Putnam
Investment
Grade
Municipal
Trust II
SEMIANNUAL REPORT
October 31, 1997
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "As always, Putnam Investment Grade Municipal Trust II invests
across the spectrum of investment-grade bonds, but we have
benefited particularly from our exposure to bonds in the lowest
tier of the investment-grade sector."
-- Richard P. Wyke, fund manager
* "[Municipal bond funds] are more liquid than actual munis. And you get
access to a manager who may be able to play the credit-rating changes
of a locality to your advantage."
-- Fortune, August 18, 1997
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
10 Portfolio holdings
15 Financial statements
22 Results of October 9, 1997 shareholder meeting
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Against a backdrop of lingering concerns about the economy, interest
rates, and renewed inflation, the municipal bond market maintained a
semblance of stability during the six months ended October 31, 1997.
Recognizing the fragility of this generally positive environment,
Richard Wyke pursued a slightly defensive policy in managing Putnam
Investment Grade Municipal Trust II during the period, which encompassed
the first half of the fund's 1998 fiscal year.
As he looks toward the months immediately ahead, Rick sees little reason
to waver from this course. In the report that follows, he provides more
details about the fiscal year and provides some insights into what he
believes is in store for
the second half.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
December 17, 1997
Report from the Fund Manager
Richard P. Wyke
Up until the last week of October 1997, when equity markets around the
world corrected, an atmosphere of low volatility and narrow trading
ranges characterized the fixed-income markets for most of the year. The
lack of direction stemmed from an ongoing tug of war between high
economic growth (negative for the bond market) and favorable low
inflation news (positive for the bond market).
Despite the subsequent narrow trading ranges for municipal bond prices,
Putnam Investment Grade Municipal Bond Trust II produced a competitive
return of 7.48% at net asset value and 9.60% at market price for the six
months ended October 31, 1997. By comparison, the Lehman Brothers
Municipal Bond Index returned 6.36% for the same period. Please see
pages 8 and 9 for additional performance information.
* CALIFORNIA AND NEW YORK PLAY KEY ROLES IN FUND PERFORMANCE
Through careful security selection and in-depth credit research, we have
been able to provide shareholders with an attractive level of monthly
income as well. The fund's investments in the California market offer an
example of this fundamental strategy at work. Although the state's
recent fiscal past is somewhat checkered, its improving economy has
generated healthy tax revenues and reduced the need for new bond
issuance. As a result, relatively higher demand for California municipal
bonds has coincided with a decrease in supply. Given this favorable
environment, it is no surprise that California bonds have outperformed
the municipal market in general, and the fund's California position has
served it well.
Another example of prudent security selection appears in our investments
in New York City bonds. Several years ago the Big Apple's problems
seemed overwhelming. Today it is apparent that the city has made
dramatic progress. Private sector employment is surging, the crime rate
is down dramatically, and the economy is thriving. The fund's bond
holdings from New York City reflect this optimism in the form of a
steady income stream and higher bond prices.
* SECTOR ALLOCATION ENHANCES RETURNS
By diversifying portfolio holdings across different states and industry
sectors, we seek to take advantage of opportunities while preserving a
relatively stable income stream. Airline-related holdings, which
performed well over the semiannual period, represented 6.8% of net
assets. Once again the strong economy played an important role in
improving the airline industry's efforts to reduce costs and post record
earnings.
The health-care sector has been another source of strong performance for
municipal bond investors, reflecting the widespread consolidation taking
place in this industry. In an era of cost cutting and reform, this
sector was besieged with consolidations between nonprofit and for-profit
institutions during much of the year. However, the Justice Department's
recent investigation of Columbia Healthcare, a publicly traded company
and an active buyer of hospitals, has slowed acquisition activity,
thereby eliminating a valuable catalyst for credit upgrades.
Nevertheless, new issuance in this sector has been low, providing a
natural price support for existing health-care bonds.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Hospitals/health care 21.3%
Transportation 16.2%
Water and sewerage 14.3%
Utilities 10.6%
Education 5.4%
Footnote reads:
*Based on net assets as of 10/31/97. Holdings will vary over time.
* FUND BENEFITS FROM QUALITY SPREAD COMPRESSION AND LOW CALL
RISK
While your fund invests across the spectrum of investment-grade bonds,
it particularly benefited over the period from its exposure to bonds in
the lowest tier of the investment-grade sector. These bonds have
continued to outperform the higher-quality tiers, resulting in only a
minimal price difference between the two groups. This phenomenon, known
as quality spread compression, usually occurs during periods of strong
economic growth such as we have experienced. With interest rates
relatively low and the strong economy improving many issuers' financial
positions, investors are more confident about taking on extra risk and
are rewarded with higher bond prices.
Throughout most of the year, as a result of relatively low interest
rates, we have seen many new and refunded issues coming to market. This
overabundance of supply held back municipal bond prices for a while
until the October stock market correction resulted in an explosive rally
for fixed-income securities. Since then, municipal bond yields have
become extremely attractive relative to taxable Treasuries and we have
been taking full advantage of the resulting opportunity.
* TAKING ADVANTAGE OF SHORT-TERM VOLATILITY TO ENHANCE RETURN
Since the Pacific Rim crisis and the subsequent correction in worldwide
equity markets, there has been enormous day-to-day volatility. Once the
equity markets settle down -- a process that may take a few months -- we
expect to see a return to a more typical municipal bond market. For the
time being, though, it appears that most markets have lost sight
of the fundamental economic reasons that typically cause extreme
reactions. We realize that volatility can be unsettling for investors,
but as professional money managers, we can take advantage of short-term
distortions and use them to improve the fund's return over time.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW*
Aaa 46.2%
Aa 4.9%
A 19.0%
Baa 26.5%
Ba 2.6%
VMGI 0.8%
Footnote reads:
*As a percentage of market value as of 10/31/97. A bond rated Baa or
higher is considered investment grade. All ratings reflect Moody's
terminologies and may include unrated bonds considered by Putnam
Management to be of comparable quality. Portfolio quality will vary over
time.
As time goes on, however, we continue to believe there will be moderate
upward pressure on interest rates driven by the strong economy. We
anticipate that the news on inflation will slowly deteriorate. While
keeping a vigilant eye on the economy, fund management will continue to
rely on in-depth research to evaluate new and existing holdings for the
fund.
The views expressed here are exclusively those of Putnam Management.
They are not meant as investment advice. Although the described holdings
were viewed favorably as of 10/31/97, there is no guarantee the fund
will continue to hold these securities in the future.
Performance summary
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.
TOTAL RETURN FOR PERIODS ENDED 10/31/97
Lehman Bros.
Market Municipal
(common shares) NAV price Bond Index
- -----------------------------------------------------------
6 months 7.48% 9.60% 6.36%
- -----------------------------------------------------------
1 year 9.62 16.39 8.50
- -----------------------------------------------------------
Life of fund (11/27/92) 44.12 43.28 41.23
Annual average 7.70 7.57 7.27
- -----------------------------------------------------------
Performance data represent past results and do not reflect future
performance. They do not take into account any adjustment for taxes
payable on reinvested distributions. Investment returns, net asset
value, and market price will fluctuate so that an investor's shares when
sold may be worth more or less than their original cost.
PRICE AND DISTRIBUTION INFORMATION
6 months ended 10/31/97
- --------------------------------------------------------------------
Distributions (common shares)
- --------------------------------------------------------------------
Number 6
- --------------------------------------------------------------------
Income $0.48
- --------------------------------------------------------------------
Total $0.48
- --------------------------------------------------------------------
Preferred shares Series A (630 shares) Series B (630 shares)
- --------------------------------------------------------------------
Income $990.16 $843.43
- --------------------------------------------------------------------
Total $990.16 $843.43
- --------------------------------------------------------------------
Share value
(common shares): NAV Market price
- --------------------------------------------------------------------
4/31/97 $13.70 $14.250
- --------------------------------------------------------------------
10/31/97 14.26 15.125
- --------------------------------------------------------------------
Current return (common shares)
- --------------------------------------------------------------------
(end of period): NAV Market price
- --------------------------------------------------------------------
Current dividend rate1 6.73% 6.35%
- --------------------------------------------------------------------
Taxable equivalent2 11.14 10.51
- --------------------------------------------------------------------
1Income portion of most recent distribution, annualized and divided by
NAV or market price at end of period.
2Assumes maximum 39.6% federal tax rate. Results for investors subject
to lower tax rates would not be as advantageous.
TOTAL RETURN FOR PERIODS ENDED 9/30/97
(most recent calendar quarter)
Market
(common shares) NAV price
- -----------------------------------------------------------
6 months 7.62% 12.61%
- -----------------------------------------------------------
1 year 9.92 18.59
- -----------------------------------------------------------
Life of fund 42.97 42.54
Annual average 7.67 7.60
- -----------------------------------------------------------
TERMS AND DEFINITIONS
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 in the fund.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities and the net assets allocated to remarketed 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 assumes reinvestment of all
distributions and interest payments and does not take into account
brokerage fees or taxes. Securities in the fund do not match those in
the indexes and performance of the fund will differ. It is not
possible to invest directly in an index.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
Portfolio of investments owned
October 31, 1997 (Unaudited)
Key to Abbreviations
AMBAC -- AMBAC Indemnity Corporation
CLI Insd. -- Connie Lee Insurance Insured
FGIC -- Financial Guaranty Insurance Company
FSA -- Financial Security Assurance
G.O. Bonds -- General Obligation Bonds
IFB -- Inverse Floating Rate Bonds
MBIA -- Municipal Bond Investors Assurance Corporation
VRDN -- Variable Rate Demand Notes
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES (98.3%) *
PRINCIPAL AMOUNT RATINGS** VALUE
Arizona (3.0%)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$2,235,000 Gila Cnty., Indl. Dev. Auth. Poll. Control Rev. Bonds
(Asarco Inc.), Ser. 87, 8.9s, 7/1/06 Baa $ 2,312,778
8,000,000 Maricopa Cnty., U. School Dist. No. 41 Gilbert
Cap. Appn. G.O. Bonds, FGIC, zero %, 1/1/07 Aaa 5,170,000
--------------
7,482,778
California (9.2%)
- ----------------------------------------------------------------------------------------------------------
5,000,000 CA Hlth. Fac. Fin. Auth. IFB (Catholic Healthcare
West), AMBAC, 6.616s, 7/1/17 Aaa 4,993,750
CA State G.O. Bonds
3,855,000 7s, 8/1/07 A 4,582,631
6,000,000 6 1/4s, 9/1/08 A 6,795,000
2,500,000 CA State U. IFB, AMBAC, 10.224s, 11/1/21
(aquired 9/2/94, cost $2,681,272) ++ Aaa 2,978,125
3,500,000 Foothill/Eastern Trans. Corridor Agcy. Toll Rd.
Rev. Bonds, Sr. Lien, Ser. A, zero %, 1/1/08 Baa 2,476,250
1,450,000 Fountain Valley, Agcy. for Cmnty. Dev. Tax Alloc.
Rev. Bonds (Indl. Area Redev.), 9.1s, 1/1/16 BBB 1,471,562
--------------
23,297,318
Colorado (8.6%)
- ----------------------------------------------------------------------------------------------------------
Denver, City & Cnty. Arpt. Rev. Bonds
3,675,000 Ser. A, 8 3/4s, 11/15/23 Baa 4,318,125
1,325,000 Ser. A, Prerefunded, 8 3/4s, 11/15/23 Baa 1,560,188
2,285,000 Ser. A, 8 1/2s, 11/15/23 Baa 2,570,625
215,000 Ser. A, Prerefunded, 8 1/2s, 11/15/23 Baa 243,756
1,525,000 Ser. A, 8s, 11/15/25 Baa 1,694,656
735,000 Ser. A, 8s, 11/15/25 Baa 820,444
145,000 Ser. A, Prerefunded, 8s, 11/15/25 Baa 162,400
265,000 Ser. A, Prerefunded, 8s, 11/15/25 Baa 299,781
2,175,000 Ser. A, 8s, 11/15/17 Baa 2,220,588
1,000,000 Ser. D, 7 3/4s, 11/15/13 Baa 1,245,000
780,000 Highlands Ranch, Dist. No. 2 G.O. Bonds,
Ser. FSA, 6 1/4s, 6/15/08 Aaa 884,325
5,250,000 SCA Tax Exempt Trust Multi-Fam. Mtge.
Rev. Bonds (Newport Village), Ser. A-8, FSA,
7.1s, 1/1/30 Aaa 5,840,625
--------------
21,860,513
Florida (9.6%)
- ----------------------------------------------------------------------------------------------------------
Broward Cnty., Res. Recvy. Rev. Bonds
10,595,000 (SES Broward Cnty. LP South), 7.95s, 12/1/08 A 11,548,550
1,150,000 (Waste-Energy LP North), 7.95s, 12/1/08 A 1,253,500
1,000,000 FL State Board of Ed. Cap. Outlay G.O. Bonds,
Ser. A, 7 1/4s, 6/1/23 Aa 1,086,250
5,000,000 Lee Cnty., Board of Directors Hosp. IFB
(Lee Memorial Hosp.), MBIA, 8.548s, 3/26/20 Aaa 5,768,750
5,000,000 Port Everglades Auth. Rev. Bonds, Ser. A, 5s, 9/1/16 BBB 4,656,250
--------------
24,313,300
Georgia (3.0%)
- ----------------------------------------------------------------------------------------------------------
6,340,000 Burke Cnty., Dev. Auth. Poll. Control Rev. Bonds
(Oglethorpe Pwr. Co. Vogtle), MBIA, 8s, 1/1/22# Aaa 7,552,525
Hawaii (1.7%)
- ----------------------------------------------------------------------------------------------------------
4,000,000 HI State Arpt. Syst. Rev. Bonds, FGIC, 7s, 7/1/10 Aaa 4,415,000
Illinois (4.0%)
- ----------------------------------------------------------------------------------------------------------
7,750,000 Central Lake Cnty., Joint Action Wtr. Agcy.
G.O. Bonds, 6s, 2/1/19 Aa 8,011,563
2,050,000 Chicago, O'Hare Intl. Arpt. Special Fac. Rev. Bonds
(United Air Lines, Inc.), Ser. C, 8.2s, 5/1/18 Baa 2,203,750
--------------
10,215,313
Indiana (0.9%)
- ----------------------------------------------------------------------------------------------------------
2,000,000 Marion Cnty., Ind. Convention & Rectl. Fac. Auth.
Rev. Bonds (Excise Tax Rev. Lease Rental),
Ser. A, AMBAC, 7s, 6/1/21 Aaa 2,185,000
Kansas (1.1%)
- ----------------------------------------------------------------------------------------------------------
2,600,000 Burlington, Poll. Control Poll. Control Rev. Bonds
(Kansas Gas & Electric Co.), MBIA, 7s, 6/1/31 Aaa 2,860,000
Kentucky (2.0%)
- ----------------------------------------------------------------------------------------------------------
5,030,000 Jefferson Cnty., Cap. Corp. Rev. Bonds, MBIA,
5 1/2s, 6/1/28 Aaa 5,074,013
Louisiana (1.1%)
- ----------------------------------------------------------------------------------------------------------
2,000,000 Beauregard, Parish Rev. Bonds
(Boise Cascade Corp.), 7 3/4s, 6/1/21 Baa 2,222,500
500,000 St. Charles Parish, Poll. Control Rev. Bonds
(LA Pwr. & Lt. Co.), 8 1/4s, 6/1/14 Baa 538,750
--------------
2,761,250
Maryland (1.2%)
- ----------------------------------------------------------------------------------------------------------
3,000,000 MD State Hlth. & Higher Edl. Fac. Auth. Rev. Bonds
(Johns Hopkins U.), 7 1/2s, 7/1/20 Aa 3,119,880
Massachusetts (5.7%)
- ----------------------------------------------------------------------------------------------------------
MA State Hlth. & Edl. Fac. Auth. IFB
5,500,000 (Med. Ctr. of Central MA),
Ser. B, AMBAC, 9.02s, 6/23/22 Aaa 6,861,250
2,000,000 (Boston U.), Ser. L, MBIA, 9.335s, 10/1/31 Aaa 2,372,500
3,000,000 MA State Port Auth. Rev. Bonds, 13s, 7/1/13 Aaa 5,130,000
--------------
14,363,750
Michigan (5.9%)
- ----------------------------------------------------------------------------------------------------------
2,000,000 Detroit, Wtr. Supply Syst. IFB, FGIC, 8.866s, 7/1/22 Aaa 2,310,000
6,000,000 MI State Hosp. Fin. Auth. Rev. Bonds
(Pontiac Osteopathic Hosp.), Ser. A, 6s, 2/1/24 Baa 6,090,000
6,250,000 Western Township, Util. Auth. Swr. Disp. Syst.
Rev. Bonds, 8.2s, 1/1/18 BBB 6,625,000
--------------
15,025,000
Minnesota (4.8%)
- ----------------------------------------------------------------------------------------------------------
2,000,000 Duluth, Tax Increment VRDN
(Lake Superior Paper), 3.6s, 9/1/10 VMIG1 2,000,000
St. Paul, Hsg. & Hosp. Redev. Auth. Rev. Bonds
(Healtheast), Ser. B
5,500,000 9 3/4s, 11/1/17 Baa 5,630,625
4,560,000 9 5/8s, 11/1/08 Baa 4,668,300
--------------
12,298,925
Mississippi (2.6%)
- ----------------------------------------------------------------------------------------------------------
6,000,000 Claiborne Cnty., Poll. Control Rev. Bonds (Middle
South Energy, Inc.), Ser. C, 9 7/8s, 12/1/14 Ba 6,501,780
New York (17.6%)
- ----------------------------------------------------------------------------------------------------------
6,370,000 Babylon, Indl. Dev. Agcy. Res. Recvy. Rev. Bonds
(Ogden Martin Syst., Inc.), Ser. A, 8 1/2s, 1/1/19 Aaa 6,748,760
4,000,000 NY City, G.O. Bonds, Ser. B, 7 1/2s, 2/1/06 Baa 4,470,000
6,250,000 NY City, Muni. Wtr. & Swr. Fin. Auth. Syst.
Rev. Bonds, Ser. C, 7 3/4s, 6/15/20 Aaa 7,085,938
NY State Dorm. Auth. Rev. Bonds
(State U. Edl. Fac.), Ser. A
6,500,000 7.7s, 5/15/12 Aaa 7,182,500
5,000,000 5 7/8s, 5/15/17 A 5,375,000
NY State Energy Resh. & Dev. Auth. Elec. Fac.
Rev. Bonds (Cons. Edison C. of NY, Inc.) Ser. A
2,000,000 7 3/4s, 1/1/24 A 2,041,000
5,000,000 7 1/2s, 1/1/26 A 5,362,500
NY State Urban Dev. Corp. Rev. Bonds
(Syracuse U.)
1,440,000 6s, 1/1/07 Baa 1,551,600
1,360,000 6s, 1/1/06 Baa 1,465,400
3,000,000 Suffolk Cnty., Wtr. Auth. Rev. Bonds, Sub. Lien,
MBIA, 6s, 6/1/14 Aaa 3,341,250
--------------
44,623,948
Oklahoma (1.6%)
- ----------------------------------------------------------------------------------------------------------
3,555,000 Tulsa, Indl. Auth. Hosp. Rev. Bonds
(Hillcrest Med. Ctr.), CLI Insd., 6 1/4s, 6/1/10 AAA 3,963,825
Pennsylvania (4.5%)
- ----------------------------------------------------------------------------------------------------------
3,000,000 Allegheny Cnty., Hosp. Dev. Auth. Rev. Bonds
(Magee-Womens Hosp.), FGIC, 6s, 10/1/13 Aaa 3,180,000
5,000,000 Dauphin Cnty., Auth. Hosp. Rev. Bonds
(Hapsco-Western PA Hosp.), Ser. A, MBIA,
6 1/2s, 7/1/12 Aaa 5,400,000
2,700,000 Philadelphia State Hosp. & Higher Ed. Fac.
Rev. Bonds (Graduate Hlth. Syst.),
Ser. A, 6 1/4s, 7/1/13 BBB 2,764,125
--------------
11,344,125
Puerto Rico (1.9%)
- ----------------------------------------------------------------------------------------------------------
4,500,000 Cmnwlth. of PR, Med. and Env. Poll. Ctrl. Fac.
Rev. Bonds (Baxter Travenol Labs., Inc.),
8s, 9/1/12 A 4,773,645
South Carolina (2.2%)
- ----------------------------------------------------------------------------------------------------------
5,000,000 Spartanburg Cnty. Solid Waste Disp. Rev. Bonds
(Bayerische Motoren Werke), 7.55s, 11/1/24 A-/P 5,606,250
Tennessee (3.7%)
- ----------------------------------------------------------------------------------------------------------
8,300,000 Metropolitan Govt. Nashville & Davidson Cnty.,
Wtr. & Swr. IFB, AMBAC, 8.276s, 1/1/22 Aaa 9,327,125
Texas (1.5%)
- ----------------------------------------------------------------------------------------------------------
1,700,000 Alliance, Arpt. Auth. Special Fac. Rev. Bonds
(Federal Express Corp.), 6 3/8s, 4/1/21 Baa 1,814,750
1,750,000 North Central Hlth. Fac. Dev. Corp. IFB
(Presbyterian Hlth. Care Syst.), Ser. C,
MBIA, 9.425s, 6/15/21 Aaa 2,089,061
--------------
3,903,811
Washington (0.9%)
- ----------------------------------------------------------------------------------------------------------
2,000,000 Tacoma, Elec. Syst. IFB, AMBAC, 8.901s, 1/2/15 Aaa 2,347,500
- ----------------------------------------------------------------------------------------------------------
Total Investments (cost $240,566,442) *** $249,216,574
- ----------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $253,594,463.
** The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available
at October 31, 1997 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, 1997. Securities rated by Putnam are indicated by "/P" and are not publicly
rated.
*** The aggregate identified cost on a tax basis is $240,566,442, resulting in gross unrealized appreciation
and depreciation of $12,204,832 and $3,554,700, respectively, or net unrealized appreciation of
$8,650,132.
++ Restricted, excluding 144A securities, as to public resale. The total market value of restricted
securities held at October 31, 1997 was $2,978,125 or 1.2% of net assets.
# A portion of this security was pledged and segregated with the custodian to cover margin requirement for
futures contracts at October 31, 1997.
This rates shown on IFBs, which are securities paying interest rates that vary inversely to changes in
the market interest rates, and VRDNs are the current interest rates at October 31, 1997.
The fund had the following industry group concentrations greater than 10% at October 31, 1997
(as a percentage of net assets):
Hospitals/Health care 21.3%
Transportation 16.2
Water & sewerage 14.3
Utilities 10.6
The fund had the following insurance concentrations greater than 10% at October 31, 1997
(as a percentage of net assets):
MBIA 13.4%
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Futures Contracts Outstanding at October 31, 1997
Aggregate Face Expiration Unrealized
Total Value Value Date Appreciation
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal Index Future (long) $24,368,750 $23,838,282 Dec-97 $530,468
- ----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
October 31, 1997 (Unaudited)
<S> <C>
Assets
- ----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $240,566,442) (Note 1) $249,216,574
- ----------------------------------------------------------------------------------------------
Cash 192,636
- ----------------------------------------------------------------------------------------------
Interest receivable 5,536,717
- ----------------------------------------------------------------------------------------------
Receivable for securities sold 230,000
- ----------------------------------------------------------------------------------------------
Receivable for variation margin 25,000
- ----------------------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 419
- ----------------------------------------------------------------------------------------------
Total assets 255,201,346
Liabilities
- ----------------------------------------------------------------------------------------------
Distributions payable to shareholders 1,068,497
- ----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 454,098
- ----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 22,331
- ----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 8,241
- ----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 567
- ----------------------------------------------------------------------------------------------
Other accrued expenses 53,149
- ----------------------------------------------------------------------------------------------
Total liabilities 1,606,883
- ----------------------------------------------------------------------------------------------
Net assets $253,594,463
Represented by
- ----------------------------------------------------------------------------------------------
Series A and B remarketed preferred shares (1,260 shares
issued and outstanding at $50,000 per share) (Note 4) $63,000,000
- ----------------------------------------------------------------------------------------------
Paid-in capital - common shares (unlimited shares authorized) (Note 1) 186,297,698
- ----------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 1,151,450
- ----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (6,035,285)
- ----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 9,180,600
- ----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $253,594,463
Computation of net asset value
- ----------------------------------------------------------------------------------------------
Series A and B remarketed preferred shares $ 63,000,000
- ----------------------------------------------------------------------------------------------
Cumulative undeclared dividends on remarketed preferred shares 77,756
- ----------------------------------------------------------------------------------------------
Net assets allocated to remarketed preferred shares --
liquidation preference 63,077,756
- ----------------------------------------------------------------------------------------------
Net assets available to common shares 190,516,707
- ----------------------------------------------------------------------------------------------
Net asset value per common share
($190,516,707 divided by 13,357,092 shares) $14.26
- ----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Six months ended October 31, 1997 (Unaudited)
<S> <C>
Tax exempt interest income: $8,536,844
- ----------------------------------------------------------------------------------------------
Expenses:
- ----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 895,815
- ----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 108,146
- ----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 5,803
- ----------------------------------------------------------------------------------------------
Administrative services (Note 2) 3,396
- ----------------------------------------------------------------------------------------------
Amortization of organization expense (Note 1) 2,644
- ----------------------------------------------------------------------------------------------
Reports to shareholders 11,817
- ----------------------------------------------------------------------------------------------
Auditing 25,067
- ----------------------------------------------------------------------------------------------
Legal 11,852
- ----------------------------------------------------------------------------------------------
Postage 22,645
- ----------------------------------------------------------------------------------------------
Exchange listing fees 12,127
- ----------------------------------------------------------------------------------------------
Preferred share remarketing agent fees 60,996
- ----------------------------------------------------------------------------------------------
Other 27,512
- ----------------------------------------------------------------------------------------------
Total expenses 1,187,820
- ----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (41,505)
- ----------------------------------------------------------------------------------------------
Net expenses 1,146,315
- ----------------------------------------------------------------------------------------------
Net investment income 7,390,529
- ----------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 244,777
- ----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and
futures during the period 7,507,164
- ----------------------------------------------------------------------------------------------
Net gain on investments 7,751,941
- ----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $15,142,470
- ----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Six months ended Year ended
October 31 April 30
1997* 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- ---------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------
Net investment income $ 7,390,529 $ 14,225,340
- ---------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments 244,777 (1,580,939)
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 7,507,164 1,180,783
- ---------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 15,142,470 13,825,184
- ---------------------------------------------------------------------------------------------------
Distributions to remarketed preferred shareholders from:
Net investment income (1,165,085) (2,209,265)
- ---------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations
applicable to common shareholders (excluding
cumulative undeclared dividends on remarketed preferred
shares of $77,756 and $67,420, respectively) 13,977,385 11,615,919
- ---------------------------------------------------------------------------------------------------
Distributions to common shareholders:
- ---------------------------------------------------------------------------------------------------
From net investment income (6,410,945) (12,822,022)
- ---------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets 7,566,440 (1,206,103)
Net assets
- ---------------------------------------------------------------------------------------------------
Beginning of period 246,028,023 247,234,126
- ---------------------------------------------------------------------------------------------------
End of period (including undistributed net investment
income of $1,151,450 and $1,336,951, respectively) $253,594,463 $246,028,023
- ---------------------------------------------------------------------------------------------------
Number of fund shares
- ---------------------------------------------------------------------------------------------------
Common shares outstanding at beginning and
end of period 13,357,092 13,357,092
- ---------------------------------------------------------------------------------------------------
Remarketed preferred shares outstanding at
beginning and end of period 1,260 1,260
- ---------------------------------------------------------------------------------------------------
* Unaudited
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
- -----------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share October 31 Nov. 27, 1992+
operating performance (Unaudited) Year ended April 30 to April 30
- -----------------------------------------------------------------------------------------------------------
1997 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $13.70 $13.79 $13.94 $14.30 $15.00 $14.06(a)
- -----------------------------------------------------------------------------------------------------------
Investment operations:
- -----------------------------------------------------------------------------------------------------------
Net investment income .55 1.07 1.09 1.14 1.16 .44(b)
- -----------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .58 (.03) (.10) (.16) (.66) .95
- -----------------------------------------------------------------------------------------------------------
Total from investment operations 1.13 1.04 .99 .98 .50 1.39
- -----------------------------------------------------------------------------------------------------------
Less distributions:
- -----------------------------------------------------------------------------------------------------------
From net investment income
- -----------------------------------------------------------------------------------------------------------
To preferred shareholders (.09) (.17) (.18) (.15) (.15) (.03)(c)
- -----------------------------------------------------------------------------------------------------------
To common shareholders (.48) (.96) (.96) (.96) (.96) (.32)
- -----------------------------------------------------------------------------------------------------------
From net realized gain
on investments
- -----------------------------------------------------------------------------------------------------------
To preferred shareholders -- -- -- -- (.01) --
- -----------------------------------------------------------------------------------------------------------
To common shareholders -- -- -- -- (.08) --
- -----------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments
- -----------------------------------------------------------------------------------------------------------
To preferred shareholders -- -- -- (.03) -- --
- -----------------------------------------------------------------------------------------------------------
To common shareholders -- -- -- (.20) -- --
- -----------------------------------------------------------------------------------------------------------
Total distributions (.57) (1.13) (1.14) (1.34) (1.20) (.35)
- -----------------------------------------------------------------------------------------------------------
Preferred share offering costs -- -- -- -- -- (.10)
- -----------------------------------------------------------------------------------------------------------
Net asset value, end of period
(common shares) $14.26 $13.70 $13.79 $13.94 $14.30 $15.00
- -----------------------------------------------------------------------------------------------------------
Market value, end of period
(common shares) $15.125 $14.250 $13.875 $12.75 $13.25 $14.63
- -----------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -----------------------------------------------------------------------------------------------------------
Total investment return at market
value (common shares) (%)(d) 9.60* 9.86 16.62 5.39 (2.81) (0.88)*
- -----------------------------------------------------------------------------------------------------------
Net assets, end of period
(total fund) (in thousands) $253,594 $246,028 $247,234 $249,223 $254,025 263,388
- -----------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(e)(f) .63* 1.26 1.24 1.28 1.14 .27(b)*
- -----------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%)(e) 3.31* 6.51 6.41 7.10 6.66 2.89(b)*
- -----------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 13.02* 45.48 160.28 85.63 32.27 4.65*
- -----------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Represents initial net asset value of $14.10 less offering expenses of approximately $0.04.
(b) Reflects an expense limitation in effect during the period November 27, 1992 to February 19, 1993. As
a result of such limitation, expenses for the period ended April 30, 1993 reflect a reduction of $0.02
per share.
(c) Preferred shares were issued on February 18, 1993.
(d) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(e) Ratios reflect net assets available to common shares only; net investment income ratio also reflects
reduction for dividend payments to preferred shareholders.
(f) The ratio of expenses to average net assets for the period ended April 30, 1996 and thereafter, includes
amounts paid through expense offset arrangements. Prior period ratios exclude these amounts (Note 2).
</TABLE>
Notes to financial statements
October 31, 1997 (Unaudited)
Note 1
Significant accounting policies
Putnam Investment Grade Municipal Trust II (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 preparation of financial statements is in conformity
with generally accepted accounting principles and requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities. Actual results could differ from those
estimates.
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 Putnam Investment
Management, Inc. ("Putnam Management"), the fund's Manager, a wholly-
owned subsidiary of Putnam Investments, Inc. following procedures
approved by the Trustees, and such valuations and procedures are
reviewed periodically by the Trustees.
B) 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.
C) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund
owns or expects to purchase. The fund may also write options on
securities it owns or in which it may invest to increase its current
returns.
The potential risk to the fund is that the change in value of futures
and options contracts may not correspond to the change in value of the
hedged instruments. In addition, losses may arise from changes in the
value of the underlying instruments, if there is an illiquid secondary
market for the contracts, or if the counterparty to the contract is
unable to perform. 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. Realized gains and losses on purchased options are included in
realized gains and losses on investment securities.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. Exchange traded options
are valued at the last sale price, or if no sales are reported, the last
bid price for purchased options and the last ask price for written
options. Options traded over-the-counter are valued using prices
supplied by dealers.
D) 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, as amended. Therefore, no
provision has been made for federal taxes on income, capital gains or
unrealized appreciation on securities held nor for excise tax on income
and capital gains.
At April 30, 1997, the fund had a capital loss carryover of
approximately $4,855,000 available to offset future capital gains, if
any. The amount of the carryover and the
expiration dates are:
Loss Carryover Expiration
- -------------- ---------------
$2,204,000 April 30, 2004
2,651,000 April 30, 2005
E) Distributions to shareholders Distributions to common and preferred
shareholders are recorded by the fund on the ex-dividend date. Dividends
on remarketed preferred shares become payable when, as and if declared
by the Trustees. Each dividend period for the remarketed preferred
shares is generally a 28 day period. The applicable dividend rate for
the remarketed preferred shares on October 31, 1997 was Series A --
3.65%, Series B -- 3.68%. The amount and character of income and gains
to be distributed are determined in accordance with income tax
regulations which may differ from generally accepted accounting
principles. Reclassifications are made to the fund's capital accounts to
reflect income and gains available for distribution (or available
capital loss carryovers) under income tax regulations.
F) Determination of net asset value Net asset value of the common shares
is determined by dividing the value of all assets of the fund, less all
liabilities and the liquidation preference of any outstanding remarketed
preferred shares, by the total number of common shares outstanding.
G) Amortization of bond premium and accretion of bond discount Any
premium resulting from the purchase of securities in excess of maturity
value is amortized on a yield-to-maturity basis. The premium in excess
of the call price, if any, is amortized to the call date; thereafter,
the remaining excess premium is amortized to maturity. Discounts on
original issue discount bonds and zero coupon bonds are accreted on a
yield-to-maturity basis.
H) Unamortized organization expenses Expenses incurred by the fund in
connection with its organization, its registration with the Securities
and Exchange Commission and with various states and the initial public
offering of its shares were $26,528. These expenses are being amortized
on a straight-line basis over a five-year period.
Note 2
Management fee, administrative services and other transactions
Compensation of Putnam Management, for management and investment
advisory services is paid quarterly based on the average net assets of
the fund. Such fee is based on the following annual rates: 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, 0.50% of any
amount thereafter.
If dividends payable on remarketed preferred shares during any dividend
payment period plus any expenses attributable to remarketed preferred
shares for that 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 the
amount of the excess (but not more than .70% of the liquidation
preference of the remarketed preferred shares outstanding during the
period).
The fund reimburses Putnam Management an allocated amount 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.
Custodial functions for the fund's assets are provided by Putnam
Fiduciary Trust Company (PFTC), a wholly-owned subsidiary of Putnam
Investments, Inc. Investor servicing agent functions are provided by
Putnam Investor Services, a division of PFTC.
For the six months ended October 31, 1997, fund expenses were reduced by
$41,505 under expense offset arrangements with PFTC and brokerage
service arrangements. Investor servicing and custodian fees reported in
the Statement of operations exclude these credits. The fund could have
invested a portion of the assets utilized in connection with the expense
offset arrangements in an income producing asset if it had not entered
into such arrangements.
Trustees of the funds receive an annual Trustees fee of which $553 has
been allocated to the fund and an additional fee for each Trustee's
meeting attended. Trustees who are not interested persons of Putnam
Management and who serve on committees of the Trustees receive
additional fees for attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan")
which allows the Trustees to defer the receipt of all or a portion of
Trustees Fees payable on or after July 1, 1995. The deferred fees remain
in the fund and are invested in certain Putnam funds until distribution
in accordance with the Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have
served as Trustee for at least five years. Benefits under the Pension
Plan are equal to 50% of the Trustee's average total retainer and
meeting fees for the three years preceding retirement. Pension expense
for the fund is included in Compensation of Trustees in the Statement of
operations. Accrued pension liability is included in Payable for
compensation of Trustees in the Statement of assets and liabilities.
Note 3
Purchase and sales of securities
During the six months ended October 31, 1997, purchases and sales of
investment securities other than short-term investments aggregated
$31,944,481 and $33,504,287, respectively. There were no purchases and
sales of U.S. government obligations. In determining the net gain or
loss on securities sold, the cost of securities has been determined on
the identified cost basis.
Note 4
Remarketed preferred shares
The Series A (630 shares) and B (630 shares) 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.
It is anticipated that dividends paid to holders of remarketed preferred
shares will be considered tax-exempt dividends under the Internal
Revenue Code of 1986. To the extent that the fund earns taxable income
and capital gains by the conclusion of a fiscal year, it will be
required to apportion to the holders of the remarketed preferred shares
throughout that year additional dividends as necessary to result in an
after-tax equivalent to the applicable dividend rate for the period.
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 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, 1997, no such
restrictions have been placed on the fund.
- ------------------------------------------------------------------------
Results of October 9, 1997 shareholder meeting
(Unaudited)
A meeting of shareholders of the fund was held on October 9, 1997. At
the meeting, each of the nominees for Trustees was elected, as follows:
Common Shares Preferred Shares
Votes Votes
Votes for withheld Votes for withheld
Jameson Adkins Baxter 12,611,056 180,411 717 13
Hans H. Estin 12,604,693 186,774 715 15
R.J. Jackson 12,609,123 182,344 717 13
Elizabeth T. Kennan 12,605,423 186,044 717 13
Lawrence J. Lasser 12,608,618 182,849 717 13
Donald S. Perkins 12,604,533 186,934 715 15
William F. Pounds 12,607,731 183,736 715 15
George Putnam 12,602,634 188,833 717 13
George Putnam, III 12,603,437 188,030 717 13
A.J.C. Smith 12,609,123 182,344 717 13
W. Nicholas Thorndike 12,608,704 182,763 715 15
A proposal to ratify the selection of Coopers & Lybrand L.L.P. as
auditors for the fund was approved as follows:
Common Shares -- 12,583,356 votes for, and 53,249 votes against, with
154,862 abstentions and non-broker votes.
Preferred Shares -- 704 votes for, and 0 votes against, with 26
abstentions and non-broker votes.
All tabulations are rounded to nearest whole number.
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
Ronald J. Jackson
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. Coburn
Vice President
William J. Curtin
Vice President
Jerome J. Jacobs
Vice President
Richard P. Wyke
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time for up-
to-date information about the fund's NAV.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- --------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- --------------------
36867-183 12/97
