Putnam
Investment
Grade
Municipal
Trust II
SEMIANNUAL REPORT
October 31, 1994
[LOGO]
BOSTON * LONDON * TOKYO
<PAGE>
Performance highlights
The new year is expected to feature more than $200 billion in
(municipal bond) calls and redemptions. . . Add to this the
stock market correction that is in mind, if not in sight, and
the prospects for a rally in the municipal market do not seem
so farfetched.
- -- Grant's Municipal Bond Observer, November 11, 1994.
Performance should always be considered in light of a fund's
investment strategy. Putnam Investment Grade Municipal Trust II
is designed for investors seeking high current income free from
federal income tax, consistent with preservation of capital.
FISCAL 1994 RESULTS AT A GLANCE
<TABLE><CAPTION>
<S> <C> <C>
- ---------------------------------------------------------------
Total return NAV Market price
- ---------------------------------------------------------------
(change in value during period
plus reinvested distributions)
6 months ended 10/31/94 -0.91% -8.92%
- ---------------------------------------------------------------
Share value NAV Market price
- ---------------------------------------------------------------
4/30/94 $14.30 $13.250
10/31/94 13.65 11.625
- ---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Capital gains(1)
Distributions No. Income Longterm Shortterm Total
- ---------------------------------------------------------------
6 months ended 10/31/94
Common shares 6 $0.48 $0.00 $0.00 $0.48
Preferred shares
Series A (630) $0.812
Series B (630) $0.987
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
Taxable equivalent(2)
Market Market
Current return NAV price NAV price
- ---------------------------------------------------------------
End of period
common shares
Current dividend rate(3) 7.03% 8.26% 11.64% 13.68%
- ---------------------------------------------------------------
<FN>
Performance data represent past results. For performance over
longer periods, see pages 8 and 9. (1)Capital gains are taxable
for federal and, in most cases, state tax purposes. For some
investors, investment income may also be subject to the federal
Alternative Minimum Tax. Investment income may be subject to
state and local taxes. (2)Assumes maximum 39.6% federal tax
rate. Results for investors subject to lower tax rates would
not be as advantageous. (3)Income portion of most recent
distribution, annualized and divided by NAV or market price at
end of period.
</TABLE>
<PAGE>
From the Chairman
[PHOTO]
(c) Karsh, Ottawa
Dear Shareholder:
When markets turn down, investors with vision look beyond the
unfolding negatives for opportunities farther down the road.
Throughout the first half of Putnam Investment Grade Municipal
Trust II's fiscal year, there was plenty to obstruct the view.
The six months ended October 31, 1994, began in the midst of a
bond market decline touched off by the Federal Reserve Board's
increase in short-term interest rates. Had Fund Manager Michael
Bouscaren not taken defensive action some months earlier, the
toll on performance would likely have been greater. Even so,
the fund joined most other fixed-income investments in the
widespread decline.
But Mike sees potential for recovery. Supplies may become
tighter as fewer issues come to market and more investors seek
tax relief. Many sectors of the tax-exempt market, including
health care, education, and resource recovery, are poised for
growth. Both signs bode well for municipal bond investors.
Mike will focus on these positive factors as he seeks out the
most promising opportunities for your fund. His report on your
fund's fiscal '95 first-half performance follows.
Respectfully yours,
/s/ George Putnam
George Putnam
Chairman of the Trustees
December 19, 1994
<PAGE>
Report from the fund manager
Michael F. Bouscaren
Throughout the six months ended October 31, 1994, the municipal
bond market endured what can truly be called tough times. Thus,
although Putnam Investment Grade Municipal Trust II posted
positive total returns at net asset value and market price for
the first quarter of fiscal 1995 in July, market volatility
quickly eroded those gains by period's end. Investor
uncertainty about the further rise of interest rates caused the
tide of no-load fund redemptions to continue, inundating the
secondary market and driving down bond prices. Your fund was
not immune to the performance-dampening effects of such
apprehension. At period's end, your fund's total return at net
asset value was -0.91%.
We encourage you to keep in mind, however, that a mutual fund
investment, particularly one that emphasizes long-term
municipal bonds in its portfolio, requires a long-term view and
that corrections are a natural part of any business cycle.
CURRENT ENVIRONMENT FAVORS HIGH AFTER-TAX YIELDS
While prices of virtually all fixed-income investments are down
this year, prices of municipal bonds have fallen less than
those of U.S. Treasury securities. Meanwhile, the yield spread
between the two remains relatively narrow. In today's low-
inflation, high-tax environment, this can mean attractive real
rates of return for municipal bond fund investors.
Because we focus the fund's investments primarily on long-term
bonds, it has produced a relatively high level of tax-free
income. A taxable investment at the maximum federal income tax
rate of 39.6% would have had to provide a current return of
11.64% to equal the fund's 7.03% current dividend rate at net
asset value at period's end.
Leveraging has also played an important role in bolstering the
fund's income level. By issuing and selling preferred shares of
the fund to institutional short-term investors, we've been able
to reinvest the proceeds in longer-term, higher-paying bonds. A
portion of the income generated from these higher-paying bonds
is then distributed to the fund's common shareholders,
enhancing their monthly dividend (25.7% of the fund's net
assets were leveraged on October 31, 1994).
STRATEGIES TO HELP MITIGATE VOLATILITY
Recently, we've put more structural emphasis into what is known
as a barbell strategy in terms of credit quality and coupon
structure. We've done so to tap the potential for higher prices
of certain issues while taking advantage of the volatility-
dampening effects of others.
The majority of the fund's assets are currently anchored at the
highest level, AAA, and the lowest, BBB, of the investment-
grade spectrum, resulting in an average portfolio quality
rating of AA. The fund continues to own BBB bonds because,
historically, lower-grade issues tend to experience less price
volatility in a declining market. They can also provide an
attractive yield. However, because the yield spread between AAA
and BBB issues remains narrow, we've been increasing the fund's
weighting in AAA and insured issues in anticipation of a market
turnaround.
Our coupon strategy involves holding discount bonds, those
selling at prices below their par values, and premium, or
"cushion" bonds, those selling at prices above their par
values. We've been adding to the fund's holdings of premium
bonds, since they typically offer high coupons, aid in lowering
the fund's average duration, and tend to be less seriously
affected when prices decline. This should help reduce the
fund's overall price volatility. We've purchased discount bonds
because of their price appreciation potential. Should the
market recover, we believe these issues are likely to increase
in value.
CREDIT QUALITY BREAKDOWN
[PIE CHART]
Plot information
- ---------------------------------------------------------------
AAA = 32%
AA = 17%
A = 8%
Aa = 9%
BBB = 8%
BBB/P = 5%
Baa = 21%
Ba = 3%
A bond rated BBB or higher is considered investment grade. All
ratings reflect Standard & PoorOs(R) descriptions, unless noted
otherwise.
PORTFOLIO IS WELL DIVERSIFIED BY REGION AND INDUSTRY
We have spread your fund's investments across the country,
though with greater emphasis on certain regions. California,
Massachusetts, and New York are significantly represented in
the portfolio, with substantial exposure given to specialty
states like Texas and Florida, as well. Primarily, high taxes,
strong investor demand, the outlook for an improving economy
with possible credit upgrades, and the availability of some
attractively yielding issues drew our attention to these
states. With minor modifications, health care, utilities,
transportation, housing, and education continued to be the
fund's top five industry sectors.
Issues of particular interest to us, and ones we anticipate
will do well over time, are the Denver City and County Airport
revenue bonds in the fund's portfolio. Although the project
incurred cost overruns, technological problems, and contractual
disagreements between the city and certain airlines, these
concerns now seem to have been ironed out to the satisfaction
of all parties. The facility is scheduled to open in February
1995, when it will become the only airport serving greater
Denver. Because it is such a distance away from downtown, we
anticipate there'll be more than the usual amount of revenue
generating sources from airport operations and associated
facilities. Restaurants, parking, hotels, and retail outlets
are all sources of fees and cash flow. With such an optimistic
long-term outlook, we took the opportunity to increase the
fund's position in these bonds in late summer. We look forward
to the anticipated progress of these issues.
TOP INDUSTRY SECTORS*
[BAR CHART]
Plot Points
- ---------------------------------------------------------------
Hospitals 19.3%
Transportation 16.5%
Water 13.3%
Utilities 11.8%
Education 8.2%
*Based on net assets on 10/31/94.
ANTICIPATING AN EVENTUAL MARKET UPTURN
We believe today's post-correction prices represent a buying
opportunity for many closed-end municipal bond fund
shareholders. While investing in a down market can be
psychologically difficult, doing so can also lead to
profitability over the long term. For the long-term investor,
acquiring shares -- either through direct purchase or
reinvestment of dividends -- during a market decline creates a
larger income- generating share base for the future.
Our long-term outlook for municipal bonds remains positive,
although in the near term we anticipate continued turmoil.
After record new issuance of tax-exempt bonds in 1993, year- to-
date new issuance has dropped by more than 40%. We believe the
decreased supply, combined with growing investor demand for tax
relief, bode well for the appreciation potential of tax-exempt
securities -- a situation we believe will occur quite suddenly
and be sustained when investors recognize the positive effects
of these two factors on bond prices.
We have positioned the fund in anticipation of such a trend. As
experienced bond fund investors have learned, time generally
favors those with patience and vision.
[FN]
The views expressed throughout the report are exclusively those
of Putnam Management. They are not meant as investment advice.
Although the described holdings were viewed favorably as of
October 31, 1994, there is no guarantee the fund will continue
to hold these securities in the future. Future holdings will
vary.
<PAGE>
Performance summary
This section provides, at a glance, information about your
fund's performance. Total return shows how the value of the
fund's shares changed over time, assuming you held the shares
through the entire period and reinvested all distributions back
into the fund. We show total return in two ways: on a
cumulative long-term basis and on average how the fund might
have grown each year over varying periods. For comparative
purposes, we show how the fund performed relative to
appropriate indices and benchmarks.
TOTAL RETURN FOR PERIODS ENDED 10/31/94
<TABLE><CAPTION>
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Lehman Bros.
Market Municipal
NAV Price Bond Index CPI
- ---------------------------------------------------------------
6 months -0.91% -8.92% -0.85% 1.43%
1 year -6.44 -17.75 -4.36 2.61
- ---------------------------------------------------------------
Life of fund
(since 11/27/92) 10.45 -11.83 7.19 5.28
Annual average 5.29 -6.31 3.66 2.70
- ---------------------------------------------------------------
TOTAL RETURN FOR PERIODS ENDED 9/30/94
(most current calendar quarter)
Lehman Bros.
Market Municipal
NAV Price Bond Index CPI
- ---------------------------------------------------------------
6 months 1.32% -5.03% 1.80% 1.50%
1 year -3.93 -13.49 -2.44 2.96
- ---------------------------------------------------------------
Life of fund
(since 11/27/92) 12.90 -7.73 9.13 5.21
Annual average 6.81 -4.28 4.86 2.80
- ---------------------------------------------------------------
<FN>
Performance data represent past results. Investment returns and
principal value will fluctuate so an investor's shares, when
sold, may be worth more or less than their original cost. Fund
performance data do not take into account any adjustment for
taxes payable on reinvested distributions.
</TABLE>
<PAGE>
TERMS AND DEFINITIONS
Net asset value (NAV) is the value of all your fund's assets,
minus any liabilities, the liquidation preference and
cumulative undeclared dividends paid on the auction-preferred
shares, divided by the number of outstanding common shares.
Market price is the current trading price of one share of the
fund. Market prices are set by transactions between buyers and
sellers on the New York Stock Exchange.
COMPARATIVE BENCHMARKS
Lehman Brothers Municipal Bond Index is an unmanaged list of
long-term, fixed-rate, investment-grade, tax-exempt bonds
representative of the municipal bond market. The index does not
take into account brokerage commissions or other costs, may
include bonds different from those in the fund, and may pose
different risks than the fund.
Consumer Price Index (CPI) is a commonly used measure of
inflation; it does not represent an investment return.
<PAGE>
Portfolio of investments owned
October 31, 1994 (Unaudited)
MUNICIPAL BONDS AND NOTES (102.9%)(a)
<TABLE><CAPTION>
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PRINCIPAL AMOUNT RATINGS(b) VALUE
- ---------------------------------------------------------------
California (10.8%)
- ---------------------------------------------------------------
$5,000,000CA State Univ. Rev. Bonds,
American Municipal Bond
Assurance Corp. (AMBAC),
6.797s, 11/1/21 AAA $ 5,156,250
1,515,000Fountain Valley, Agcy. for
Cmnty. Dev. Tax Alloc. Rev.
Bonds (Indl. Area Redev.
Project), 9.1s, 1/1/16 BBB 1,592,644
7,190,000Los Angeles, Dept. Wtr. & Pwr.
Elec. Plant Rev. Bonds,
Municipal Bond Insurance
Association (MBIA), 5 1/4s,
11/15/26 AAA 5,662,125
5,875,000Los Angeles, Regl. Arpts.
Impt. Corp. Lease Rev. Bonds
(Western Airlines-Delta
Airlines), 11 1/4s, 11/1/25 Ba 6,315,625
700,000Orange Cnty., Various Certif.
of Participation (COP), AMBAC,
3.45s, 8/1/16 A1 700,000
4,000,000Santa Rosa, Kaiser Permanente
Rev. Bonds, Ser. A, 9s, 12/1/15 AA 4,220,000
2,800,000Stanislaus, Solid Waste Fac.
Rev. Bonds (Ogden Martin Syst.
Inc. Project), 7 5/8s, 1/1/10 BBB 2,873,500
-----------
26,520,144
Colorado (9.4%)
- ---------------------------------------------------------------
Denver, City & Cnty. Arpt. Rev. Bonds
4,700,000 Ser. A, 8 3/4s, 11/15/23 Baa
4,870,375
2,500,000 Ser. A, 8 1/2s, 11/15/23 Baa
2,546,875
1,000,000 Ser. D, 7 3/4s, 11/15/13 Baa
967,500
4,985,000 Ser. D, 7s, 11/15/25 Baa
4,374,338
1,670,000Denver City & Cnty. Arpt.
Rev. Bonds DD 5/1/90,
Ser. A, 8s, 11/15/25 Baa 1,626,163
1,000,000Denver, City & Cnty. Arpt.
Rev. Bonds DD 4/1/91,
Ser. A, 8s, 11/15/25 Baa 973,750
9,000,000Denver, City & Cnty. Special
Fac. Arpt. Rev. Bonds
(United Air Lines, Inc. Project),
Ser. A, 6 7/8s, 10/1/32 Baa 7,728,750
-----------
23,087,751
Connecticut (3.2%)
- ---------------------------------------------------------------
8,000,000 CT State Hsg. Fin. Auth.
Rev. Bonds, Ser. B,
6 3/4s, 11/15/23 AA 7,860,000
Florida (5.8%)
- ---------------------------------------------------------------
5,000,000Port Everglades Auth. Port
Impt. Rev. Bonds, Ser. A,
5s, 9/1/16 BBB 3,918,750
9,725,000Tampa, Cap. Impt. Rev. Bonds,
Ser. B, 8 3/8s, 10/1/18 BBB 10,259,875
-----------
14,178,625
Georgia (1.4%)
- ---------------------------------------------------------------
$3,150,000Appling Cnty., Dev. Auth. Poll.
Control Rev. Bonds (Hatch Project),
10.6s, 10/1/15 A$ 3,350,813
Illinois (3.0%)
- ---------------------------------------------------------------
8,000,000Central Lake Cnty., Joint Action
Wtr. Agcy. Rev. Bonds,
6s, 2/1/19 Aa 7,260,000
Indiana (5.8%)
- ---------------------------------------------------------------
10,000,000Evansville Hosp. Daughters
Charity Rev. Bonds (St. Mary's
Medical), 10 1/8s, 11/1/15 Aa 10,650,000
3,500,000Petersburg, Indl. Poll. Control
Rev. Bonds (Indianapolis Pwr.
& Lt. Co.), 9 5/8s, 9/1/12 AA 3,683,750
-----------
14,333,750
Louisiana (1.2%)
- ---------------------------------------------------------------
St. Charles Parish, Poll. Control Rev. Bonds
500,000 (LA Pwr. & Lt.), 8 1/4s,
6/1/14 Baa 541,250
2,500,000 (Union Carbide Project),
7.35s, 11/1/22 BBB/P 2,475,000
-----------
3,016,250
Massachusetts (8.4%)
- ---------------------------------------------------------------
1,200,000 MA State Updates VRDN,
3.55s, 12/1/97 A-1 1,200,000
2,000,000 MA State Hlth. & Edl.
Facs. Auth. Inverse Floating
Bonds (IFB), MBIA (Boston U.),
Ser. L, 9.577s, 10/1/31 AAA 1,917,500
11,000,000MA State Hlth. & Edl. Facs.
Auth. Rev. Bonds, AMBAC,
6.55s, 6/23/22 AAA 10,683,750
2,000,000MA State Indl. Fin. Agcy.
Rev. Bonds (1st Mtge. Brookhaven),
Ser. A, 7s, 1/1/09 BBB/P 1,960,000
3,000,000 MA State Port Auth. Rev.
Bonds, 13s, 7/1/13 AAA 4,845,000
-----------
20,606,250
Michigan (2.0%)
- ---------------------------------------------------------------
2,000,000MI State Bldg. Auth. Rev.
Bonds, Ser. I, AMBAC, 5 1/4s,
10/1/11 AAA 1,717,500
3,460,000St. Clair Shores, Econ. Dev.
Corp. Rev. Bonds (Bon Secours
Hlth. Syst.), 6s, 8/15/27 AAA 3,079,400
-----------
4,796,900
Minnesota (2.5%)
- ---------------------------------------------------------------
5,500,000St. Paul, Hsg. & Redev. Auth.
Hosp. Rev. Bonds (Healtheast
Project), Ser. B, 9 3/4s,
11/1/17 Baa 6,050,000
Mississippi (2.8%)
- ---------------------------------------------------------------
6,000,000Claiborne Cnty., Poll. Control
Rev. Bonds (Middle South
Energy Inc.), Ser. C, 9 7/8s,
12/1/14 BBB/P 6,847,500
Nevada (2.2%)
- ---------------------------------------------------------------
$1,000,000Clark Cnty., Indl. Dev. Rev.
Bonds (Southwest Gas Corp.),
Ser. B, 7 1/2s, 9/1/32 Ba $ 973,750
5,000,000Clark Cnty., Passenger Fac.
Arpt. Rev. Bonds (Las Vegas-
McCarran Intl. Arpt.) Ser. A,
AMBAC, 6s, 7/1/22 AAA 4,450,000
-----------
5,423,750
New York (15.6%)
- ---------------------------------------------------------------
6,370,000Babylon, Indl. Dev. Agcy.
Resource Recvy. Rev. Bonds
(Ogden Martin Syst.), Ser. A,
8 1/2s, 1/1/19 Baa 6,863,675
2,750,000Met. Tran. Auth. Svcs. Contract
Rfdg. Rev. Bonds (Commuter Fac.),
Ser. 5, 7s, 7/1/12 Baa 2,784,375
NY City, G.O. Bonds
1,100,000Sub. Ser. B-4, 2.35s, 8/15/21 A-1
1,100,000
2,000,000Ser. B, FGIC, 3.55s, 10/1/20 A-1
2,000,000
6,200,000NY City, Mun. Wtr. Fin. Auth.
VRDN, Ser. G, FGIC, 3.6s,
6/15/24 A-1 6,200,000
NY State Dorm. Auth. Rev. Bonds
7,850,000(State Univ. Edl. Facs.),
Ser. A, 6 3/4s, 5/15/21 AAA 8,478,000
7,060,000(City Univ.), Ser. F, 5 1/2s,
7/1/12 Baa 6,018,650
2,000,000NY State Hsg. Corp. Rev. Bonds,
5s, 11/1/18 AA 1,575,000
4,350,000NY State Loc. Govt. Assistance
Corp. Rev. Bonds, Ser. C,
5s, 4/1/21 A 3,322,313
-----------
38,342,013
Pennsylvania (5.2%)
- ---------------------------------------------------------------
3,000,000Allegheny Cnty., Hosp. Dev.
Auth. Rev. Bonds (Magee-
Women's Hosp.), FGIC,
6s, 10/1/13 AAA 2,808,750
4,895,000Beaver Cnty., Indl. Dev. Auth.
Poll. Control Rev. Bonds
(OH Edison Co.-Beaver Valley),
Ser. A, 10 1/2s, 10/1/15 Baa 5,158,106
5,000,000Dauphin Cnty., Auth. Hosp. Rev.
Bonds (Hapsco-Western PA Hosp.
Project), Ser. A, MBIA, 6 1/2s,
7/1/12 AAA 4,875,000
-----------
12,841,856
Rhode Island (1.9%)
- ---------------------------------------------------------------
6,210,000Convention Ctr. Auth, Rev.
Bonds, Ser. C, MBIA, 5s,
5/15/23 AAA 4,711,838
South Carolina (4.1%)
- ---------------------------------------------------------------
3,000,000 Grand Strand Wtr. &
Swr. Auth. Rev.
Bonds, MBIA, 6s, 6/1/19 AAA 2,722,500
5,000,000Piedmont, Muni. Pwr. Agcy.
Elec. Rev. Bonds, MBIA,
6.3s, 1/1/22 AAA 4,675,000
2,610,000 SC State Pub. Svc. Auth.
Elec. Rev. Bonds (Electric
Systems Expansion) Rfdg.,
Ser A, 7 7/8s, 7/1/21 AA 2,727,450
-----------
10,124,950
Tennessee (1.5%)
- ---------------------------------------------------------------
$4,000,000Met. Nashville & Davidson Cnty.,
Hlth. & Edl. Fac. Board Rev.
Bonds (Vanderbilt U.), Ser. A,
6s, 10/1/22 AA$ 3,700,000
Texas (5.9%)
- ---------------------------------------------------------------
1,000,000 Brazos River Auth. Poll.
Ctrl. Rev. Bonds, 8 1/4s,
1/1/19 Baa 1,085,000
Harris Cnty., G.O. Bonds
3,000,000 6s, 12/15/11 AA
2,857,500
2,000,000 6s, 12/15/10 AA
1,907,500
4,000,000Northeast Hosp. Auth. Rev. Bonds
(Northeast Med. Ctr. Hosp.),
Ser. B, FGIC, 7 1/4s, 7/1/22 AAA 3,795,000
TX Hsg. Agcy. Single Fam.
Mtge. Rev. Bonds
3,835,000 Ser. A, 9 3/8s, 9/1/16 Aa
3,978,813
870,000 Ser. B, 9 3/8s, 9/1/15 Aa
899,363
-----------
14,523,176
Utah (1.5%)
- ---------------------------------------------------------------
4,295,000Salt Lake Cnty. Wtr. Conser.
Dist. Rev. Bonds, Ser. A, 5.3s,
10/1/13 AAA 3,613,169
Virginia (6.6%)
- ---------------------------------------------------------------
Fairfax Cnty., Wtr. Auth. Rev. Bonds
7,000,000 6s, 4/1/22 AA
6,370,000
8,000,000 5 3/4s, 4/1/29 AA
6,910,000
3,000,000Richmond, Metro. Auth. Expressway
Rev. Bonds, Ser. B, FGIC, 6 1/4s,
7/15/22 AAA 2,827,500
-----------
16,107,500
Washington (0.5%)
- ---------------------------------------------------------------
1,500,000 WA State Hlth. Care Fac.
Auth. Rev. Bonds (Multicare
Med. Ctr.-Tacoma), FGIC, 5 3/4s,
8/15/22 AAA 1,288,125
Wisconsin (1.6%)
- ---------------------------------------------------------------
4,445,000WI Hsg. & Econ. Dev. Auth.
Hsg. Rev. Bonds, Ser. C, 5.8s,
11/1/13 A 3,933,822
- ---------------------------------------------------------------
Total Investments
(cost $261,661,904)(c) $252,518,182
- ---------------------------------------------------------------
<FN>
NOTES
(a) Percentages indicated are based on net assets of
$245,278,470. Net assets available to common shareholders
are $182,278,470, which correspond to a net asset value
per common share of $13.65.
(b) The Moody's or Standard & Poor's ratings indicated are
believed to be the most recent ratings available at
October 31, 1994 for the securities listed. Ratings are
generally ascribed to securities at the time of issuance.
While the agencies may from time to time revise such
ratings, they undertake no obligation to do so, and the
ratings do not necessarily represent what the agencies
would ascribe to these securities at October 31, 1994.
Securities rated by Putnam are indicated by "/P" and are
not publicly rated.
(c) The aggregate identified cost on a tax cost basis is
$261,661,904, resulting in gross unrealized appreciation
and depreciation of $716,560 and $9,860,282, respectively,
or net unrealized depreciation of $9,143,722.
The rates shown on Variable Rate Demand Notes (VRDN) and
Inverse Floating Bonds(IFB), which are securities paying
variable interest rates that vary inversely to changes in
market rates, are the current interest rates at October
31, 1994, which are subject to change based on terms of
the security.
The fund had the following industry group concentrations
greater than 10% on October 31, 1994 (as a percentage of
net assets):
Hospitals/Health care 19.3%
Transportation 16.5
Water & Sewer 13.3
Utility 11.8
Education 8.2
</TABLE>
<PAGE>
Statement of assets and liabilities
October 31, 1994 (Unaudited)
<TABLE><CAPTION>
<S> <C>
- ---------------------------------------------------------------
Assets
- ---------------------------------------------------------------
Investments in securities, at value
(identified cost $261,661,904) (Note 1) $252,518,182
- ---------------------------------------------------------------
Cash 284,820
- ---------------------------------------------------------------
Interest receivable 5,562,414
- ---------------------------------------------------------------
Unamortized organization expenses (Note 1) 16,299
- ---------------------------------------------------------------
Total assets $258,381,715
- ---------------------------------------------------------------
Liabilities
- ---------------------------------------------------------------
Distributions payable to shareholders $1,204,828
- ---------------------------------------------------------------
Payable for securities purchased 11,376,758
- ---------------------------------------------------------------
Payable for compensation of Manager (Note 3) 453,351
- ---------------------------------------------------------------
Payable for investor servicing and
custodian fees (Note 3) 62,130
- ---------------------------------------------------------------
Payable for administrative services (Note 3) 6,178
- ---------------------------------------------------------------
Total liabilities 13,103,245
- ---------------------------------------------------------------
Net assets $245,278,470
- ---------------------------------------------------------------
Represented by
- ---------------------------------------------------------------
Series A and B remarketed preferred shares,
without par value; 1,260 shares authorized
(1,260 shares issued at $50,000 per share
liquidation preference) (Note 2) $63,000,000
- ---------------------------------------------------------------
Common shares, without par value;
unlimited shares authorized; 13,357,092
shares outstanding 186,311,373
- ---------------------------------------------------------------
Undistributed net investment income 2,063,390
- ---------------------------------------------------------------
Accumulated net realized gain on
investment transactions 3,047,429
- ---------------------------------------------------------------
Net unrealized depreciation of investments (9,143,722)
- ---------------------------------------------------------------
Net assets $245,278,470
- ---------------------------------------------------------------
Remarketed preferred shares at
liquidation preference $63,000,000
- ---------------------------------------------------------------
Net assets available to common shares:
Net asset value per share $13.65
($182,278,470 divided by 13,357,092 shares) $182,278,470
- ---------------------------------------------------------------
Net assets $245,278,470
- ---------------------------------------------------------------
</TABLE>
<PAGE>
Statement of operations
For the six months ended October 31, 1994 (Unaudited)
<TABLE><CAPTION>
<S> <C>
Tax exempt interest income $8,766,643
- ---------------------------------------------------------------
Expenses:
- ---------------------------------------------------------------
Compensation of Manager (Note 3) $901,685
- ---------------------------------------------------------------
Investor servicing and custodian fees (Note 3) 144,987
- ---------------------------------------------------------------
Compensation of Trustees (Note 3) 5,797
- ---------------------------------------------------------------
Reports to shareholders 21,325
- ---------------------------------------------------------------
Auditing 26,155
- ---------------------------------------------------------------
Legal 6,050
- ---------------------------------------------------------------
Postage 15,468
- ---------------------------------------------------------------
Administrative services (Note 3) 4,789
- ---------------------------------------------------------------
Exchange listing fees 12,350
- ---------------------------------------------------------------
Amortization of organization expenses (Note 1) 2,673
- ---------------------------------------------------------------
Preferred share remarketing agent fees 100,911
- ---------------------------------------------------------------
Other 11,799
- ---------------------------------------------------------------
Total expenses 1,253,989
- ---------------------------------------------------------------
Net investment income 7,512,654
- ---------------------------------------------------------------
Net realized gain on investments (Notes 1, 4 and 5) 523,523
- ---------------------------------------------------------------
Net realized gain on futures (Note 1) 2,660,727
- ---------------------------------------------------------------
Net unrealized depreciation of
investments during the period (11,896,140)
- ---------------------------------------------------------------
Net loss on investment transactions (8,711,890)
- ---------------------------------------------------------------
Net decrease in net assets resulting
from operations $(1,199,236)
- ---------------------------------------------------------------
</TABLE>
<PAGE>
Statement of changes in net assets
<TABLE><CAPTION>
<S> <C> <C>
Six months ended Year ended
October 31* April 30
- ---------------------------------------------------------------
1994 1994
- ---------------------------------------------------------------
Increase (decrease) in net assets
- ---------------------------------------------------------------
Operations:
- ---------------------------------------------------------------
Net investment income $7,512,654 $15,679,111
- ---------------------------------------------------------------
Net realized gain on investments 523,523 518,202
- ---------------------------------------------------------------
Net realized gain on futures 2,660,727 520,946
- ---------------------------------------------------------------
Net unrealized depreciation of
investments (11,896,140) (9,883,736)
- ---------------------------------------------------------------
Net increase (decrease) in net
assets resulting from operations (1,199,236) 6,834,523
- ---------------------------------------------------------------
Distributions to remarketed preferred
shareholders from:
- ---------------------------------------------------------------
Net investment income (1,134,000) (2,012,609)
- ---------------------------------------------------------------
Capital gains -- (147,491)
- ---------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations applicable to common shareholders
(excluding cumulative undeclared dividends on
remarketed preferred shares of $0, $0,
respectively) (2,333,236) 4,674,423
- ---------------------------------------------------------------
Distributions to common shareholders from:
- ---------------------------------------------------------------
Net investment income (6,413,325) (12,823,202)
- ---------------------------------------------------------------
Net realized gains -- (1,028,478)
- ---------------------------------------------------------------
Underwriting commissions and
offering costs on remarketed
preferred shares (Note 2) -- (185,652)
- ---------------------------------------------------------------
Total decrease in net assets (8,746,561) (9,362,909)
- ---------------------------------------------------------------
Net assets
- ---------------------------------------------------------------
Beginning of period 254,025,031 263,387,940
- ---------------------------------------------------------------
End of period (including undistributed
net investment income of $2,063,390
and $2,098,061, respectively) $245,278,470 $254,025,031
- ---------------------------------------------------------------
Number of fund shares
- ---------------------------------------------------------------
Common shares outstanding at
beginning of period 13,357,092 13,357,092
- ---------------------------------------------------------------
Common shares outstanding
at end of period 13,357,092 13,357,092
- ---------------------------------------------------------------
Remarketed preferred shares
at beginning of period 1,260 1,260
- ---------------------------------------------------------------
Remarketed preferred shares
outstanding at end of period 1,260 1,260
- ---------------------------------------------------------------
<FN>
* Unaudited.
</TABLE>
<PAGE>
Financial highlights
(For a share outstanding throughout the period)
<TABLE><CAPTION>
<S> <C> <C> <C>
For the period
November 27, 1992
Six months For the (commencement
ended year ended of operations) to
October 31(++) April 30 April 30
- ---------------------------------------------------------------
1994 1994 1993
- ---------------------------------------------------------------
Net asset value,
beginning of period $14.30 $15.00 $14.06*
- ---------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------
Net investment income .57 1.16 .44(a)
- ---------------------------------------------------------------
Net realized and
unrealized gain
on investments (.65) (.66) .95
- ---------------------------------------------------------------
Total from investment
operations (.08) .50 1.39
- ---------------------------------------------------------------
Less distributions from:
- ---------------------------------------------------------------
Net investment income:
- ---------------------------------------------------------------
to preferred shareholders(.09) (.15) (.03)(+)
- ---------------------------------------------------------------
to common shareholders (.48) (.96) (.32)
- ---------------------------------------------------------------
Net realized gain
on investments
- ---------------------------------------------------------------
to preferred shareholders -- (.01) --
- ---------------------------------------------------------------
to common shareholders -- (.08) --
- ---------------------------------------------------------------
Total distributions (.57) (1.20) (.35)
- ---------------------------------------------------------------
Preferred share
offering costs -- -- (.10)
- ---------------------------------------------------------------
Net asset value,
end of period
(common shares) $13.65 $14.30 $15.00
- ---------------------------------------------------------------
Market value,
end of period
(common shares) $11.63 $13.25 $14.63
- ---------------------------------------------------------------
Total investment
return at market
value (common
shares) (%)(b)(d) (8.92) (2.81) (0.38)
- ---------------------------------------------------------------
Net assets,
end of period
(in thousands) $245,278 $254,025 $263,388
- ---------------------------------------------------------------
Ratio of expenses
to average net
assets (%)(c)(d) .75 1.14 .27(a)
- ---------------------------------------------------------------
Ratio of net
investment income
to average net
assets (%)(c)(d) 3.82 6.66 2.89(a)
- ---------------------------------------------------------------
Portfolio turnover
rate (%)(d) 48.77 32.37 4.65
- ---------------------------------------------------------------
<FN>
* Represents initial net asset value of $14.10 less offering
expenses of approximately $0.04.
(+) Preferred shares were issued on February 18, 1993
(++) Unaudited.
(a) Reflects a waiver of the management fee for the period
November 27, 1992 to February 19, 1993. As a result of the
waiver, expenses of the fund for the period ended April
30, 1993 reflect a reduction of $0.02 per share.
(b) Total investment return assumes dividend reinvestment and
does not reflect the effect of sales charges.
(c) Ratios reflect net assets available to common shares only;
net investment income ratio also reflects reduction for
dividend payments to preferred shareholders.
(d) Not annualized.
</TABLE>
<PAGE>
Notes to financial statements
October 31, 1994 (unaudited)
Note 1
Significant accounting policies
The fund is registered under the Investment Company Act of
1940, as amended, as a diversified, closed-end management
investment company. The fund's investment objective is to
provide as high a level of current income exempt from federal
income tax as is believed to be consistent with preservation of
capital. The fund intends to achieve its objective by investing
in a portfolio of investment grade municipal securities that
the fund's Manager believes does not involve undue risk to
income or principal.
The following is a summary of significant accounting policies
consistently followed by the fund in the preparation of its
financial statements. The policies are in conformity with
generally accepted accounting principles.
A Security valuation
Tax-exempt bonds and notes are stated on the basis of
valuations provided by a pricing service, approved by the
Trustees, which uses information with respect to transactions
in bonds, quotations from bond dealers, market transactions in
comparable securities, and various relationships between
securities in determining value. The fair value of restricted
securities is determined by the Manager following procedures
approved by the Trustees, and such valuations and procedures
are reviewed periodically by Trustees.
B Determination of net asset value
Net asset value of the common shares is determined by dividing
the value of all assets of the fund (including accrued interest
and dividends), less all liabilities (including accrued
expenses) undeclared dividends on remarketed preferred shares,
and the liquidation value of any outstanding remarketed
preferred shares, by the total number of common shares
outstanding.
C Security transactions and related investment income
Security transactions are accounted for on the trade date (date
the order to buy or sell is executed). Interest income is
recorded on the accrual basis.
D Futures
A futures contract is an agreement between two parties to buy
and sell a security at a set price on a future date. Upon
entering into such a contract the fund is required to pledge to
the broker an amount of cash or tax-exempt securities equal to
the minimum "initial margin" requirements of the futures
exchange. Pursuant to the contract, the fund agrees to receive
from or pay to the broker an amount of cash equal to the daily
fluctuation in value to the contract. Such receipts or payments
are known as "variation margin," and are recorded by the fund
as unrealized gains or losses. When the contract is closed, the
fund records a realized gain or loss equal to the difference
between the value of the contract at the time it was opened and
the value at the time it was closed. The potential risk to the
fund is that the change in value of the underlying securities
may not correspond to the change in value of the futures
contracts.
E Federal taxes
It is the policy of the fund to distribute all of its income
within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code applicable to regulated
investment companies. It is also the intention of the fund to
distribute an amount sufficient to avoid imposition of any
excise tax under Section 4982 of the Internal Revenue Code of
1986. Therefore, no provision has been made for federal taxes
on income, capital gains or unrealized appreciation of
securities held, and excise tax on income and capital gains.
F Distributions to shareholders
Distributions to common and preferred shareholders are recorded
by the fund on the ex-dividend date. Dividends on each share of
remarketed preferred shares will accumulate from its Date of
Original Issue and will be payable, when, as and if declared by
the Trustees, on the applicable Dividend Payment Dates. Each
dividend period for the remarketed preferred shares is
generally a 30-day period until May 18, 1995 for series A and
January 5, 1995 for series B. The applicable dividend rates for
the remarketed preferred shares on October 31, 1994 were:
Series A -- 3.25%; Series B -- 3.95% per annum until January 4,
1995.
G Amortization of bond premium and discount
Any premium resulting from the purchase of securities in excess
of maturity value is amortized on a yield-to-maturity basis.
Discounts on zero-coupon bonds, stepped-coupon bonds, and
original issue discount bonds are accreted according to the
effective yield method.
H Unamortized organization expenses
Expenses incurred by the fund in connection with its
organization aggregated $26,528. These expenses are being
amortized on a straight-line basis over a five-year period.
Note 2
Remarketed preferred shares
On February 18, 1993, the fund issued 630 shares of Series A
Remarketed Preferred and 630 shares of Series B Remarketed
Preferred. Proceeds to the fund, before deducting underwriting
expenses of $1,102,500 and offering expenses of $220,189,
amounted to $63,000,000. These expenses were charged against
net assets of the fund available to common shareholders. Both
the Series A and Series B remarketed preferred shares are
redeemable at the option of the fund on any dividend payment
date at a redemption price of $50,000 per share, plus an amount
equal to any dividends accumulated on a daily basis but unpaid
through the redemption date (whether or not such dividends have
been declared) and, in certain circumstances, a call premium.
There were no undeclared dividends on preferred shares at
October 31, 1994.
Under the Investment Company Act of 1940, the fund is required
to maintain asset coverage of at least 200% with respect to the
remarketed preferred shares as of the last business day of each
month in which any such shares are outstanding. Additionally,
the fund is required to meet more stringent asset coverage
requirements under the terms of the remarketed preferred shares
and the shares' rating agencies. Should these requirements not
be met, or should dividends accrued on the remarketed preferred
shares not be paid, the fund may be restricted in its ability
to declare dividends to common shareholders or may be required
to redeem certain of the remarketed preferred shares. At
October 31, 1994, there were no such restrictions on the fund.
Note 3
Management fee, administrative services, and other transactions
Compensation of Putnam Investment Management, Inc. (Putnam
Management), the fund's Manager, a wholly-owned subsidiary of
Putnam Investments, Inc., for management and investment
advisory services is paid quarterly based on the average net
assets of the fund. Such fee in the aggregate is based on the
annual rate of 0.70% of the first $500 million of the average
net asset value of the fund, 0.60% of the next $500 million,
0.55% of the next $500 million, and 0.50% of any excess over
1.5 billion of such average net asset value.
If dividends payable on remarketed preferred shares during any
dividend payment period plus any expenses attributable to
remarketed preferred shares for the period exceed the fund's
net income attributable to the proceeds of the remarketed
preferred shares during that period, then the fee payable to
Putnam Management for that period will be reduced by
an agreed upon formula. See "Administration Services Contact."
The Fund also reimburses the Manager for the compensation and
related expenses of certain officers of the fund and their
staff who provide administrative services to the fund. The
aggregate amount of all such reimbursements is determined
annually by the Trustees. For the six months ended October 31,
1994, the fund paid $4,789 for these services.
Trustees of the fund receive an annual Trustee's fee of $810
and an additional fee for each Trustees' meeting attended.
Trustees who are not interested persons of the Manager and who
serve on committees of the Trustees receive additional fees for
attendance at certain committee meetings.
Custodial functions for the fund's assets are provided by
Putnam Fiduciary Trust Company (PFTC), a subsidiary of Putnam
Investments, Inc. Investor servicing agent functions are
provided by Putnam Investor Services, a division of PFTC. Fees
paid for these investor servicing and custodial functions for
the six months ended October 31, 1994 amounted to $144,987.
Investor servicing and custodian fees reported in the Statement
of operations for the six months ended October 31, 1994 have
been reduced by credits allowed by PFTC.
Note 4
Purchases and sales of securities
During the six months ended October 31, 1994, purchases and
sales of investment securities other than short-term
investments aggregated $137,709,228 and $129,950,273,
respectively. Purchases and sales of short-term municipal
obligations aggregated $90,610,000 and $87,410,000,
respectively. In determining the net gain or loss on securities
sold, the cost of securities has been determined on the
identified cost basis.
The following is a summary of futures contract activity during
the year.
<TABLE><CAPTION>
<S> <C> <C>
Sales of Futures Contracts
- ---------------------------------------------------------------
Number of Aggregate
Contracts Face Value
- ---------------------------------------------------------------
Opened at beginning of period 287 $30,790,024
Contracts opened 5,570 564,504,250
Contracts closed (5,857) (595,294,274)
Outstanding at end of period -- $ --
- ---------------------------------------------------------------
</TABLE>
Note 5
Reclassification of capital accounts
The fund has adopted the provisions of Statement of Position 93-
2 "Determination, Disclosure and Financial Statement
Presentation of Income, Capital Gains and Return of Capital
Distributions by Investment Companies" ("SOP"). The SOP
requires the fund to report the undistributed net investment
income (accumulated loss) and accumulated net realized gain
(loss) accounts in such a manner as to approximate amounts
available for future tax distributions (or to offset futures
taxable capital gains).
In implementing the SOP the fund has reclassified $147,492, to
increase undistributed net investment income and $147,492 to
decrease accumulated net realized gain. These adjustments
represent the cumulative amounts necessary to report these
balances on a tax basis through April 30, 1994. These
reclassifications have no impact on the total net asset value
of the fund.
<PAGE>
Selected quarterly data*
(Unaudited)
<TABLE><CAPTION>
<S> <C> <C>
October 31 July 31
1994 1994
- ---------------------------------------------------------------
Total investment income
Total $4,350,562 $4,416,081
Per share(+) $0.33 $0.33
- ---------------------------------------------------------------
Net investment income available to common shareholders
Total $3,139,962 $3,238,692
Per share(+) $0.24 $0.24
- ---------------------------------------------------------------
Net realized and unrealized gain on investments
Total $(9,964,779) $1,251,989
Per share(+) $(0.75) $0.10
- ---------------------------------------------------------------
Net increase in net assets available to common shareholders
resulting from operations
Total $(6,824,817) $4,490,681
Per share(+) $(0.51) $0.34
- ---------------------------------------------------------------
Net assets available to common shareholders at end of period
Total $182,278,470 $192,309,284
Per share(+) $13.65 $14.40
- ---------------------------------------------------------------
<FN>
* In connection with the initial offering shares of the
fund, Putnam Management agreed to waive its management fee
for the period November 27, 1992 to February 19, 1993.
(+) Per common share. Fund information
</TABLE>
<PAGE>
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. Coburn
Vice President
James E. Erickson
Vice President
Michael F. Bouscaren
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
John D. Hughes
Vice President and Treasurer
Beverly Marcus
Clerk and Assistant Treasurer
Call 1-800-225-15781 weekdays from 9 a.m. to 5 p.m. Eastern
Time for up-to-date information about the fund's NAV or to
request Putnam's Quarterly Closed-End Fund commentary.
<PAGE>
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
183-15437
<PAGE>
APPENDIX TO FORM N30D FILINGS TO DESCRIBE DIFFERENCES BETWEEN
PRINTED AND EDGAR-FILED TEXTS.
(1) Rule lines for tables are omitted.
(2) Boldface and italic typefaces are displayed in normal
type.
(3) Headers (e.g. the names of the fund) and footers (e.g.
page numbers and OThe accompanying notes are an integral
part of these financial statementsO) are omitted.
(4) Because the printed page breaks are not reflected, certain
tabular and columnar headings and symbols are displayed
differently in this filing.
(5) Bullet points and similar graphic symbols are omitted.
(6) Page Numbering is different.
