Putnam
Investment Grade
Municipal Trust II
SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK
10-31-98
[LOGO: BOSTON * LONDON * TOKYO]
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Throughout the dramatic shifts in the security markets during 1998,
municipal bonds have continued to stand their ground. As of the end of
October, yields of long-term municipal bonds were approximately the same
as those of 30-year Treasury bonds -- an unprecedented level of near
parity. It is within this environment that I am pleased to report that
Putnam Investment Grade Municipal Trust II met its goal of producing high
current income exempt from federal taxes. For the six months ended October
31, 1998, the fund provided total returns of 3.97% at net asset value and
9.22% at market price. For complete performance information, please see
pages 6 and 7.
* FLIGHT TO QUALITY DRIVES TREASURY YIELDS DOWN
A steady stream of international events set off the stock market
volatility that sparked the bond market rallies: the unabated financial
chaos in the Pacific Rim, currency devaluations and defaults in Russia,
and plunging stock markets in Latin America. As foreign investors and
hedge fund investors panicked about plummeting stock markets, they began a
flight to quality -- selling hedge funds and emerging-markets funds in
favor of the safety of U.S. Treasury bonds. This buying drove up the
prices of Treasuries, and consequently, because yields and prices move in
an inverse relationship, pulled down their yields. Since foreign investors
do not benefit from the tax advantages of municipal bonds, prices in this
market did not rise as much as those of Treasuries. As a result, with
municipal bond yields about equal to Treasury yields, municipals have
become an exceptional investment choice for U.S. investors.
* REFUNDINGS SLOW; MUNICIPAL SUPPLY BEGINS TO MODERATE
Normally, when interest rates fall, refundings boost the pace of bond
supply. But rates have been low for some time. Most issuers have already
completed their refundings and now Fund Manager Richard Wyke expects that
the supply of new issues will slow down, leading to a continuing decline
in the municipal bond supply. This is likely to have a positive influence
on municipal bond prices if demand remains strong. However, as the equity
market begins to recover, Rick expects that demand for municipals may
taper off.
The yield relationship of Treasury and municipal securities is also
contributing to the decline in supply. Since Treasury yields fell so
dramatically relative to municipal yields, the Treasury escrows used in
prerefundings are not adequate to pay off the municipal issues.
Since last spring, one of Rick's challenges has been to deliver an
attractive level of income in a market in which yields have fallen. He has
tried to meet this challenge by using the lower tiers of the
investment-grade sector to increase the fund's yield. However, the yield
spreads between higher-quality and lower-quality investment-grade paper
have narrowed, and it is hard to justify shifting the fund's focus from
the higher-quality investments without a significant yield advantage.
During the reporting period, Rick was able to purchase Southwest Gas Corp.
revenue bonds (issued by Clark County, Nevada Industrial Development
Authority) in exchange for selling lower-yielding paper in California.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Transportation 18.4%
Utilities 16.4%
Hospitals/health care 16.1%
Water and sewer 14.7%
Education 10.0%
Footnote reads:
*Based on net assets as of 10/31/98. Holdings will vary over time.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW*
Aa -- 7.4%
A -- 19.7%
Baa -- 24.8%
Ba and below -- 2.9%
Aaa -- 45.2%
Footnote reads:
*As a percentage of market value as of 10/31/98. A bond rated Baa or
higher is considered investment grade. All ratings reflect Moody's
descriptions unless noted otherwise; percentages may include unrated bonds
considered by Putnam Management to be of comparable quality. Ratings will
vary over time.
Another strategy Rick has used is to extend call protection as he makes
new investments. This is done by purchasing noncallable bonds or bonds
with distant call dates. Callable bonds carry the option of being
redeemed, or called away, by the issuer at a certain future date. Bonds
are normally called away if interest rates are lower at that time than
when the bonds were originally issued. By avoiding callable bonds, the
portfolio has a better chance of maintaining a consistent level of income.
* INTEREST-RATE CUTS HELP BOND MARKET FOCUS
The bond markets are beginning to move away from their obsession with the
international markets. The Federal Reserve Board cut interest rates twice
in three weeks (and again in mid November, after the close of this
reporting period), which helped the U.S. bond markets pay more attention
to economic fundamentals and thus become more balanced.
The intermediate maturity range of the yield curve (8 to 15 years) --
where many of the fund's holdings have been positioned -- has outperformed
other maturity ranges, and Rick expects this trend to continue over the
near term. However, there will come a time when a shift to longer
maturities will offer better performance. As opportunities appear in the
longer-term market, he will adjust the portfolio accordingly.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
December 16, 1998
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 10/31/98, there is no guarantee the fund will
continue to hold these securities in the future.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its 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 10/31/98
Lehman Bros.
Market Municipal Consumer
(common shares) NAV price Bond Index Price Index
- -------------------------------------------------------------------------
6 months 3.97% 9.22% 5.11% 0.80%
- -------------------------------------------------------------------------
1 year 6.32 5.27 8.02 1.36
- -------------------------------------------------------------------------
5 years 29.80 40.70 36.12 12.42
Annual average 5.35 7.07 6.36 2.37
- -------------------------------------------------------------------------
Life of fund (since 11/27/92) 53.22 50.83 52.56 15.35
Annual average 7.47 7.19 7.40 2.44
- -------------------------------------------------------------------------
TOTAL RETURN FOR PERIODS ENDED 9/30/98
(most recent calendar quarter)
Market
(common shares) NAV price
- ------------------------------------------------------------------------------
6 months 3.60% 3.29%
- ------------------------------------------------------------------------------
1 year 7.77 5.67
- ------------------------------------------------------------------------------
5 years 31.12 41.23
Annual average 5.57 7.15
- ------------------------------------------------------------------------------
Life of fund (since 11/27/92) 54.08 50.62
Annual average 7.68 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.
This performance information does not reflect any market volatility that
may have occurred since the date of the information. As a result, more
recent returns may be more or less than those shown.
PRICE AND DISTRIBUTION INFORMATION
6 months ended 10/31/98
- ------------------------------------------------------------------------------
Distributions (common shares)
- ------------------------------------------------------------------------------
Number 6
- ------------------------------------------------------------------------------
Income $0.48
- ------------------------------------------------------------------------------
Capital gains1 --
- ------------------------------------------------------------------------------
Total $0.48
- ------------------------------------------------------------------------------
Preferred shares Series A (630 shares) Series B (630 shares)
- ------------------------------------------------------------------------------
Income $970.94 $835.78
- ------------------------------------------------------------------------------
Capital gains1 -- --
- ------------------------------------------------------------------------------
Total $970.94 $835.78
- ------------------------------------------------------------------------------
Share value (common shares) NAV Market price
- ------------------------------------------------------------------------------
4/30/98 $14.13 $14.125
- ------------------------------------------------------------------------------
10/31/98 14.22 14.937
- ------------------------------------------------------------------------------
Current return (common shares/end of period)
- ------------------------------------------------------------------------------
Current dividend rate2 6.75% 6.43%
- ------------------------------------------------------------------------------
Taxable equivalent3 11.18 10.65
- ------------------------------------------------------------------------------
1 Capital gains, if any, 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 Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
3 Assumes maximum 39.6% federal tax rate. Results for investors subject to
lower tax rates would not be as advantageous.
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 in 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.
<TABLE>
<CAPTION>
Portfolio of investments owned
October 31, 1998 (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
MUNICIPAL BONDS AND NOTES (98.1%) (a)
PRINCIPAL AMOUNT RATINGS(RAT) VALUE
<S> <C> <C> <C>
Alaska (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
$2,000,000 Valdez, Marine Term. Rev. Bonds (Sohio Pipeline),
7 1/8s, 12/1/25 AA $ 2,210,000
Arizona (1.7%)
- --------------------------------------------------------------------------------------------------------------------------
6,000,000 Maricopa Cnty., U. School Dist. No. 41 Gilbert
Cap. Appn. G.O. Bonds, FGIC, zero % 1/1/07 Aaa 4,305,000
California (4.9%)
- --------------------------------------------------------------------------------------------------------------------------
5,000,000 CA Hlth. Fac. Fin. Auth. IFB (Catholic Healthcare
West), AMBAC, 6.906s, 7/1/17 Aaa 5,206,250
2,500,000 CA State U. IFB, AMBAC, 9.959s, 11/1/21
(acquired 9/2/94, cost $2,681,272) (RES) Aaa 2,915,625
3,500,000 Foothill/Eastern Trans. Corridor Agcy. Toll Rd.
Rev. Bonds, sr. lien, Ser. A, 7s, 1/1/08 Baa 2,782,500
1,420,000 Fountain Valley, Agcy. for Cmnty. Dev. Tax Alloc.
Rev. Bonds (Indl. Area Redev.), 9.1s, 1/1/16 BBB+ 1,436,245
--------------
12,340,620
Colorado (7.3%)
- --------------------------------------------------------------------------------------------------------------------------
Denver, City & Cnty. Arpt. Rev. Bonds
3,675,000 Ser. A, 8 3/4s, 11/15/23 Baa1 4,180,313
1,325,000 Prerefunded, Ser. A, 8 3/4s, 11/15/23 Aaa 1,537,000
2,285,000 Ser. A, 8 1/2s, 11/15/23 Baa1 2,502,075
215,000 Prerefunded, Ser. A, 8 1/2s, 11/15/23 Aaa 239,188
1,525,000 Ser. A, 8s, 11/15/25 Baa1 1,656,531
735,000 Ser. A, 8s, 11/15/25 Baa1 807,581
265,000 Prerefunded, Ser. A, 8s, 11/15/25 Aaa 297,131
145,000 Prerefunded, Ser. A, 8s, 11/15/25 Aaa 159,863
1,000,000 Ser. D, 7 3/4s, 11/15/13 Baa1 1,291,250
5,250,000 SCA Tax Exempt Trust Multi-Fam. Mtge. Rev. Bonds
(Newport Village), Ser. A-8, FSA, 7.1s, 1/1/30 Aaa 5,866,875
--------------
18,537,807
Florida (9.2%)
- --------------------------------------------------------------------------------------------------------------------------
Broward Cnty., Resource Recvy. Rev. Bonds
9,650,000 (SES Broward Cnty. LP South), 7.95s, 12/1/08 A 10,292,208
1,045,000 (Waste-Energy LP North), 7.95s, 12/1/08 A 1,114,545
1,000,000 FL State Board of Ed. Cap. Outlay G.O. Bonds,
Ser. A, 7 1/4s, 6/1/23 Aa2 1,067,500
5,000,000 Lee Cnty., Board of Directors Hosp. IFB
(Lee Memorial Hosp.), MBIA, 8.867s, 3/26/20 Aaa 5,887,500
5,000,000 Port Everglades, Auth. Rev. Bonds, Ser. A, 5s, 9/1/16 BBB 4,818,750
--------------
23,180,503
Georgia (3.0%)
- --------------------------------------------------------------------------------------------------------------------------
6,340,000 Burke Cnty., Dev. Auth. Poll. Control Rev. Bonds
(Oglethorpe Pwr. Co. Vogtle), MBIA, 8s, 1/1/22 (SEG) Aaa 7,504,975
Hawaii (2.6%)
- --------------------------------------------------------------------------------------------------------------------------
4,000,000 HI State Arpt. Syst. Rev. Bonds, FGIC, 7s, 7/1/10 Aaa 4,370,000
2,000,000 HI State Arpt. Syst. Rev. Bonds, AMBAC, 7.3s, 7/1/20 Aaa 2,147,500
--------------
6,517,500
Illinois (5.1%)
- --------------------------------------------------------------------------------------------------------------------------
7,750,000 Central Lake Cnty., Joint Action Wtr. Agcy.
G.O. Bonds, 6s, 2/1/19 Aa 8,263,437
Chicago, O'Hare Intl. Arpt. Special Fac. Rev. Bonds
2,005,000 (United Air Lines, Inc.), Ser. C, 8.2s, 5/1/18 Baa2 2,098,994
2,250,000 (American Airlines, Inc.), Ser. A, 7 7/8s, 11/1/25 Baa2 2,427,188
--------------
12,789,619
Indiana (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
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 2,177,500
Kansas (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
2,600,000 Burlington, Poll. Control Rev. Bonds (Kansas Gas &
Electric Co.), MBIA, 7s, 6/1/31 Aaa 2,847,000
Kentucky (2.1%)
- --------------------------------------------------------------------------------------------------------------------------
5,030,000 Jefferson Cnty., Cap. Corp. Rev. Bonds, MBIA,
5 1/2s, 6/1/28 Aaa 5,281,500
Louisiana (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
500,000 St. Charles Parish, Poll. Control Rev. Bonds
(LA Pwr. & Lt.), 8 1/4s, 6/1/14 Baa3 525,175
2,000,000 Beauregard, Parish Rev. Bonds (Boise Cascade
Corp.), 7 3/4s, 6/1/21 Baa3 2,180,000
--------------
2,705,175
Massachusetts (5.8%)
- --------------------------------------------------------------------------------------------------------------------------
MA State Hlth. & Edl. Fac. Auth. IFB
5,500,000 (Med. Ctr. of Central MA), Ser. B, AMBAC, 9.19s,
6/23/22 Aaa 7,253,125
2,000,000 (Beth Israel-Deaconess Hosp.), AMBAC, 8.46s,
10/1/31 Aaa 2,365,000
3,000,000 MA State Port Auth. Rev. Bonds, 13s, 7/1/13 Aaa 5,152,500
--------------
14,770,625
Michigan (5.9%)
- --------------------------------------------------------------------------------------------------------------------------
2,000,000 Detroit, Wtr. Supply Syst. IFB, FGIC, 8.968s, 7/1/22 Aaa 2,332,500
6,000,000 MI State Hosp. Fin. Auth. Rev. Bonds (Pontiac
Osteopathic Hosp.), Ser. A, 6s, 2/1/24 Baa1 6,255,000
6,250,000 Western Township, Util. Auth. Swr. Disp. Syst.
Rev. Bonds, 8.2s, 1/1/18 BBB+ 6,420,063
--------------
15,007,563
Mississippi (2.5%)
- --------------------------------------------------------------------------------------------------------------------------
6,000,000 Claiborne Cnty., Poll. Control Rev. Bonds (Middle
South Energy, Inc.), Ser. C, 9 7/8s, 12/1/14 Ba1 6,203,880
Nevada (2.1%)
- --------------------------------------------------------------------------------------------------------------------------
3,000,000 Clark Cnty., Indl. Dev. Rev. Bonds (Southwest Gas
Corp.), Ser. B, 7 1/2s, 9/1/32 Baa2 3,330,000
2,000,000 Clark Cnty., Indl. Dev. Rev. Bonds (NV Pwr. Co.),
Ser. C, 5 1/2s, 10/1/30 BBB- 2,005,000
--------------
5,335,000
New York (16.9%)
- --------------------------------------------------------------------------------------------------------------------------
2,000,000 Long Island, Pwr. Auth. NY Elec. Syst. Rev. Bonds,
Ser. A, 5 1/4s, 12/1/26 Baa1 2,015,000
NY City, G.O. Bonds
2,900,000 Ser. B, 7 1/2s, 2/1/06 A3 3,240,750
5,000,000 Ser. D, 5 1/4s, 8/1/21 A3 5,031,250
1,100,000 Prerefunded, Ser. B, 7 1/2s, 2/1/06 A3 1,241,625
6,250,000 NY City, Muni. Wtr.& Swr. Syst. Fin. Auth. Rev.
Bonds, Ser. B, 7 3/4s, 6/15/20 Aaa 6,984,375
NY State Dorm. Auth. Rev. Bonds (State U.
Edl. Fac.), Ser. A
6,500,000 7.7s, 5/15/12 Aaa 7,036,250
5,000,000 5 7/8s, 5/15/17 A3 5,562,500
5,000,000 NY State Energy Res. & Dev. Auth. Elec. Fac.
Rev. Bonds (Cons. Edison Co. of NY, Inc.), Ser. A,
7 1/2s, 1/1/26 A1 5,225,000
NY State Urban Dev. Corp. Rev. Bonds (Syracuse U.)
1,440,000 6s, 1/1/07 Baa1 1,614,600
1,360,000 6s, 1/1/06 Baa1 1,513,000
3,000,000 Suffolk Cnty., Wtr. Auth. Rev. Bonds, Sub. Lien,
MBIA, 6s, 6/1/14 Aaa 3,420,000
--------------
42,884,350
Oklahoma (1.6%)
- --------------------------------------------------------------------------------------------------------------------------
3,555,000 Tulsa, Indl. Auth. Hosp. Rev. Bonds (Hillcrest Med.
Ctr.), CLI Insd., 6 1/4s, 6/1/10 AAA 4,150,463
Pennsylvania (4.7%)
- --------------------------------------------------------------------------------------------------------------------------
3,000,000 Allegheny Cnty., Hosp. Dev. Auth. Rev. Bonds
(Magee-Womans Hosp.), FGIC, 6s, 10/1/13 Aaa 3,255,000
2,000,000 Allegheny Cnty. Indl. Dev. Auth. Rev. Bonds
(Environmental Import USX), 6.7s,12/1/20 Baa2 2,200,000
5,000,000 Dauphin Cnty., Auth. Hosp. Rev. Bonds (Hapsco-
Western PA Hosp.), Ser. A, MBIA, 6 1/2s, 7/1/12 Aaa 5,456,250
2,700,000 PA State Higher Ed. Assistance Agcy. Rev. Bonds
(Student Loan IFB), Ser. A, AMBAC, 6 1/4s, 7/1/13 Caa3 1,080,000
--------------
11,991,250
Puerto Rico (1.8%)
- --------------------------------------------------------------------------------------------------------------------------
4,500,000 Cmnwlth. of PR, Med. and Env. Poll. Ctrl. Fac.
Rev. Bonds (Baxter Travenol Labs., Inc.), 8s, 9/1/12 A3 4,648,905
South Carolina (2.3%)
- --------------------------------------------------------------------------------------------------------------------------
5,000,000 Spartanburg Cnty. Solid Waste Disp. Rev. Bonds
(Bayerische Motoren Werke), 7.55s, 11/1/24 A/P 5,743,750
Tennessee (5.2%)
- --------------------------------------------------------------------------------------------------------------------------
3,000,000 Maury Cnty. Indl. Dev. Board Poll. Control
Rev. Bonds (Saturn Corp.), 6 1/2s, 9/1/24 A2 3,333,750
8,300,000 Metropolitan Govt. Nashville & Davidson Cnty.,
Tenn. Wtr. & Swr. IFB, AMBAC, 8.368s, 1/1/22 Aaa 9,731,750
--------------
13,065,500
Texas (4.6%)
- --------------------------------------------------------------------------------------------------------------------------
1,700,000 Alliance, Arpt. Auth. Rev. Bonds (Federal Express
Corp.), 6 3/8s, 4/1/21 Baa2 1,833,875
1,250,000 Dallas-Fort Worth, Intl. Arpt. Fac. Impt. Corp.
Rev. Bonds (American Airlines, Inc.), 7 1/2s,
11/1/25 Baa2 1,339,060
1,750,000 North Central Hlth. Fac. Dev. Corp. IFB
(Presbyterian Hlth. Care Syst.), Ser. C, MBIA,
9.407s, 6/22/21 Aaa 2,065,000
3,000,000 Nueces Cnty., Port of Corpus Christi Rev. Bonds
(Union Pacific), 5.65s, 12/1/22 Baa3 3,082,500
3,000,000 Titus Cnty., Fresh Wtr. Supply Dist. No. 1 Poll.
Rev. Bonds (Southwestern Elec. Pwr. Co.), Ser. A,
8.2s, 8/1/11 A1 3,356,250
--------------
11,676,685
Washington (3.6%)
- --------------------------------------------------------------------------------------------------------------------------
6,000,000 King Cnty., G.O. Bonds, Ser. C, 6 1/4s, 1/1/32 Aa1 6,682,500
2,000,000 Tacoma, Elec. Syst. IFB, AMBAC, 9.043s, 1/2/15 Aaa 2,310,000
--------------
8,992,500
West Virginia (1.3%)
- --------------------------------------------------------------------------------------------------------------------------
3,000,000 Mason Cnty., Poll. Ctrl. Rev. Bonds (Appalachian
Pwr. Co.), Ser. I, 6.85s, 6/1/22 Baa1 3,281,250
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $239,258,925) (b) $ 248,148,920
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $253,013,635.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available at
October 31, 1998 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, 1998. Securities
rated by Putnam are indicated by "/P" and are not publicly rated.
(b) The aggregate identified cost on a tax basis is $239,258,925, resulting in gross unrealized appreciation and
depreciation of $13,532,779 and $4,642,784, respectively, or net unrealized appreciation of $8,889,995.
(RES) Restricted, excluding 144A securities, as to public resale. The total market value of restricted securities held at
October 31, 1998 was $2,915,625 or 1.2% of net assets.
(SEG) A portion of this security was pledged and segregated with the custodian to cover margin requirements for
futures contracts at October 31, 1998.
The rates shown on IFBs, which are securities paying interest rates that vary inversely to changes in the
market interest rates, and are the current interest rates at October 31, 1998.
The fund had the following industry group concentrations greater than 10% at October 31, 1998 (as a percentage
of net assets):
Transportation 18.4%
Utilities 16.4
Hospitals/health care 16.1
Water and sewerage 14.7
Education 10.0
The fund had the following insurance concentrations greater than 10% at October 31, 1998 (as a percentage of
net assets):
AMBAC 13.9%
MBIA 12.8
- -------------------------------------------------------------------------------
Futures Contracts Outstanding at October 31, 1998 (Unaudited)
Aggregate Face Expiration Unrealized
Total Value Value Date Depreciation
- -------------------------------------------------------------------------------
Muni Index Future (long) $17,565,625 $17,592,785 Dec-98 $(27,160)
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
October 31, 1998 (Unaudited)
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $239,258,925) (Note 1) $248,148,920
- -----------------------------------------------------------------------------------------------
Cash 1,011,056
- -----------------------------------------------------------------------------------------------
Interest receivable 5,002,466
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 550,000
- -----------------------------------------------------------------------------------------------
Total assets 254,712,442
Liabilities
- -----------------------------------------------------------------------------------------------
Distributions payable to shareholders 1,068,567
- -----------------------------------------------------------------------------------------------
Payable for variation margin 105,000
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 449,789
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 23,301
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 10,727
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 536
- -----------------------------------------------------------------------------------------------
Other accrued expenses 40,887
- -----------------------------------------------------------------------------------------------
Total liabilities 1,698,807
- -----------------------------------------------------------------------------------------------
Net assets $253,013,635
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) 356,485
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (5,503,383)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 8,862,835
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $253,013,635
Computation of net asset value
- -----------------------------------------------------------------------------------------------
Series A and B Remarketed preferred shares 63,000,000
- -----------------------------------------------------------------------------------------------
Cumulative undeclared dividends on remarketed preferred shares 80,131
- -----------------------------------------------------------------------------------------------
Net assets allocated to remarketed preferred shares
at liquidation preference 63,080,131
- -----------------------------------------------------------------------------------------------
Net assets available to common shares 189,933,504
- -----------------------------------------------------------------------------------------------
Net asset value per common share
($189,933,504 divided by 13,357,092 shares) $14.22
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Six months ended October 31, 1998 (Unaudited)
<S> <C>
Tax exempt interest income: $8,681,201
- -----------------------------------------------------------------------------------------------
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 892,967
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 119,895
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 5,768
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 3,209
- -----------------------------------------------------------------------------------------------
Reports to shareholders 15,375
- -----------------------------------------------------------------------------------------------
Auditing 21,970
- -----------------------------------------------------------------------------------------------
Legal 7,074
- -----------------------------------------------------------------------------------------------
Postage 13,507
- -----------------------------------------------------------------------------------------------
Exchange listing fees 12,166
- -----------------------------------------------------------------------------------------------
Preferred share remarketing agent fees 85,750
- -----------------------------------------------------------------------------------------------
Other 25,039
- -----------------------------------------------------------------------------------------------
Total expenses 1,202,720
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (14,973)
- -----------------------------------------------------------------------------------------------
Net expenses 1,187,747
- -----------------------------------------------------------------------------------------------
Net investment income 7,493,454
- -----------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (357,566)
- -----------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Note 1) 626,487
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and
futures contracts during the period 936,313
- -----------------------------------------------------------------------------------------------
Net gain on investments 1,205,234
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $8,698,688
- -----------------------------------------------------------------------------------------------
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
1998* 1998
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Increase in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 7,493,454 $ 14,218,035
- ---------------------------------------------------------------------------------------------------------------
Net realized gain on investments 268,921 507,758
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 936,313 6,253,086
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 8,698,688 20,978,879
- ---------------------------------------------------------------------------------------------------------------
Distributions to remarketed preferred shareholders:
From net investment income (1,138,233) (2,320,529)
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations
applicable to common shareholders (excluding
cumulative undeclared dividends on remarketed preferred
shares of $80,131 and $76,159, respectively) 7,560,455 18,658,350
- ---------------------------------------------------------------------------------------------------------------
Distributions to common shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income (6,411,312) (12,821,881)
- ---------------------------------------------------------------------------------------------------------------
Total increase in net assets 1,149,143 5,836,469
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of period 251,864,492 246,028,023
- ---------------------------------------------------------------------------------------------------------------
End of period (including undistributed net investment
income of $356,485 and $412,576, respectively) $253,013,635 $251,864,492
- ---------------------------------------------------------------------------------------------------------------
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
Per-share October 31
operating performance (Unaudited) Year ended April 30
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $14.13 $13.70 $13.79 $13.94 $14.30 $15.00
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .56 1.06 1.07 1.09 1.14 1.16
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .10 .50 (.03) (.10) (.16) (.66)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .66 1.56 1.04 .99 .98 .50
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net investment income
- ------------------------------------------------------------------------------------------------------------------------------------
To preferred shareholders (.09) (.17) (.17) (.18) (.15) (.15)
- ------------------------------------------------------------------------------------------------------------------------------------
To common shareholders (.48) (.96) (.96) (.96) (.96) (.96)
- ------------------------------------------------------------------------------------------------------------------------------------
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) (1.13) (1.14) (1.34) (1.20)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period
(common shares) $14.22 $14.13 $13.70 $13.79 $13.94 $14.30
- ------------------------------------------------------------------------------------------------------------------------------------
Market value, end of period
(common shares) 14.937 $14.125 $14.250 $13.875 $12.75 $13.25
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return at market
value (common shares) (%)(a) 9.22* 5.63 9.86 16.62 5.39 (2.81)
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(total fund) (in thousands) $253,014 $251,864 $246,028 $247,234 $249,223 $254,025
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b)(c) .63* 1.26 1.26 1.24 1.28 1.14
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%)(b) 3.33* 6.26 6.51 6.41 7.10 6.66
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 6.23* 25.71 45.48 160.28 85.63 32.27
- ------------------------------------------------------------------------------------------------------------------------------------
* Not annualized
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) Ratios reflect net assets available to common shares only; net investment income ratio also reflects
reduction for dividend payments to preferred shareholders.
(c) 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, 1998 (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 Putnam Investment Management, Inc.
("Putnam Management"), the fund's Manager, a wholly-owned subsidiary of
Putnam Investments, Inc., 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 Management
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, 1998, the fund had a capital loss carryover of approximately
$5,097,000 available to offset future capital gains, if any. The amount of
the carryover and the expiration dates are:
Loss Carryover Expiration
--------------- ---------------
$2,203,000 April 30, 2004
2,651,000 April 30, 2005
243,000 April 30, 2006
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, 1998 was Series A -- 3.50%, Series B --
3.58%. 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. Discounts on original issue
discount bonds and zero coupon bonds are accreted on a yield-to-maturity
basis.
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% 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 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, 1998, fund expenses were reduced by
$14,973 under expense offset arrangements with PFTC. 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.
Each Trustee of the fund receives an annual Trustees fee, of which $490
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, 1998, purchases and sales of
investment securities other than short-term investments aggregated
$15,436,755 and $15,686,106, 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, 1998, no such restrictions have been
placed on the fund.
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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
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
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
Ian C. Ferguson
Vice President
Brett C. Browchuk
Vice President
Jerome J. Jacobs
Vice President
Richard P. Wyke
Vice President and Fund Manager
John R. Verani
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time, or visit
our website (www.putnaminv.com) any 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
www.putnaminv.com
- ---------------------
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47857 183 12/98
