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Prudential Mutual Funds
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Prudential Municipal Bond Fund
SUPPLEMENT DATED MARCH 31, 2000
TO STATEMENT OF ADDITIONAL INFORMATION
DATED JUNE 30, 1999
The section entitled 'Description of the Fund, Its Investments and Risks' is
amended as follows:
The following is added at the end of the section entitled 'Inverse Floaters':
The Fund may invest in secondary inverse floaters. A secondary inverse
floater is an asset backed security, generally evidenced by a trust or custodial
receipt, the interest rate on which moves in the opposite direction of the
interest rate on another security or the value of an index.
The following is added at the end of the section entitled 'Hedging Strategies':
Interest Rate Swap Transactions. The Fund may enter into interest rate
swaps. Interest rate swaps involve the exchange by the Fund with another party
of their respective commitments to pay or receive interest, E.G., an exchange
of floating rate payments for fixed rate payments. The Fund expects to enter
into these transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio or to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date. The Fund intends to use these transactions as a hedge and not as a
speculative investment.
The Fund may enter into interest rate swaps, on either an asset-based or
liability-based basis, depending on whether it is hedging its assets or its
liabilities. Under normal circumstances, the Fund will enter into interest rate
swaps on a net basis, that is, the two payment streams netted out, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. The net amount of the excess, if any, of the Fund's obligations over
its entitlements with respect to each interest rate swap will be accrued on a
daily basis and an amount of cash or liquid assets having an aggregate net
asset value
MF133C1
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at least equal to the accrued excess will be maintained in a segregated account
by a custodian that satisfies the requirements of the Investment Company Act.
To the extent that the Fund enters into interest rate swaps on other than a
net basis, the amount maintained in a segregated account will be the full
amount of the Fund's obligations, if any, with respect to such interest rate
swaps, accrued on a daily basis. Inasmuch as segregated accounts are
established for these hedging transactions the investment adviser and the Fund
believe such obligations do not constitute senior securities. If there is a
default by the other party to such a transaction, the Fund will have
contractual remedies pursuant to the agreement related to the transaction. The
swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become relatively liquid. The Fund will enter into interest rate swaps only
with parties meeting creditworthiness standards approved by the Fund's Board of
Trustees. The investment adviser will monitor the creditworthiness of such
parties under the supervision of the Board of Trustees.
If the Fund purchases an interest rate swap to hedge against a change in
an interest rate of a security the Fund anticipates buying, and such interest
rate changes unfavorably for the Fund, then the Fund may determine not to invest
in the securities as planned and will realize a loss on the interest rate swap
that is not offset by a change in the interest rates or the price of the
securities.
The use of interest rate swaps is highly speculative activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the investment adviser is
incorrect in its forecast of market values, interest rates, and other applicable
factors, the investment performance of the Fund would diminish compared to what
it would have been if this investment technique was never used.
The Fund may enter into interest rate swaps traded on an exchange or in
the over-the-counter market. The Fund may only enter into interest rate swaps to
hedge its portfolio. Interest rate swaps do not involve the delivery of
securities or other underlying assets or principal. Accordingly, the risk of
loss with respect to interest rate swaps is limited to the net amount of
interest payments
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that the Fund is contractually obligated to make. If the other
party to an interest rate swap defaults, the Fund's risk of loss consists of
the net amount of interest payments that the Fund is contractually entitled to
receive. Since interest rate swaps are individually negotiated, the Fund
expects to achieve an acceptable degree of correlation between its rights to
receive interest on its portfolio securities and its rights and obligations to
receive and pay interest pursuant to interest rate swaps.
