VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST, 497, 1995-11-16

VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST
497, 1995-11-16

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VAN KAMPEN AMERICAN CAPITAL
PRIME RATE INCOME TRUST
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Van Kampen American Capital Prime Rate Income Trust (the "Fund") is a non-
diversified, closed-end management investment company. The Fund's investment
objective is to provide a high level of current income, consistent with
preservation of capital. The Fund seeks to achieve its objective by investing
primarily in a professionally managed portfolio of interests in floating or
variable rate senior loans ("Senior Loans") to United States corporations,
partnerships and other entities ("Borrowers") which operate in a variety of
industries and geographical regions. Although the Fund's net asset value will
vary, the Fund's policy of acquiring interests in floating or variable rate
Senior Loans is expected to minimize fluctuations in the Fund's net asset value
as a result of changes in interest rates. The Fund's net asset value may be
affected by changes in the credit quality of Borrowers with respect to Senior
Loan interests in which the Fund invests. The Fund's investment adviser is Van
Kampen American Capital Investment Advisory Corp. (the "Adviser"). An investment
in the Fund may not be appropriate for all investors and there is no assurance
that the Fund will achieve its investment objective. See "Investment Objective
and Policies and Special Risk Considerations."

The Board of Trustees of the Fund currently intends, each quarter, to
consider authorizing the Fund to make tender offers for all or a portion of its
outstanding common shares of beneficial interest ("Common Shares") at the then
current net asset value of the Common Shares. An early withdrawal charge payable
to Van Kampen American Capital Distributors, Inc. ("VKAC") will be imposed on
most Common Shares held for less than five years that are accepted for
repurchase pursuant to a tender offer by the Fund. The Fund does not intend to
list the Common Shares on any national securities exchange and none of the Fund,
the Adviser or VKAC intends to make a secondary market in the Common Shares at
any time. Accordingly, Common Shares of the Fund have no history of public
trading, and there is not expected to be any secondary trading market in the
Common Shares. An investment in the Common Shares should be considered illiquid.
------------------ (Continued on next page.)

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

SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, GUARANTEED OR
ENDORSED BY, ANY BANK OR DEPOSITORY INSTITUTION; FURTHER, SUCH SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. SHARES OF THE FUND INVOLVE
INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.

This Prospectus sets forth concisely the information that a prospective
investor should know before investing in the Common Shares of the Fund. Please
read and retain this Prospectus for future reference. A Statement of Additional
Information dated November 13, 1995 has been filed with the Securities and
Exchange Commission and can be obtained without charge by calling 1-800-421-5666
or, for Telecommunications Device for the Deaf, 1-800-772-8889. A table of
contents to the Statement of Additional Information is located at page 49 of
this Prospectus. This Prospectus incorporates by reference the entire Statement
of Additional Information.
------------------

VAN KAMPEN AMERICAN CAPITALSM
------------------

THIS PROSPECTUS IS DATED NOVEMBER 13, 1995.

SM denotes a registered servicemark of Van Kampen American Capital Distributors,
Inc.
<PAGE> 2

(Continued from previous page.)

The Fund completed an initial public offering of its Common Shares in
October, 1989. Since November 13, 1989 the Fund has engaged in a continuous
offering of its Common Shares through VKAC, as principal underwriter, and
through selected broker-dealers and financial services firms, at a price per
Common Share equal to net asset value. There is no initial sales charge or
underwriting discount on purchases of Common Shares. VKAC will compensate from
its own assets the broker-dealers and financial services firms participating in
the continuous offering. The minimum initial investment is $1,000. The minimum
initial investment for tax sheltered retirement plans is $250. See "Purchasing
Shares of the Fund." The Fund has registered 225,000,000 Common Shares for sale
under the Registration Statement to which this Prospectus relates. The Fund
expects to incur approximately $922,600 in expenses in connection with the
offering of such Shares. A portion of such expenses will be charged as operating
expenses during the current period and the remainder will be amortized over a
period of not more than twelve months.

Senior Loans in which the Fund may invest generally will pay interest at
rates which are periodically redetermined on the basis of a base lending rate
plus a premium. These base lending rates are generally the Prime Rate offered by
a major United States bank, the London Inter-Bank Offered Rate, the Certificate
of Deposit rate or other base lending rates used by commercial lenders. The Fund
will seek to achieve over time an effective yield that approximates the average
published Prime Rate of major United States banks. Senior Loans generally will
hold the most senior position in the capital structure of the Borrower and
generally will be secured with specific collateral, which may include
guarantees. The terms of Senior Loans typically will include various restrictive
covenants which are designed to limit certain activities of the Borrower. It is
anticipated that the proceeds of the Senior Loans in which the Fund will acquire
interests will be used primarily to finance leveraged buyouts,
recapitalizations, mergers, acquisitions, stock repurchases and, to a lesser
extent, to finance internal growth and for other corporate purposes of
Borrowers. See "Investment Objective and Policies and Special Risk
Considerations."
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FOR TEXAS INVESTORS ONLY

There is no limit on the percentage of the Fund's assets which may be
invested in interests in Senior Loans which are not readily marketable or
subject to restrictions on resale. The value of interests in Senior Loans will
be determined by the Adviser following guidelines established by the Trustees.
Interests in Senior Loans will be valued by the Adviser on behalf of the Fund on
the basis of market quotations and transactions in instruments with comparable
credit quality, interest rate, interest rate redetermination period and maturity
(such as commercial paper, negotiable certificates of deposit, treasury bills
and short-term variable rate securities) and the relationship between such
instruments and the Senior Loan interests in the Fund's portfolio. In
determining such relationship the Adviser will consider, among other factors,
(i) the credit worthiness of the Borrower and (ii) the current interest rate,
the period until next interest rate redetermination and maturity of the Senior
Loans.

The investment advisory and administrative services fees will be determined
on the basis of the average weekly managed assets of the Fund. The price of
offers for tender of Common Shares made by the Fund will be based upon the then
current net asset value of the Common Shares.

The minimum initial investment in the Fund required for Texas investors is
$5,000.
------------------

FOR ARIZONA, NEW JERSEY AND WASHINGTON INVESTORS ONLY

THESE SECURITIES ARE SPECULATIVE.

See "Investment Practices and Special Risks."
------------------

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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fund Expenses.................................................. 4
Prospectus Summary............................................. 5
Financial Highlights........................................... 14
The Fund....................................................... 16
Use of Proceeds................................................ 17
Investment Objective and Policies and Special Risk Factors..... 17
Certain Characteristics of Senior Loan Interests............. 17
Special Risk Considerations.................................. 25
Investment Practices and Special Risks......................... 28
Taxation....................................................... 33
Management of the Fund......................................... 34
Distributions.................................................. 36
Dividend Reinvestment Plan..................................... 36
Repurchase of Shares........................................... 38
Description of Common Shares................................... 42
Purchasing Shares of the Fund.................................. 44
Communications with Shareholders............................... 47
Custodian, Dividend Disbursing and Transfer Agent.............. 48
Legal Opinions................................................. 48
Experts........................................................ 49
Additional Information......................................... 49
Table of Contents for Statement of Additional Information...... 49
</TABLE>

NO DEALER, SALESMAN 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 MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE FUND, THE FUND'S ADVISER OR PRINCIPAL UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER
TO BUY ANY SECURITY OTHER THAN THE COMMON SHARES OFFERED BY THIS PROSPECTUS, NOR
DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE
COMMON SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, IN ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

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FUND EXPENSES
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The following tables are intended to assist investors in understanding the
various costs and expenses directly or indirectly associated with investing in
the Fund.

<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of offering price)........... None
Dividend Reinvestment Plan Fees.......................... None
Early Withdrawal Charge.................................. 0.00-3.00%
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF NET ASSETS
ATTRIBUTABLE TO COMMON SHARES)
Investment Advisory and Administration Fees.............. 1.20%
Interest Payments on Borrowed Funds...................... 0.00%
Other Expenses........................................... 0.29%
----------
Total Annual Fund Operating Expenses................. 1.49%
</TABLE>

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See "Management of the Fund" for additional information.

EXAMPLE

An investor would pay the following expenses on a $1,000 investment in the
Fund, assuming a 5% annual return:

<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Assuming no tender of Common
Shares......................... $ 15 $47 $ 81 $ 178
Assuming tender and repurchase of
Common Shares on last day of
period and imposition of
maximum applicable early
withdrawal charge................ $ 45 $67 $ 91 $ 178
</TABLE>

This "Example" assumes that all dividends and other distributions are
reinvested at net asset value and that the percentage amounts listed under Total
Annual Fund Operating Expenses remain the same in the years shown except, as to
the Three, Five and Ten Year periods, for the completion of organization expense
amortization. The above tables and the assumptions in the Example of a 5% annual
return and reinvestment at net asset value are required by regulation of the
Securities and Exchange Commission ("SEC"); the assumed 5% annual return is not
a prediction of, and does not represent, the projected or actual performance of
the Fund's Common Shares. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF FUTURE EXPENSES, AND THE FUND'S ACTUAL EXPENSES MAY BE MORE OR LESS THAN
THOSE SHOWN.

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PROSPECTUS SUMMARY
- ------------------------------------------------------------------------------

The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus and the Statement of
Additional Information.

THE FUND. Van Kampen American Capital Prime Rate Income Trust (the "Fund") is a
non-diversified, closed-end management investment company, organized as a
Massachusetts business trust on July 14, 1989. The Fund completed an initial
public offering of its common shares of beneficial interest ("Common Shares") in
October, 1989. Since November 13, 1989 the Fund has engaged in a continuous
offering of its Common Shares through Van Kampen American Capital Distributors,
Inc. ("VKAC") (an indirect affiliate of the Fund), as principal underwriter. As
of October 5, 1995, the Fund had 298,525,974 Common Shares outstanding and had
net assets of $2,996,923,822. See "The Fund."

CONTINUOUS OFFERING. The Fund is continuously offering Common Shares through
VKAC, as principal underwriter, and through selected broker-dealers and
financial services firms, at a public offering price per Common Share equal to
net asset value. There is no initial sales charge or underwriting discount on
purchases of Common Shares. VKAC will compensate from its own assets the
broker-dealers and financial services firms participating in the continuous
offering. The minimum initial investment is $1,000 and minimum subsequent
investment is $100. The minimum initial investment for tax sheltered retirement
plans is $250. The Fund does not intend to list the Common Shares on any
national securities exchange. The Fund may from time to time make tender offers
for all or a portion of its Common Shares. An early withdrawal charge payable to
VKAC will be imposed on most Common Shares accepted for tender that have been
held for less than five years. See "Purchasing Shares of the Fund" and
"Repurchase of Shares."

INVESTMENT OBJECTIVE AND POLICIES. The Fund's investment objective is to
provide a high level of current income, consistent with preservation of capital.
The Fund seeks to achieve its objective by investing primarily in a
professionally managed portfolio of interests in floating or variable rate
senior loans ("Senior Loans") to United States corporations, partnerships and
other entities ("Borrowers"). Although the Fund's net asset value will vary, the
Fund's policy of acquiring interests in floating or variable rate Senior Loans
is expected to minimize fluctuations in the Fund's net asset value as a result
of changes in interest rates. Senior Loans in which the Fund will purchase
interests generally pay interest at rates which are periodically redetermined by
reference to a base lending rate plus a premium. These base lending rates are
generally the prime rate offered by one or more major United States banks
("Prime Rate"), the London Inter-Bank Offered Rate ("LIBOR"), the Certificate of
Deposit ("CD") rate or other base lending rates used by commercial lenders. The
Fund seeks to achieve over time an effective yield that approximates the average
published Prime Rate of major United States banks. The

5
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Fund's net asset value may be affected by changes in the credit quality of
Borrowers with respect to Senior Loan interests in which the Fund invests. An
investment in the Fund may not be appropriate for all investors and is not
intended to be a complete investment program. No assurance can be given that the
Fund will achieve its investment objective. As discussed below in this
Prospectus Summary under "Tender Offers," an investment in the Common Shares
should be considered illiquid.

Senior Loans generally are arranged through private negotiations between a
Borrower and several financial institutions ("Lenders") represented in each case
by one or more such Lenders acting as agent ("Agent") of the several Lenders. On
behalf of the several Lenders, the Agent will be primarily responsible for
negotiating the loan agreement ("Loan Agreement") that establishes the relative
terms and conditions of the Senior Loan and rights of the Borrower and the
several Lenders. The Fund will invest in participations ("Participations") in
Senior Loans, will purchase assignments ("Assignments") of portions of Senior
Loans from third parties and may act as one of the group of Lenders originating
a Senior Loan (an "Original Lender"). The Fund will purchase an Assignment or
act as Original Lender with respect to a syndicated Senior Loan, initially, only
where the Agent with respect to such Senior Loan at the time of investment has
outstanding debt or deposit obligations rated investment grade (BBB or A-3 or
higher by Standard & Poor's Ratings Group "S&P" or Baa or P-3 or higher by
Moody's Investors Service "Moody's") or determined by the Adviser to be of
comparable quality. In addition, the Fund will purchase a Participation only
when the Lender selling such Participation, and any other person interpositioned
between such Lender and the Fund at the time of investment have outstanding debt
obligations rated investment grade or determined by the Adviser to be of
comparable quality. Further, the Fund will not purchase interests in Senior
Loans unless such Agent, Lender or interpositioned person has entered into an
agreement which provides for the holding of assets in safekeeping for, or the
prompt disbursement of assets to, the Fund. With respect to any given Senior
Loan, the rights of the Fund when it acquires a Participation may be different
from, and more limited than, the rights of Original Lenders or of persons who
acquire an Assignment. Participations may entail certain risks relating to the
creditworthiness of the parties from which the Participations are obtained. The
Fund may pay a fee or forgo a portion of interest payments to the Lender selling
a Participation or Assignment pursuant to the terms of such Participation or
Assignment.

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Loans which are not secured by any specific collateral in connection with its
investments in collateralized Senior Loans. The Fund may also acquire warrants,
equity securities and, in limited circumstances, junior debt securities in
connection with its investments in Senior Loans, as discussed below. Such equity
securities will not be treated by the Fund as Senior Loans. Investment in Senior
Loans which are not secured by specific collateral and in warrants, equity
securities and junior debt securities entails certain risks in addition to those
associated with investment in collateralized Senior Loans. Loan Agreements may
provide for various restrictive covenants designed to limit the activities of
the Borrower in an effort to protect the interests of the Lenders. Breach of
such covenants, if not waived by the Lenders, is generally an event of default
under the Loan Agreement and may give the Lenders the right to accelerate
principal and interest payments. The Adviser will consider the terms of such
restrictive covenants in deciding whether to invest in Senior Loans for the
Fund's portfolio. When the Fund holds a Participation in a Senior Loan it may
not have the right to vote to waive enforcement of any restrictive covenant
breached by a Borrower. Lenders voting in connection with a potential waiver of
a restrictive covenant may have interests different from those of the Fund and
such Lenders may not consider the interests of the Fund in connection with their
votes.

Pursuant to the relevant Loan Agreement, the Borrower may be required in
certain circumstances, and may have the option at any time, to prepay the
principal amount of a Senior Loan, often without incurring a prepayment penalty.
A Lender may have certain obligations pursuant to a Loan Agreement, which may
include the obligation to make additional loans in certain circumstances. The
Fund currently intends to reserve against such contingent obligations by
segregating sufficient investments in high quality short-term, liquid
instruments. The Fund will not purchase interests in Senior Loans that would
commit the Fund to make any such additional loans if the assets segregated
against such additional loan commitments, taken together with assets otherwise
held in high quality, short-term debt securities, would exceed 20% of the Fund's
total assets.

In normal market conditions, at least 80% of the Fund's total assets will be
invested in Senior Loans. The Fund is not subject to any restrictions with
respect to the maturity of Senior Loans held in its portfolio. It is currently
anticipated that the Fund's assets invested in Senior Loans will consist of
Senior Loans with stated maturities of between three and seven years, inclusive,
and with rates of interest which are redetermined either daily, monthly,
quarterly or semi-annually; provided, however, that the Fund may invest up to 5%
of its total assets in Senior Loans which permit the Borrower to select an
interest rate redetermination period of up to one year. Investment in Senior
Loans with longer interest rate redetermination periods may increase
fluctuations in the Fund's net asset value as a result of changes in interest
rates. The Senior Loans in the Fund's portfolio will at all times have a
dollar-weighted average time until next interest rate redetermination of 90 days
or less. Because most Senior Loans in the Fund's portfolio will be subject to
mandatory and/or optional prepayment and as there may be significant economic

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incentives for a Borrower to prepay its Senior Loans, prepayment of Senior Loans
in the Fund's portfolio may occur. Accordingly, the actual remaining maturity of
the Fund's portfolio invested in Senior Loans may vary substantially from the
average stated maturity of the Senior Loans held in the Fund's portfolio.
However, because most Senior Loans in which the Fund may invest redetermine
interest rates at least semi-annually, the Fund and the Adviser believe that the
possibility of prepayment does not entail a significant yield risk to holders of
Common Shares.

During normal market conditions, the Fund may invest up to 20% of its total
assets in (i) high quality, short-term debt securities with remaining maturities
of one year or less (including assets maintained by the Fund as a reserve
against any additional loan commitments) and (ii) warrants, equity securities
and, in limited circumstances, junior debt securities acquired in connection
with the Fund's investments in Senior Loans. Such high quality, short-term debt
securities may include commercial paper rated at least in the top two rating
categories of either S&P or Moody's or unrated commercial paper considered by
the Adviser to be of comparable quality, interests in short-term loans of
Borrowers having short-term debt obligations rated or a short-term credit rating
at least in such top two rating categories or having no such rating but
determined by the Adviser to be of comparable quality, certificates of deposit
and bankers' acceptances and securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. Such high quality, short-term
debt securities may pay interest at rates that are periodically redetermined, or
may pay interest at fixed rates. If the Adviser determines that market
conditions temporarily warrant a defensive investment policy, the Fund may,
subject to its ability to liquidate its relatively illiquid portfolio of Senior
Loans, invest up to 100% of its assets in cash and such high quality, short-term
securities. The Fund may also lend its portfolio securities to other parties and
may enter into repurchase and reverse repurchase agreements for securities,
subject to certain restrictions. For further discussion of the Fund's investment
objective and policies and its investment practices and the associated
considerations, see "Investment Objective and Policies and Special Risk
Considerations" and "Investment Practices and Special Risks."

Senior Loans generally are not rated by nationally recognized statistical
rating organizations. Because of the collateralized nature of most Senior Loans
in the Fund's portfolio, the Fund and the Adviser believe that ratings of other
securities issued by a Borrower do not necessarily reflect adequately the
relative quality of a Borrower's Senior Loans. Therefore, although the Adviser
may consider such ratings in determining whether to invest in a particular
Senior Loan, the Adviser is not required to consider such ratings and such
ratings will not be the determinative factor in the Adviser's analysis. The Fund
may invest in Senior Loans, the Borrowers with respect to which have outstanding
debt securities which are rated below investment grade by a nationally
recognized statistical rating organization or are unrated but of comparable
quality to such securities. Debt securities rated below investment grade, or
unrated but of comparable quality, commonly are referred to as "junk bonds." The
Fund will invest only in those Senior Loans with respect to

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which the Borrower, in the opinion of the Adviser, demonstrates certain of the
following characteristics: sufficient cash flow to service debt; adequate
liquidity; successful operating history; strong competitive position;
experienced management; and, with respect to collateralized Senior Loans,
adequate collateral coverage of the Senior Loan. In addition, the Adviser will
consider, and may rely in part, on analyses performed by Lenders other than the
Fund.

When the Fund purchases a Participation, the Fund typically enters into a
contractual relationship with the Lender selling such Participation, but not
with the Borrower. As a result, the Fund may assume the credit risk of both the
Borrower and the Lender selling the Participation and the Fund may not directly
benefit from the collateral supporting the Senior Loan in which it has purchased
the Participation. The Fund will only acquire Participations if the Lender
selling the Participation, and any other person interpositioned between the Fund
and such Lender (i) at the time of investment has outstanding debt or deposit
obligations rated investment grade or determined by the Adviser to be of
comparable quality and (ii) has entered into an agreement providing for the
holding of assets in safekeeping for the Fund. The Fund ordinarily will purchase
a Participation only if, at the time of such purchase, the Fund believes that
the party from whom it is purchasing such Participation is retaining an interest
in the underlying Senior Loan. The Fund believes that such policies
significantly reduce the credit risk that it assumes with respect to such Lender
or interpositioned person.

INVESTMENT ADVISER. Van Kampen American Capital Investment Advisory Corp. (the
"Adviser"), a wholly-owned subsidiary of Van Kampen American Capital, Inc., is
the Fund's investment adviser. Van Kampen American Capital, Inc. is a
diversified asset management company with more than two million retail investor
accounts, extensive capabilities for managing institutional portfolios and over
$54 billion under management or supervision. Van Kampen American Capital, Inc.'s
36 open-end and 38 closed-end funds and more than 2,800 unit investment trusts
are professionally distributed by leading financial advisers nationwide. In
connection with advising the Fund, the Adviser will utilize, at its own expense,
credit analysis and research services provided by its affiliate, McCarthy,
Crisanti & Maffei, Inc. ("MCM"). See "Management of the Fund."

ADMINISTRATOR. VKAC is the Fund's administrator (the "Administrator"). The
Administrator is responsible for managing the business affairs of the Fund,
subject to the supervision of the Fund's Board of Trustees. The administrative
services to be provided by the Administrator include monitoring the provisions
of the Loan Agreements and any agreements with respect to Participations and
Assignments, recordkeeping responsibilities with respect to Senior Loans in the
Fund's portfolio and providing certain services to the holders of the Fund's
securities. See "Management of the Fund."

FEES AND EXPENSES. The Fund will pay the Adviser a monthly fee at an annual
rate of 0.95% of the average net assets of the Fund (as defined). The advisory
fee, which also covers the credit analysis and research services of MCM, is
higher than the fees

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paid by most other management investment companies, although it is comparable to
the fees paid by several publicly offered, closed-end management investment
companies with an investment objective and policies similar to those of the
Fund. The Fund will pay the Administrator a monthly fee at an annual rate of
0.25% of the average net assets of the Fund (as defined). See "Management of the
Fund."

DISTRIBUTIONS. The Fund's policy is to declare daily and pay monthly
distributions to holders of Common Shares of substantially all net investment
income of the Fund. Distributions to holders of Common Shares cannot be assured,
and the amount of each monthly distribution is likely to vary. Net realized
long-term capital gains, if any, are distributed to holders of Common Shares at
least annually. Holders of Common Shares may elect to have distributions
automatically reinvested in additional Common Shares. See "Distributions,"
"Taxation" and "Dividend Reinvestments."

TENDER OFFERS. The Board of Trustees of the Fund currently intends, each
quarter, to consider authorizing the Fund to make tender offers for all or a
portion of its outstanding Common Shares at the then current net asset value of
the Common Shares. As of the date hereof, the Fund has commenced and consummated
tender offers in each quarter since the commencement of investment operations.
An early withdrawal charge payable to VKAC will be imposed on most Common Shares
accepted for tender that have been held for less than five years. The Fund does
not intend to list the Common Shares on any national securities exchange and
none of the Fund, the Adviser or VKAC intends to make a secondary trading market
in the Common Shares at any time. Accordingly, there is not expected to be any
secondary trading market in the Common Shares and an investment in the Common
Shares should be considered illiquid. There can be no assurance that the Fund
will in fact tender for any of its Common Shares. If the Fund tenders for Common
Shares there is no guarantee that all, or any, Common Shares tendered will be
purchased. Subject to its borrowing restrictions, the Fund may incur debt to
finance repurchases of its Common Shares pursuant to tender offers; such
borrowings entail additional risks. The ability of the Fund to tender for its
Common Shares may be limited by certain requirements of the Internal Revenue
Code of 1986, as amended, that must be satisfied in order for the Fund to
maintain its desired tax status as a regulated investment company. The Fund may
be required to suspend the continuous offering of its Common Shares during the
term of any such tender offer. See "The Fund," "Purchasing Shares of the Fund"
and "Repurchase of Shares."

SPECIAL RISK CONSIDERATIONS. Illiquidity. The Fund is a closed-end
investment company designed primarily for long-term investors and not as a
trading vehicle. The Fund does not intend to list the Common Shares for trading
on any national securities exchange. There is not expected to be any secondary
trading market in the Common Shares and an investment in the Common Shares
should be considered illiquid. In the event that the Fund's Board of Trustees
does not, at any time or from time to time, authorize the Fund to engage in
tender offers for its Common Shares, it is unlikely that a holder of Common
Shares will be able to otherwise sell Common Shares to the Fund. The shares of
closed-end investment

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<PAGE> 11

companies often trade at a discount from their net asset values and, in the
unlikely event that a secondary market for the Common Shares were to develop,
the Common Shares likewise may trade at a discount from net asset value. Because
the Fund intends to offer its Common Shares continuously at a price equal to net
asset value, it is unlikely that the Common Shares would trade at a premium to
net asset value should a secondary market for the Common Shares develop.

Borrowings. The Fund is authorized to borrow money in an amount up to 33 1/3%
of the Fund's total assets (after giving effect to the amount borrowed) for the
purpose of obtaining short-term credits in connection with tender offers by the
Fund for the Common Shares. Under the requirements of the 1940 Act, the Fund,
immediately after any such borrowings, must have an asset coverage of at least
300%. Asset coverage is the ratio which the value of the total assets of the
Fund, less all liabilities and indebtedness not represented by senior securities
(as that term is defined in the Investment Company Act of 1940, as amended (the
"1940 Act"), bears to the aggregate amount of any such borrowings by the Fund.
The rights of any lenders to the Fund to receive payments of interest on and
repayments of principal of such borrowings will be senior to those of the
holders of Common Shares, and the terms of any such borrowings may contain
provisions which limit certain activities of the Fund, including the payment of
dividends to holders of Common Shares in certain circumstances. Further, the
terms of any such borrowings may, and the provisions of the 1940 Act do (in
certain circumstances), grant lenders certain voting rights in the event of
default in the payment of interest or repayment of principal. In the event that
such provisions would impair the Fund's status as a regulated investment
company, the Fund, subject to its ability to liquidate its relatively illiquid
portfolio, intends to repay the borrowings. Interest payments and fees incurred
in connection with any such borrowings will reduce the amount of net income
available for payment to the holders of Common Shares. The Fund does not intend
to use borrowings for leverage purposes. Accordingly, the Fund will not purchase
additional portfolio securities at any time that borrowings, including the
Fund's commitments pursuant to reverse repurchase agreements, exceed 5% of the
Fund's total assets (after giving effect to the amount borrowed). See
"Repurchase of Shares."

Senior Loans. Senior Loans in which the Fund will invest generally will not be
rated by a nationally recognized statistical rating organization, will not be
registered with the SEC or any state securities commission and generally will
not be listed on any national securities exchange. Although the Fund will
generally have access to financial and other information made available to the
Lenders in connection with Senior Loans, the amount of public information
available with respect to Senior Loans will generally be less extensive than
that available for rated, registered and exchange-listed securities. As a
result, the performance of the Fund and its ability to meet its investment
objective is more dependent on the analytical abilities of the Adviser than
would be the case for an investment company that invests primarily in rated,
registered or exchange listed securities. See "Investment Objective and Policies
and Special Risk Considerations."

11
<PAGE> 12

Interests in Senior Loans generally are not listed on any national securities
exchange or automated quotation system and no regular market has developed in
which interests in Senior Loans are traded. Any secondary market purchases and
sales of Senior Loans generally are conducted in private transactions between
buyers and sellers. Senior Loans are thus relatively illiquid, which illiquidity
may impair the Fund's ability to realize the full value of its assets in the
event of a voluntary or involuntary liquidation of such assets. Liquidity
relates to the ability of the Fund to sell an investment in a timely manner. The
market for relatively illiquid securities tends to be more volatile than the
market for liquid securities. The substantial portion of the Fund's assets
invested in relatively illiquid Senior Loan interests may restrict the ability
of the Fund to dispose of its investments in Senior Loans in a timely fashion
and at a fair price, and could result in capital losses to the Fund and holders
of Common Shares. However, many of the Senior Loans in which the Fund expects to
purchase interests are of a relatively large principal amount and are held by a
relatively large number of owners which should, in the Adviser's opinion,
enhance the relative liquidity of such interests. The risks associated with
illiquidity are particularly acute in situations where the Fund's operations
require cash, such as when the Fund tenders for its Common Shares or when the
Adviser considers it advantageous to increase the percentage of the Fund's
portfolio invested in high quality, short-term securities, and may in certain
circumstances result in the Fund engaging in borrowings to meet short-term cash
requirements. See "Investment Objective and Policies and Special Risk
Considerations."

Credit Risks Associated with Investments in Participations. The Fund will
purchase Participations in Senior Loans. With respect to any given Senior Loan,
the terms of Participations are arrived at through private negotiations between
the Fund and the seller of such an interest in a Senior Loan, and may result in
the Fund having rights which differ from, and are more limited than, the rights
of Lenders or of persons who acquire such interests by Assignment.
Participations typically result in the Fund having a contractual relationship
with the Lender selling the Participation, but not with the Borrower. In the
event of the insolvency of the Lender selling the Participation, the Fund may be
treated as a general creditor of such Lender, and may not have any exclusive or
senior claim with respect to such Lender's interest in, or the collateral with
respect to, the Senior Loan. As such, the Fund may incur the credit risk of the
Lender selling the Participation in addition to the credit risk of the Borrower
with respect to the Senior Loan when purchasing Participations and may not
benefit directly from the security provided by the collateral supporting the
Senior Loan with respect to which such Participation was sold. The Fund has
implemented measures designed to reduce such risk. The Fund may pay a fee or
forgo a portion of interest payments when acquiring Participations or
Assignments. See "Investment Objective and Policies and Special Risk
Considerations."

Credit Risks Associated with Senior Loans. Senior Loans, like other corporate
debt obligations, are subject to the risk of non-payment of scheduled interest
or principal. Such non-payment would result in a reduction of income to the
Fund, a reduction in the value of the Senior Loan experiencing non-payment and a
potential

12
<PAGE> 13

decrease in the net asset value of the Fund. Although Senior Loans in which the
Fund will invest generally will be secured by specific collateral, there can be
no assurance that liquidation of such collateral would satisfy the Borrower's
obligation in the event of nonpayment of scheduled interest or principal or that
such collateral could be readily liquidated. In the event of bankruptcy of a
Borrower, the Fund could experience delays or limitations with respect to its
ability to realize the benefits of the collateral securing a Senior Loan. In the
event that the Fund invests a portion of its assets in Senior Loans that are not
secured by specific collateral, the Fund will not enjoy the benefits of
collateralization with respect to such Senior Loans. See "Investment Objective
and Policies and Special Risk Considerations."

Certain Investment Practices. The Fund may use various investment practices
that involve special considerations including lending its portfolio securities,
entering into when-issued and delayed delivery transactions and entering into
repurchase and reverse repurchase agreements. In addition, the Fund has the
authority to engage in interest rate and other hedging and risk management
transactions. For further discussion of these practices and associated special
considerations, see "Investment Practices and Special Risks."

Diversification. The Fund has registered as a "non-diversified" investment
company so that it will be able to invest more than 5% of the value of its
assets in the obligations of any single issuer, including Senior Loans of a
single Borrower or Participations purchased from a single Lender. The Fund does
not intend to invest, however, more than 5% of the value of its assets in
interests in Senior Loans of a single Borrower. To the extent the Fund invests a
relatively high percentage of its assets in obligations of a limited number of
issuers, the Fund will be more susceptible than a more widely diversified
investment company to any single corporate, economic, political or regulatory
occurrence. See "The Fund."

Percentage of Assets in Participations. The Fund may invest up to 100% of its
assets in Participations. The Lenders selling such Participations and other
persons interpositioned between such Lenders and the Fund with respect to such
Participations will likely conduct their principal business activities in the
bank, finance and financial services industries. Because the Fund may invest a
relatively high percentage of its assets in such Participations, the Fund may be
more susceptible than an investment company without such a policy to any single
economic, political or regulatory occurrence affecting such industries. The Fund
has taken measures which it believes significantly reduce its exposure to such
risk. See "Investment Objective and Policies and Special Risk Considerations"
and "Investment Restrictions."

Anti-Takeover Provisions. The Fund's Declaration of Trust includes provisions
that could have the effect of limiting the ability of other persons or entities
to acquire control of the Fund or to change the composition of its Board of
Trustees. See "Description of Common Shares--Anti-Takeover Provisions of the
Declaration of Trust."

13
<PAGE> 14

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (for one Common Share of the Fund outstanding throughout
the periods indicated)
- --------------------------------------------------------------------------------

The following schedule presents financial highlights for one Common Share of the
Fund outstanding throughout the periods indicated. The financial highlights have
been audited by KPMG Peat Marwick LLP, independent certified public accountants
for the periods indicated, and their report thereon appears in the Fund's
related Statement of Additional Information. This information should be read in
conjunction with the financial statements and related notes included in the
Statement of Additional Information.

<TABLE>
<CAPTION>
OCTOBER 4,
1989
(COMMENCEMENT
OF INVESTMENT
YEAR ENDED JULY 31 OPERATIONS)
------------------------------------------------------ TO
1995 1994 1993 1992 1991 JULY 31, 1990
----------- ------- ------- ------ ------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $10.052 $10.004 $ 9.998 $9.985 $10.008 $10.000
------- ------- ------- ------ ------- -------
Net Investment Income................................ .756 .618 .600 .698 .907 .815
Net Realized and Unrealized Gain/Loss on
Investments........................................ (.004) .015 .008 .004 (.008) .005
------- ------- ------- ------ ------- -------
Total from Investment
Operations........................................... .752 .633 .608 .702 .899 .820
------- ------- ------- ------ ------- -------
Less:
Distributions from Net Investment Income............. .758 .585 .600 .689 .910 .812
Distributions in Excess of Net Investment Income..... -0- -0- .002 -0- .012 -0-
------- ------- ------- ------ ------- -------
Total Distributions.................................... .758 .585 .602 .689 .922 .812
------- ------- ------- ------ ------- -------
Net Asset Value, End of Period......................... $10.046 $10.052 $10.004 $9.998 $ 9.985 $10.008
======= ======= ======= ====== ======= =======
</TABLE>

(Continued on following page)

See Financial Statements and Notes to Financial Statements.

14
<PAGE> 15

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- continued (for one Common Share of the Fund outstanding
throughout the periods indicated)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
OCTOBER 4,
1989
(COMMENCEMENT
OF INVESTMENT
YEAR ENDED JULY 31 OPERATIONS)
------------------------------------------------------- TO
1995 1994 1993 1992 1991 JULY 31, 1990
----------- -------- ------- ------ ------- -------------
<S> <C> <C> <C> <C> <C> <C>
Total Return(1) (Non-Annualized)...................... 7.82% 6.52% 6.17% 7.25% 9.41% 8.51%
Net Assets at End of Period (in millions)............. $ 2,530.1 $1,229.0 $ 966.7 $928.3 $ 997.5 $ 659.1
Ratio of Expenses to Average Net Assets(1)
(Annualized)........................................ 1.49% 1.53% 1.53% 1.55% 1.56% 1.59%
Ratio of Net Investment Income to Average Net
Assets(1) (Annualized).............................. 7.71% 6.16% 5.96% 6.98% 8.91% 9.91%
Portfolio Turnover(2)................................. 71.31% 73.50% 66.54% 58.79% 40.73% 53.44%
- ----------------
(1) If certain expenses had not been assumed by the investment advisor, total return would have been lower and the ratios would
have been as follows:
Ratio of Expenses to Average Net Assets
(Annualized)....................................... N/A N/A N/A N/A 1.58% N/A
Ratio of Net Investment Income to Average Net
Assets (Annualized)................................ N/A N/A N/A N/A 8.89% N/A
(2) Calculation includes the proceeds from principal repayments and sales of variable rate senior loan interests.
</TABLE>

See Financial Statements and Notes to Financial Statements.

15
<PAGE> 16

- ------------------------------------------------------------------------------
THE FUND
- ------------------------------------------------------------------------------

Van Kampen American Capital Prime Rate Income Trust (the "Fund") is a
non-diversified, closed-end management investment company which was organized as
a Massachusetts business trust on July 14, 1989 and which commenced investment
operations on October 4, 1989. The Fund completed an initial public offering of
its common shares of beneficial interest ("Common Shares") in October, 1989.
Since November 13, 1989, the Fund has also engaged in a continuous offering of
the Common Shares through Van Kampen American Capital Distributors, Inc.
("VKAC") (an indirect affiliate of the Fund), as principal underwriter. As of
October 5, 1995, the Fund had 298,525,974 Common Shares outstanding and had net
assets of $2,996,923,822. The net asset value per Common Share of the Fund on
October 5, 1995 was $10.04. The Fund's principal office is located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181 and its telephone number is
1-800-421-5666.

The Fund is a closed-end investment company designed primarily for long-term
investors and not as a trading vehicle. The Fund does not intend to list the
Common Shares for trading on any national securities exchange and none of the
Fund, Van Kampen American Capital Investment Advisory Corp. (the "Adviser") or
VKAC intends to make a secondary trading market in the Common Shares at any
time. Accordingly, there is not expected to be any secondary trading market in
the Common Shares and an investment in the Common Shares should be considered
illiquid. The Board of Trustees of the Fund currently intends each quarter to
consider authorizing the Fund to make tender offers for all or a portion of its
then outstanding Common Shares at the then current net asset value for the
Common Shares. As of the date hereof the Fund has commenced and consummated
tender offers in each quarter since the commencement of investment operations.
An early withdrawal charge payable to VKAC will be imposed on most Shares held
for less than five years which are accepted for repurchase pursuant to a tender
offer by the Fund. There can be no assurance that the Fund will in fact tender
for any of its Common Shares and, in the event that the Fund does not so tender
it is unlikely that a holder of Common Shares will be able to otherwise sell
Common Shares to the Fund. If the Fund tenders for Common Shares, there is no
guarantee that all, or any, Common Shares tendered will be purchased. Subject to
its borrowing restrictions, the Fund may incur debt to finance repurchases of
its Common Shares pursuant to tender offers, which entails additional risks. The
ability of the Fund to enter into tender offers may be limited by certain
requirements of the Internal Revenue Code of 1986, as amended, that must be
satisfied in order for the Fund to maintain its desired tax status as a
regulated investment company. See "Repurchase of Shares."

16
<PAGE> 17

- ------------------------------------------------------------------------------
USE OF PROCEEDS
- ------------------------------------------------------------------------------

The net proceeds from the sale of the Common Shares offered hereby will be
invested in accordance with the Fund's investment objective and policies.
Pending such investment, the proceeds may be invested in high quality,
short-term securities.

- ------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES AND SPECIAL RISK FACTORS
- ------------------------------------------------------------------------------

An investment in the Fund may not be appropriate for all investors and is not
intended to be a complete investment program. No assurance can be given that the
Fund will achieve its investment objective.

The Fund's investment objective is to provide a high level of current income,
consistent with preservation of capital. The Fund seeks to achieve its objective
through investment primarily in a professionally managed portfolio of interests
in floating or variable rate senior loans ("Senior Loans") to United States
corporations, partnerships and other entities ("Borrowers"). Although the Fund's
net asset value will vary, the Fund's policy of acquiring interests in floating
or variable rate Senior Loans is expected to minimize the fluctuations in the
Fund's net asset value as a result of changes in interest rates. The Fund's net
asset value may be affected by changes in the credit quality of Borrowers with
respect to Senior Loan interests in which the Fund invests. The Fund seeks to
achieve over time an effective yield that approximates the average published
Prime Rate of major United States banks. An investment in the Fund may not be
appropriate for all investors and is not intended to be a complete investment
program. No assurance can be given that the Fund will achieve its investment
objective.

CERTAIN CHARACTERISTICS OF SENIOR LOAN INTERESTS

The Fund will invest in participations ("Participations") in Senior Loans,
will purchase assignments ("Assignments") of portions of Senior Loans from third

17
<PAGE> 18

parties and may act as one of the group of Lenders originating a Senior Loan (an
"Original Lender").

It is anticipated that the proceeds of the Senior Loans in which the Fund will
acquire interests primarily will be used to finance leveraged buyouts,
recapitalizations, mergers, acquisitions, stock repurchases, and, to a lesser
extent, to finance internal growth and for other corporate purposes of
Borrowers. The Fund currently does not intend to acquire interests in Senior
Loans the proceeds of which would be used primarily to finance construction or
real estate development projects. Senior Loans have the most senior position in
a Borrower's capital structure, although some Senior Loans may hold an equal
ranking with other senior securities of the Borrower. The capital structure of
Borrowers may include Senior Loans, senior and junior subordinated debt (which
may include "junk bonds"), preferred stock and common stock issued by the
Borrower, typically in descending order of seniority with respect to claims on
the Borrower's assets. Senior Loans generally are secured by specific
collateral, which may include guarantees. In connection with the acquisition of
collateralized Senior Loans, the Fund may invest up to 5% of its total assets in
Senior Loans which are not secured by any collateral. Such unsecured Senior
Loans would constitute an interim financing intended to be refinanced through,
in whole or in part, a collateralized Senior Loan. In the event that the Fund
invests a portion of its assets in Senior Loans that are not secured by specific
collateral, the Fund will not enjoy the benefits associated with
collateralization with respect to such Senior Loans and such Senior Loans may
pose a greater risk of nonpayment of interest or loss of principal than do
collateralized Senior Loans. As discussed below, the Fund may also acquire
warrants and equity securities issued by the Borrower or its affiliates as part
of a package of investments in the Borrower or its affiliates. Warrants and
equity securities will not be treated as Senior Loans and thus assets invested
in such securities will not count toward the 80% of the Fund's total assets that
normally will be invested in Senior Loans. The Fund will acquire such interests
in unsecured Senior Loans, warrants and equity securities only as an incident to
the intended purchase of interests in collateralized Senior Loans. Loan
Agreements may also include various restrictive covenants designed to limit the
activities of the Borrower in an effort to protect the right of the Lenders to
receive timely payments of interest on and repayment of principal of the Senior
Loans. In order to borrow money pursuant to collateralized Senior Loans, a
Borrower will frequently, for the term of the Senior Loan, pledge as collateral
assets, including but not limited to, trademarks, accounts receivable,
inventory, buildings, real estate, franchises and common and preferred stock in
its subsidiaries. In addition, in the case of some Senior Loans, there may be
additional collateral pledged in the form of guarantees by and/or securities of
affiliates of the Borrowers. In certain instances, a Senior Loan may be secured
only by stock in the Borrower or its subsidiaries. Such collateral may consist
of assets that may not be readily liquidated, and there is no assurance that the
liquidation of such assets would satisfy fully a Borrower's obligations under a
Senior Loan.

18
<PAGE> 19

Restrictive covenants may include mandatory prepayment provisions arising from
excess cash flows and typically include restrictions on dividend payments,
specific mandatory minimum financial ratios, limits on total debt and other
financial tests. Breach of such covenants, if not waived by the Lenders, is
generally an event of default under the applicable Loan Agreement and may give
the Lenders the right to accelerate principal and interest payments. The Adviser
will consider the terms of such restrictive covenants in deciding whether to
invest in Senior Loans for the Fund's portfolio. When the Fund holds a
Participation in a Senior Loan it may not have the right to vote to waive
enforcement of any restrictive covenant breached by a Borrower. Lenders voting
in connection with a potential waiver of a restrictive covenant may have
interests different from those of the Fund and such Lenders may not consider the
interests of the Fund in connection with their votes.

Senior Loans in which the Fund will invest generally pay interest at rates
which are periodically redetermined by reference to a base lending rate plus a
premium. These base lending rates generally are the prime rate offered by one or
more major United States banks (the "Prime Rate"), the London Inter-Bank Offered
Rate ("LIBOR"), the certificate of deposit ("CD") rate or other base lending
rates used by commercial lenders. The Prime Rate quoted by a major U.S. bank is
the interest rate at which such bank is willing to lend U.S. dollars to its most
creditworthy borrowers. LIBOR, as provided for in Loan Agreements, is an average
of the interest rates quoted by several designated banks as the rates at which
such banks would offer to pay interest to major financial institutional
depositors in the London interbank market on U.S. dollar denominated deposits
for a specified period of time. The CD rate, as generally provided for in Loan
Agreements, is the average rate paid on large certificates of deposit traded in
the secondary market. At least 80% of the Fund's total assets normally will be
invested in Senior Loans. In normal market conditions, at least 65% of the
Fund's assets will be invested in Senior Loans which, at the time of the Fund's
initial investment in such Senior Loans, provided the Fund with a rate of return
which was at least equal to the Prime Rate existing on the date of such initial
investment. The Fund is not subject to any restrictions with respect to the
maturity of Senior Loans held in its portfolio. It is currently anticipated that
the Fund's assets invested in Senior Loans will consist of Senior Loans with
stated maturities of between three and seven years, inclusive, and with rates of
interest which are redetermined either daily, monthly, quarterly or
semi-annually; provided, however, that the Fund may invest up to 5% of its total
assets in Senior Loans which permit the Borrower to select an interest rate
redetermination period of up to one year. Investment in Senior Loans with longer
interest rate redetermination periods may increase fluctuations in the Fund's
net asset value as a result of changes in interest rates. The Senior Loans in
the Fund's portfolio will at all times have a dollar-weighted average time until
the next interest rate redetermination of 90 days or less. As a result, as
short-term interest rates increase, interest payable to the Fund from its
investments in Senior Loans should increase, and as short-term interest rates
decrease, interest payable to the Fund from its investments in Senior Loans
should decrease. The amount of time required to pass before the Fund will
realize the effects of changing short-term market interest rates on its
portfolio will

19
<PAGE> 20

vary with the dollar-weighted average time until the next interest rate
redetermination on the Senior Loans in the Fund's portfolio. The Fund may
utilize certain investment practices to, among other things, shorten the
effective interest rate redetermination period of Senior Loans in its portfolio.
In such event, the Fund will consider such shortened period to be the interest
rate redetermination period of the Senior Loan; provided, however, that the Fund
will not invest in Senior Loans which permit the Borrower to select an interest
rate redetermination period in excess of one year. Because most Senior Loans in
the Fund's portfolio will be subject to mandatory and/or optional prepayment and
there may be significant economic incentives for a Borrower to prepay its loans,
prepayments of Senior Loans in the Fund's portfolio may occur. Accordingly, the
actual remaining maturity of the Fund's portfolio invested in Senior Loans may
vary substantially from the average stated maturity of the Senior Loans held in
the Fund's portfolio. As a result of expected prepayments from time to time of
Senior Loans in the Fund's portfolio, the Fund estimates that the actual average
maturity of the Senior Loans held in its portfolio will be approximately 18-24
months.

When interest rates decline, the value of a portfolio invested in fixed-rate
obligations can be expected to rise. Conversely, when interest rates rise, the
value of a portfolio invested in fixed-rate obligations can be expected to
decline. Although the Fund's net asset value will vary, the Fund's management
expects the Fund's policy of acquiring interests in floating or variable rate
Senior Loans to minimize fluctuations in net asset value as a result of changes
in interest rates. Accordingly, the Fund's management expects the value of the
Fund's portfolio to fluctuate significantly less than a portfolio of fixed-rate,
longer term obligations as a result of interest rate changes. However, changes
in prevailing interest rates can be expected to cause some fluctuation in the
Fund's net asset value. In addition to changes in interest rates, changes in the
credit quality of Borrowers will also effect the Fund's net asset value.
Further, a serious deterioration in the credit quality of a Borrower could cause
a prolonged or permanent decrease in the Fund's net asset value.

The Fund may purchase and retain in its portfolio a Senior Loan interest the
Borrower with respect to which has filed for protection under the federal
bankruptcy laws or has had an involuntary bankruptcy petition filed against it
by its creditors. As of July 31, 1995, the date of the Fund's most recent
audited financial statements, the Fund held no such Senior Loan interests in its
portfolio. The values of such Senior Loan interests, if any, reflect, among
other things, the Adviser's assessment of the likelihood that the Fund
ultimately will receive full repayment of the principal amount of such Senior
Loan interests, the likely duration, if any, of a lapse in the scheduled
repayment of principal and prevailing interest rates. At times, in connection
with the restructuring of a Senior Loan either outside of bankruptcy court or in
the context of bankruptcy court proceedings, the Fund may determine or be
required to accept equity securities and/or junior debt securities in exchange
for all or a portion of a Senior Loan interest. Depending upon, among other
things, the Adviser's evaluation of the potential value of such securities in
relation to the price that could be obtained by the Fund at any given time upon
sale thereof, the Fund

20
<PAGE> 21

may determine to hold such securities in its portfolio. Any equity securities
and junior debt securities held by the Fund will not be treated as Senior Loans
and thus will not count toward the 80% of the Fund's total assets that normally
will be invested in Senior Loans.

Senior Loans generally are not rated by nationally recognized statistical
rating organizations. Because of the collateralized and/or guaranteed nature of
most Senior Loans, the Fund and the Adviser believe that ratings of other
securities issued by a Borrower do not necessarily reflect adequately the
relative quality of a Borrower's Senior Loans. Therefore, although the Adviser
may consider such ratings in determining whether to invest in a particular
Senior Loan, the Adviser is not required to consider such ratings and such
ratings will not be the determinative factor in the Adviser's analysis. The Fund
may invest in Senior Loans, the Borrowers with respect to which have outstanding
debt securities which are rated below investment grade by a nationally
recognized statistical rating organization or are unrated but of comparable
quality to such securities. Debt securities rated below investment grade or
unrated but of comparable quality commonly are referred to as "junk bonds." The
Fund will invest only in those Senior Loans with respect to which the Borrower,
in the opinion of the Adviser, demonstrates certain of the following
characteristics: sufficient cash flow to service debt; adequate liquidity;
successful operating history; strong competitive position; experienced
management; and, with respect to collateralized Senior Loans, collateral
coverage that equals or exceeds the outstanding principal amount of the Senior
Loan. In addition, the Adviser will consider, and may rely in part, on the
analyses performed by the Agent and other Lenders, including such persons'
determinations with respect to collateral securing a Senior Loan.

The Fund may invest up to 100% of its assets in Participations. The selling
Lenders and other persons interpositioned between such Lenders and the Fund with
respect to such Participations will likely conduct their principal business
activities in the banking, finance and financial services industries. Although,
as discussed below, the Fund has taken measures which it believes significantly
reduce its exposure to any risks incident to such policy, the Fund may be more
susceptible than an investment company without such a policy to any single
economic, political or regulatory occurrence affecting such industries. Persons
engaged in such industries may be more susceptible than are persons engaged in
some other industry to, among other things, fluctuations in interest rates,
changes in the Federal Open Market Committee's monetary policy, governmental
regulations concerning such industries and concerning capital raising activities
generally and fluctuations in the financial markets generally.

Participations by the Fund in a Lender's portion of a Senior Loan typically
result in the Fund having a contractual relationship only with such Lender, not
with the Borrower. The Fund has the right to receive payments of principal,
interest and any fees to which it is entitled only from the Lender selling the
Participation and only upon receipt by such Lender of such payments from the
Borrower. In connection

21
<PAGE> 22

with purchasing Participations, the Fund generally will have no right to enforce
compliance by the Borrower with the terms of the Loan Agreement, nor any rights
with respect to any funds acquired by other Lenders through set-off against the
Borrower and the Fund may not directly benefit from the collateral supporting
the Senior Loan in which it has purchased the Participation. As a result, the
Fund may assume the credit risk of both the Borrower and the Lender selling the
Participation. In the event of the insolvency of the Lender selling a
Participation, the Fund may be treated as a general creditor of such Lender, and
may not benefit from any set-off between such Lender and the Borrower. The Fund
has taken the following measures in an effort to minimize such risks. The Fund
will only acquire Participations if the Lender selling the Participation, and
any other persons interpositioned between the Fund and the Lender, (i) at the
time of investment has outstanding debt or deposit obligations rated investment
grade (BBB or A-3 or higher by Standard & Poor's Ratings Group ("S&P") or Baa or
P-3 or higher by Moody's Investors Service ("Moody's")) or determined by the
Adviser to be of comparable quality and (ii) has entered into an agreement which
provides for the holding of assets in safekeeping for, or the prompt
disbursement of assets to, the Fund. Long-term debt rated BBB by S&P is regarded
by S&P as having adequate capacity to pay interest and repay principal and debt
rated Baa by Moody's is regarded by Moody's as a medium grade obligation, i.e.,
it is neither highly protected nor poorly secured. Commercial paper rated A-1 by
S&P indicates that the degree of safety regarding timely payment is considered
by S&P to be either overwhelming or very strong and issues of commercial paper
rated Prime-1 by Moody's are considered by Moody's to have a superior ability
for repayment of senior short-term debt obligations. The Fund ordinarily will
purchase a Participation only if, at the time of such purchase, the Fund
believes that the party from whom it is purchasing such Participation is
retaining an interest in the underlying Senior Loan.

The Fund may also purchase Assignments from Lenders. The purchaser of an
Assignment typically succeeds to all the rights and obligations under the Loan
Agreement of the assigning Lender and becomes a Lender under the Loan Agreement
with the same rights and obligations as the assigning Lender. Assignments are,
however, arranged through private negotiations between potential assignees and
potential assignors, and the rights and obligations acquired by the purchaser of
an Assignment may differ from, and be more limited than, those held by the
assigning Lender.

When the Fund is an Original Lender originating a Senior Loan it may share in
a fee paid to the Original Lenders. The Fund will never act as the Agent or
principal negotiator or administrator of a Senior Loan. When the Fund is a
Lender, it will have a direct contractual relationship with the Borrower, may
enforce compliance by the Borrower with the terms of the Loan Agreement and may
have rights with respect to any funds acquired by other Lenders through set-off.
Lenders also have full voting and consent rights under the applicable Loan
Agreement. Action subject to Lender vote or consent generally requires the vote
or consent of the holders of some specified percentage of the outstanding
principal amount of the Senior Loan.

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<PAGE> 23

Certain decisions, such as reducing the amount or increasing the time for
payment of interest on or repayment of principal of a Senior Loan, or releasing
collateral therefor, frequently require the unanimous vote or consent of all
Lenders affected.

The Fund will purchase an Assignment or act as a Lender with respect to a
syndicated Senior Loan only where the Agent with respect to such Senior Loan at
the time of investment has outstanding debt or deposit obligations rated
investment grade (BBB or A-3 or higher by S&P or Baa or P-3 or higher by
Moody's) or determined by the Adviser to be of comparable quality. In addition,
the Fund will purchase a Participation only where the Lender selling such
Participation, and any other person interpositioned between such Lender and the
Fund at the time of investment, have outstanding debt obligations rated
investment grade or determined by the Adviser to be of comparable quality.
Further, the Fund will not purchase interests in Senior Loans unless such Agent,
Lender or interpositioned person has entered into an agreement which provides
for the holding of assets in safekeeping for, or the prompt disbursement of
assets to, the Fund.

Loan Agreements typically provide for the termination of the Agent's agency
status in the event that it fails to act as required under the relevant Loan
Agreement, becomes insolvent, enters FDIC receivership, or if not FDIC insured,
enters into bankruptcy. Should such an Agent, Lender or assignor with respect to
an Assignment interpositioned between the Fund and the Borrower become insolvent
or enter FDIC receivership or bankruptcy, any interest in the Senior Loan of
such person and any loan payment held by such person for the benefit of the Fund
should not be included in such person's estate. If, however, any such amount
were included in such person's estate, the Fund would incur certain costs and
delays in realizing payment or could suffer a loss of principal and/or interest.
In such event, the Fund could experience a decrease in net asset value.

The Fund may be required to pay and may receive various fees and commissions
in connection with purchasing, selling and holding interests in Senior Loans.
The fees normally paid by Borrowers may include three types: facility fees,
commitment fees and prepayment penalties. Facility fees are paid to Lenders upon
origination of a Senior Loan. Commitment fees are paid to Lenders on an ongoing
basis based upon the undrawn portion committed by the Lenders of the underlying
Senior Loan. Lenders may receive prepayment penalties when a Borrower prepays
all or part of a Senior Loan. The Fund will receive these fees directly from the
Borrower if the Fund is an Original Lender, or, in the case of commitment fees
and prepayment penalties, if the Fund acquires an interest in a Senior Loan by
way of Assignment. Whether or not the Fund receives a facility fee from the
Lender in the case of an Assignment, or any fees in the case of a Participation,
depends upon negotiations between the Fund and the Lender selling such
interests. When the Fund is an assignee, it may be required to pay a fee, or
forgo a portion of interest and any fees payable to it, to the Lender selling
the Assignment. Occasionally, the assignor will pay a fee to the assignee based
on the portion of the principal amount of the Senior Loan which is being
assigned. A Lender selling a Participation to the Fund may deduct a portion of
the interest and any fees payable to the Fund as an administrative

23
<PAGE> 24

fee prior to payment thereof to the Fund. The Fund may be required to pay over
or pass along to a purchaser of an interest in a Senior Loan from the Fund a
portion of any fees that the Fund would otherwise be entitled to.

Pursuant to the relevant Loan Agreement, a Borrower may be required in certain
circumstances, and may have the option at any time, to prepay the principal
amount of a Senior Loan, often without incurring a prepayment penalty. Because
the interest rates on Senior Loans are periodically redetermined at relatively
short intervals, the Fund and the Adviser believe that the prepayment of, and
subsequent reinvestment by the Fund in, Senior Loans will not have a materially
adverse impact on the yield on the Fund's portfolio and may have a beneficial
impact on income due to receipt of prepayment penalties, if any, and any
facility fees earned in connection with reinvestment.

A Lender may have certain obligations pursuant to a Loan Agreement, which may
include the obligation to make additional loans in certain circumstances. The
Fund currently intends to reserve against such contingent obligations by
segregating sufficient investments in high quality short-term, liquid
investments. The Fund will not purchase interests in Senior Loans that would
require the Fund to make any such additional loans if such additional loan
commitments would exceed 20% of the Fund's total assets or would cause the Fund
to fail to meet the diversification requirements set forth under the heading
"Investment Restrictions."

During normal market conditions, the Fund may invest up to 20% of its total
assets in (i) high quality, short-term debt securities with remaining maturities
of one year or less (including assets maintained by the Fund as a reserve
against any additional loan commitments) and (ii) warrants, equity securities
and, in certain limited circumstances discussed above, junior debt securities
acquired in connection with the Fund's investments in Senior Loans. Such high
quality, short-term securities may include commercial paper rated at least in
the top two rating categories of either S&P or Moody's, or unrated commercial
paper considered by the Adviser to be of similar quality, interests in
short-term loans of Borrowers having short-term debt obligations rated or a
short-term credit rating at least in such top two rating categories or having no
such rating but determined by the Adviser to be of comparable quality,
certificates of deposit and bankers' acceptances and securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities. Such high
quality, short-term securities may pay interest at rates which are periodically
redetermined or may pay interest at fixed rates. If the Adviser determines that
market conditions temporarily warrant a defensive investment policy, the Fund
may invest, subject to its ability to liquidate its relatively illiquid
portfolio of Senior Loans, up to 100% of its assets in cash and such high
quality, short-term debt securities. The Fund will acquire such warrants and
equity securities only as an incident to the purchase or intended purchase of
interests in collateralized Senior Loans. Warrants and equity securities will
not qualify as assets required to be maintained as a reserve against additional
loan commitments. Although the Fund generally will acquire interests in warrants
and equity securities only when the Adviser believes that the relative value
being given by the Fund in

24
<PAGE> 25

exchange for such interests is substantially outweighed by the potential value
of such instruments, investment in warrants and equity securities entail certain
risks in addition to those associated with investments in Senior Loans. Warrants
and equity securities have a subordinate claim on a Borrower's assets as
compared with debt securities and junior debt securities have a subordinate
claim on such assets as compared with Senior Loans. As such, the values of
warrants and equity securities generally are more dependent on the financial
condition of the Borrower and less dependent on fluctuations in interest rates
than are the values of many debt securities. The values of warrants, equity
securities and junior debt securities may be more volatile than those of Senior
Loans and thus may have an adverse impact on the ability of the Fund to minimize
fluctuations in its net asset value.

SPECIAL RISK CONSIDERATIONS

On behalf of the several Lenders, the Agent generally will be required to
administer and manage the Senior Loan and, with respect to collateralized Senior
Loans, to service or monitor the collateral. In this connection, the valuation
of assets pledged as collateral will reflect market value and the Agent may rely
on independent appraisals as to the value of specific collateral. The Agent,
however, may not obtain an independent appraisal as to the value of assets
pledged as collateral in all cases. The Fund normally will rely primarily on the
Agent (where the Fund is an Original Lender or owns an Assignment) or the
selling Lender (where the Fund owns a Participation) to collect principal of and
interest on a Senior Loan. Furthermore, the Fund usually will rely on the Agent
(where the Fund is an Original Lender or owns an Assignment) or the selling
Lender (where the Fund owns a Participation) to monitor compliance by the
Borrower with the restrictive covenants in the Loan Agreement and notify the
Fund of any adverse change in the Borrower's financial condition or any
declaration of insolvency. Collateralized Senior Loans will frequently be
secured by all assets of the Borrower that qualify as collateral, which may
include common stock of the Borrower or its subsidiaries. Additionally, the
terms of the Loan Agreement may require the Borrower to pledge additional
collateral to secure the Senior Loan, and enable the Agent, upon proper
authorization of the Lenders, to take possession of and liquidate the collateral
and to distribute the liquidation proceeds pro rata among the Lenders. If the
terms of a Senior Loan do not require the Borrower to pledge additional
collateral in the event of a decline in the value of the original collateral,
the Fund will be exposed to the risk that the value of the collateral will not
at all times equal or exceed the amount of the Borrower's obligations under the
Senior Loan. Lenders that have sold Participation interests in such Senior Loan
will distribute liquidation proceeds received by the Lenders pro rata among the
holders of such Participations. The Adviser will also monitor these aspects of
the Fund's investments and, where the Fund is an Original Lender or owns an
Assignment, will be directly involved with the Agent and the other Lenders
regarding the exercise of credit remedies. Senior Loans, like other corporate
debt obligations, are subject to the risk of non-payment of scheduled interest
or principal. Such non-payment would result in a reduction of income to the
Fund, a reduction in the value of the Senior Loan

25
<PAGE> 26

experiencing non-payment and a potential decrease in the net asset value of the
Fund. Although, with respect to collateralized Senior Loans, the Fund generally
will invest only in Senior Loans that the Adviser believes are secured by
specific collateral, which may include guarantees, the value of which exceeds
the principal amount of the Senior Loan at the time of initial investment, there
can be no assurance that the liquidation of any such collateral would satisfy
the Borrower's obligation in the event of non-payment of scheduled interest or
principal payments, or that such collateral could be readily liquidated. In the
event of bankruptcy of a Borrower, the Fund could experience delays or
limitations with respect to its ability to realize the benefits of the
collateral securing a Senior Loan. To the extent that a Senior Loan is
collateralized by stock in the Borrower or its subsidiaries, such stock may lose
all or substantially all of its value in the event of bankruptcy of the
Borrower. The Agent generally is responsible for determining that the Lenders
have obtained a perfected security interest in the collateral securing the
Senior Loan. Some Senior Loans in which the Fund may invest are subject to the
risk that a court, pursuant to fraudulent conveyance or other similar laws,
could subordinate such Senior Loans to presently existing or future indebtedness
of the Borrower or take other action detrimental to the holders of Senior Loans,
such as the Fund, including, under certain circumstances, invalidating such
Senior Loans. Lenders commonly have certain obligations pursuant to the Loan
Agreement, which may include the obligation to make additional loans or release
collateral in certain circumstances.

Senior Loans in which the Fund will invest generally will not be rated by a
nationally recognized statistical rating organization, will not be registered
with the Securities and Exchange Commission ("SEC") or any state securities
commission and will not be listed on any national securities exchange. Although
the Fund will generally have access to financial and other information made
available to the Lenders in connection with Senior Loans, the amount of public
information available with respect to Senior Loans will generally be less
extensive than that available for rated, registered and/or exchange listed
securities. As a result, the performance of the Fund and its ability to meet its
investment objective is more dependent on the analytical ability of the Adviser
than would be the case for an investment company that invests primarily in
rated, registered and/or exchange listed securities.

Senior Loans are, at present, not readily marketable and may be subject to
restrictions on resale. Interests in Senior Loans generally are not listed on
any national securities exchange or automated quotation system and no regular
market has developed for such interests. Any secondary market purchases and
sales of Senior Loans generally are conducted in private transactions between
buyers and sellers. Senior Loans are thus relatively illiquid, which illiquidity
may impair the Fund's ability to realize the full value of its assets in the
event of a voluntary or involuntary liquidation of such assets. Liquidity
relates to the ability of the Fund to sell an investment in a timely manner. The
market for relatively illiquid securities tends to be more volatile than the
market for more liquid securities. The Fund has no limitation on the amount of
its assets which may be invested in securities which

26
<PAGE> 27

are not readily marketable or are subject to restrictions on resale. The
substantial portion of the Fund's assets invested in relatively illiquid Senior
Loan interests may restrict the ability of the Fund to dispose of its
investments in Senior Loans in a timely fashion and at a fair price, and could
result in capital losses to the Fund and holders of Common Shares. However, many
of the Senior Loans in which the Fund expects to purchase interests are of a
relatively large principal amount and are held by a relatively large number of
owners which should, in the Adviser's opinion, enhance the relative liquidity of
such interests. The risks associated with illiquidity are particularly acute in
situations where the Fund's operations require cash, such as when the Fund
tenders for its Common Shares, and may result in the Fund borrowing to meet
short-term cash requirements.

To the extent that legislation or state or federal regulators that regulate
certain financial institutions impose additional requirements or restrictions
with respect to the ability of such institutions to make loans in connection
with highly leveraged transactions, the availability of Senior Loan interests
for investment by the Fund may be adversely affected. In addition, such
requirements or restrictions may reduce or eliminate sources of financing for
certain Borrowers. Further, to the extent that legislation or federal or state
regulators that regulate certain financial institutions require such
institutions to dispose of Senior Loan interests relating to highly leveraged
transactions or subject such Senior Loan interests to increased regulatory
scrutiny, such financial institutions may determine to sell such Senior Loan
interests in a manner that results in a price which, in the opinion of the
Adviser, is not indicative of fair value. Were the Fund to attempt to sell a
Senior Loan interest at a time when a financial institution was engaging in such
a sale with respect to such Senior Loan interest, the price at which the Fund
could consummate such a sale might be adversely affected.

The Fund has registered as a "non-diversified" investment company so that,
subject to its investment restrictions, it will be able to invest more than 5%
of the value of its assets in the obligations of any single issuer, including
Senior Loans of a single Borrower or Participations purchased from a single
Lender. See "Investment Restrictions" in the Statement of Additional
Information. The Fund does not intend, however, to invest more than 5% of the
value of its assets in interests in Senior Loans of a single Borrower. To the
extent the Fund invests a relatively high percentage of its assets in
obligations of a limited number of issuers, the Fund will be more susceptible
than a more widely diversified investment company to any single corporate,
economic, political or regulatory occurrence.

The Fund may use various investment practices that involve special
considerations including engaging in interest rate and other hedging
transactions, lending its portfolio securities, entering into when-issued and
delayed delivery transactions and entering into repurchase and reverse
repurchase agreements. For further discussion of these practices and associated
special considerations, see "Investment Practices and Special Risks."

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<PAGE> 28

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INVESTMENT PRACTICES AND SPECIAL RISKS
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In connection with the investment objective and policies described above, the
Fund may: engage in interest rate and other hedging transactions, lend portfolio
holdings, purchase and sell interests in Senior Loans and other portfolio debt
securities on a "when issued" or "delayed delivery" basis, and enter into
repurchase and reverse repurchase agreements. These investment practices involve
certain special risk considerations. The Adviser may use some or all of the
following investment practices when, in the opinion of the Adviser, their use is
appropriate. Although the Adviser believes that these investment practices may
further the Fund's investment objective, no assurance can be given that these
investment practices will achieve this result.

INTEREST RATE AND OTHER DERIVATIVE HEDGING TRANSACTIONS

The Fund may enter into various interest rate hedging and risk management
transactions. Certain of these interest rate hedging and risk management
transactions may be considered to involve derivative instruments. A derivative
is a financial instrument whose performance is derived at least in part from the
performance of an underlying index, security or asset. The values of certain
derivatives can be affected dramatically by even small market movements,
sometimes in ways that are difficult to predict. There are many different types
of derivatives, with many different uses. The Fund expects to enter into these
transactions primarily to seek to preserve a return on a particular investment
or portion of its portfolio, and may also enter into such transactions to seek
to protect against decreases in the anticipated rate of return on floating or
variable rate financial instruments the Fund owns or anticipates purchasing at a
later date, or for other risk management strategies such as managing the
effective dollar- weighted average duration of the Fund's portfolio. In
addition, with respect to fixed-income securities in the Fund's portfolio or to
the extent an active secondary market develops in interests in Senior Loans in
which the Fund may invest, the Fund may also engage in hedging transactions to
seek to protect the value of its portfolio against declines in net asset value
resulting from changes in interest rates or other market changes. The Fund does
not intend to engage in such transactions to enhance the yield on its portfolio
to increase income available for distributions. Market conditions will determine
whether and in what circumstances the Fund would employ any of the hedging and
risk management techniques described below. The Fund will not engage in any of
the transactions for speculative purposes and will use them only as a means to
hedge or manage the risks associated with assets held in, or anticipated to be
purchased for, the Fund's portfolio or obligations incurred by the Fund. The
successful utilization of hedging and risk management transactions requires
skills different from those needed in the selection of the Fund's portfolio
securities. The Fund believes that the Adviser possesses the skills necessary
for the successful utilization of hedging and risk management transactions. The
Fund will incur brokerage and other costs in connection with its hedging
transactions.

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<PAGE> 29

To the extent permitted by applicable regulatory authority, the Fund may enter
into interest rate swaps or purchase or sell interest rate caps or floors. The
Fund will not sell interest rate caps or floors that it does not own. Interest
rate swaps involve the exchange by the Fund with another party of their
respective obligations to pay or receive interest, e.g., an exchange of an
obligation to make floating rate payments for an obligation to make fixed rate
payments. For example, the Fund may seek to shorten the effective interest rate
redetermination period of a Senior Loan in its portfolio the Borrower to which
has selected an interest rate redetermination period of one year. The Fund could
exchange the Borrower's obligation to make fixed rate payments for one year for
an obligation to make payments that readjust monthly. In such event, the Fund
would consider the interest rate redetermination period of such Senior Loan to
be the shorter period.

The purchase of an interest rate cap entitles the purchaser, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest at the difference of the index and the predetermined rate
on a notional principal amount (the reference amount with respect to which
interest obligations are determined although no actual exchange of principal
occurs) from the party selling such interest rate cap. The purchase of an
interest rate floor entitles the purchaser, to the extent that a specified index
falls below a predetermined interest rate, to receive payments of interest at
the difference of the index and the predetermined rate on a notional principal
amount from the party selling such interest rate floor. The Fund will not enter
into swaps, caps or floors if, on a net basis, the aggregate notional principal
amount with respect to such agreements exceeds the net assets of the Fund.

In circumstances in which the Adviser anticipates that interest rates will
decline, the Fund might, for example, enter into an interest rate swap as the
floating rate payor or, alternatively, purchase an interest rate floor. In the
case of purchasing an interest rate floor, if interest rates declined below the
floor rate, the Fund would receive payments from its counterparty which would
wholly or partially offset the decrease in the payments it would receive in
respect of the portfolio assets being hedged. In the case where the Fund
purchases such an interest rate swap, if the floating rate payments fell below
the level of the fixed rate payment set in the swap agreement, the Fund's
counterparty would pay the Fund amounts equal to interest computed at the
difference between the fixed and floating rates over the notional principal
amount. Such payments would offset or partially offset the decrease in the
payments the Fund would receive in respect of floating rate portfolio assets
being hedged.

The successful use of swaps, caps and floors to preserve the rate of return on
a portfolio of financial instruments depends on the Adviser's ability to predict
correctly the direction and extent of movements in interest rates. Although the
Fund believes that use of the hedging and risk management techniques described
above will benefit the Fund, if the Adviser's judgment about the direction or
extent of the movement in interest rates in incorrect, the Fund's overall
performance

29
<PAGE> 30

would be worse than if it had not entered into any such transactions. For
example, if the Fund had purchased an interest rate swap or an interest rate
floor to hedge against its expectation that interest rates would decline but
instead interest rates rose, the Fund would lose part or all of the benefit of
the increased payments it would receive as a result of the rising interest rates
because it would have to pay amounts to its counterparty under the swap
agreement or would have paid the purchase price of the interest rate floor.

Inasmuch as these hedging transactions are entered into for good-faith risk
management purposes, the Adviser and the Fund believe such obligations do not
constitute senior securities. The Fund will usually enter into interest rate
swaps on a net basis, i.e., where the two parties make net payments 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 and an
amount of cash or liquid securities having an aggregate net asset value at least
equal to the accrued excess will be maintained in a segregated account by the
Fund's custodian. If the Fund enters into a swap on other than a net basis, the
Fund will maintain in the segregated account the full amount of the Fund's
obligations under each such swap. Accordingly, the Fund does not treat swaps as
senior securities. The Fund may enter into swaps, caps and floors with member
banks of the Federal Reserve System, members of the New York Stock Exchange or
other entities determined by the Adviser, pursuant to procedures adopted and
reviewed on an ongoing basis by the Board of Trustees, to be creditworthy. If a
default occurs by the other party to such transaction, the Fund will have
contractual remedies pursuant to the agreements related to the transaction but
such remedies may be subject to bankruptcy and insolvency laws which could
affect the Fund's rights as a creditor. The swap market has grown substantially
in recent years with a large number of banks and financial services firms acting
both as principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid. Caps and floors are more
recent innovations and they are less liquid than swaps. There can be no
assurance, however, that the Fund will be able to enter into interest rate swaps
or to purchase interest rate caps or floors at prices or on terms the Adviser
believes are advantageous to the Fund. In addition, although the terms of
interest rate swaps, caps and floors may provide for termination, there can be
no assurance that the Fund will be able to terminate an interest rate swap or to
sell or offset interest rate caps or floors that it has purchased.

New financial products continue to be developed and the Fund may invest in any
such products as may be developed to the extent consistent with its investment
objective and the regulatory and federal tax requirements applicable to
investment companies.

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<PAGE> 31

LENDING OF PORTFOLIO HOLDINGS

The Fund may seek to increase its income by lending financial instruments in
its portfolio in accordance with present regulatory policies, including those of
the Board of Governors of the Federal Reserve System and the SEC. Such loans may
be made, without limit, to brokers, dealers, banks or other recognized
institutional borrowers of financial instruments and would be required to be
secured continuously by collateral, including cash, cash equivalents or U.S.
Treasury bills maintained on a current basis at an amount at least equal to the
market value of the financial instruments loaned. The Fund would have the right
to call a loan and obtain the financial instruments loaned at any time on five
days' notice. For the duration of a loan, the Fund would continue to receive the
equivalent of the interest paid by the issuer on the financial instruments
loaned and also would receive compensation from the investment of the
collateral. The Fund would not have the right to vote any financial instruments
having voting rights during the existence of the loan, but the Fund could call
the loan in anticipation of an important vote to be taken among holders of the
financial instruments or in anticipation of the giving or withholding of their
consent on a material matter affecting the financial instruments. As with other
extensions of credit, risks of delay in recovery or even loss of rights in the
collateral exist should the borrower of the financial instruments fail
financially. However, the loans would be made only to firms deemed by the
Adviser to be of good standing and when, in the judgment of the Adviser, the
consideration which can be earned currently from loans of this type justifies
the attendant risk. The creditworthiness of firms to which the Fund lends its
portfolio holdings will be monitored on an ongoing basis by the Adviser pursuant
to procedures adopted and reviewed, on an ongoing basis, by the Board of
Trustees of the Fund. No specific limitation exists as to the percentage of the
Fund's assets which the Fund may lend.

"WHEN ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS

The Fund may also purchase and sell interests in Senior Loans and other
portfolio securities on a "when issued" and "delayed delivery" basis. No income
accrues to the Fund on such interests or securities in connection with such
purchase transactions prior to the date the Fund actually takes delivery of such
interests or securities. These transactions are subject to market fluctuation;
the value of the interests in Senior Loans and other portfolio debt securities
at delivery may be more or less than their purchase price, and yields generally
available on such interests or securities when delivery occurs may be higher or
lower than yields on the interests or securities obtained pursuant to such
transactions. Because the Fund relies on the buyer or seller, as the case may
be, to consummate the transaction, failure by the other party to complete the
transaction may result in the Fund missing the opportunity of obtaining a price
or yield considered to be advantageous. When the Fund is the buyer in such a
transaction, however, it will maintain, in a segregated account with its
custodian, cash or high-grade portfolio securities having an aggregate value
equal to the amount of such purchase commitments until payment is made. The Fund
will make commitments to purchase such interests or securities

31
<PAGE> 32

on such basis only with the intention of actually acquiring these interests or
securities, but the Fund may sell such interests or securities prior to the
settlement date if such sale is considered to be advisable. To the extent the
Fund engages in "when issued" and "delayed delivery" transactions, it will do so
for the purpose of acquiring interests or securities for the Fund's portfolio
consistent with the Fund's investment objective and policies and not for the
purpose of investment leverage. No specific limitation exists as to the
percentage of the Fund's assets which may be used to acquire securities on a
"when issued" or "delayed delivery" basis.

REPURCHASE AGREEMENTS

The Fund may enter into repurchase agreements (a purchase of, and a
simultaneous commitment to resell, a financial instrument at an agreed upon
price on an agreed upon date) only with member banks of the Federal Reserve
System and member firms of the New York Stock Exchange. When participating in
repurchase agreements, the Fund buys securities from a vendor, e.g., a bank or
brokerage firm, with the agreement that the vendor will repurchase the
securities at a higher price at a later date. Such transactions afford an
opportunity for the Fund to earn a return on available cash at minimal market
risk, although the Fund may be subject to various delays and risks of loss if
the vendor is unable to meet its obligation to repurchase. Under the 1940 Act,
repurchase agreements are deemed to be collateralized loans of money by the Fund
to the seller. In evaluating whether to enter into a repurchase agreement, the
Adviser will consider carefully the creditworthiness of the vendor. If the
member bank or member firm that is the party to the repurchase agreement
petitions for bankruptcy or otherwise becomes subject to the U.S. Bankruptcy
Code, the law regarding the rights of the Fund is unsettled. The securities
underlying a repurchase agreement will be marked to market every business day so
that the value of the collateral is at least equal to the value of the loan,
including the accrued interest thereon, and the Adviser will monitor the value
of the collateral. No specific limitation exists as to the percentage of the
Fund's assets which may be used to participate in repurchase agreements.

REVERSE REPURCHASE AGREEMENTS

The Fund may enter into reverse repurchase agreements with respect to debt
obligations which could otherwise be sold by the Fund. A reverse repurchase
agreement is an instrument under which the Fund may sell an underlying debt
instrument and simultaneously obtain the commitment of the purchaser (a
commercial bank or a broker or dealer) to sell the security back to the Fund at
an agreed upon price on an agreed upon date. The Fund will maintain in a
segregated account with its custodian cash or liquid high grade portfolio
securities in an amount sufficient to cover its obligations with respect to
reverse repurchase agreements. The Fund receives payment for such securities
only upon physical delivery or evidence of book entry transfer by its custodian.
Regulations of the SEC require either that securities sold by the Fund under a
reverse repurchase agreement be segregated pending repurchase or that the
proceeds be segregated on the Fund's books and records pending repurchase.
Reverse repurchase agreements could

32
<PAGE> 33

involve certain risks in the event of default or insolvency of the other party,
including possible delays or restrictions upon the Fund's ability to dispose of
the underlying securities. An additional risk is that the market value of
securities sold by the Fund under a reverse repurchase agreement could decline
below the price at which the Fund is obligated to repurchase them. Reverse
repurchase agreements will be considered borrowings by the Fund and as such
would be subject to the restrictions on borrowing described in the Statement of
Additional Information under "Investment Restrictions." The Fund will not hold
more than 5% of the value of its total assets in reverse repurchase agreements.

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TAXATION
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The following federal tax discussion is based on the advice of Skadden, Arps,
Slate, Meagher & Flom, reflects applicable tax laws as of the date of this
Prospectus and is qualified by reference to the additional federal income tax
discussion included in the Statement of Additional Information.

The Fund intends to qualify each year and to elect to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). If the Fund so qualifies and distributes each
year to its shareholders at least 90% of its net investment income (including,
among other things, interest and net short-term capital gains, but not net
capital gains, which are the excess of net long-term capital gains over net
short-term capital losses) in each year, the Fund will not be required to pay
federal income taxes on any income distributed to shareholders. The Fund will
not be subject to federal income tax on any net capital gains distributed to
shareholders. As a Massachusetts business trust, the Fund will not be subject to
any excise or income taxes in Massachusetts as long as it qualifies as a
regulated investment company for federal income tax purposes.

If the Fund failed to qualify as a regulated investment company or failed to
satisfy the 90% distribution requirement in any taxable year, the Fund would be
taxed as an ordinary corporation on its taxable income (even if such income were
distributed to its shareholders) and all distributions out of earnings and
profits would be taxed to shareholders as ordinary income.

Distributions. Distributions of the Fund's net investment income are taxable
to holders of Common Shares as ordinary income, whether paid in cash or
reinvested in additional Common Shares. Distributions of the Fund's net capital
gains ("capital gains dividends"), if any, are taxable to holders of Common
Shares at the rates applicable to long-term capital gains regardless of the
length of time shares of the Fund have been held by such shareholders. The Fund
will inform shareholders of the source and tax status of all distributions
promptly after the close of each calendar year.

Sale of Shares. Except as discussed below, selling shareholders will
generally recognize gain or loss in an amount equal to the difference between
their adjusted

33
<PAGE> 34

tax basis in the Common Shares and the amount received. If such Common Shares
are held as a capital asset, the gain or loss will be a capital gain or loss and
will be long-term if such Common Shares have been held for more than one year.
It is possible, although the Fund believes it is unlikely, that tendering
holders of Common Shares may not qualify for gain or loss treatment as described
above, which in turn may result in deemed distributions to non-tendering holders
of Common Shares. The federal income tax consequences of the repurchase of
Common Shares pursuant to tender offers will be disclosed in the related
offering documents. Any loss realized upon a taxable disposition of Common
Shares held for six months or less will be treated as a long-term capital loss
to the extent of any capital gains dividends received with respect to such
Common Shares. For purposes of determining whether Common Shares have been held
for six months or less, the holding period is suspended for any periods during
which the Common Shareholder's risk of loss is diminished as a result of holding
one or more other positions in substantially similar or related property or
through certain options or short sales.

General. The federal income tax discussion set forth above is for general
information only. Prospective investors should consult their advisors regarding
the specific federal and state tax consequences of holding and disposing of
Common Shares, as well as the effects of other state, local and foreign tax laws
and any proposed tax law changes.

- ------------------------------------------------------------------------------
MANAGEMENT OF THE FUND
- ------------------------------------------------------------------------------

BOARD OF TRUSTEES

The management of the Fund, including general supervision of the duties
performed by the Adviser under the Advisory Agreement, is the responsibility of
the Fund's Board of Trustees.

THE ADVISER

Van Kampen American Capital Investment Advisory Corp. (the "Adviser") is the
Fund's investment adviser. The Adviser is a wholly-owned subsidiary of Van
Kampen American Capital, Inc., which in turn is a wholly-owned subsidiary of
VK/AC Holding, Inc. VK/AC Holding, Inc. is indirectly controlled by Clayton &
Dubilier Associates IV Limited Partnership, the general partners of which are
Joseph L. Rice, III, B. Charles Ames, William A. Barbe, Alberto Cribiore, Donald
J. Gogel, Leon J. Hendrix, Jr., Hubbard C. Howe and Andrall E. Pearson, each of
whom is a principal of Clayton, Dubilier & Rice, Inc., a New York based private
investment partnership. The Adviser's principal office is located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181.

Van Kampen American Capital, Inc. is a diversified asset management company
with more than two million retail investor accounts, extensive capabilities for
managing institutional portfolios, and over $54 billion under management or
supervision. Van Kampen American Capital, Inc.'s 36 open-end and 38 closed-end

34
<PAGE> 35

funds and more than 2,800 unit investment trusts are professionally distributed
by leading financial advisers nationwide. In connection with advising the Fund,
the Adviser will utilize at its own expense credit analysis and research
services provided by its affiliate, McCarthy, Crisanti & Maffei ("MCM").

INVESTMENT ADVISORY AGREEMENT. The business and affairs of the Fund will be
managed under the direction of the Fund's Board of Trustees. Subject to their
authority, the Adviser and the Fund's officers will supervise and implement the
Fund's investment activities and will be responsible for overall management of
the Fund's business affairs. The investment advisory agreement (the "Advisory
Agreement") between the Adviser and the Fund provides that the Adviser will
supply investment research and portfolio management, including the selection of
securities for the Fund to purchase, hold, or sell and the selection of brokers
through whom the Fund's portfolio transactions are executed. The Adviser also
furnishes offices, necessary facilities and equipment and permits its officers
and employees to serve without compensation as Trustees and officers of the Fund
if duly elected to such positions. The Fund has reimbursed VKAC for costs
incurred in connection with the Fund's organization and its initial registration
of the common shares in the amount of $1,037,578. The Fund expects to incur
approximately $922,600 in expenses in connection with the offering of
225,000,000 Common Shares. A portion of such expenses will be charged as
operating expenses during the current period and the remainder will be amortized
over a period of not more than twelve months.

For the services provided by the Adviser under the Advisory Agreement, the
Fund will pay the Adviser an annualized fee (accrued daily and paid monthly)
equal to 0.95% of the average net assets of the Fund. The advisory fee, which
also covers the credit analysis and research services of MCM, is higher than the
fees paid by most management investment companies, although it is comparable to
the fees paid by several publicly offered, closed-end management investment
companies with investment objectives and policies similar to those of the Fund.

PORTFOLIO MANAGEMENT. Jeffrey W. Maillet is a Vice President of the Adviser
and has been primarily responsible for the day to day management of the Fund's
portfolio since the Fund's commencement of investment operations. Mr. Maillet
has been employed by the Adviser since 1989.

THE ADMINISTRATOR. The administrator for the Fund is VKAC (in such capacity,
the "Administrator"). Its principal business address is One Parkview Plaza,
Oakbrook Terrace, Illinois 60181. The Administrator is a wholly-owned subsidiary
of Van Kampen American Capital, Inc., which in turn is a wholly-owned subsidiary
of VK/AC Holding, Inc. The Administrator maintains offices and regional
representatives in major cities across the nation. VKAC is the principal
underwriter of the Common Shares in connection with the offering thereof by the
Fund. See "Purchase of Shares."

Pursuant to the administration agreement between the Fund and the
Administrator (the "Administration Agreement") and in consideration of its
administrative

35
<PAGE> 36

fee, the Administrator will (i) monitor the provisions of the Loan Agreements
and any agreements with respect to Participations and Assignments and be
responsible for recordkeeping with respect to Senior Loans in the Fund's
portfolio; (ii) arrange for the printing and dissemination of reports to holders
of Common Shares; (iii) arrange for the dissemination of the Fund's proxy and
any tender offer materials to holders of Common Shares, and oversee the
tabulation of proxies by the Fund's transfer agent; (iv) negotiate the terms and
conditions under which custodian services will be provided to the Fund and the
fees to be paid by the Fund in connection therewith; (v) negotiate the terms and
conditions under which dividend disbursing services will be provided to the
Fund, and the fees to be paid by the Fund in connection therewith and review the
provision of dividend disbursing services to the Fund; (vi) provide the Fund's
dividend disbursing agent and custodian with such information as is required for
such parties to effect payment of dividends and distributions and to implement
the Fund's dividend reinvestment plan; (vii) make such reports and
recommendations to the Board of Trustees as the Trustees reasonably request or
deem appropriate; and (viii) provide shareholder services to holders or
potential holders of the Fund's securities.

For the services rendered to the Fund and related expenses borne by the
Administrator, the Fund pays the Administrator a fee, accrued daily and paid
monthly, at the annualized rate of 0.25% of the Fund's average assets
(determined in the same manner as described above with respect to the Advisory
Agreement).

- ------------------------------------------------------------------------------
DISTRIBUTIONS
- ------------------------------------------------------------------------------

The Fund's present policy is to declare daily and pay monthly distributions to
holders of Common Shares of substantially all net investment income of the Fund.
Net investment income of the Fund consists of all interest income, fee income,
other ordinary income earned by the Fund on its portfolio assets and net
short-term capital gains, less all expenses of the Fund. Expenses of the Fund
are accrued each day. Distributions to holders of Common Shares cannot be
assured, and the amount of each monthly distribution is likely to vary. Net
realized long-term capital gains, if any, are expected to be distributed to
holders of Common Shares at least annually. Holders of Common Shares may elect
to have distributions automatically reinvested in additional Common Shares. See
"Dividend Reinvestments."

- ------------------------------------------------------------------------------
DIVIDEND REINVESTMENT PLAN
- ------------------------------------------------------------------------------

The Fund offers a Dividend Reinvestment Plan (the "Plan") pursuant to which
Common Shareholders may elect to have all distributions of dividends and all
capital gains automatically reinvested in Common Shares pursuant to the Plan.
Unless Common Shareholders elect to participate in the Plan, all Common
Shareholders will receive distributions of dividends and capital gains in cash.

36
<PAGE> 37

State Street Bank and Trust Company, as plan agent (the "Plan Agent"), serves
as agent for the Common Shareholders in administering the Plan. Participants in
the Plan will receive the equivalent in Common Shares valued on the valuation
date, at net asset value. The valuation date will be the dividend or
distribution payment date or, if that date is not a business day, the next
preceding business day.

The Plan Agent maintains each Common Shareholder's account in the Plan and
furnishes monthly written confirmations of all transactions in the accounts,
including information needed by Common Shareholders for personal and tax
records. Common Shares in the account of each Plan participant will be held by
the Plan Agent in non-certificated form in the name of the participant, and each
Common Shareholder's proxy will include those Common Shares purchased pursuant
to the Plan. The Plan Agent's fees for the handling of the reinvestment of
dividends and distributions will be paid by the Fund.

In the case of Common Shareholders, such as banks, brokers or nominees, which
hold Common Shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of Common Shares certified from
time to time by the record Common Shareholders as representing the total amount
registered in the record Common Shareholder's name and held for the account of
beneficial owners who are participating in the Plan.

The automatic reinvestment of dividends and distributions will not relieve
participants of any federal income tax that may be payable or required to be
withheld on such dividends or distributions.

Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan as
applied to any dividend or distribution paid subsequent to written notice of the
change sent to all Common Shareholders of the Fund at least 90 days before the
record date for the dividend distribution. The Plan also may be amended or
terminated by the Plan Agent by at least 90 days written notice to all Common
Shareholders of the Fund.

All registered Common Shareholders (other than brokers or nominees) will be
mailed information regarding the Plan, including a form with which they may
elect to participate in the Plan. Shareholders who intend to hold their Common
Shares through a broker or nominee should contact such person to confirm that
they may participate in the Plan and to determine the effect, if any, that a
transfer of the account by the shareholder to another broker or nominee will
have on continued participation in the Plan. A Common Shareholder may withdraw
from the Plan at any time by contacting the Plan Agent at the address or
telephone number set forth below. There is no penalty for non-participation in
or withdrawal from the Plan, and Common Shareholders who have previously
withdrawn from the Plan may rejoin it at any time. Changes in elections should
be directed to the Plan Agent and should include the name of the Fund and the
Common Shareholder's name and address as registered. An election to withdraw
from the Plan will, until such election is changed, be deemed to be an election
by a Common Shareholder to take all

37
<PAGE> 38

subsequent dividends and distributions in cash. Elections will only be effective
for dividends and distributions declared after, and with a record date of at
least ten days after, such elections are received by the Plan Agent. When a
participant withdraws from the Plan or upon termination of the Plan as provided
above, certificates for whole Common Shares credited to his or her account under
the Plan will be issued and a cash payment will be made for any fraction of a
Common Share credited to such account. All correspondence concerning the Plan
should be directed to the Plan Agent at P.O. Box 8200, Boston, MA 02101.
Telephone calls concerning the Plan may be directed to the Plan Agent between
the hours of 7:30 a.m. and 5:00 p.m. Central Standard Time at (800) 341-2929.

DIVIDEND DIVERSIFICATION. A shareholder also may, upon written request or by
completing the appropriate section of the application form accompanied by this
Prospectus or by calling (800) 421-5666 ((800) 772-8889 for the hearing
impaired), elect to have all dividends and other distributions paid on Common
Shares of the Fund invested into shares of certain mutual funds advised by the
Adviser or its affiliates so long as a pre-existing account for such shares
exists for the shareholder. A shareholder may call the phone numbers shown above
to obtain a list of the mutual funds available and to request current
prospectuses.

If the qualified pre-existing account does not exist, the shareholder must
establish a new account subject to minimum investment and other requirements of
the fund into which distributions would be invested. Distributions are invested
into the selected fund at its net asset value as of the payable date of the
distribution only if shares of such selected fund have been registered for sale
in the investor's state.

- ------------------------------------------------------------------------------
REPURCHASE OF SHARES
- ------------------------------------------------------------------------------

The Board of Trustees of the Fund currently intends, each quarter, to consider
authorizing the Fund to make tender offers for all or a portion of its then
outstanding Common Shares at the net asset value of the Common Shares on the
expiration date of the tender offer. Although such tender offers, if undertaken
and completed, will provide some liquidity for holders of the Common Shares,
there can be no assurance that such tender offers will in fact be undertaken or
completed or, if completed, that they will provide sufficient liquidity for all
holders of Common Shares who may desire to sell such Common Shares. As such,
investment in the Common Shares should be considered illiquid. As of the date of
this Prospectus, the Fund has commenced and consummated tender offers in each
quarter since the commencement of investment operations. An early withdrawal
charge payable to VKAC will be imposed on most Common Shares accepted for tender
by the Fund which have been held for less than five years, as described below.

38
<PAGE> 39

Although the Board of Trustees believes that tender offers for the Common
Shares generally would increase the liquidity of the Common Shares, the
acquisition of Common Shares by the Fund will decrease the total assets of the
Fund and, therefore, have the effect of increasing the Fund's expense ratio.
Because of the nature of the Fund's investment objective and policies and the
Fund's portfolio, the Adviser anticipates potential difficulty in disposing of
portfolio securities in order to consummate tender offers for the Common Shares.
As a result, the Fund may be required to borrow money in order to finance
repurchases and tenders.

The Fund's Declaration of Trust authorizes the Fund, without prior approval of
the holders of Common Shares, to borrow money in an amount up to 33 1/3% of the
Fund's total assets, for the purpose of, among other things, obtaining
short-term credits in connection with tender offers by the Fund for Common
Shares. In this connection, the Fund may issue notes or other evidence of
indebtedness or secure any such borrowings by mortgaging, pledging or otherwise
subjecting as security the Fund's assets. Under the requirements of the 1940
Act, the Fund, immediately after any such borrowing, must have an "asset
coverage" of at least 300%. With respect to any such borrowing, asset coverage
means the ratio which the value of the total assets of the Fund, less all
liabilities and indebtedness not represented by senior securities (as defined in
the 1940 Act), bears to the aggregate amount of such borrowing by the Fund. The
rights of lenders to the Fund to receive interest on and repayment of principal
of any such borrowings will be senior to those of the holders of Common Shares,
and the terms of any such borrowings may contain provisions which limit certain
activities of the Fund, including the payment of dividends to holders of Common
Shares in certain circumstances. Further, the terms of any such borrowing may
and the 1940 Act does (in certain circumstances) grant to the lenders to the
Fund certain voting rights in the event of default in the payment of interest on
or repayment of principal. In the event that such provisions would impair the
Fund's status as a regulated investment company, the Fund, subject to its
ability to liquidate its relatively illiquid portfolio, intends to repay the
borrowings. Any borrowing will likely rank senior to or pari passu with all
other existing and future borrowings of the Fund. Interest payments and fees
incurred in connection with borrowings will reduce the amount of net income
available for payment to the holders of Common Shares. The Fund does not intend
to use borrowings for leverage purposes. Accordingly, the Fund will not purchase
additional portfolio securities at any time that borrowings, including the
Fund's commitments, pursuant to reverse repurchase agreements, exceed 5% of the
Fund's total assets (after giving effect to the amount borrowed).

The Fund has entered into a Credit Agreement with Morgan Guaranty Trust
Company of New York ("Morgan") pursuant to which Morgan has agreed to provide a
credit facility in the maximum amount of $50,000,000 to the Fund. The credit
facility provided by Morgan will terminate on January 26, 1996, unless extended
pursuant to the terms thereof. The Fund has entered into a revolving credit
agreement with Bank of America Illinois, formerly known as Continental Bank N.A.
("Bank of America") pursuant to which Bank of America has agreed to

39
<PAGE> 40

provide a credit facility in the maximum amount of $25,000,000 to the Fund. The
credit facility provided by Bank of America will terminate on December 13, 1995,
unless extended by its terms. The Fund is also a party to a letter agreement
with State Street Bank and Trust Company ("State Street") pursuant to which
State Street has agreed to provide a credit facility in the maximum amount of
$25,000,000 to the Fund. The credit facility provided by State Street will
terminate on February 28, 1996, unless extended by its terms. As of the date of
this Prospectus, the Fund had not borrowed any amounts pursuant to the credit
agreements with Morgan, State Street and Bank of America. See "Repurchase of
Shares" in the Statement of Additional Information.

Should the Fund determine to make a tender offer for its Common Shares, a
notice describing the tender offer, containing information shareholders should
consider in deciding whether to tender their Common Shares and including
instructions on how to tender Common Shares will be sent to shareholders of
record. Information concerning the purchase price to be paid by the Fund and the
manner in which shareholders may ascertain net asset value during the pendency
of a tender offer will also be set forth in the notice. The Fund will purchase
all Common Shares tendered in accordance with the terms of the offer unless it
determines to terminate the offer. Costs associated with the tender will be
charged against capital. See the Statement of Additional Information for
additional information concerning repurchase of Common Stock.

Upon the death of a holder of Common Shares, VKAC will waive any early
withdrawal charge (discussed below) applicable to the first $100,000 worth of
such holder's Common Shares repurchased pursuant to a tender offer commenced
within one year of such holder's death; provided that the Transfer Agent has
received, on VKAC's behalf, proper notice of the death of such holder. For this
purpose, the Transfer Agent will be deemed to have received proper notice of
such holder's death upon its receipt of (i) a duly executed Letter of
Transmittal duly submitted in connection with a tender offer, (ii) a written
request for waiver of the early withdrawal charge, in form satisfactory to the
Transfer Agent, signed by the holder's duly authorized representative or
surviving tenant, (iii) appropriate evidence of death and (iv) appropriate
evidence of the authority of the representative of the deceased holder or
surviving tenant. Common Shares held in joint tenancy or tenancy in common will
be deemed to be held by a single holder (which may be either tenant in the case
of joint tenancy) and the death of any such tenant will be deemed to be the
death of such holder of Common Shares. Information concerning the waiver of the
early withdrawal charge may be obtained by contacting the Fund.

If the Fund must liquidate portfolio holdings in order to purchase Common
Shares tendered, the Fund may realize gains and losses. Such gains may be
realized on securities held for less than three months. Due to the requirement
for qualification as a regulated investment company under the Code that less
than 30% of the Fund's annual gross income be derived from the disposition of
securities held for less than three months, the Fund may not be able to sell
portfolio holdings held for

40
<PAGE> 41

less than three months that the Fund may wish to sell in the ordinary course of
its portfolio management, which may affect adversely the Fund's yield.

EARLY WITHDRAWAL CHARGE. An early withdrawal charge to recover offering
expenses will be charged in connection with most Common Shares held for less
than five years which are accepted by the Fund for repurchase pursuant to tender
offers. The early withdrawal charge will be imposed on a number of Common Shares
accepted for tender from a record holder of Common Shares the value of which
exceeds the aggregate value at the time the tender is accepted of (a) all Common
Shares owned by such holder that were purchased more than five years prior to
such acceptance, (b) all Common Shares owned by such holder that were acquired
through reinvestment of distributions, and (c) the increase, if any, of value of
all other Common Shares owned by such holder (namely those purchased within the
five years preceding the acceptance) over the purchase price of such Common
Shares. The early withdrawal charge will be paid to VKAC. For the fiscal years
ended July 31, 1993, 1994 and 1995, VKAC received payments totalling $1,354,000,
$2,100,000 and $1,469,000 respectively pursuant to the early withdrawal charge.
In determining whether an early withdrawal charge is payable, it is assumed that
the acceptance of a repurchase offer would be made from the earliest purchase of
Common Shares. Any early withdrawal charge which is required to be imposed will
be made in accordance with the following schedule.

<TABLE>
<CAPTION>
YEAR OF REPURCHASE
AFTER PURCHASE EARLY WITHDRAWAL CHARGE
- --------------------------------------------------- -----------------------
<S> <C> <C>
First........................................ 3.0%
Second....................................... 2.5%
Third........................................ 2.0%
Fourth....................................... 1.5%
Fifth........................................ 1.0%
Sixth and following.......................... 0.0%
</TABLE>

The following example will illustrate the operation of the early withdrawal
charge. Assume that an investor purchases $10,000 worth of the Fund's Common
Shares for cash through VKAC and that 21 months later the value of the account
has grown through the reinvestment of dividends and capital appreciation to
$12,000. The investor then may submit for repurchase pursuant to a tender offer
up to $2,000 worth of Common Shares without incurring an early withdrawal
charge. If the investor should submit for repurchase pursuant to a tender offer
$5,000 worth of Common Shares, an early withdrawal charge would be imposed on
$3,000 worth of the Common Shares submitted. The charge would be imposed at the
rate of 2.5% because it is in the second year after the purchase was made and
the charge would be $75.

41
<PAGE> 42

- ------------------------------------------------------------------------------
DESCRIPTION OF COMMON SHARES
- ------------------------------------------------------------------------------

The Fund is an unincorporated business trust established under the laws of the
Commonwealth of Massachusetts by a Declaration of Trust dated July 14, 1989, as
amended and restated on September 19, 1989 (the "Declaration of Trust"). The
Declaration of Trust provides that the Trustees of the Fund may authorize
separate classes of shares of beneficial interest. The Trustees have authorized
an unlimited number of Common Shares. The Declaration of Trust also authorizes
the Fund to borrow money or otherwise obtain credit and in this connection issue
notes or other evidence of indebtedness. The Fund does not intend to hold annual
meetings of the holders of Common Shares.

COMMON SHARES. The Declaration of Trust permits the Fund to issue an
unlimited number of full and fractional Common Shares of beneficial interest,
$.01 par value per Common Share. Each Common Share represents an equal
proportionate interest in the assets of the Fund with each other Common Share in
the Fund. Holders of Common Shares will be entitled to the payment of dividends
when, as and if declared by the Board of Trustees. The terms of any borrowings
may limit the payment of dividends to the holders of Common Shares. Each whole
Common Share shall be entitled to one vote as to matters on which it is entitled
to vote pursuant to the terms of the Fund's Declaration of Trust on file with
the SEC. Upon liquidation of the Fund, after paying or adequately providing for
the payment of all liabilities of the Fund, and upon receipt of such releases,
indemnities and refunding agreements as they deem necessary for their
protection, the Trustees may distribute the remaining assets of the Fund among
the holders of the Common Shares. The Declaration of Trust provides that
shareholders are not liable for any liabilities of the Fund, requires inclusion
of a clause to that effect in every agreement entered into by the Fund and
indemnifies shareholders against any such liability. Although shareholders of an
unincorporated business trust established under Massachusetts law, in certain
limited circumstances, may be held personally liable for the obligations of the
Trust as though they were general partners, the provisions of the Declaration of
Trust described in the foregoing sentence make the likelihood of such personal
liability remote.

As a rule, the Fund will not issue share certificates. However, upon written
request to the Transfer Agent, a Share certificate will be issued for any or all
of the full Common Shares credited to an investor's account. Share certificates
which have been issued to an investor may be returned at any time.

The Common Shares are not, and are not expected to be, listed for trading on
any national securities exchange nor, to the Fund's knowledge, is there, or is
there expected to be, any secondary trading market in the Common Shares. The
following table sets forth, since the commencement of the Fund's investment
operations, for

42
<PAGE> 43

the quarterly periods ending on the dates set forth below the high and low net
asset value per Common Share during such period.

<TABLE>
<CAPTION>
QUARTERLY PERIOD ENDING HIGH LOW
- ----------------------------------------------- ------ ------
<S> <C> <C>
September 30, 1995............................. $10.05 $10.04
June 30, 1995.................................. 10.05 10.03
March 31, 1995................................. 10.07 10.02
December 31, 1994.............................. $10.06 $10.04
September 30, 1994............................. 10.05 10.03
June 30, 1994.................................. 10.05 10.03
March 31, 1994................................. 10.07 10.05
December 31, 1993.............................. $10.07 $10.00
September 30, 1993............................. 10.01 9.99
June 30, 1993.................................. 10.06 9.99
March 31, 1993................................. 10.06 10.04
December 31, 1992.............................. $10.04 $ 9.97
September 30, 1992............................. 10.02 9.99
June 30, 1992.................................. 10.01 9.98
March 31, 1992................................. 10.02 10.00
December 31, 1991.............................. $10.01 $ 9.99
September 30, 1991............................. 9.99 9.98
</TABLE>

As of October 5, 1995, the net asset value per Common Share was $10.04. The
following table sets forth certain information with respect to the Common Shares
as of October 5, 1995:

<TABLE>
<CAPTION>
(3)
AMOUNT (4)
HELD AMOUNT
BY OUTSTANDING
FUND EXCLUSIVE
FOR OF
(2) ITS AMOUNT
(1) AMOUNT OWN SHOWN
TITLE OF CLASS AUTHORIZED ACCOUNT UNDER (3)
- -------------------------------- --------- --- -----------
<S> <C> <C> <C>
Common Shares of beneficial
interest, $.01 par value unlimited 0 298,525,974
</TABLE>

To the knowledge of the Fund, as of October 5, 1995, no person held 5% or more
of the Fund's Common Shares either beneficially or of record. Further, as of
such date, officers and trustees of the Fund as a group owned less than 1% of
the Common Shares.

ANTI-TAKEOVER PROVISIONS IN THE DECLARATION OF TRUST. The Fund's Declaration
of Trust includes provisions that could have the effect of limiting the ability
of other entities or persons to acquire control of the Fund or to change the
composition of its Board of Trustees by discouraging a third party from seeking
to obtain control of the Fund. In addition, in the event a secondary market were
to develop in the Common Shares, such provisions could have the effect of
depriving holders of Common Shares of an opportunity to sell their Common Shares
at a premium over prevailing

43
<PAGE> 44

market prices. A Trustee may be removed from office only for cause by a written
instrument signed by at least two-thirds of the remaining Trustees or by a vote
of the holders of at least two-thirds of the Common Shares.

In addition, the Declaration of Trust requires the favorable vote of the
holders of at least two-thirds of the outstanding Common Shares then entitled to
vote to approve, adopt or authorize certain transactions with 5%-or-greater
holders of Common Shares and their associates, unless the Board of Trustees
shall by resolution have approved a memorandum of understanding with such
holders, in which case normal voting requirements would be in effect. See
"Repurchase of Shares--Anti-takeover Provisions" in the Statement of Additional
Information.

- ------------------------------------------------------------------------------
PURCHASING SHARES OF THE FUND
- ------------------------------------------------------------------------------

The Fund offers continuously its Common Shares through VKAC, the principal
underwriter of the continuous offering of the Common Shares, whose offices are
located at One Parkview Plaza, Oakbrook Terrace, Illinois 60181. The Common
Shares will also be offered through members of the National Association of
Securities Dealers, Inc. ("NASD") or eligible non-NASD members who are acting as
brokers or agents for investors ("broker-dealers"). The Fund reserves the right
to terminate or suspend the continuous offering of its Shares at any time
without prior notice.

The Fund does not intend to list the Common Shares on any national securities
exchange and none of the Fund, the Adviser or VKAC, intends to make a secondary
market in the Common Shares. Accordingly, there is not expected to be any
secondary trading market in the Common Shares and an investment in the Common
Shares should be considered illiquid.

Except as discussed below under "Investments by Tax Sheltered Retirement
Plans," the minimum initial investment in the Fund is $1,000 and minimum
subsequent investment is $100.

During the continuous offering, the Common Shares will be offered by the Fund
at the public offering price next computed after an investor places an order to
purchase directly with VKAC, or with the investor's broker-dealer. The price of
Common Shares ordered through an investor's broker-dealer will be the public
offering price next determined after the Fund receives the order. Because the
Fund determines the public offering price once daily on each business day as of
5:00 p.m. Eastern time, orders placed through an investor's broker-dealer must
be transmitted to the Fund by the broker-dealer prior to such time for the
investor's order to be executed at the public offering price to be determined
that day. Any change in price due to the failure of the Fund to receive an order
prior to such time must be settled between the investor and the broker-dealer
placing the order. The public offering price is equal to the net asset value per
Common Share. There will be no initial sales charge or underwriting discount on
purchases of Common Shares.

44
<PAGE> 45

VKAC will compensate broker-dealers participating in the continuous offering
at a rate of 3.0% of the dollar value of Common Shares purchased from the Fund
by such broker-dealers. If the Common Shares remain outstanding after one year
from the date of their original purchase, VKAC will compensate such
broker-dealers at an annual rate, paid quarterly, in an amount based on a
percentage of the value of such Common Shares, in accordance with the following
schedule:

<TABLE>
<CAPTION>
ANNUAL
COMPENSATION AS A
YEAR AFTER DATE PERCENTAGE OF VALUE
OF ORIGINAL PURCHASE OF SHARES OUTSTANDING
- --------------------------------------------------- -----------------------
<S> <C>
First.............................................. 0.00%
Second............................................. 0.10%
Third.............................................. 0.15%
Fourth............................................. 0.20%
Fifth.............................................. 0.25%
Sixth and following................................ 0.35%
</TABLE>

At various times VKAC may implement programs under which a broker-dealer's sales
force may be eligible to win nominal awards for certain sales efforts. The value
of any such non-cash awards will not exceed $50 per person annually. These
incentives will not change the price investors pay for Common Shares or the
amount that the Fund will receive from the sale of Common Shares. The
compensation paid to broker-dealers at the time of purchase, the quarterly
payments mentioned above will be paid by VKAC out of its own assets, and not out
of the assets of the Fund. An early withdrawal charge payable to VKAC will be
imposed on most Common Shares held for less than five years that are accepted
for repurchase pursuant to a tender offer by the Fund. See "Repurchase of
Shares." The compensation paid to broker-dealers and VKAC, including the
compensation paid at the time of purchase, the quarterly payments mentioned
above and the early withdrawal charge, if any, will not in the aggregate exceed
applicable limitations, which the Fund currently understands to be 8.0%. VKAC
will monitor the aggregate value of all such compensation on an ongoing basis.

Automatic Investment. Once an investor has opened an account in the Fund with
the minimum $1,000 investment, the automatic investment option may be utilized
to make regular monthly investments of $100 or more into such investor's account
with the Fund. In order to utilize this option, an investor must fill out and
sign the Automatic Investment application bound in this Prospectus or available
from the Transfer Agent, the Fund, such investor's broker or dealer, or VKAC.
Once the Transfer Agent has received this application, such investor's checking
account at his designated local bank will be debited each month in the amount
authorized by such investor to purchase shares of the Fund. Once enrolled in the
Automatic Investment Program, an investor may change the monthly amount or
terminate participation at any time by writing the Transfer Agent. Investors in
the automatic investment program will receive a confirmation of these
transactions from the Fund

45
<PAGE> 46

quarterly and their regular bank account statements will show the debit
transaction each month.

Investments by Tax-Sheltered Retirement Plans. Common Shares are available for
purchase in connection with certain types of tax-sheltered retirement plans,
including: Individual Retirement Accounts ("IRA's") for individuals; Simplified
Employee Pension Plans ("SEP's") for employees; qualified plans for
self-employed individuals; and qualified corporate pension and profit sharing
plans for employees.

The purchase of shares of the Fund may be limited by the plans' provisions and
does not itself establish such plans. The minimum initial investment in
connection with a tax-sheltered retirement plan is $250.

IRAs are available for individuals under age 70 1/2 whether or not they are
active participants in any other tax-qualified employer plan. Generally,
individuals who are not active participants in a tax-qualified employer plan may
deduct from gross income their IRA contributions which do not exceed 100% of
compensation received during a year or $2,000 ($2,250 for a spousal account),
whichever is less. If an employee or the employee's spouse is an active
participant in a tax-qualified employer plan, the IRA deduction is phased out
above certain income levels. Individuals may, however, make non-deductible
contributions to their IRAs up to the lesser of 100% of annual compensation or
$2,000 ($2,250 for a spousal account) without being subject to an excise tax on
excessive contributions. Generally, earnings on investments held in an IRA are
not taxable until withdrawn. Subject to certain exceptions, substantial tax
penalties apply to withdrawals before age 59 1/2.

A SEP is a retirement program established by an employer (including
individuals) for the benefit of its eligible employees. Generally, any employee
who has attained age 21, worked for the employer during three of the past five
years and earned a specified amount from the employer in the current year will
be eligible to participate. Under a SEP, each participant establishes an IRA to
which the sponsoring employer makes annual calendar year contributions.
Generally, those contributions cannot exceed the lesser of $30,000 or 15% of the
participant's compensation for the year. A participating employee may also make
his or her IRA contribution to the same account. Generally, earnings on accounts
held in an IRA established pursuant to a SEP are not taxable until withdrawn.
Subject to certain exceptions, substantial tax penalties apply to withdrawals
before attainment of age 59 1/2.

Common Shares may also be purchased by employer sponsored tax qualified
retirement plans which allow for investments in investment companies. A
standardized plan is available through securities dealers or brokers, the Fund,
or VKAC for employers (including individuals) who desire to start or amend a
retirement plan. The form of this standardized plan has been determined to be
"qualified" under the Internal Revenue Code. An employer may use this prototype
to establish a profit sharing plan, a money purchase pension plan or both for
its eligible employees. The cost for the use of the prototype is an initial fee
of $50 and there are no annual fees.

46
<PAGE> 47

The adopting employer determines within the prescribed limits the eligibility
standards, rate of contributions and other significant provisions of the
prototype plan. VKAC, as sponsor of this prototype plan, reserves the right to
amend such plan from time to time to assure its continued qualification under
the Internal Revenue Code or for other reasons. Employers adopting this
prototype plan will be bound by such amendments.

Shareholders considering establishing a retirement plan or purchasing any Fund
shares in connection with a retirement plan, should consult with their attorney
or tax advisor with respect to plan requirements and tax aspects pertaining to
the shareholder.

The illiquid nature of the Fund's Common Shares may affect the nature of
distributions from tax sheltered retirement plans and may affect the ability of
participants in such plans to rollover assets to other tax sheltered retirement
plans.
- ------------------------------------------------------------------------------
COMMUNICATIONS WITH SHAREHOLDERS
- ------------------------------------------------------------------------------

The Fund will send semi-annual and annual reports to shareholders, including a
list of the portfolio investments held by the Fund.

From time to time advertisements and other sales materials for the Fund may
include information concerning the historical performance of the Fund. Any such
information may include a distribution rate and an average compounded
distribution rate of the Fund for specified periods of time. Such information
may also include performance rankings and similar information from independent
organizations such as Lipper Analytical Services, Inc., Business Week, Forbes or
other industry publications.

The Fund's distribution rate generally is determined on a monthly basis with
respect to the immediately preceding monthly distribution period. The
distribution rate is computed by first annualizing the Fund's distributions per
Share during such a monthly distribution period and dividing the annualized
distribution by the Fund's maximum offering price per Share on the last day of
such period. The Fund calculates the compounded distribution rate by adding one
to the monthly distribution rate, raising the sum to the power of 12 and
subtracting one from the product. In circumstances in which the Fund believes
that, as a result of decreases in market rates of interest, its expected monthly
distributions may be less than the distributions with respect to the immediately
preceding monthly distribution period, the Fund reserves the right to calculate
the distribution rate on the basis of a period of less than one month.

Distribution rate and compounded distribution rate figures utilized by the
Fund are based on historical performance and are not intended to indicate future
performance. Distribution rate, compounded distribution rate and net asset value
per share can be expected to fluctuate over time.

47
<PAGE> 48

The following table is intended to provide investors with a comparison of
short-term money market rates. This comparison should not be considered a
representation of future money market rates, nor what an investment in the Fund
may earn or what an investor's yield or total return may be in the future. These
comparisons may be used in advertisements and in information furnished to
present or prospective shareholders.

<TABLE>
<CAPTION>
COMPARISON OF PRIME RATE,
CERTIFICATE OF DEPOSIT RATE, MONEY MARKET RATE AND
LONDON INTER-BANK OFFERED RATE
(AVERAGE OF CALENDAR YEAR)
---------------------------------------------------------------------------------------------
1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
----- ----- ----- ---- ---- ---- ---- ----- ----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Prime
Rate(1)...... 15.06% 10.78% 12.06% 9.99% 8.38% 8.15% 9.24% 10.88% 10.01% 8.46% 6.25% 6.00% 8.50%
C.D.
Rate(2)...... 12.57 9.27 10.68 8.25 6.51 7.01 7.91 9.08 8.17 5.91 3.76 3.28 6.90
Money Market
Rate(3)...... 11.70 8.20 9.58 7.50 6.17 5.89 6.77 8.53 7.82 5.44 3.36 2.70 3.75
LIBOR(4)...... 9.18 9.81 8.75 8.00 6.37 7.43 9.62 8.37 7.56 4.25 3.43 3.37 6.50
</TABLE>

- ---------------
(1) The Prime Rate quoted by a major U.S. bank is the base rate on corporate
loans at large U.S. money center commercial banks. Source: Federal Reserve
Bulletin.

(2) The Certificate of Deposit Rate represents the average annual rate paid on
large six-month CDs traded in the secondary market. Source: Bloomberg.

(3) The Money Market Rate represents Donoghue's Money Fund Averages for taxable
money market funds.

(4) The London Inter-Bank Offered Rate represents the rate at which most
creditworthy international banks dealing in Eurodollars charge each other
for large loans. Source: Bloomberg.

- ------------------------------------------------------------------------------
CUSTODIAN, DIVIDEND DISBURSING AND TRANSFER AGENT
- ------------------------------------------------------------------------------

State Street Bank and Trust Company, 225 Franklin Street, P.O. Box 1713,
Boston, Massachusetts 02105-1713, is the custodian of the Fund and has custody
of the securities and cash of the Fund. The custodian, among other things,
attends to the collection of principal and income and payment for and collection
of proceeds of securities bought and sold by the Fund. State Street Bank and
Trust Company also will perform certain accounting services for the Fund
pursuant to the Fund Accounting Agreement between it and the Fund. ACCESS
Investor Services, Inc., P.O. Box 418256, Kansas City, Missouri 64141-9256 is
the dividend disbursing and transfer agent of the Fund.

- ------------------------------------------------------------------------------
LEGAL OPINIONS
- ------------------------------------------------------------------------------

Certain legal matters in connection with the Common Shares offered hereby have
been passed upon for the Fund by Skadden, Arps, Slate, Meagher & Flom.

48
<PAGE> 49

- ------------------------------------------------------------------------------
EXPERTS
- ------------------------------------------------------------------------------

The financial statements for the period ended July 31, 1995, included in the
Statement of Additional Information, have been so included in reliance on the
report of KPMG Peat Marwick LLP, independent certified public accountants, given
on the authority of said firm as experts in auditing and accounting.

- ------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- ------------------------------------------------------------------------------

The Prospectus and the Statement of Additional Information do not contain all
of the information set forth in the Registration Statement that the Fund has
filed with the SEC. The complete Registration Statement may be obtained from the
SEC upon payment of the fee prescribed by its Rules and Regulations.

Statements contained in this Prospectus as to the contents of any contract or
other documents referred to are not necessarily complete, and, in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement of which this Prospectus forms a part,
each such statement being qualified in all respects by such reference.

The Table of Contents for the Statement of Additional Information is as
follows:

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies and Special Risk
Considerations................................................ B-2
Investment Restrictions......................................... B-8
Officers and Trustees........................................... B-10
Portfolio Transactions.......................................... B-13
Management of the Fund.......................................... B-14
Net Asset Value................................................. B-16
Taxation........................................................ B-17
Repurchase of Shares............................................ B-20
Independent Auditors' Report.................................... B-24
Financial Statements for the Year Ended July 31, 1995........... B-25
Notes to Financial Statements................................... B-36
</TABLE>

49
<PAGE> 50

EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE
CALL THE FUND'S TOLL-FREE
NUMBER 1-800-421-5666.

PROSPECTIVE INVESTORS--CALL
YOUR BROKER OR 1-800-421-5666.

DEALERS--FOR DEALER
INFORMATION, CALL
1-800-421-5666. FOR WIRE ORDERS
CALL ACCESS INVESTOR
SERVICES, INC.'S TOLL FREE
NUMBER--1-800-231-7166

FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)
DIAL 1-800-772-8889

FOR AUTOMATED TELEPHONE
SERVICES DIAL 1-800-847-2424
VAN KAMPEN AMERICAN CAPITAL
PRIME RATE INCOME TRUST
One Parkview Plaza
Oakbrook Terrace, IL 60181

Investment Adviser

VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
One Parkview Plaza
Oakbrook Terrace, IL 60181

Principal Underwriter

VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181

Dividend Disbursing and Transfer Agent

ACCESS INVESTOR
SERVICES, INC.
P.O. BOX 418256
Kansas City, MO 64141-9256
Attn: Van Kampen American Capital
Prime Rate Income Trust

Custodian

STATE STREET BANK AND
TRUST COMPANY
225 Franklin Street, P.O. Box 1713
Boston, MA 02105-1713

Legal Counsel

SKADDEN, ARPS, SLATE,
MEAGHER & FLOM
333 West Wacker Drive
Chicago, IL 60606

Independent Auditors

KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 51

PRIME RATE
INCOME TRUST

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

P R O S P E C T U S

NOVEMBER 13, 1995

------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH
- ------
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------