Reports

(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).

(c) Amended Certificate of Designation, incorporated by reference to
Exhibit No. 1(c) to Post-Effective Amendment No. 14 to the
Registration Statement on Form N-1A filed via EDGAR on June 27, 1996
(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. Specimen receipt for shares of beneficial interest.*

5. (a) Amended and Restated Management Agreement between the Registrant
and Prudential Mutual Fund Management, Inc., incorporated by
reference to Exhibit No. 5(a) to Post-Effective Amendment No. 14 to
the Registration Statement on Form N-1A filed via EDGAR on June 27,
1996 (File No. 33-10649).*

(b) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation.*

6. Amended and Restated Distribution Agreement, incorporated by
reference to Exhibit No. 6 to Post-Effective Amendment No. 14 to the
Registration Statement on Form N-1A filed via EDGAR on June 27, 1996
(File No. 33-10649).

8. (a) Custodian Contract between the Registrant and State Street Bank
and Trust Company.*

(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).

C-1
<PAGE>
(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, LLC.*

10. Opinion of Counsel.*

11. (a) Consent of Price Waterhouse LLP*

(b) Consent of Deloitte & Touche LLP*

13. N/A

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.*

(b) Schedule of Computation of Performance Quotations for Class A
shares.*

(d) Schedule of Computation of Performance Quotations for Class Z
shares.*

18. Rule 18f-3 Plan, incorporated by reference to Exhibit No. 18 to
Post-Effective Amendment No. 14 to the Registration Statement on Form
N-1A filed via EDGAR on June 27, 1996 (File No. 33-10649).

27. Financial Data Schedules.*

- --------------
*Filed herewith.

ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.

None.

ITEM 26. NUMBER OF HOLDERS OF SECURITIES.

As of June 6, 1997, there were 12,560, 8,686 and 700 record holders of Class A
shares of beneficial interest of the High Yield Series, Insured Series and
Intermediate Series, respectively; 21,480, 12,611 and 1,315 record holders of
Class B shares of beneficial interest of the High Yield Series, Insured Series
and Intermediate Series, respectively; 292, 43 and 8 record holders of Class C
shares of beneficial interest of the High Yield Series, Insured Series and
Intermediate Series, respectively; and 68, 3 and 18 record holders of Class Z
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,
as amended (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), the
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.

C-2
<PAGE>

Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended (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 Investments Fund
Management LLC (PIFM) 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 the 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 Investments Fund Management LLC (PIFM)

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 PIFM 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, March 30, 1996).

The business and other connections of PIFM's directors and principal executive
officers are set forth below. Except as otherwise indicated, the address of each
person is Gateway Center Three, Newark, New Jersey 07102.

<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATIONS
- ------------------------- -------------------- -------------------------------------------------------------
<S> <C> <C>
Brian M. Storms Officer-in-charge, President, Prudential Mutual Funds & Annuities (PMF&A);
President, Chief Officer in Charge, President, Chief Executive Officer and
Executive Officer Chief Operating Officer, PIFM
and Chief Operating
Officer
Robert F. Gunia Executive Vice Executive Vice President and Treasurer, PIFM; Senior Vice
President and President of Prudential Securities Incorporated (Prudential
Treasurer Securities)
Thomas A. Early Executive Vice Vice President and General Counsel, PMF&A; Executive Vice
President, Secretary President, Secretary and General Counsel, PIFM
and General Counsel
Susan C. Cote Executive Vice Vice President of Finance, PMF&A; Executive Vice President
President and Chief and Chief Financial Officer, PIFM
Financial Officer
</TABLE>

C-3
<PAGE>

<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATIONS
- ------------------------- -------------------- -------------------------------------------------------------
<S> <C> <C>
Neil A. McGuinness Executive Vice Executive Vice President and Director of Marketing, PMF&A;
President Executive Vice President, PIFM
Robert J. Sullivan Executive Vice Executive Vice President, PMF&A; Executive Vice President,
President PIFM
</TABLE>

(b) The Prudential Investment Corporation (PIC)

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, New Jersey 07101.

<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- ------------------------- -------------------- -------------------------------------------------------------
<S> <C> <C>
E. Michael Caulfield Chairman of the Chief Executive Officer, Prudential Investments of
Board, President, Prudential; Chairman of the Board, President, Chief
Chief Executive Executive Officer and Director, PIC
Officer and Director

Jonathan M. Greene Senior Vice President--Investment Management, Prudential Investments of
President and Prudential; Senior Vice President and Director, PIC
Director

John R. Strangfeld Vice President and President of Private Asset Management Group of Prudential;
Director Vice President and Director, PIC
</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, The Global Government Plus Fund, Inc., The Global Total Return
Fund, Inc., 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 Dryden Fund, Prudential
Emerging Growth Fund, Inc., Prudential Equity Fund, Inc., Prudential Equity
Income Fund, Prudential Europe Growth Fund, Inc., Prudential Global Genesis
Fund, Inc., Prudential Global Limited Maturity Fund, Inc., Prudential Government
Income Fund, Inc., Prudential Government Securities Trust, Prudential High Yield
Fund, Inc., Prudential Institutional Liquidity Portfolio, Inc., Prudential
Intermediate Global Income Fund, Inc., Prudential Jennison Series 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
Natural Resources Fund, Inc., Prudential Pacific Growth Fund, Inc., Prudential
Small Company Value Fund, Inc., Prudential Special Money Market Fund, Inc.,
Prudential Structured Maturity Fund, Inc., Prudential Tax-Free Money Fund, Inc.,
Prudential Utility Fund, Inc., Prudential World Fund, Inc. and The Target
Portfolio Trust. Prudential Securities is also a depositor for the following
unit investment trusts:

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

C-4
<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 10292
Alan D. Hogan......... Executive Vice President and Director None
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 10292
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 10292
Hardwick Simmons...... Chief Executive Officer, President and None
Director
Lee B. Spencer, Jr.... General Counsel, Executive Vice None
President, Secretary and Director
Brian Storms.......... Director None
</TABLE>

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

(1)The address of each person named is One Seaport Plaza, New York, New York
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, Gateway Center
Three, Newark, New Jersey 07102; and Prudential Mutual Fund Services LLC,
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 Gateway Center Three, Newark, New Jersey
07102 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 LLC.

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-5
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant 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 Newark, and
State of New Jersey, on the 1st day of July, 1997.

PRUDENTIAL MUNICIPAL BOND FUND, INC.

/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/ Grace C. Torres Treasurer and Principal Financial July 1, 1997
- ------------------------------------ and Accounting Officer
GRACE C. TORRES

/s/ Edward D. Beach Trustee July 1, 1997
- ------------------------------------
EDWARD D. BEACH

/s/ Eugene C. Dorsey Trustee July 1, 1997
- ------------------------------------
EUGENE C. DORSEY

/s/ Delayne Dedrick Gold Trustee July 1, 1997
- ------------------------------------
DELAYNE DEDRICK GOLD

/s/ Robert F. Gunia Trustee July 1, 1997
- ------------------------------------
ROBERT F. GUNIA

/s/ Harry A. Jacobs, Jr. Trustee July 1, 1997
- ------------------------------------
HARRY A. JACOBS, JR.

/s/ Donald D. Lennox Trustee July 1, 1997
- ------------------------------------
DONALD D. LENNOX

/s/ Mendel A. Melzer Trustee July 1, 1997
- ------------------------------------
MENDEL A. MELZER

/s/ Thomas T. Mooney Trustee July 1, 1997
- ------------------------------------
THOMAS T. MOONEY

/s/ Thomas O'Brien Trustee July 1, 1997
- ------------------------------------
THOMAS O'BRIEN

/s/ Richard A. Redeker President and Trustee July 1, 1997
- ------------------------------------
RICHARD A. REDEKER

/s/ Nancy H. Teeters Trustee July 1, 1997
- ------------------------------------
NANCY H. TEETERS

/s/ Louis A. Weil, III Trustee July 1, 1997
- ------------------------------------
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, incorporated by reference to Exhibit No. 1(c) to Post-Effective
Amendment No. 14 to the Registration Statement on Form N-1A filed via EDGAR on June 27, 1996 (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. Specimen receipt for shares of beneficial interest.*
5. (a) Amended and Restated Management Agreement between the Registrant and Prudential Mutual Fund
Management, Inc., incorporated by reference to Exhibit No. 5(a) to Post-Effective Amendment No. 14 to
the Registration Statement on Form N-1A filed via EDGAR on June 27, 1996 (File No. 33-10649).
(b) Subadvisory Agreement between Prudential Mutual Fund Management, Inc. and The Prudential Investment
Corporation.*
6. Amended and Restated Distribution Agreement, incorporated by reference to Exhibit No. 6 to
Post-Effective Amendment No. 14 to the Registration Statement on Form N-1A filed via EDGAR on June 27,
1996 (File No. 33-10649).
8. (a) Custodian Contract between the Registrant and State Street Bank and Trust Company.*
(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, LLC.*
10. Opinion of Counsel.*
11. (a) Consent of Price Waterhouse LLP.*
(b) Consent of Deloitte & Touche LLP.*
13. N/A
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).
</TABLE>

<PAGE>

- --------------
*Filed herewith.

<PAGE>

Form of Specimen Receipt for Shares of Beneficial Interest

This is to certify that is the owner of fully-paid and
--------- ------------
non-assessable shares of the par value of $ .01 each of the shares of beneficial
interest of Prudential Municipal Bond Fund, hereafter called the "Trust",
transferable on the books of the Trust by the owner in person or by only duly
authorized attorney under surrender of this Specimen Receipt properly endorsed.

This Specimen Receipt and the shares represented hereby are issued and shall be
held subject to the Declaration of Trust and by-Laws of the Trust and all
amendments thereof, copies of which are at the office of the Trust, to all of
which the Holder, by acceptance hereof assents.

This Specimen Receipt is not valid unless countersigned by the Transfer Agent.

IN WITNESS WHEREOF, the Corporation has caused this Specimen Receipt to be
signed in its name by its proper officers and to be sealed with the Corporate
Seal.

<PAGE>

Ex-5.(b)
Subadvisory Agreement

PRUDENTIAL-BACHE MUNICIPAL BOND FUND
SUBADVISORY AGREEMENT

Agreement made as of this 1st day of March, l988 between Prudential Mutual
Fund Management Inc., a Delaware Corporation ("PMF" or the "Manager"), and The
Prudential Investment Corporation, a New Jersey Corporation (the "Subadviser").

WHEREAS, the Manager has entered into a Management Agreement, dated March
1, l988 (the "Management Agreement"), with Prudential-Bache Municipal Bond Fund
(the "Fund"), a Massachusetts business trust and a diversified open-end
management investment company registered under the Investment Company Act of
1940 (the "1940 Act"), pursuant to which PMF will act as Manager of the Fund.

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, PMF desires to retain the Subadviser to provide investment
advisory services to the Fund in connection with the management of the Fund and
the Subadviser is willing to render such investment advisory services.

NOW, THEREFORE, the Parties agree as follows:

1. (a) Subject to the supervision of the Manager and of the Trustees of
the Fund, the Subadviser shall manage the investment operations of each
series 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, (such Prospectus and Statement of
Additional Information as currently in effect and as amended or
supplemented from time to time, being herein called the "Prospectus"), and
subject to the following understandings:

(i) The Subadviser shall provide supervision of each series'
investments and determine from time to time what investments and
securities will be purchased, retained, sold or loaned by each series of
the Fund, and what portion of the assets will be invested or held
uninvested as cash.

(ii) In the performance of its duties and obligations under this
Agreement, the Subadviser shall act in conformity with the Declaration of
Trust, By-Laws and Prospectus of the Fund and with the instructions and
directions of the Manager and of the Trustees of the Fund and will conform
to and comply with the requirements of the 1940 Act, the Internal Revenue
Code of 1986 and all other applicable federal and state laws and
regulations.
<PAGE>

(iii) The Subadviser shall determine the securities and futures
contracts to be purchased or sold by each series of the Fund and will
place orders with or through such persons, brokers, dealers or futures
commission merchants (including but not limited to Prudential-Bache
Securities Inc.) to carry out the policy with respect to brokerage as set
forth in the Fund's Registration Statement and Prospectus or as the
Trustees may direct from time to time. In providing the Fund with
investment supervision, it is recognized that the Subadviser will give
primary consideration to securing the most favorable price and efficient
execution. Within The framework of this policy, The Subadviser 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 the Subadviser's other clients may be a party. It is
understood that Prudential-Bache Securities Inc. 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 Subadviser have
access to supplemental investment and market research and security and
economic analysis provided by brokers or futures commission merchants who
may execute brokerage transactions at a higher cost to the Fund than may
result when allocating brokerage to other brokers on the basis of seeking
the most favorable price and efficient execution. Therefore, the
Subadviser is authorized to place orders for the purchase and sale of
securities and futures contracts for each series of he Fund with such
brokers or futures commission merchants, 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 brokers
or futures commission merchants may be useful to the Subadviser in
connection with the Subadviser's services to other clients.

On occasions when the Subadviser deems the purchase or sale of a
security or futures contract to be in the best interest of the Fund (and
each series of the Fund) as well as other clients of the Subadviser, the
Subadviser, 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 sold or 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 Subadviser in the manner the Subadviser 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.

-2-
<PAGE>

(iv) The Subadviser shall maintain all books and records with
respect to the Fund's portfolio transactions required by subparagraphs
(b)(5), (6), (7), (9), (10) and (11) and paragraph (f) of Rule 31a-1
under the 1940 Act and shall render to the Fund's Trustees such periodic
and Special reports as the Trustees may reasonably request.

(v) The Subadviser shall provide the Fund's Custodian on each
business day with information relating to all transactions concerning the
Fund's assets and shall provide the Manager with such information upon
request of the Manager.

(vi) The investment management services provided by the subadviser
hereunder are not to be deemed exclusive, and the Subadviser shall be free
to render similar services to others.

(b) The subadviser 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. Services to be
furnished by the Subadviser under this Agreement may be furnished through
the medium of any of such directors, officers or employees.

(c) The Subadviser shall keep the Fund's books and records required to be
maintained by the Subadviser pursuant to paragraph 1(a) hereof and shall
timely furnish to the Manager all information relating to the Subadviser's
services hereunder needed by the Manager to keep the other books and
records of the Fund required by Rule 3la-l under the 1940 Act. The
Subadviser agrees that all records which it maintains for the Fund are the
property of the Fund and the Subadviser will surrender promptly to the
Fund any of such records upon the Fund's request, provided however that
the Subadviser may retain a copy of such records. The Subadviser further
agrees to preserve for the periods prescribed by Rule 3la-2 of the
Commission under the 1940 Act any such records as are required to be
maintained by it pursuant to paragraph 1(a) hereof.

2. The Manager shall continue to have responsibility for all services to
be provided to the Fund pursuant to the Management Agreement and shall
oversee and review the Subadviser's performance of its duties under this
Agreement.

3. The Manager Shall reimburse the Subadviser for reasonable costs and
expenses incurred by the Subadviser determined in a manner acceptable to
the Manager in furnishing the services described in paragraph 1 hereof.

4. The Subadviser shall not be liable for any error of judgment or for any
loss suffered by the Fund or the Manager in connection with the matters to
which this Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the Subadviser's part in the
performance of its duties or from its reckless disregard of its
obligations and duties under this Agreement.

-3-
<PAGE>

5. 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 the Fund, or by the Manager or the Subadviser 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) or upon the termination of the Management Agreement.

6. Nothing in this Agreement shall limit or restrict the right of any of
the Subadviser's directors, officers, or employees 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 a dissimilar
nature, nor limit or restrict the Subadviser's right to engage in any
other business or to render services of any kind to any other corporation,
firm, individual or association.

7. During the term of this Agreement, the Manager agrees to furnish the
Subadviser 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 to the
Subadviser in any way, prior to use thereof and not to use material if the
Subadviser reasonably objects in writing five business days (or such other
time as may be mutually agreed) after receipt thereof. Sales literature
may be furnished to the Subadviser hereunder by first-class or overnight
mail, facsimile transmission equipment or hand delivery.

8. This Agreement may be amended by mutual consent, but the consent of
each series of the Fund must be obtained in conformity with the
requirements of the 1940 Act.

9. This Agreement shall be governed by the laws of the State of New York.

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 MUTUAL FUND MANAGEMENT, INC.

By /s/ Michael J. Downey
------------------------------------

THE PRUDENTIAL INVESTMENT CORPORATION

By /s/ Roger Ford
------------------------------------

-4-

<PAGE>
Ex-8.(a)
Custodian Contract

CUSTODIAN CONTRACT
Between
PRUDENTIAL-BACHE MUNICIPAL BOND FUND
and
STATE STREET BANK AND TRUST COMPANY

<PAGE>

TABLE OF CONTENTS
Page
----

1. Employment of Custodian and Property to be Held By
It ..................................................................... 1

2. Duties of the Custodian with Respect to Property
of the Fund Held by the Custodian ...................................... 2
2.1 Holding Securities ............................................... 2
2.2 Delivery of Securities ........................................... 2
2.3 Registration of Securities ....................................... 7
2.4 Bank Accounts .................................................... 8
2.5 Payments for Shares .............................................. 8
2.6 Investment and Availability of Federal Funds ..................... 9
2.7 Collection of Income ............................................. 9
2.8 Payment of Fund Moneys ...........................................10
2.9 Liability for Payment in Advance of
Receipt of Securities Purchased ..................................12
2.10 Payments for Repurchases or Redemptions
of Shares of the Fund ............................................13
2.11 Appointment of Agents ............................................13
2.12 Deposit of Fund Assets in Securities System ......................14
2.13 Segregated Account ...............................................17
2.14 Ownership Certificates for Tax Purposes ..........................18
2.15 Proxies ..........................................................18
2.16 Communications Relating to Fund
Portfolio Securities .............................................19
2.17 Proper Instructions ..............................................19
2.18 Actions Permitted Without Express Authority ......................20
2.19 Evidence of Authority ............................................22

3. Duties of Custodian With Respect to the Books of Account
and Calculation of Net Asset Value and Net
Income .................................................................22

4. Records ................................................................23

5. Opinion of Fund's Independent Accountants ..............................23

6 Reports to Fund by Independent Public Accountants ......................24

7. Compensation of Custodian ..............................................24

8. Responsibility of Custodian ............................................24

9. Effective Period, Termination and Amendment ............................26

10. Successor Custodian.....................................................27

11. Interpretive and Additional Provisions .................................28

12. Massachusetts Law to Apply .............................................29

13. Prior Contracts ........................................................29

14. Trustees ...............................................................29
<PAGE>

CUSTODIAN CONTRACT

This Contract between Prudential-Bache Municipal Bond Fund, a business
trust organized and existing under the laws of Massachusetts, having its
principal place of business at One Seaport Plaza, New York, New York 10292
hereinafter called the "Fund", and State Street Bank and Trust Company, a
Massachusetts corporation, having its principal place of business at 225
Franklin Street, Boston, Massachusetts, 02110, hereinafter called the
"Custodian",

WITNESSETH, that in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:

1. Employment of Custodian and Property to be Held by It

The Fund hereby employs the Custodian as the custodian of its assets
pursuant to the provisions of the Declaration of Trust. The Fund agrees to
deliver to the Custodian all securities and cash owned by it, and all payments
of income, payments of principal or capital distributions received by it with
respect to all securities owned by the Fund from time to time, and the cash
consideration received by it for such new or treasury shares of beneficial
interest ("Shares") of the Fund as may be issued or sold from time to time. The
Custodian shall not be responsible for any property of the Fund held or received
by the Fund and not delivered to the Custodian.

Upon receipt of "Proper Instructions" (within the meaning of Section
2.17), the Custodian shall from time to time employ
<PAGE>

one or sore sub-custodians, but if such sub-custodian is located outside the
U.S. only in accordance with Rule 17f-5 of the 1940 Act, and provided that the
Custodian shall have the same responsibility or liability to the Fund on account
of any action or omissions of any sub-custodian so employed as any such
sub-custodian has to the Custodian, provided that the Custodian agreement with
any such sub-custodian shall impose on such sub-custodian responsibilities and
liabilities similar in nature and scope to those imposed by this Agreement with
respect to the functions to be performed by such sub-custodian.

2. Duties of the Custodian with Respect to Property of the Fund Held By the
Custodian

2.1 Holding Securities. The Custodian shall hold and physically segregate for
the account of the Fund all non-cash property, including all securities
owned by the Fund, other than securities which are maintained pursuant to
Section 2.12 in a clearing agency which acts as a securities depository or
in a book-entry system authorized by the U.S. Department of the Treasury,
collectively referred to herein as "Securities System".

2.2 Delivery of Securities. The Custodian shall release and deliver securities
owned by the Fund held by the Custodian or in a Securities System account
of the Custodian only upon receipt of Proper Instructions, which may be
continuing instructions when deemed appropriate by the parties, and only
in the following cases:

-2-
<PAGE>

1) Upon sale of such securities for the account of the Fund and receipt
of payment therefor;

2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Fund;

3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 2.12 hereof;

4) To the depository agent in connection with tender or other similar
offers for portfolio securities of the Fund;

5) To the issuer thereof or its agent when such securities are called,
redeemed, retired or otherwise become payable; provided that, in any
such case, the cash or other consideration is to be delivered to the
Custodian;

6) To the issuer thereof, or its agent, for transfer into the name of
the Fund or into the name of my nominee or nominees of the Custodian
or into the name or nominee name of any agent appointed pursuant to
Section 2.11 or into the name or nominee name of any sub-custodian
appointed pursuant to Article 1; or for exchange for a different
number of bonds, certificates or other evidence representing the
same aggregate face amount

-3-
<PAGE>

or number of units; provided that, in any such case, the new
securities are to be delivered to the Custodian;

7) To the broker selling the same for examination in accordance with
the "street delivery" custom, provided that the Custodian shall
adopt such procedures as the Fund may from time to time approve to
ensure prompt return of the securities to the Custodian by the
broker if the broker elects not to accept them;

8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization. reorganization or readjustment of
the securities of the issuer of such securities, or pursuant to
provisions for conversion contained in such securities, or pursuant
to any deposit agreement; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the Custodian;

9) In the case of warrants, rights or similar securities, the surrender
thereof in the exercise of such warrants, rights or similar
securities or the surrender of interim receipts or temporary
securities for definitive securities; provided that, in any

-4-
<PAGE>

such case, the new securities and cash, if any, are to be delivered
to the Custodian;

10) For delivery in connection with any loans of securities made by the
Fund, but only against receipt of adequate collateral as agreed upon
from time to time by the Custodian and the Fund, which may be in the
form of cash or obligations issued by the United States government,
its agencies or instrumentalities, except that in connection with
any loans for which collateral is to be credited to the Custodian's
account in the book-entry system authorized by the U.S. Department
of the Treasury, the Custodian will not be held liable or
responsible for the delivery of securities owned by the Fund prior
to the receipt of such collateral;

11) For delivery as security in connection with any borrowings by the
Fund requiring a pledge of assets by the Fund, but only against
receipt of amounts borrowed;

12) For delivery in accordance with the provisions of any agreement
among the Fund, the Custodian and a broker-dealer registered under
the Securities Exchange Act of 1934 (the "Exchange Act") and a
member of The National Association of Securities Dealers,

-5-
<PAGE>

Inc. ("NASD"), relating to compliance with the rules of The Options
Clearing Corporation and of any registered national securities
exchange, or of any similar organization or organizations, regarding
escrow or other arrangements in connection with transactions by the
Fund;

13) For delivery in accordance with the provisions of any agreement
among the Fund, the Custodian, and a Futures Commission Merchant
registered under the Commodity Exchange Act, relating to compliance
with the rules of the Commodity Futures Trading Commission and/or
any Contract Market, or any similar organization or organizations,
regarding account deposits in connection with transactions by the
Fund;

14) Upon receipt of instructions from the transfer agent ("Transfer
Agent") for the Fund, for delivery to such Transfer Agent or to the
holders of shares in connection with distributions in kind, as may
be described free time to time in the Fund's currently effective
prospectus and statement of additional information ("prospectus"),
in satisfaction of requests by holders of Shares for repurchase or
redemption; and

-6-
<PAGE>

15) For any other proper corporate purpose, but only upon receipt of, in
addition to Proper Instructions, a certified copy of a resolution of
the Trustees or of the Executive Committee signed by an officer of
the Fund and certified by the Secretary or an Assistant Secretary,
specifying the securities to be delivered, setting forth the purpose
for which such delivery is to be made, declaring such purpose to be
a proper corporate purpose, and naming the person or persons to whom
delivery of such securities shall be made.

2.3 Registration of Securities. Securities held by the Custodian (other than
bearer securities) shall be registered in the name of the Fund or in the
name of any nominee of the Fund or of any nominee of the Custodian which
nominee shall be assigned exclusively to the Fund, unless the Fund has
authorized in writing the appointment of a nominee to be used in common
with other registered investment companies having the same investment
adviser as the Fund, or in the name or nominee name of any agent appointed
pursuant to Section 2.11 or in the name or nominee name of any
sub-custodian appointed pursuant to Article 1. All securities accepted by
the Custodian on behalf of the Fund under the terms of this Contract shall
be in "street name" or other good delivery form.

-7-
<PAGE>

2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the name of the Fund, subject only to draft or
order by the Custodian acting pursuant to the terms of this Contract, and
shall hold in such account or accounts, subject to the provisions hereof,
all cash received by it from or for the account of the Fund, other than
cash maintained by the Fund in a bank account established and used in
accordance with Rule 17f-3 under the Investment Company Act of 1940. Funds
held by the Custodian for the Fund may be deposited by it to its credit as
Custodian in the flanking Department of the Custodian or in such other
banks or trust companies as it may in its discretion deem necessary or
desirable; provided, however, that every such bank or trust company shall
be qualified to act as a custodian under the Investment Company Act of
1940 and that each such bank or trust company and the funds to be
deposited with each such bank or trust company shall be approved by vote
of a majority of the Trustees of the Fund. Such funds shall be deposited
by the Custodian in its capacity as Custodian and shall be withdrawable by
the Custodian only in that capacity.

2.5 Payments for Shares. The Custodian shall receive from the distributor for
the Fund's Shares or from the Transfer Agent of the Fund and deposit into
the Fund's account such payments as are received for Shares of the Fund
issued or sold from time to time by the Fund. The

-8-
<PAGE>

Custodian will provide timely notification to the Fund and the Transfer
Agent of any receipt by it of payments for Shares of the Fund.

2.6 Investment and Availability of Federal Funds. Upon mutual agreement
between the Fund and the Custodian, the Custodian shall, upon the receipt
of Proper Instructions, (i) invest in such instruments as may be set forth
in such instructions on the same day as received all federal funds
received after a time agreed upon between the Custodian and the Fund, (ii)
make federal funds available to the Fund as of specified times agreed upon
from time to time by the Fund and the Custodian in the amount of checks
received in payment for Shares of the Fund which are deposited into the
Fund's account.

2.7 Collection of Income. The Custodian shall collect on a timely basis all
income and other payments with respect to registered securities held
hereunder to which the Fund shall be entitled either by law or pursuant to
custom in the securities business, and shall collect on a timely basis all
income and other payments with respect to bearer securities if, on the
date of payment by the issuer, such securities are held by the Custodian
or its agent thereof and shall credit such income, as collected, to the
Fund's custodian account. Without limiting the generality of the
foregoing, the Custodian shall detach and present for payment all coupons
and other income items requiring presentation as and when they become due

-9-
<PAGE>

and shall collect when due on securities held hereunder. Income due the Fund on
securities loaned pursuant to the provisions of Section 2.2 (10) shall be the
responsibility of the Fund. The Custodian will have no duty or responsibility in
connection therewith, other than to provide the Fund with such information or
data as may be necessary to assist the Fund in arranging for the timely delivery
to the Custodian of the income to which the Fund is properly entitled.

2.8 Payment of Fund Moneys. Upon receipt of Proper Instructions, which may be
continuing instructions when deemed appropriate by the parties, the
Custodian shall pay out moneys of the Fund in the following cases only:

1) Upon the purchase of securities, futures contracts or options on
futures contracts for the account of the Fund but only (a) against
the delivery of such securities, or evidence of title to futures
contracts or options on futures contracts, to the Custodian (or any
bank, banking firm or trust company doing business in the United
States or abroad which is qualified under the Investment Company Act
of 1940, as amended, to act as a custodian and has been designated
by the Custodian as its agent for this purpose) registered in the
name of the Fund or in the name of a nominee of the Custodian
referred to in Section 2.3

-10-
<PAGE>

hereof or in proper form for transfer; (b) in the case of a purchase
effected through a Securities System, in accordance with the
conditions set forth in Section 2.12 hereof or (c) in the case of
repurchase agreements entered into between the Fund and the
Custodian, or another bank, or a broker-dealer which is a member of
NASD, (i) against delivery of the securities either in certificate
form or through an entry crediting the Custodian's customer account
at the Federal Reserve Bank with such securities or (ii) against
delivery of the receipt evidencing purchase by the Fund of
securities owned by the Custodian along with written evidence of the
agreement by the Custodian to repurchase such securities from the
Fund;

2) In connection with conversion, exchange or surrender of securities
owned by the Fund as set forth in Section 2.2 hereof;

3) For the redemption or repurchase of Shares issued by the Fund as set
forth in Section 2.10 hereof;

4) For the payment of any expense or liability incurred by the Fund,
including but not limited to the following payments for the account
of the Fund: interest, taxes,

-11-
<PAGE>

management, accounting, transfer agent and legal fees, and operating
expenses of the Fund whether or not such expenses are to be in whole
or part capitalized or treated as deferred expenses;

5) For the payment of any dividends declared pursuant to the governing
documents of the Fund;

6) For payment of the amount of dividends received in respect of
securities sold short;

7) For any other proper purpose, but only upon receipt of, in addition
to Proper Instructions, a certified copy of a resolution of the
Trustees or of the Executive Committee of the Fund signed by an
officer of the Fund and certified by its Secretary or an Assistant
Secretary, specifying the amount of such payment, setting forth the
purpose for which such payment is to be made, declaring such purpose
to be a proper purpose, and naming the person or persons to whom
such payment is to be made.

2.9 Liability for Payment in Advance of Receipt of Securities Purchased. In
any and every case where payment for purchase of securities for the
account of the Fund is made by the Custodian in advance of receipt of the
securities purchased in the absence of specific written

-12-
<PAGE>

instructions from the Fund to so pay in advance, the Custodian shall be
absolutely liable to the Fund for such securities to the same extent as if
the securities had been received by the Custodian.

2.10 Payments for Repurchases or Redemptions of Shares of the Fund. From such
funds as may be available for the purpose but subject to the limitations
of the Declaration of Trust and any applicable votes of the Trustees of
the Fund pursuant thereto, the Custodian shall, upon receipt of
instructions from the Transfer Agent, make funds available for payment to
holders of Shares who have delivered to the Transfer Agent a request for
redemption or repurchase of their Shares. In connection with the
redemption or repurchase of Shares of the Fund, the Custodian is
authorized upon receipt of instructions from the Transfer Agent to wire
funds to or through a commercial bank designated by the redeeming
shareholders. In connection with the redemption or repurchase of Shares of
the Fund, the Custodian shall honor checks drawn on the Custodian by a
holder of Shares, which checks have been furnished by the Fund to the
holder of Shares, when presented to the Custodian in accordance with such
procedures and controls as are mutually agreed upon from time to time
between the Fund and the Custodian.

2.11 Appointment of Agents. The Custodian may from time to time in its
discretion appoint (and may at any time

-13-
<PAGE>

remove) any other bank or trust company, which is itself qualified under
the Investment Company Act of 1940, as amended, to act as a custodian, as
its agent for a defined time period to carry out one or more designated
duties under the provisions of this Article 2 as the Custodian may direct;
provided, however, that the appointment of any agent shall not relieve the
Custodian of its responsibilities or liabilities hereunder.

2.12 Deposit of Fund Assets in Securities Systems. The custodian may deposit
and/or maintain securities owned by the Fund in a clearing agency
registered with the Securities and Exchange Commission under Section 17A
of the Securities Exchange Act of 1934, which acts as a securities
depository, or in the book-entry system authorized by the U.S. Department
of the Treasury and certain federal agencies, collectively referred to
herein as "Securities System" in accordance with applicable Federal
Reserve Board and Securities and Exchange Commission rules and
regulations, if any, and subject to the following provisions:

1) The Custodian may keep securities of the Fund in a Securities
System provided that such securities are represented in an
account ("Account") of the Custodian in the Securities System
which shall not include any assets of the Custodian other than
assets held as a fiduciary, custodian or otherwise for
customers;

-14-
<PAGE>

2) The records of the Custodian with respect to securities of the
Fund which are maintained in a Securities System shall
identify by book-entry those securities belonging to the Fund;

3) The Custodian shall pay for securities purchased for the
account of the Fund upon (i) receipt of advice from the
Securities System that such securities have been transferred
to the Account, and (ii) the making of an entry on the records
of the Custodian to reflect such payment and transfer for the
account of the Fund. The Custodian shall transfer securities
sold for the account of the Fund upon (i) receipt of advice
from the Securities System that payment for such securities
has been transferred to the Account, and (ii) the making of an
entry on the records of the Custodian to reflect such transfer
and payment for the account of the Fund. Copies of all advices
from the Securities System of transfers of securities for the
account of the Fund shall identify the Fund, be maintained for
the Fund by the Custodian and be provided to the Fund at its
request. Upon request, the Custodian shall furnish the Fund

-15-
<PAGE>

confirmation of each transfer to or from the account of the
Fund in the form of a written advice or notice and shall
furnish promptly to the Fund copies of daily transaction
sheets reflecting each day's transactions in the Securities
System for the account of the Fund.

4) The Custodian shall provide the Fund with any report obtained
by the Custodian on the Securities System's accounting system,
internal accounting control and procedures for safeguarding
securities deposited in the Securities System;

5) The Custodian shall have received the initial or annual
certificate, as the case may be, required by Article 9 hereof;

6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for any loss or damage
to the Fund resulting from use of the Securities System by
reason of any negligence, misfeasance or misconduct of the
Custodian or any of its agents or of any of its or their
employees or from failure of the Custodian or any such agent
to enforce effectively such rights as it may have against the
Securities System; at the election of the Fund, it shall be
entitled to be subrogated to the rights of

-16-
<PAGE>

the Custodian with respect to any claim against the Securities
System or any other person which the Custodian may have as a
consequence of any such loss or damage if and to the extent
that the Fund has not been made whole for any such loss or
damage.

2.13 Segregated Account. The Custodian shall upon receipt of Proper
Instructions establish and maintain a segregated account or accounts for
and on behalf of the Fund, into which account or accounts may be
transferred cash and/or securities, including securities maintained in an
account by the Custodian pursuant to Section 2.12 hereof, (i) in
accordance with the provisions of any agreement among the Fund, the
Custodian and a broker-dealer registered under the Exchange Act and a
member of the NASD (or any futures commission merchant registered under
the Commodity Exchange Act), relating to compliance with the rules of The
Options Clearing Corporation and of any registered national securities
exchange (or the Commodity Futures Trading Commission or any registered
contract market), or of any similar organization or organizations,
regarding escrow or other arrangements in connection with transactions by
the Fund, (ii) for purposes of segregating cash, government securities or
liquid high grade debt obligations in connection with options purchased,
sold or written by the Fund or commodity futures contracts or options
thereon purchased or sold by

-17-
<PAGE>

the Fund, (iii) for the purposes of compliance by the Fund with the
procedures required by Investment Company Act Release No. 10666, or any
subsequent release or releases of the Securities and Exchange Commission
relating to the maintenance of segregated accounts by registered
investment companies and (iv) for other proper corporate purposes, but
only, in the case of clause (iv), upon receipt of, in addition to Proper
Instructions, a certified copy of a resolution of the Trustees or of the
Executive Committee signed by an officer of the Fund and certified by the
Secretary or an Assistant Secretary, setting forth the purpose or purposes
of such segregated account and declaring such purposes to be proper
corporate purposes.

2.14 Ownership Certificates for Tax Purposes. The. Custodian shall execute
ownership and other certificates and affidavits for all federal and state
tax purposes in connection with receipt of income or other payments with
respect to securities of the Fund held by it and in connection with
transfers of securities.

2.15 Proxies. The Custodian shall, with respect to the securities held
hereunder, cause to be promptly executed by the registered holder of such
securities, if the securities are registered otherwise than in the name of
the Fund or a nominee of the Fund, all proxies, without indication of the
manner in which such proxies are to be voted, and shall promptly deliver
to the Fund such

-18-
<PAGE>

proxies, all proxy soliciting materials and all notices relating to such
securities.

2.16 Communications Relating to Fund Portfolio Securities. The Custodian shall
transmit promptly to the Fund all written information (including, without
limitation, pendency of calls and maturities of securities and expirations
of rights in connection therewith and notices of exercise of call and put
options written by the Fund and the maturity of futures contracts
purchased or sold by the Fund) received by the Custodian from issuers of
the securities being held for the Fund. With respect to tender or exchange
offers, the Custodian shall transmit promptly to the Fund all written
information received by the Custodian from issuers of the securities whose
tender or exchange is sought and from the party (or his agents) making the
tender or exchange offer. If the Fund desires to take action with respect
to any tender offer, exchange offer or any other similar transaction, the
Fund shall notify the Custodian at least three business days prior to the
date on which the Custodian is to take such action.

2.17 Proper Instructions. Proper Instructions as used throughout this Article 2
means a writing signed or initialled by one or more person or persons as
the officers of the Fund shall have from time to time authorized. Each
such writing shall set forth the specific transaction or type of
transaction involved, including a specific statement of the purpose for
which

-19-
<PAGE>

such action is requested. Oral instructions will be considered Proper
Instructions if the Custodian reasonably believes them to have been given
by a person authorized to give such instructions with respect to the
transaction involved. The Fund shall cause all oral instructions to be
confirmed in writing. It is understood and agreed that the Board of
Trustees has authorized (i) The Prudential Insurance Company of America
("Prudential"), as investment adviser of the Fund pursuant to an
Investment Advisory Agreement, dated August 25, 1987 , between Prudential
and the Fund, to deliver proper instructions with respect to all matters
for which proper instructions are required by this Article 2 except
Section 2.2(13), Section 2.2(14), Section 2.8(3), Section 2.8(4), Section
2.8(5) and Section 2.8(7) hereof and (ii) Prudential Mutual Fund
Management, Inc. ("PMF"), as administrator of the Fund pursuant to an
Administration Agreement, dated August 25, 1987 , between PMF and the
Fund, to deliver proper instruction with respect to matters set forth in
Section 2.2(13), Section 2.8(3), Section 2.8(4) and Section 2.8(5). The
Custodian may rely upon the certificate of an officer of Prudential or
PMF, as the case may be, with respect to the person or persons authorized
on behalf of Prudential and PMF, respectively, to sign, initial or give
proper instructions for the purposes of this Article 2.

-20-
<PAGE>

Upon receipt of a certificate of the Secretary or an Assistant Secretary
as to the authorization by an officer of the Fund accompanied by a
detailed description of procedures approved by the Trustees, Proper
Instructions may include communications effected directly between
electro-mechanical or electronic devices provided that the Fund and the
Custodian are satisfied that such procedures afford adequate safeguards
for the Fund's assets.

2.18 Actions Permitted without Express Authority. The custodian may in its
discretion, without express authority from the Fund:

1) make payments to itself or others for minor expenses of
handling securities or other similar items relating to its
duties under this Contract, provided that all such payments
shall be accounted for to the Fund;

2) surrender securities in temporary form for securities in
definitive form;

3) endorse for collection, in the name of the Fund, checks,
drafts and other negotiable instruments; and

4) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase,
transfer and other dealings with the securities and property
of the Fund except as otherwise directed by the Trustees of
the Fund.

-21-
<PAGE>

2.19 Evidence of Authority. The Custodian shall be protected in acting upon any
instructions, notice, request, consent, certificate or other instrument or
paper believed by it to be genuine and to have been properly executed by
or on behalf of the Fund. The Custodian may receive and accept a certified
copy of a vote of the Trustees of the Fund as conclusive evidence (a) of
the authority of any person to act in accordance with such vote or (b) of
any determination or of any action by the Trustees pursuant to the
Declaration of Trust as described in such vote, and such vote may be
considered as in full force and effect until receipt by the Custodian of
written notice to the contrary.

3. Duties of Custodian with Respect to the Books of Account and Calculation
of Net Asset Value and Net Income.

The Custodian shall cooperate with and supply necessary information to the
entity or entities appointed by the Trustees of the Fund to keep the books of
account of the Fund and/or compute the net asset value per share of the
outstanding shares of the Fund or, if directed in writing to do so by the Fund,
shall itself keep such books of account and/or compute such net asset value per
share. If so directed, the Custodian shall also calculate daily the net income
of the Fund as described in the Fund's currently effective prospectus and shall
advise the Fund and the Transfer Agent daily of the total amounts of such net
income and, if instructed in writing by an officer of the Fund to do so, shall
advise the Transfer Agent periodically of the

-22-
<PAGE>

division of such net income among its various components. The calculations of
the net asset value per share and the daily income of the Fund shall be made at
the time or times described from time to time in the Fund's currently effective
prospectus.

4. Records

The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet the
obligations of the Fund under the Investment Company Act of 1940, with
particular attention to Section 31 thereof and Rules 31a-l and 31a-2 thereunder,
applicable federal and state tax laws and any other law or administrative rules
or procedures which may be applicable to the Fund. All such records shall be the
property of the Fund and shall at all times during the regular business hours of
the Custodian be open for inspection by duly authorized officers, employees or
agents of the Fund and employees and agents of the Securities and Exchange
Commission. The Custodian shall, at the Fund's request, supply the Fund with a
tabulation of securities owned by the Fund and held by the Custodian and shall,
when requested to do so by the Fund and for such compensation as shall be agreed
upon between the Fund and the Custodian, include certificate numbers in such
tabulations.

5. Opinion of Fund's Independent Accountant

The Custodian shall take all reasonable action, as the Fund may from time
to time request, to obtain from year to year favorable opinions from the Fund's
independent accountants with respect to its activities hereunder in connection
with the

-23-
<PAGE>

preparation of the Fund's Form N-1A, and Form N-SAR or other annual reports to
the Securities and Exchange Commission and with respect to any other
requirements of such Commission.

6. Reports to Fund by Independent Public Accountants

The Custodian shall provide the Fund, at such times as the Fund may
reasonably require, with reports by independent public accountants on the
accounting system, internal accounting control and procedures for safeguarding
securities, futures contracts and options on futures contracts, including
securities deposited and/or maintained in a Securities System, relating to the
services provided by the Custodian under this Contract; such reports, shall be
of sufficient scope and in sufficient detail, as may reasonably be required by
the Fund to provide reasonable assurance that any material inadequacies would be
disclosed by such examination, and, if there are no such inadequacies, the
reports shall so state.

7. Compensation of Custodian

The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between the
Fund and the Custodian.

8. Responsibility of Custodian

So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably

-24-
<PAGE>

believed by it to be genuine and to be signed by the proper party or parties.
The Custodian shall be held to the exercise of reasonable care in carrying out
the provisions of this Contract, but shall be kept indemnified by and shall be
without liability to the Fund for any action taken or omitted by it in good
faith without negligence. It shall be entitled to rely on and may act upon
advice of counsel (who may be counsel for the Fund) on all matters, and shall be
without liability far any action reasonably taken or omitted pursuant to such
advice. Notwithstanding the foregoing, the responsibility of the Custodian with
respect to redemptions effected by check shall be in accordance with a separate
Agreement entered into between the Custodian and the Fund.

If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned to
the Fund being liable for the payment of money or incurring liability of some
other form, the Fund, as a prerequisite to requiring the Custodian to take such
action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.

If the Fund requires the Custodian to advance cash or securities for any
purpose or in the event that the Custodian or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or liabilities in
connection with the performance of this Contract, except such as may arise from
its or its nominee's own negligent action, negligent failure to

-25-
<PAGE>

act or willful misconduct, any property at any time held for the account of the
Fund shall be security therefor and should the Fund fail to repay the Custodian
promptly, the Custodian shall be entitled to utilize available cash and to
dispose of Fund assets to the extent necessary to obtain reimbursement.

9 Effective Period, Termination and Amendment

This Contract shall become effective as of its execution, shall continue
in full force and effect until terminated as hereinafter provided, may be
amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than sixty (60) days after the date of such delivery or mailing; provided,
however that the Custodian shall not act under Section 2.12 hereof in the
absence of receipt of an initial certificate of the Secretary or an Assistant
Secretary that the Trustees of the Fund hare approved the initial use of a
particular Securities System and the receipt of an annual certificate of the
Secretary or an Assistant Secretary that the Trustees hare renewed the use by
the Fund of such Securities System, as required in each case by Rule 17f-4 under
the Investment Company Act of 1940, as amended; provided further, however, that
the Fund shall not amend or terminate this Contract in contravention of any
applicable federal or state regulations, or any provision of the Declaration of
Trust or the By-laws, and further provided, that the Fund may at any time by
action of its Trustees (i) substitute another bank or trust company for the

-26-
<PAGE>

Custodian by giving notice as described above to the Custodian, or
(ii) immediately terminate this Contract in the event of the appointment of a
conservator or receiver for the Custodian by the Comptroller of the Currency
or upon the happening of a like event at the direction of an appropriate
regulatory agency or court of competent jurisdiction.

Upon termination of the Contract, the Fund shall pay to the Custodian such
compensation as may be due as of the date of such termination and shall likewise
reimburse the Custodian for its costs, expenses and disbursements.

10. Successor Custodian

If a successor custodian shall be appointed by the Trustees of the Fund,
the Custodian shall, upon termination, deliver to such successor custodian at
the office of the Custodian, duly endorsed and in the form for transfer, all
securities then held by it hereunder and shall transfer to an account of the
successor custodian all of the Fund's securities held in a Securities System.

If no such successor custodian shall be appointed, the Custodian shall, in
like manner, upon receipt of a certified copy of a vote of the Trustees of the
Fund, deliver at the office of the Custodian and transfer such securities, funds
and other properties in accordance with such vote.

In the event that no written order designating a successor custodian or
certified copy of a vote of the Trustees shall have been delivered to the
Custodian on or before the date when such termination shall become effective,
then the Custodian

-27-
<PAGE>

shall have the right to deliver to a bank or trust company, which is a "bank" as
defined in the Investment Company Act of 1940, doing business in Boston,
Massachusetts, of its own selection, having an aggregate capital, surplus, and
undivided profits, as shown by its last published report, of not less than
$25,000,000, all securities, funds and other properties held by the Custodian
and all instruments held by the Custodian relative thereto and all other
property held by it under this Contract and to transfer to an account of such
successor custodian all of the Fund's securities held in any Securities System.
Thereafter, such bank or trust company shall be the successor of the Custodian
under this Contract.

In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Trustees to appoint a successor custodian, the Custodian shall be entitled
to fair compensation for its services during such period as the Custodian
retains possession of such securities, funds and other properties and the
provisions to this Contract relating to the duties and obligations of the
custodian shall remain in full force and effect.

11. Interpretive and Additional Provisions

In connection with the operation of this Contract, the Custodian and the
Fund may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with

-28-
<PAGE>

the general tenor of this Contract. Any such interpretive or additional
provisions shall be in a writing signed by both parties and shall be annexed
hereto, provided that no such interpretive or additional provisions shall
contravene any applicable federal or state regulations or any provision of the
Declaration of Trust of the Fund. No interpretive or additional provisions made
as provided in the preceding sentence shall be deemed to be an amendment of this
Contract.

12. Massachusetts Law to Apply

This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.

13. Prior Contracts

This Contract supersedes and terminates, as of the date hereof, all prior
contracts between the Fund and the Custodian relating to the custody of the
Fund's assets.

14. Trustees

All references to actions of or by Trustees herein shall require action by
such Trustees acting as a board or a formally constituted group and not
individually. The name "Prudential-Bache Municipal Bond Fund" is the designation
of the Trustees under the Declaration of Trust, 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, officer, agents or shareholders
assume any personal responsibility for obligations entered into on behalf of the
Fund.

-29-
<PAGE>

IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the 25th day of August, 1987.

ATTEST PRUDENTIAL-BACHE MUNICIPAL BOND FUND

/s/ Anita Jennings By /s/ Lawrence C. McQuade
- ---------------------- ------------------------------------

ATTEST STATE STREET BANK AND TRUST COMPANY

/s/ [ILLEGIBLE] By /s/ [ILLEGIBLE]
- ---------------------- ------------------------------------
Assistant Secretary Vice President

-30-

<PAGE>

EX-9
Transfer Agency and Service Agreement

TRANSFER AGENCY AND SERVICE AGREEMENT

between

PRUDENTIAL-BACHE MUNICIPAL BOND FUND

(a Massachusetts Business Trust)

and

PRUDENTIAL MUTUAL FUND SERVICES, INC.
<PAGE>

TABLE OF CONTENTS

Article 1 Terms of Appointment; Duties of the Agent ...................... 1

Article 2 Fees and Expenses .............................................. 4

Article 3 Representations and Warranties of the Agent .................... 5

Article 4 Representations of Warranties of the Fund ...................... 5

Article 5 Duty of Care and Indemnification ............................... 6

Article 6 Documents and Covenants of the Fund and the Agent .............. 8

Article 7 Termination of Agreement ....................................... 10

Article 8 Assignment ..................................................... 10

Article 9 Affiliations ................................................... 11

Article 10 Amendment ...................................................... 11

Article 11 Applicable Law ................................................. 12

Article 12 Miscellaneous .................................................. 12

Article 13 Merger of Agreement ............................................ 13
<PAGE>

TRANSFER AGENCY AND SERVICE AGREEMENT

AGREEMENT made as of the 1st day of January, 1988 by and between
PRUDENTIAL-BACHE MUNICIPAL BOND FUND, a Massachusetts business trust, having its
principal office and place of business at One Seaport Plaza, New York, New York
10292 (the "Fund"), and PRUDENTIAL MUTUAL FUND SERVICES, INC., a New Jersey
corporation, having its principal office and place of business at Raritan Plaza
I, Edison, New Jersey 08818 (the "Agent" or "PMFS").

WHEREAS, the Fund desires to appoint PMFS as its transfer agent, dividend
disbursing agent and shareholder servicing agent in connection with certain
other activities, and PMFS desires to accept such appointment;

NOW THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:

Article 1 Terms of Appointment; Duties of PMFS

1.01 Subject to the terms and conditions set forth in this
Agreement, the Fund hereby employs and appoints PMFS to act as, and PMFS agrees
to act as, the transfer agent for the authorized and issued shares of beneficial
interest of each series of the Fund, $.01 par value ("Shares"), dividend
disbursing agent and shareholder servicing agent in connection with any
accumulation, open-account or similar plans provided to the shareholders of the
Fund or any series thereof ("Shareholders") and set out in the currently
effective prospectus and statement of additional information ("prospectus") of
the Fund, including without limitation any periodic investment plan or periodic
withdrawal program.

-1-
<PAGE>

1.02 PMFS agrees that it will perform the following services:

(a) In accordance with procedures established from time to time by
agreement between the Fund and PMFS, PMFS shall:

(i) Receive for acceptance, orders for the purchase of Shares, and
promptly deliver payment and appropriate documentation therefor to the Custodian
of the Fund authorized pursuant to the Declaration of Trust of the Fund (the
"Custodian");

(ii) Pursuant to purchase orders, issue the appropriate number of Shares
and hold such Shares in the appropriate Shareholder account;

(iii) Receive for acceptance redemption requests and redemption directions
and deliver the appropriate documentation therefor to the Custodian;

(iv) At the appropriate time as and when it receives monies paid to it by
the Custodian with respect to any redemption, pay over or cause to be paid over
in the appropriate manner such monies as instructed by the redeeming
Shareholders;

(v) Effect transfers of Shares by the registered owners thereof upon
receipt of appropriate instructions;

(vi) Prepare and transmit payments for dividends and distributions
declared by the Fund;

(vii) Calculate any sales charges payable by a Shareholder on purchases
and/or redemptions of Shares of the Fund as such charges may be reflected in the
prospectus;

(viii) Maintain records of account for and advise the Fund and its
Shareholders as to the foregoing; and

-2-
<PAGE>

(ix) Record the issuance of Shares of the Fund and maintain pursuant to
Rule 17Ad-10(e) under the Securities Exchange Act of 1934 ("1934 Act") a record
of the total number of Shares of the Fund which are authorized, based upon data
provided to it by the Fund, and issued and outstanding. PMFS shall also provide
to the Fund on a regular basis the total number of Shares which are authorized,
issued and outstanding. When recording the issuance of Shares, PMFS shall have
no obligation to take cognizance of any Blue Sky laws relating to the issue or
sale of such Shares, which functions shall be the sole responsibility of the
Fund.

(b) In addition to and not in lieu of the services set forth in the above
paragraph (a), PMFS shall: (i) perform all of the customary services of a
transfer agent, dividend disbursing agent and, as relevant, shareholder
servicing agent in connection with accumulation, open-account or similar plans
(including without limitation any periodic investment plan or periodic
withdrawal program), including but not limited to, maintaining all Shareholder
accounts, preparing Shareholder meeting lists, mailing proxies, receiving and
tabulating proxies, mailing Shareholder reports and prospectuses to current
Shareholders, withholding taxes on non-resident alien accounts, preparing and
filing appropriate forms required with respect to dividends and distributions by
federal tax authorities for all Shareholders, preparing and mailing confirmation
forms and statements of account to Shareholders for all purchases and
redemptions of Shares and other confirmable transactions in Shareholder
accounts, preparing and mailing activity statements for Shareholders and
providing Shareholder account information and (ii) provide a system which will
enable the Fund to monitor the total number of Shares sold in each State or
other jurisdiction.

-3-
<PAGE>

those transactions and assets to be treated as exempt from Blue Sky reporting
for each State and (ii) verify the establishment of transactions for each State
on the system prior to activation and thereafter monitor the daily activity for
each State. The responsibility of PMFS for the Fund's registration status under
the Blue Sky or securities laws of any State or other jurisdiction is solely
limited to the initial establishment of transactions subject to Blue Sky
compliance by the Fund and the reporting of such transactions to the Fund as
provided above and as agreed from time to time by the Fund and PMFS.

PMFS may also provide such additional services and functions not
specifically described herein as may be mutually agreed between PMFS and the
Fund and set forth in Schedule B hereto.

Procedures applicable to certain of these services may be established from
time to time by agreement between the Fund and PMFS.

Article 2 Fees and Expenses

2.01 For performance by PMFS pursuant to this Agreement, the Fund
agrees to pay PMFS an annual maintenance fee for each Shareholder account and
certain transactional fees as set out in the fee schedule attached hereto as
Schedule A. Such fees and out-of-pocket expenses and advances identified under
Section 2.02 below may be changed from time to time subject to mutual written
agreement between the Fund and PMFS.

2.02 In addition to the fees paid under Section 2.01 above, the Fund
agrees to reimburse PMFS for out-of-pocket expenses or advances incurred by PMFS
for the items set out in Schedule A attached hereto. In addition, any other
expenses incurred by PMFS at the request or with the consent of the Fund will be
reimbursed by the Fund.

2.03 The Fund agrees to pay all fees and reimbursable expenses
within a reasonable period of time following the mailing of the respective

-4-
<PAGE>

billing notice. Postage for mailing of dividends, proxies, Fund reports and
other mailings to all Shareholder accounts shall be advanced to PMFS by the Fund
upon request prior to the mailing date of such materials.

Article 3 Representations and Warranties of PMFS

PMFS represents and warrants to the Fund that:

3.01 It is a corporation duly organized and existing and in good
standing under the laws of New Jersey and it is duly qualified to carry on its
business in New Jersey.

3.02 It is and will remain registered with the U.S. Securities and
Exchange Commission ("SEC") as a Transfer Agent pursuant to the requirements of
Section 17A of the 1934 Act.

3.03 It is empowered under applicable laws and by its charter and
By-Laws to enter into and perform this Agreement.

3.04 All requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement.

3.05 It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and obligations under
this Agreement.

Article 4 Representations and Warranties of the Fund

The Fund represents and warrants to PMFS that:

4.01 It is a business trust duly organized and existing and in good
standing under the laws of the Commonwealth of Massachusetts.

4.02 It is empowered under applicable laws and by its Declaration of
Trust and By-Laws to enter into and perform this Agreement.

4.03 All corporate proceedings required by said Declaration of Trust
and By-Laws have been taken to authorize it to enter into and perform

-5-
<PAGE>

this Agreement.

4.04 It is an investment company registered with the SEC under the
Investment Company Act of 1940, as amended (the "1940 Act").

4.05 A registration statement under the Securities Act of 1933 (the
"1933 Act") is currently effective and will remain effective, and appropriate
State securities laws filings have been made and will continue to be made, with
respect to all Shares of the Fund being offered for sale.

Article 5 Duty of Care and Indemnification

5.01 PMFS shall not be responsible for, and the Fund shall indemnify
and hold PMFS harmless from and against, any and all losses, damages, costs,
charges, counsel fees, payments, expenses and liability arising out of or
attributable to:

(a) All actions of PMFS or its agents or subcontractors required to be
taken pursuant to this Agreement, provided that such actions are taken in good
faith and without negligence or willful misconduct.

(b) The Fund's refusal or failure to comply with the terms of this
Agreement, or which arise out of the Fund's lack of good faith, negligence or
willful misconduct or which arise out of the breach of any representation or
warranty of the Fund hereunder.

(c) The reliance on or use by PMFS or its agents or subcontractors of
information, records and documents which (i) are received by PMFS or its agents
or subcontractors and furnished to it by or on behalf of the Fund, and (ii) have
been prepared and/or maintained by the Fund or any other person or firm on
behalf of the Fund.

(d) The reliance on, or the carrying out by PMFS or its agents or
subcontractors of, any instructions or requests of the Fund.

(e) The offer or sale of Shares in violation of any requirement under

-6-
<PAGE>

the federal securities laws or regulations or the securities or Blue Sky laws of
any State or other jurisdiction that such Shares be registered in such State or
other jurisdiction or in violation of any stop order or other determination or
ruling by any federal agency or any State or other jurisdiction with respect to
the offer or sale of such Shares in such State or other jurisdiction.

5.02 PMFS shall indemnify and hold the Fund harmless from and
against any and all losses, damages, costs, charges, counsel fees, payments,
expenses and liability arising out of or attributable to any action or failure
or omission to act by PMFS as a result of PMFS' lack of good faith, negligence
or willful misconduct.

5.03 At any time PMFS may apply to any officer of the Fund for
instructions, and may consult with legal counsel, with respect to any matter
arising in connection with the services to be performed by PMFS under this
Agreement, and PMFS and its agents or subcontractors shall not be liable and
shall be indemnified by the Fund for any action taken or omitted by it in
reliance upon such instructions or upon the opinion of such counsel. PMFS, its
agents and subcontractors shall be protected and indemnified in acting upon any
paper or document furnished by or on behalf of the Fund, reasonably believed to
be genuine and to have been signed by the proper person or persons, or upon any
instruction, information, data, records or documents provided to PMFS or its
agents or subcontractors by machine readable input, telex, CRT data entry or
other similar means authorized by the Fund, and shall not be held to have notice
of any change of authority of any person, until receipt of written notice
thereof from the Fund. PMFS, its agents and subcontractors shall also be
protected and indemnified in recognizing share certificates which are reasonably
believed to bear the proper manual or facsimile signature of the officers of the
Fund, and the proper countersignature of any former transfer

-7-
<PAGE>

agent or registrar, or of a co-transfer agent or co-registrar.

5.04 In the event either party is unable to perform its obligations
under the terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage reasonably beyond its control, or other causes
reasonably beyond its control, such party shall not be liable for damages to the
other for any damages resulting from such failure to perform or otherwise from
such causes.

5.05 Neither party to this Agreement shall be liable to the other
party for consequential damages under any provision of this Agreement or for any
act or failure to act hereunder.

5.06 In order that the indemnification provisions contained in this
Article 5 shall apply, upon the assertion of a claim for which either party may
be required to indemnify the other, the party seeking indemnification shall
promptly notify the other party of such assertion, and shall keep the other
party advised with respect to all developments concerning such claim. The party
who may be required to indemnify shall have the option to participate with the
party seeking indemnification in the defense of such claim. The party seeking
indemnification shall in no case confess any claim or make any compromise in any
case in which the other party may be required to indemnify it except with the
other party's prior written consent.

Article 6 Documents and Covenants of the Fund and PMFS

6.01 The Fund shall promptly furnish to PMFS the following:

(a) A certified copy of the resolution of the Trustees of the Fund
authorizing the appointment of PMFS and the execution and delivery of this
Agreement;

(b) A certified copy of the Declaration of Trust and By-Laws of the
Fund and all amendments thereto:

-8-
<PAGE>

(c) The current registration statements and any amendments and
supplements thereto filed with the SEC pursuant to the requirements of the 1933
Act and the 1940 Act;

(d) A specimen of the certificate for Shares of the Fund in the form
approved by the Trustees with a certificate of the Secretary of the Fund as to
such approval;

(e) All account application forms or other documents relating to
Shareholder accounts and/or relating to any plan program or service offered or
to be offered by the Fund; and

(f) Such other certificates, documents or opinions as the Agent
deems to be appropriate or necessary for the proper performance of its duties.

6.02 PMFS hereby agrees to establish and maintain facilities and
procedures reasonably acceptable to the Fund for safekeeping of share
certificates, check forms and facsimile signature imprinting devices, if any;
and for the preparation or use, and for keeping account of, such certificates,
forms and devices.

6.03 PMFS shall prepare and keep records relating to the services to
be performed hereunder, in the form and manner as it may deem advisable. To the
extent required by Section 31 of the 1940 Act, and the Rules and Regulations
thereunder, PMFS agrees that all such records prepared or maintained by PMFS
relating to the services to be performed by PMFS hereunder are the property of
the Fund and will be preserved, maintained and made available in accordance with
such Section 31 of the 1940 Act, and the Rules and Regulations thereunder, and
will be surrendered promptly to the Fund on and in accordance with its request.

6.04 PMFS and the Fund agree that all books, records, information
and data pertaining to the business of the other party which are exchanged or

-9-
<PAGE>

received pursuant to the negotiation or the carrying out of this Agreement shall
remain confidential and shall not be voluntarily disclosed to any other person
except as may be required by law or with the prior consent of PMFS and the Fund.

6.05 In case of any requests or demands for the inspection of the
Shareholder records of the Fund, PMFS will endeavor to notify the Fund and to
secure instructions from an authorized officer of the Fund as to such
inspection. PMFS reserves the right, however, to exhibit the Shareholder records
to any person whenever it is advised by its counsel that it may be held liable
for the failure to exhibit the Shareholder records to such person.

Article 7 Termination of Agreement

7.01 This Agreement may be terminated by either party upon one
hundred twenty (120) days written notice to the other.

7.02 Should the Fund exercise its right to terminate, all
out-of-pocket expenses associated with the movement of records and other
materials will be borne by the Fund. Additionally, PMFS reserves the right to
charge for any other reasonable fees and expenses associated with such
termination.

Article 8 Assignment

8.01 Except as provided in Section 8.03 below, neither this
Agreement nor any rights or obligations hereunder may be assigned by either
party without the written consent of the other party.

8.02 This Agreement shall inure to the benefit of and be binding
upon the parties and their respective permitted successors and assigns.

8.03 PMFS may, in its sole discretion and without further consent by
the Fund, subcontract, in whole or in part, for the performance of its
obligations and duties hereunder with any person or entity including but not
limited to: (i) Prudential-Bache Securities Inc. ("Prudential-Bache"), a

-10-
<PAGE>

registered broker-dealer, (ii) The Prudential Insurance Company of America
("Prudential"), (iii) Pruco Securities Corporation, a registered broker-dealer,
(iv) any Prudential-Bache or Prudential subsidiary or affiliate duly registered
as a broker-dealer and/or a transfer agent pursuant to the 1934 Act or (vi) any
other Prudential-Bache or Prudential affiliate or subsidiary; provided, however,
that PMFS shall be as fully responsible to the Fund for the acts and omissions
of any agent or subcontractor as it is for its own acts and omissions.

Article 9 Affiliations

9.01 PMFS may now or hereafter, without the consent of or notice to
the Fund, function as Transfer Agent and/or Shareholder Servicing Agent for any
other investment company registered with the SEC under the 1940 Act, including
without limitation any investment company whose adviser, administrator, sponsor
or principal underwriter is or may become affiliated with Prudential-Bache
and/or Prudential or any of its or their direct or indirect subsidiaries or
affiliates.

9.02 It is understood and agreed that the directors, officers,
employees, agents and Shareholders of the Fund, and the directors, officers,
employees, agents and shareholders of the Fund's investment adviser and/or
distributor, are or may be interested in the Agent as directors, officers,
employees, agents, shareholders or otherwise, and that the directors, officers,
employees, agents or shareholders of the Agent may be interested in the Fund as
directors, officers, employees, agents, Shareholders or otherwise, or in the
investment adviser and/or distributor as officers, directors, employees, agents,
shareholders or otherwise.

Article 10 Amendment

10.01 This Agreement may be amended or modified by a written

-11-
<PAGE>

agreement executed by both parties and authorized or approved by a resolution of
the Board of Directors of the Fund.

Article 11 Applicable Law

11.01 This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of the State of New Jersey.

Article 12 Miscellaneous

12.01 In the event of an alleged loss or destruction of any Share
certificate, no new certificate shall be issued in lieu thereof, unless there
shall first be furnished to PMFS an affidavit of loss or non-receipt by the
holder of Shares with respect to which a certificate has been lost or destroyed,
supported by an appropriate bond satisfactory to PMFS and the Fund issued by a
surety company satisfactory to PMFS, except that PMFS may accept an affidavit of
loss and indemnity agreement executed by the registered holder (or legal
representative) without surety in such form as PMFS deems appropriate
indemnifying PMFS and the Fund for the issuance of a replacement certificate, in
cases where the alleged loss is in the amount of $1000 or less.

12.02 In the event that any check or other order for payment of
money on the account of any Shareholder or new investor is returned unpaid for
any reason, PMFS will (a) give prompt notification to the Fund's distributor
("Distributor") of such non-payment; and (b) take such other action, including
imposition of a reasonable processing or handling fee, as PMFS may, in its sole
discretion, deem appropriate or as the Fund and the Distributor may instruct
PMFS.

12.03 Any notice or other instrument authorized or required by this
Agreement to be given in writing to the Fund or to PMFS shall be sufficiently
given if addressed to that party and received by it at its office set forth
below or at such other place as it may from time to time designate in

-12-
<PAGE>

writing.

To the Fund:

Prudential-Bache Municipal Bond Fund
One Seaport Plaza
New York, NY 10292
Attention: President

To PMFS:

Prudential Mutual Fund Services, Inc.
Raritan Plaza I
Edison, NJ 08818
Attention: President

12.04 All references to actions of or by Trustees herein shall
require action by such Trustees acting as a board or a formally constituted
group and not individually. The name "Prudential-Bache Municipal Bond Fund" is
the designation of the Trustees under the Declaration of Trust, and all persons
dealing with the Fund must look solely to the Fund for the enforcement of any
claims against the Fund as none of the Trustees, officers, agents or
Shareholders assume any personal responsibility for obligations entered into on
behalf of the Fund.

Article 13 Merger of Agreement

13.01 This Agreement constitutes the entire agreement between the
parties hereto and supersedes any prior agreement with respect to the subject
matter hereof whether oral or written.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed in their names and on their behalf under their seals by and through
their duly authorized officers, as of the day and year first above written.

-13-
<PAGE>

PRUDENTIAL-BACHE MUNICIPAL BOND FUND

BY: /s/ Michael J. Downey
---------------------------------

ATTEST:

/s/ S. Jane Rose
- ---------------------------

PRUDENTIAL MUTUAL FUND
SERVICES, INC.

BY: /s/ Fred Fiandaca
---------------------------------

ATTEST:

/s/ Lynda M. Puglisi
- ---------------------------

-14-
<PAGE>

Schedule A

Prudential Mutual Fund Services, Inc.

Fee Schedule

Fee Information for Services as
Transfer Agent, Dividend Disbursing Agent
and Shareholder Servicing Agent

PRUDENTIAL-BACHE MUNICIPAL BOND FUND
(HIGH YIELD SERIES)

General - Fees are based on an annual per shareholder account charge for account
maintenance plus out-of-pocket expenses. The effective period of this fee
schedule is January 1, 1990 through December 31, 1990 and shall continue
thereafter from year to year, unless otherwise amended.

Annual Maintenance Charges - The annual maintenance charge includes the
processing of all transactions and correspondence. The fee is billable on a
monthly basis at the rate of 1/12 of the annual fee. A charge is made for an
account in the month that an account opens or closes.

Basic Annual Per Account Fee $ 10.00

New Account Set-up Fee for Manually $ 2.00
Established Accounts

Inactive Account Fee - $ .20 per month. A monthly fee is charged for inactive
accounts with a zero balance.

Out-of-Pocket Expenses - Out-of-pocket expenses include but are not limited to:
postage, stationery and printing, allocable communication costs, microfilm,
microfiche, and expenses incurred at the specific direction of the Fund.

Payment - An invoice will be presented to the Fund on a monthly basis assessing
the Fund the appropriate fee and out-of-pocket expenses.

PRUDENTIAL-BACHE MUNICIPAL PRUDENTIAL MUTUAL FUND
BOND FUND (HIGH YIELD SERIES) SERVICES, INC.

NAME: /s/ Susan C. Cote NAME: /s/ Robert F. Gunia
---------------------- ------------------------

TITLE: Treasurer TITLE: Executive Vice President

DATE: January 1, 1990 DATE: January 1, 1990
<PAGE>

Schedule A

Prudential Mutual Fund Services, Inc.

Fee Schedule

Fee Information for Services as
Transfer Agent, Dividend Disbursing Agent
and Shareholder Servicing Agent

PRUDENTIAL-BACHE MUNICIPAL BOND FUND
(INSURED SERIES)

Basic Annual Per Account Fee $ 10.00

New Account Set-up Fee for Manually $ 2.00
Established Accounts

Inactive Account Fee - $ .20 per month. A monthly fee is charged for inactive
accounts with a zero balance.

Payment - An invoice will be presented to the Fund on a monthly basis assessing
the Fund the appropriate fee and out-of-pocket expenses.

PRUDENTIAL-BACHE MUNICIPAL PRUDENTIAL MUTUAL FUND
BOND FUND (INSURED SERIES) SERVICES, INC.

NAME: /s/ Susan C. Cote NAME: /s/ Robert F. Gunia
---------------------- ------------------------

TITLE: Treasurer TITLE: Executive Vice President

DATE: January 1, 1990 DATE: January 1, 1990
<PAGE>

Schedule A

Prudential Mutual Fund Services, Inc.

Fee Schedule

Fee Information for Services as
Transfer Agent, Dividend Disbursing Agent
and Shareholder Servicing Agent

PRUDENTIAL-BACHE MUNICIPAL BOND FUND
(MODIFIED TERM SERIES)

Basic Annual Per Account Fee $ 10.00

New Account Set-up Fee for Manually $ 2.00
Established Accounts

Inactive Account Fee - $ .20 per month. A monthly fee is charged for inactive
accounts with a zero balance.

Payment - An invoice will be presented to the Fund on a monthly basis assessing
the Fund the appropriate fee and out-of-pocket expenses.

PRUDENTIAL-BACHE MUNICIPAL PRUDENTIAL MUTUAL FUND
BOND FUND (MODIFIED TERM SERIES) SERVICES, INC.

NAME: /s/ Susan C. Cote NAME: /s/ Robert F. Gunia
---------------------- ------------------------

TITLE: Treasurer TITLE: Executive Vice President

DATE: January 1, 1990 DATE: January 1, 1990

<PAGE>

[LETTERHEAD]

June 30, 1997

Prudential Investments Fund
Management LLC
Gateway Center Three
Newark, New Jersey 07102

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 Declaration of Trust
originally filed November 3, 1986 (the "ORIGINAL DECLARATION"), as amended and
restated by an Amended and Restated Declaration of Trust filed September 15,
1994, supplemented by an Amended and Restated Certificate of Designation filed
May 2, 1995 and further amended by an Amended Certificate of Designation filed
June 20, 1996 (the Original Declaration, 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. 16 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. 20 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 issuance and sale of Shares of the three
series (the High Yield Series, the Insured Series and the Modified Term Series)
which have been issued by the Fund to date. In addition, we have examined

<PAGE>

Prudential Investments Fund
Management LLC -2- June 30, 1997

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,

SULLIVAN & WORCESTER LLP

<PAGE>

Exhibit 99.11(a)

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 16 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
June 25, 1997, relating to the financial statements and financial highlights
of the High Yield Series, Insured Series, and Intermediate Series (the
"Funds"), constituting the Prudential Municipal Bond Fund, which appears in
such Statement of Additional Information, and to the incorporation by
reference of our report in the Prospectuses which constitute parts of this
Registration Statement. We also consent to the reference to us under the
heading "Custodian, Transfer and Dividend Disbursing Agent and Independent
Accountants" in such Statement of Additional Information and to the reference
to us under the heading "Financial Highlights" in such Prospectuses.

PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
June 25, 1997

<PAGE>

Exhibit 99.11(a)

CONSENT OF INDEPENDENT ACCOUNTANTS

PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
June 25, 1997

<PAGE>

Prudential - Bachs Municipal Bond Fund

EXHIBIT 16

Yield Calculation

As of 7/31/88

6
Yield = 2 * [([(a - b)/(c * d)] + 1) - 1]

a = dividends & interest earned during the period

b = expenses accrued for the period

c = average daily number of shares o/s during the period
entitled to receive dividends

d = maximum offering price per share

Base period = 30 days

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

Yield including subsidy:

High Yield Insured Modified Term
Series Series Series

a = $518,496.23 $428,750.77 $130,126.60

b = $ 0 $ 0 $ 0

c = 7,068,583.015 6,603,237.261 2,217,421.252

d = $10.23 $10.23 $10.05

Yield = 8.76% 7.74% 7.11%

Yield excluding subsidy:

High Yield Insured Modified Term
Series Series Series

a = $518,496.23 $428.750.77 $130,126.60

b = $ 78,105.88 $ 73,188.71 $ 40,955.07

c = 7,068,583.015 6,603,237.261 2,217,421.252

d = $10.23 $10.23 $10.05

Yield = 7.42% 6.40% 4.85%

<PAGE>

Prudential - Bachs Municipal Bond Fund

EXHIBIT 16
Average Annual Total Return
Calculation

n
ERV = P * (1 + T)

P = hypothetical initial payment of $1,000

T = average annual total return

n = number of years

ERV = ending redeemable value

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

Average Annual Total Return including subsidy:

High Yield Insured Modified Term
Series Series Series

P = $1,000 $1,000 $1,000

n = 0.619 0.619 0.619

ERV = 1,016 1,010 1,006

T = 2.57% 1.63% 0.96%

Average Annual Total Return excluding subsidy:

High Yield Insured Modified Term
Series Series Series

P = $1,000 $1,000 $1,000

n = 0.619 0.619 0.619

ERV = 1,013 1,007 999

T = 2.05% 1.12% -0.22%

<PAGE>

PRUDENTIAL MUNICIPAL BOND FUND

*** CLASS C ***

EXHIBIT
YIELD CALCULATION

AS OF 4/30/97

YIELD = 2 * [([(a - b)/(c * d)] + 1)^6 - 1]

a = dividends & interest earned during the period

b = expenses accrued for the period

c = average daily number of shares o/s during the
period entitled to receive dividends

d = maximum offering price per share

Base period = 30 days

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

High Yield Insured Intermediate
Series Series Series
---------- ------- ------------
a = $48,674.26 $4,133.42 $1,115.18

b = $9,670.85 $958.78 $388.86

c = 850,556.252 81,168.360 24,234.759

d = $10.84 $10.91 $10.59

YIELD = 5.13% 4.34% 3.42%

- --------------------------------------------------------------------------------
TAX EQUIVALENT YIELD = t / 1 - 39.6%

t = THE PORTION OF THE YIELD WHICH IS
DERIVED FROM TAX EXEMPT INCOME

TAX EQUIVALENT YIELD = 8.49% 7.19% 5.66%

<PAGE>

PRUDENTIAL MUNICIPAL BOND FUND

*** CLASS Z ***

EXHIBIT
YIELD CALCULATION

AS OF 4/30/97

YIELD = 2 * [([(a - b)/(c * d)] + 1)^6 - 1]

a = dividends & interest earned during the period

b = expenses accrued for the period

c = average daily number of shares o/s during the
period entitled to receive dividends

d = maximum offering price per share

Base period = 30 days

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

High Yield Insured Intermediate
Series Series Series
------------- --------------- ------------

a = $13,997.33 $70.19 $897.30

b = $1,159.38 $6.95 $185.72

c = 244,738.047 1,379.512 19,504.439

d = $10.83 $10.91 $10.59

YIELD = 5.88% 5.10% 4.17%

- --------------------------------------------------------------------------------
TAX EQUIVALENT YIELD = t / 1 - 39.6%

t = THE PORTION OF THE YIELD WHICH IS
DERIVED FROM TAX EXEMPT INCOME

TAX EQUIVALENT YIELD = 9.74% 8.44% 6.90%

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

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 43,325,811
<INVESTMENTS-AT-VALUE> 43,761,050
<RECEIVABLES> 804,568
<ASSETS-OTHER> 936
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 44,566,554
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 343,302
<TOTAL-LIABILITIES> 343,302
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 43,622,594
<SHARES-COMMON-STOCK> 4,176,360
<SHARES-COMMON-PRIOR> 5,007,087
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 152,513
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 448,145
<NET-ASSETS> 44,223,252
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,661,312
<OTHER-INCOME> 0
<EXPENSES-NET> 703,083
<NET-INVESTMENT-INCOME> 1,958,229
<REALIZED-GAINS-CURRENT> 478,036
<APPREC-INCREASE-CURRENT> (699,669)
<NET-CHANGE-FROM-OPS> 1,736,596
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,958,229)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (32,116)
<NUMBER-OF-SHARES-SOLD> 5,261,896
<NUMBER-OF-SHARES-REDEEMED> (15,354,228)
<SHARES-REINVESTED> 1,242,265
<NET-CHANGE-IN-ASSETS> (9,103,816)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (293,501)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 244,485
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 677,677
<AVERAGE-NET-ASSETS> 13,487,000
<PER-SHARE-NAV-BEGIN> 10.65
<PER-SHARE-NII> 0.46
<PER-SHARE-GAIN-APPREC> (0.05)
<PER-SHARE-DIVIDEND> (0.46)
<PER-SHARE-DISTRIBUTIONS> (0.01)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.59
<EXPENSE-RATIO> 1.15
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>

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

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 43,325,811
<INVESTMENTS-AT-VALUE> 43,761,050
<RECEIVABLES> 804,568
<ASSETS-OTHER> 936
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 44,566,554
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 343,302
<TOTAL-LIABILITIES> 343,302
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 43,622,594
<SHARES-COMMON-STOCK> 4,176,360
<SHARES-COMMON-PRIOR> 5,007,087
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 152,513
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 448,145
<NET-ASSETS> 44,223,252
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,661,312
<OTHER-INCOME> 0
<EXPENSES-NET> 703,083
<NET-INVESTMENT-INCOME> 1,958,229
<REALIZED-GAINS-CURRENT> 478,036
<APPREC-INCREASE-CURRENT> (699,669)
<NET-CHANGE-FROM-OPS> 1,736,596
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,958,229)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (32,116)
<NUMBER-OF-SHARES-SOLD> 5,261,896
<NUMBER-OF-SHARES-REDEEMED> (15,354,228)
<SHARES-REINVESTED> 1,242,265
<NET-CHANGE-IN-ASSETS> (9,103,816)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (293,501)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 244,485
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 677,677
<AVERAGE-NET-ASSETS> 35,221,000
<PER-SHARE-NAV-BEGIN> 10.65
<PER-SHARE-NII> 0.42
<PER-SHARE-GAIN-APPREC> (0.05)
<PER-SHARE-DIVIDEND> (0.42)
<PER-SHARE-DISTRIBUTIONS> (0.01)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.59
<EXPENSE-RATIO> 1.55
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>

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

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 43,325,811
<INVESTMENTS-AT-VALUE> 43,761,050
<RECEIVABLES> 804,568
<ASSETS-OTHER> 936
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 44,566,554
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 343,302
<TOTAL-LIABILITIES> 343,302
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 43,622,594
<SHARES-COMMON-STOCK> 4,176,360
<SHARES-COMMON-PRIOR> 5,007,087
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 152,513
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 448,145
<NET-ASSETS> 44,223,252
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,661,312
<OTHER-INCOME> 0
<EXPENSES-NET> 703,083
<NET-INVESTMENT-INCOME> 1,958,229
<REALIZED-GAINS-CURRENT> 478,036
<APPREC-INCREASE-CURRENT> (699,669)
<NET-CHANGE-FROM-OPS> 1,736,596
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,958,229)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (32,116)
<NUMBER-OF-SHARES-SOLD> 5,261,896
<NUMBER-OF-SHARES-REDEEMED> (15,354,228)
<SHARES-REINVESTED> 1,242,265
<NET-CHANGE-IN-ASSETS> (9,103,816)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (293,501)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 244,485
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 677,677
<AVERAGE-NET-ASSETS> 149,000
<PER-SHARE-NAV-BEGIN> 10.65
<PER-SHARE-NII> 0.39
<PER-SHARE-GAIN-APPREC> (0.05)
<PER-SHARE-DIVIDEND> (0.39)
<PER-SHARE-DISTRIBUTIONS> (0.01)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.59
<EXPENSE-RATIO> 1.80
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>

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

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 43,325,811
<INVESTMENTS-AT-VALUE> 43,761,050
<RECEIVABLES> 804,568
<ASSETS-OTHER> 936
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 44,566,554
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 343,302
<TOTAL-LIABILITIES> 343,302
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 43,622,594
<SHARES-COMMON-STOCK> 4,176,360
<SHARES-COMMON-PRIOR> 5,007,087
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 152,513
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 448,145
<NET-ASSETS> 44,223,252
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,661,312
<OTHER-INCOME> 0
<EXPENSES-NET> 703,083
<NET-INVESTMENT-INCOME> 1,958,229
<REALIZED-GAINS-CURRENT> 478,036
<APPREC-INCREASE-CURRENT> (699,669)
<NET-CHANGE-FROM-OPS> 1,736,596
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,958,229)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (32,116)
<NUMBER-OF-SHARES-SOLD> 5,261,896
<NUMBER-OF-SHARES-REDEEMED> (15,354,228)
<SHARES-REINVESTED> 1,242,265
<NET-CHANGE-IN-ASSETS> (9,103,816)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (293,501)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 244,485
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 677,677
<AVERAGE-NET-ASSETS> 63,000
<PER-SHARE-NAV-BEGIN> 11
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> (0)
<PER-SHARE-DIVIDEND> (0)
<PER-SHARE-DISTRIBUTIONS> (0)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11
<EXPENSE-RATIO> 1
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000807394
<NAME> PRUDENTIAL MUNICIPAL BOND FUND INTERMEDIATE SERIES
<SERIES>
<NUMBER> 011
<NAME> PRUDENTIAL MUNICIPAL BOND FUND INSURED SERIES (CLASS A)

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 491,496,078
<INVESTMENTS-AT-VALUE> 501,321,625
<RECEIVABLES> 12,590,025
<ASSETS-OTHER> 59,160
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 513,970,810
<PAYABLE-FOR-SECURITIES> 4,655,893
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,996,499
<TOTAL-LIABILITIES> 6,652,392
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 491,892,717
<SHARES-COMMON-STOCK> 46,501,727
<SHARES-COMMON-PRIOR> 53,343,285
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 579,841
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 9,633,860
<NET-ASSETS> 502,106,418
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 31,173,544
<OTHER-INCOME> 0
<EXPENSES-NET> 5,261,652
<NET-INVESTMENT-INCOME> 25,911,892
<REALIZED-GAINS-CURRENT> 12,131,022
<APPREC-INCREASE-CURRENT> (7,713,454)
<NET-CHANGE-FROM-OPS> 30,329,460
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (25,911,892)
<DISTRIBUTIONS-OF-GAINS> (5,415,492)
<DISTRIBUTIONS-OTHER> (298,101)
<NUMBER-OF-SHARES-SOLD> 201,450,948
<NUMBER-OF-SHARES-REDEEMED> (294,754,828)
<SHARES-REINVESTED> 17,841,830
<NET-CHANGE-IN-ASSETS> (76,758,075)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (625,588)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,771,203
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,981,024
<AVERAGE-NET-ASSETS> 187,371,000
<PER-SHARE-NAV-BEGIN> 10.94
<PER-SHARE-NII> 0.63
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> (0.55)
<PER-SHARE-DISTRIBUTIONS> (0.12)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.90
<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 INTERMEDIATE SERIES
<SERIES>
<NUMBER> 012
<NAME> PRUDENTIAL MUNICIPAL BOND FUND INSURED SERIES (CLASS B)

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 491,496,078
<INVESTMENTS-AT-VALUE> 501,321,625
<RECEIVABLES> 12,590,025
<ASSETS-OTHER> 59,160
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 513,970,810
<PAYABLE-FOR-SECURITIES> 4,655,893
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,996,499
<TOTAL-LIABILITIES> 6,652,392
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 491,892,717
<SHARES-COMMON-STOCK> 46,501,727
<SHARES-COMMON-PRIOR> 53,343,285
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 579,841
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 9,633,860
<NET-ASSETS> 502,106,418
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 31,173,544
<OTHER-INCOME> 0
<EXPENSES-NET> 5,261,652
<NET-INVESTMENT-INCOME> 25,911,892
<REALIZED-GAINS-CURRENT> 12,131,022
<APPREC-INCREASE-CURRENT> (7,713,454)
<NET-CHANGE-FROM-OPS> 30,329,460
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (25,911,892)
<DISTRIBUTIONS-OF-GAINS> (5,415,492)
<DISTRIBUTIONS-OTHER> (298,101)
<NUMBER-OF-SHARES-SOLD> 201,450,948
<NUMBER-OF-SHARES-REDEEMED> (294,754,828)
<SHARES-REINVESTED> 17,841,830
<NET-CHANGE-IN-ASSETS> (76,758,075)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (625,588)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,771,203
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,981,024
<AVERAGE-NET-ASSETS> 365,891,000
<PER-SHARE-NAV-BEGIN> 10.95
<PER-SHARE-NII> 0.58
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> (0.50)
<PER-SHARE-DISTRIBUTIONS> (0.12)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.91
<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 INTERMEDIATE SERIES
<SERIES>
<NUMBER> 013
<NAME> PRUDENTIAL MUNICIPAL BOND FUND INSURED SERIES (CLASS C)

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 491,496,078
<INVESTMENTS-AT-VALUE> 501,321,625
<RECEIVABLES> 12,590,025
<ASSETS-OTHER> 59,160
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 513,970,810
<PAYABLE-FOR-SECURITIES> 4,655,893
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,996,499
<TOTAL-LIABILITIES> 6,652,392
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 491,892,717
<SHARES-COMMON-STOCK> 46,501,727
<SHARES-COMMON-PRIOR> 53,343,285
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 579,841
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 9,633,860
<NET-ASSETS> 502,106,418
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 31,173,544
<OTHER-INCOME> 0
<EXPENSES-NET> 5,261,652
<NET-INVESTMENT-INCOME> 25,911,892
<REALIZED-GAINS-CURRENT> 12,131,022
<APPREC-INCREASE-CURRENT> (7,713,454)
<NET-CHANGE-FROM-OPS> 30,329,460
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (25,911,892)
<DISTRIBUTIONS-OF-GAINS> (5,415,492)
<DISTRIBUTIONS-OTHER> (298,101)
<NUMBER-OF-SHARES-SOLD> 201,450,948
<NUMBER-OF-SHARES-REDEEMED> (294,754,828)
<SHARES-REINVESTED> 17,841,830
<NET-CHANGE-IN-ASSETS> (76,758,075)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (625,588)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,771,203
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,981,024
<AVERAGE-NET-ASSETS> 973,000
<PER-SHARE-NAV-BEGIN> 10.95
<PER-SHARE-NII> 0.56
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> (0.49)
<PER-SHARE-DISTRIBUTIONS> (0.11)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.91
<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 INTERMEDIATE SERIES
<SERIES>
<NUMBER> 014
<NAME> PRUDENTIAL MUNICIPAL BOND FUND INSURED SERIES (CLASS Z)

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 491,496,078
<INVESTMENTS-AT-VALUE> 501,321,625
<RECEIVABLES> 12,590,025
<ASSETS-OTHER> 59,160
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 513,970,810
<PAYABLE-FOR-SECURITIES> 4,655,893
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,996,499
<TOTAL-LIABILITIES> 6,652,392
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 491,892,717
<SHARES-COMMON-STOCK> 46,501,727
<SHARES-COMMON-PRIOR> 53,343,285
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 579,841
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 9,633,860
<NET-ASSETS> 502,106,418
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 31,173,544
<OTHER-INCOME> 0
<EXPENSES-NET> 5,261,652
<NET-INVESTMENT-INCOME> 25,911,892
<REALIZED-GAINS-CURRENT> 12,131,022
<APPREC-INCREASE-CURRENT> (7,713,454)
<NET-CHANGE-FROM-OPS> 30,329,460
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (25,911,892)
<DISTRIBUTIONS-OF-GAINS> (5,415,492)
<DISTRIBUTIONS-OTHER> (298,101)
<NUMBER-OF-SHARES-SOLD> 201,450,948
<NUMBER-OF-SHARES-REDEEMED> (294,754,828)
<SHARES-REINVESTED> 17,841,830
<NET-CHANGE-IN-ASSETS> (76,758,075)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (625,588)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,771,203
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,981,024
<AVERAGE-NET-ASSETS> 10,000
<PER-SHARE-NAV-BEGIN> 11
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (0)
<PER-SHARE-DISTRIBUTIONS> (0)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11
<EXPENSE-RATIO> 1
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000807394
<NAME> PRUDENTIAL MUNICIPAL BOND FUND HIGH YIELD SERIES
<SERIES>
<NUMBER> 021
<NAME> PRUDENTIAL MUNICIPAL BOND FUND HIGH YIELD SERIES (CLASS A)

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 949,207,739
<INVESTMENTS-AT-VALUE> 980,628,714
<RECEIVABLES> 36,310,753
<ASSETS-OTHER> 17,758
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,016,957,225
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,088,382
<TOTAL-LIABILITIES> 5,088,382
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 998,935,122
<SHARES-COMMON-STOCK> 93,365,816
<SHARES-COMMON-PRIOR> 96,175,471
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (18,487,254)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 31,420,975
<NET-ASSETS> 1,011,868,843
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 72,933,887
<OTHER-INCOME> 0
<EXPENSES-NET> 9,565,776
<NET-INVESTMENT-INCOME> 63,368,111
<REALIZED-GAINS-CURRENT> (4,271,817)
<APPREC-INCREASE-CURRENT> 18,105,192
<NET-CHANGE-FROM-OPS> 77,201,486
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (63,368,111)
<DISTRIBUTIONS-OF-GAINS> (123,008)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 116,459,010
<NUMBER-OF-SHARES-REDEEMED> (175,001,590)
<SHARES-REINVESTED> 28,109,609
<NET-CHANGE-IN-ASSETS> (16,722,604)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (14,083,951)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,129,335
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 9,046,851
<AVERAGE-NET-ASSETS> 294,940,000
<PER-SHARE-NAV-BEGIN> 10.70
<PER-SHARE-NII> 0.70
<PER-SHARE-GAIN-APPREC> 0.14
<PER-SHARE-DIVIDEND> (0.70)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.84
<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 HIGH YIELD SERIES
<SERIES>
<NUMBER> 022
<NAME> PRUDENTIAL MUNICIPAL BOND FUND HIGH YIELD SERIES (CLASS B)

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 949,207,739
<INVESTMENTS-AT-VALUE> 980,628,714
<RECEIVABLES> 36,310,753
<ASSETS-OTHER> 17,758
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,016,957,225
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,088,382
<TOTAL-LIABILITIES> 5,088,382
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 998,935,122
<SHARES-COMMON-STOCK> 93,365,816
<SHARES-COMMON-PRIOR> 96,175,471
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (18,487,254)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 31,420,975
<NET-ASSETS> 1,011,868,843
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 72,933,887
<OTHER-INCOME> 0
<EXPENSES-NET> 9,565,776
<NET-INVESTMENT-INCOME> 63,368,111
<REALIZED-GAINS-CURRENT> (4,271,817)
<APPREC-INCREASE-CURRENT> 18,105,192
<NET-CHANGE-FROM-OPS> 77,201,486
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (63,368,111)
<DISTRIBUTIONS-OF-GAINS> (123,008)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 116,459,010
<NUMBER-OF-SHARES-REDEEMED> (175,001,590)
<SHARES-REINVESTED> 28,109,609
<NET-CHANGE-IN-ASSETS> (16,722,604)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (14,083,951)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,129,335
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 9,046,851
<AVERAGE-NET-ASSETS> 725,305,000
<PER-SHARE-NAV-BEGIN> 10.69
<PER-SHARE-NII> 0.66
<PER-SHARE-GAIN-APPREC> 0.15
<PER-SHARE-DIVIDEND> (0.66)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.84
<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 HIGH YIELD SERIES
<SERIES>
<NUMBER> 023
<NAME> PRUDENTIAL MUNICIPAL BOND FUND HIGH YIELD SERIES (CLASS C)

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 949,207,739
<INVESTMENTS-AT-VALUE> 980,628,714
<RECEIVABLES> 36,310,753
<ASSETS-OTHER> 17,758
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,016,957,225
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,088,382
<TOTAL-LIABILITIES> 5,088,382
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 998,935,122
<SHARES-COMMON-STOCK> 93,365,816
<SHARES-COMMON-PRIOR> 96,175,471
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (18,487,254)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 31,420,975
<NET-ASSETS> 1,011,868,843
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 72,933,887
<OTHER-INCOME> 0
<EXPENSES-NET> 9,565,776
<NET-INVESTMENT-INCOME> 63,368,111
<REALIZED-GAINS-CURRENT> (4,271,817)
<APPREC-INCREASE-CURRENT> 18,105,192
<NET-CHANGE-FROM-OPS> 77,201,486
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (63,368,111)
<DISTRIBUTIONS-OF-GAINS> (123,008)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 116,459,010
<NUMBER-OF-SHARES-REDEEMED> (175,001,590)
<SHARES-REINVESTED> 28,109,609
<NET-CHANGE-IN-ASSETS> (16,722,604)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (14,083,951)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,129,335
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 9,046,851
<AVERAGE-NET-ASSETS> 8,060,000
<PER-SHARE-NAV-BEGIN> 10.69
<PER-SHARE-NII> 0.63
<PER-SHARE-GAIN-APPREC> 0.15
<PER-SHARE-DIVIDEND> (0.63)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.84
<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 HIGH YIELD SERIES
<SERIES>
<NUMBER> 024
<NAME> PRUDENTIAL MUNICIPAL BOND FUND HIGH YIELD SERIES (CLASS Z)

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 949,207,739
<INVESTMENTS-AT-VALUE> 980,628,714
<RECEIVABLES> 36,310,753
<ASSETS-OTHER> 17,758
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,016,957,225
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,088,382
<TOTAL-LIABILITIES> 5,088,382
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 998,935,122
<SHARES-COMMON-STOCK> 93,365,816
<SHARES-COMMON-PRIOR> 96,175,471
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (18,487,254)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 31,420,975
<NET-ASSETS> 1,011,868,843
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 72,933,887
<OTHER-INCOME> 0
<EXPENSES-NET> 9,565,776
<NET-INVESTMENT-INCOME> 63,368,111
<REALIZED-GAINS-CURRENT> (4,271,817)
<APPREC-INCREASE-CURRENT> 18,105,192
<NET-CHANGE-FROM-OPS> 77,201,486
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (63,368,111)
<DISTRIBUTIONS-OF-GAINS> (123,008)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 116,459,010
<NUMBER-OF-SHARES-REDEEMED> (175,001,590)
<SHARES-REINVESTED> 28,109,609
<NET-CHANGE-IN-ASSETS> (16,722,604)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (14,083,951)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,129,335
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 9,046,851
<AVERAGE-NET-ASSETS> 704,000
<PER-SHARE-NAV-BEGIN> 10.79
<PER-SHARE-NII> 0.45
<PER-SHARE-GAIN-APPREC> 0.04
<PER-SHARE-DIVIDEND> (0.45)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.83
<EXPENSE-RATIO> 0.54
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>