PUTNAM INVESTMENT GRADE MUNICIPAL TRUST III, N-2/A, 1994-01-27

PUTNAM INVESTMENT GRADE MUNICIPAL TRUST III
N-2/A, 1994-01-27

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 27, 1994

SECURITIES ACT FILE NO. 33-51667

INVESTMENT COMPANY ACT FILE NO. 811-07099

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 /X/

PRE-EFFECTIVE AMENDMENT NO. 1 /X/

POST-EFFECTIVE AMENDMENT NO. / /

AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 4 /X/
(Check appropriate box or boxes)

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PUTNAM INVESTMENT GRADE MUNICIPAL TRUST III
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)

ONE POST OFFICE SQUARE, BOSTON, MASSACHUSETTS 02109
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 292-1000

JOHN R. VERANI
VICE PRESIDENT
PUTNAM INVESTMENT GRADE MUNICIPAL TRUST III
ONE POST OFFICE SQUARE
BOSTON, MASSACHUSETTS 02109
(NAME AND ADDRESS OF AGENT FOR SERVICE)

Copies to:

<TABLE>
<S> <C>
THOMAS A. HALE, ESQ. JOSEPH B. KITTREDGE, JR., ESQ.
SKADDEN, ARPS, SLATE, ROPES & GRAY
MEAGHER & FLOM One International Place
333 W. Wacker Drive Boston, Massachusetts 02110-2624
Chicago, Illinois 60606
</TABLE>

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APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
this Registration Statement becomes effective.
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<TABLE>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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<CAPTION>
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PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SECURITIES BEING OFFERING PRICE AGGREGATE REGISTRATION
BEING REGISTERED REGISTERED PER UNIT OFFERING PRICE FEE(1)

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<S> <C> <C> <C> <C>
Preferred Shares of Beneficial
Interest 200 $50,000 $10,000,000 $3,449
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<FN>

(1) Registration Fee previously paid.

</TABLE>

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.

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<PAGE> 2

PUTNAM INVESTMENT GRADE MUNICIPAL TRUST III

CROSS REFERENCE SHEET PURSUANT TO RULE 495(A)

UNDER THE SECURITIES ACT OF 1933

<TABLE>

PARTS A AND B OF PROSPECTUS*

<CAPTION>
ITEM
NO. REGISTRATION STATEMENT CAPTION LOCATION IN PROSPECTUS
- ---- ------------------------------------- ------------------------------------------------
<C> <S> <C>
1. Outside Front Cover.................. Outside Front Cover
2. Inside Front and Outside Back Cover
Page................................. Inside Front and Outside Back Cover Page
3. Synopsis............................. Prospectus Summary
4. Financial Highlights................. Not Applicable
5. Plan of Distribution................. Cover Page; Outside Front Cover; Prospectus
Summary; Underwriting
6. Selling Shareholders................. Not Applicable
7. Use of Proceeds...................... Outside Front Cover; Inside Front Cover;
Prospectus Summary; Use of Proceeds; Investment
Objective and Policies
8. General Description of Registrant.... Outside Front Cover; Inside Front Cover;
Prospectus Summary; The Fund; Investment
Objective and Policies; Other Investment
Practices; Investment Restrictions; Taxation;
Portfolio Transactions; Description of Preferred
Shares; Description of Common Shares;
Determination of Net Asset Value; Appendix D
9. Management........................... Inside Front Cover; Prospectus Summary;
Investment Manager and Administrator; Trustees
and Officers; Investment Management Contract;
Administrative Services Contract; Portfolio
Transactions; Custodian, Transfer Agent,
Dividend Disbursing Agent, and Registrar;
Statement of Assets and Liabilities
10. Capital Stock, Long-Term Debt, and
Other Securities..................... Prospectus Summary; Description of Preferred
Shares; Description of Common Shares; Taxation;
Appendix B
11. Defaults and Arrears on Senior
Securities........................... Not Applicable
12. Legal Proceedings.................... Not Applicable
13. Table of Contents of Statement of
Additional Information............... Not Applicable
14. Cover Page........................... Not Applicable
15. Table of Contents.................... Not Applicable
16. General Information and History...... Not Applicable
17. Investment Objective and Policies.... Outside Front Cover; Inside Front Cover;
Prospectus Summary; Investment Objective and
Policies; Other Investment Practices; Investment
Restrictions; Appendix D
18. Management........................... Trustees and Officers
19. Control Persons and Principal Holders
of Securities........................ Principal Holders of Securities; Description of
Common Shares; Statement of Assets and
Liabilities

- ---------------
<FN>
* Pursuant to General Instruction H of Form N-2, all information required to be
set forth in Part B: Statement of Additional Information has been included in
Part A: The Prospectus.

</TABLE>

<PAGE> 3

<TABLE>
<CAPTION>
ITEM
NO. REGISTRATION STATEMENT CAPTION LOCATION IN PROSPECTUS
- ---- ------------------------------------- ------------------------------------------------
<C> <S> <C>
20. Investment Advisory and Other
Services............................. Prospectus Summary; Investment Manager and
Administrator; Trustees and Officers; Investment
Management Contract; Administrative Services
Contract; Portfolio Transactions; Statement of
Assets and Liabilities
21. Brokerage Allocation and Other
Practices............................ Portfolio Transactions
22. Tax Status........................... Taxation
23. Financial Statements................. Experts; Report of Independent Accountants;
Statement of Assets and Liabilities
</TABLE>

PART C

The information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Registration Statement.
<PAGE> 4

Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.

SUBJECT TO COMPLETION, DATED JANUARY 27, 1994

PROSPECTUS

$10,000,000

PUTNAM INVESTMENT GRADE MUNICIPAL TRUST III

MUNICIPAL INCOME PREFERRED SHARES

200 SHARES

LIQUIDATION PREFERENCE $50,000 PER SHARE
------------------------

Putnam Investment Grade Municipal Trust III (the "Fund") is offering hereby
200 Municipal Income Shares ("Preferred Shares"), with a liquidation preference
of $50,000 per share plus accumulated and unpaid dividends. Dividends on each
Preferred Share will be cumulative from the Date of Original Issue and will be
payable, when, as and if declared, subject to certain exceptions, on each
Dividend Payment Date for each such share. The Initial Dividend Period for
Preferred Shares will end on February , 1995. The First Initial Dividend
Payment Date for Preferred Shares will be March 1, 1994, and dividends will be
payable thereafter during the Initial Dividend Period, subject to certain
exceptions, on the first day of each calendar month and through the first day of
the last calendar month in the Initial Dividend Period and on the last Initial
Dividend Payment Date of February , 1995. The Applicable Dividend Rate on
Preferred Shares for the Initial Dividend Period will be % per annum.
Dividends on each Preferred Share will be cumulative from the Date of Original
Issue and will be payable, when, as and if declared, subject to certain
exceptions, on each Dividend Payment Date for each such share. After the Initial
Dividend Period for Preferred Shares, each subsequent Dividend Period (other
than a Special Dividend Period) will generally be a 28-day Dividend Period and,
except as otherwise described herein, dividends on Preferred Shares will
accumulate at the Applicable Dividend Rate in effect from time to time as
determined by the Remarketing Agent in advance of such Dividend Period, as more
fully described herein.

This Prospectus explains concisely what investors should know before
investing in the Fund. Investors are advised to read this Prospectus carefully
and to retain it for future reference.

(CONTINUED ON FOLLOWING PAGE)

<TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COM-
MISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<CAPTION>
PRICE TO SALES PROCEEDS TO
PUBLIC(1) LOAD FUND(1)(2)

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<S> <C> <C> <C>
Per Share................................ $50,000 $ $
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Total.................................... $10,000,000 $ $
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<FN>
(1) Plus accumulated dividends, if any, from the Date of Original Issue.
(2) The Fund and Putnam have agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting."

(3) Before deducting expenses, estimated at $170,000, payable by the Fund.

</TABLE>
------------------------

The Preferred Shares are offered by the Underwriter, subject to prior sale,
when, as and if issued by the Fund and accepted by the Underwriter, subject to
approval of certain legal matters by counsel for the Underwriter and certain
other conditions. The Underwriter reserves the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
one certificate for the Preferred Shares will be delivered to the nominee of The
Depository Trust Company on or about February , 1994.

SMITH BARNEY SHEARSON INC.

February , 1994

<PAGE> 5

(CONTINUED FROM COVER PAGE)

The Fund is a closed-end, diversified management investment company. The
Fund's investment objective is to seek as high a level of current income exempt
from federal income tax as the Fund's investment manager believes is consistent
with preservation of capital. The Fund will invest in tax exempt securities
rated investment grade at the time of investment, or, with respect to 20% of its
total assets, if not rated, determined by the Fund's investment manager to be of
comparable quality. Investment grade securities are rated BBB or higher by
Standard & Poor's Corporation or Fitch Investors Service, Inc. or Baa or higher
by Moody's Investors Service, Inc. (or equivalently rated by another nationally
recognized rating service). The Fund may invest a portion of its assets in tax
exempt securities that pay interest that is subject to the federal alternative
minimum tax. See "Investment Objective and Policies" and "Taxation."

Putnam Investment Management, Inc. ("Putnam") serves as investment manager
and administrator to the Fund. The Fund's address is One Post Office Square,
Boston, Massachusetts 02109, and its telephone number is (617) 292-1000.

Dividends on the Preferred Shares, to the extent payable from tax-exempt
interest earned on the Fund's investments, will be exempt from Federal income
tax in the hands of holders of such shares, subject to the possible application
of the Federal alternative minimum tax. If, on the basis of an estimate made by
the Fund, the Fund anticipates that any portion of a dividend on Preferred
Shares at the Applicable Dividend Rate will not be exempt from Federal income
tax solely because the Fund, in its judgment, believes it is required, in order
to comply with a published position of the Internal Revenue Service described in
this Prospectus, to allocate to Preferred Shares capital gains or other income
not exempt from Federal income tax, then the Fund will either (i) give notice of
the amount of any taxable income to be included in the dividend prior to the
Remarketing in which the Applicable Dividend Rate for such dividend will be
determined, or (ii) include such taxable income in that dividend without giving
notice of such inclusion prior to the setting of the Applicable Dividend Rate
and increase the dividend by an amount to offset (on the basis of certain
assumptions set forth in the Prospectus) the Federal tax effect thereof, all as
more fully described herein. See "Taxation" and "Remarketing -- Remarketing
Schedule; Advance Notice of Allocation of Taxable Income; Inclusion of Taxable
Income in Dividend."

Each Preferred Share subject to Tender and Dividend Reset may be tendered
in a Remarketing by submitting to the Remarketing Agent no later than 12:00
noon, New York City time, on the Remarketing Date an order to sell such share on
such date. There can be no assurance that all shares so tendered will be sold in
a Remarketing. Prospective purchasers should carefully review the remarketing
procedures described herein. Under certain conditions, Preferred Shares will be
redeemable at the option of the Fund, and will under certain other circumstances
be subject to mandatory redemption, at $50,000 per share plus accumulated but
unpaid dividends (plus, in the case of an optional redemption, any applicable
premium). Preferred Shares will not be redeemable at the option of the Fund
during the Initial Dividend Period. See "Description of Preferred Shares --
Redemption."

Subject to certain exceptions, ownership of Preferred Shares will be in
book entry form by or through the Securities Depository. The Paying Agent will
maintain a record of certain beneficial owners of Preferred Shares for purposes
of determining such owners entitled to participate in Remarketings and for
certain other purposes. The Paying Agent will only record transfers of such
beneficial ownership, in a Remarketing or otherwise, of which it is notified in
accordance with its procedures in effect from time to time. See "Remarketing --
Restrictions on Transfer." Prior to this offering, no Preferred Shares have been
outstanding, and accordingly there has not been a market for such shares.

2
<PAGE> 6

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus and the Appendices hereto.
Capitalized terms not defined in this Summary are defined in the Glossary
appearing on page 64 of this Prospectus or, in certain cases, are defined
elsewhere herein.

THE FUND

Putnam Investment Grade Municipal Trust III (the "Fund") is a closed-end,
diversified management investment company. As a recently organized entity, the
Fund has a limited operating history. See "The Fund." The Fund is managed by
Putnam Investment Management, Inc. ("Putnam").

THE OFFERING

The Fund is offering 200 Preferred Shares at a purchase price of $50,000
per Share. The Preferred Shares are being offered by Smith Barney Shearson Inc.
(the "Underwriter"). The Preferred Shares will entitle their holders to receive
cash dividends at a rate per annum that may vary for the successive Dividend
Periods for the Preferred Shares. Each Dividend Period subsequent to the Initial
Dividend Period will generally be 28 days in length or such other period as the
Fund may determine, as described below. The Applicable Dividend Rate for a
particular Dividend Period will generally be determined by a Remarketing
conducted on the Business Day next preceding the start of such Dividend Period.
For a discussion of special considerations relating to Preferred Shares, see
"Description of Preferred Shares."

INVESTMENT OBJECTIVE AND POLICIES

The Fund's investment objective is to seek as high a level of current
income exempt from federal income tax as the Fund's investment manager believes
is consistent with preservation of capital.

The Fund intends to pursue its objective by investing in a diversified
portfolio of investment grade tax exempt securities which Putnam believes does
not involve undue risk to income or principal. Investment grade tax exempt
securities are rated BBB or higher by Standard & Poor's Corporation ("S&P") or
Fitch Investors Service, Inc. ("Fitch") or Baa or higher by Moody's Investors
Service, Inc. ("Moody's") (or equivalently rated by another nationally
recognized rating service). The Fund may also invest up to 20% of its total
assets in non-rated tax exempt securities determined by Putnam at the time of
investment to be of comparable quality to rated securities in which the Fund may
invest. Tax exempt securities rated BBB by S&P or Fitch or Baa by Moody's (and
non-rated securities of comparable quality) are considered medium grade
securities and have speculative characteristics. See "Investment Objective and
Policies" and "Appendix C -- Description of Bond Ratings."

The Fund may invest up to 20% of its total assets in tax exempt securities
the interest on which is subject to the federal alternative minimum tax, and as
a result, a portion of the Fund's distributions may be taxable to certain
shareholders. All or a portion of the Fund's distributions may be subject to
state and local taxation.

The Fund may also invest in inverse floating obligations or residual
interest bonds whose stated rates of interest generally vary inversely with
changes in market rates of tax exempt interest. The values of inverse floating
obligations are generally more volatile, and the market for inverse floating
obligations is generally more illiquid, than those of many other tax exempt
securities. In addition, because coupon rates of interest on inverse floating
obligations vary inversely with changes in market rates of interest, interest
income earned by the Fund may be more volatile than if the Fund invested solely
in fixed-rate tax exempt securities. Because inverse floating obligations
represent a relatively recent innovation in the municipal securities market,
there is a lack of historical data concerning the attributes of such securities
under all market conditions. Such securities also have the effect of providing a
degree of investment leverage, since they will generally increase or decrease in
value in response to changes in market interest rates at a rate which is a
multiple of the rate at which fixed-rate tax exempt securities of comparable
maturity and credit quality increase or decrease in value in response to such
changes. Putnam believes that inverse floating obligations represent a flexible
portfolio management instrument for the Fund which will allow Putnam to vary the
degree of investment leverage

3
<PAGE> 7

relatively efficiently under different market conditions. Often, inverse
floating obligations are created by selling two complementary interests in a
single, previously issued fixed-rate tax exempt security: a floating rate
obligation and the inverse floating obligation. In other cases, the issuer will
itself issue directly the two complementary obligations. In seeking to limit the
risks associated with the less liquid secondary market for inverse floating
obligations, the Fund will only purchase such securities if, pursuant to their
terms or the terms of the complementary instruments, such securities may be
recombined with the complementary floating rate obligation. Also, to seek to
limit credit risk, the Fund will only purchase inverse floating obligations
which are themselves rated, or which represent components of fixed-rate tax
exempt securities that are rated, AAA (or an equivalent rating) by S&P, Fitch,
Moody's or another nationally recognized rating service. To seek to limit the
interest rate risk of these securities, the Fund may purchase inverse floating
obligations with shorter-term maturities or which contain limitations on the
extent to which the interest rate may vary. The Fund will not invest more than
25% of its total assets in inverse floating obligations. In addition, at any
time when Preferred Shares are outstanding, the Fund will not invest more than
15% of its total assets in such obligations. See "Investment Objective and
Policies."

In an effort to preserve capital, the Fund may engage in interest rate and
other hedging transactions by purchasing and selling financial futures contracts
and options on fixed-income securities indices and on U.S. Government
securities. The Fund may also enter into forward commitments and repurchase
agreements. These investment practices entail risks and may give rise to taxable
income. The Fund may also invest in certain tax exempt securities, the terms of
which include elements of instruments that may be used by the Fund in its
hedging activities.

The Fund may implement various temporary "defensive" strategies at times
when Putnam determines that conditions in the markets for tax exempt securities
make pursuing the Fund's basic investment strategy inconsistent with the best
interests of its shareholders. These strategies may include an increase in the
portion of the Fund's assets invested in high-quality tax exempt securities and
investments in taxable obligations.

The market values of fixed-income securities generally rise during periods
of falling interest rates and fall during periods of rising interest rates. Such
changes in the values of fixed-income securities will not affect interest income
derived from them but will affect the net asset value of the Fund.

Putnam believes that, in general, the secondary market for tax exempt
securities is less liquid than that for taxable fixed-income securities.
Consequently, the ability of the Fund to buy and sell tax exempt securities may,
at any particular time and with respect to any particular securities, be
limited. The publicly available information about the financial condition of an
issuer of tax exempt securities may not be as extensive as comparable
information about corporations whose securities are publicly traded. Obligations
of issuers of tax exempt securities may be subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the United States Bankruptcy Code and applicable state laws,
which could limit the ability of the Fund to recover payments of principal or
interest on such securities.

The Fund may at times purchase securities at prices greater than the
principal amounts payable on maturity. Such securities provide the Fund a higher
level of investment income distributable to Common Shareholders on a current
basis than if the Fund purchased securities bearing current market rates of
interest. However, because the value of premium securities tends to approach the
principal amount as they approach maturity (or call price in the case of
securities approaching their first call date), the purchase of such securities
increases the Fund's risk of capital loss. See "Investment Objective and
Policies -- Tax exempt securities."

Certain tax exempt securities which may be held by the Fund may permit the
issuer at its option to "call," or redeem, its securities. If an issuer were to
redeem tax exempt securities held by the Fund during a time of declining
interest rates, any gain that the Fund might otherwise realize on another
disposition of its investment may be reduced, and the Fund may not be able to
reinvest the proceeds in tax exempt securities providing as high a level of
investment return as the securities redeemed. See "Investment Objective and
Policies."

4
<PAGE> 8

With respect to the 20% of the Fund's total assets which may be invested in
non-rated tax exempt securities determined by Putnam at the time of investment
to be of comparable quality to rated securities in which the Fund may invest,
the Fund will be more dependent upon Putnam's investment analysis of such non-
rated tax exempt securities than in the case of rated securities. See
"Investment Objective and Policies."

The Fund is not intended to be a complete investment program, and there is
no assurance that the Fund will achieve its objective.

See "Investment Objective and Policies," "Other Investment Practices,"
"Taxation" and "Appendix C -- Description of Bond Ratings."

INVESTMENT MANAGER AND ADMINISTRATOR

Putnam Investment Management, Inc. ("Putnam") serves as the investment
manager and administrator to the Fund. Putnam has been a manager of mutual funds
since 1937. Putnam serves as the investment manager for the funds in the Putnam
family, with approximately $64 billion in assets in over three million
shareholder accounts as of December 31, 1993, including approximately $17
billion invested in tax exempt securities. Putnam currently employs seven
portfolio managers dedicated to the tax exempt securities market, supported by
ten investment analysts and other research personnel. In addition to the Fund,
Putnam manages sixteen closed-end funds, nine of which, Putnam Investment Grade
Municipal Trust, Putnam Investment Grade Municipal Trust II, Putnam California
Investment Grade Municipal Trust, Putnam New York Investment Grade Municipal
Trust, Putnam Tax-Free Health Care Fund, Putnam Managed Municipal Trust, Putnam
Investment Grade Intermediate Municipal Trust, Putnam Municipal Opportunities
Trust and Putnam High Yield Municipal Trust, invest primarily in tax exempt
securities. An affiliate, The Putnam Advisory Company, Inc., manages domestic
and foreign institutional accounts and foreign mutual funds. Another affiliate,
Putnam Fiduciary Trust Company, provides investment advice to institutional
clients under its banking and fiduciary powers. Putnam and its affiliates
managed over $90 billion in assets as of December 31, 1993. See "Investment
Manager and Administrator."

MANAGEMENT FEES

The Fund pays Putnam a quarterly investment management fee based on the
average weekly net asset value of the Fund, at the annual rate of 0.50% of the
first $500 million of the average net asset value of the Fund, 0.43% of the next
$500 million, 0.39% of the next $500 million and 0.35% of any excess over $1.5
billion of such average net asset value, pursuant to a Management Contract
between the Fund and Putnam. The net asset value upon which the investment
management fee is calculated includes net assets attributable to any outstanding
Preferred Shares (not treating the liquidation preference of the Preferred
Shares as a liability). If dividends payable on any Preferred Shares during any
dividend period plus expenses attributable to the Preferred Shares for that
period exceed the gross income of the Fund during that period attributable to
the investment of the proceeds of the Preferred Shares, then the management fee
payable to Putnam for that period will be reduced by an amount equal to the
product of such excess and a fraction, the numerator of which shall be the fee
otherwise payable to Putnam pursuant to the Management Contract and the
denominator of which shall be the sum of the fee otherwise payable to Putnam
pursuant to the Management Contract and the administrative service fee otherwise
payable to Putnam under the Administrative Services Contract, described below,
between the Fund and Putnam; provided, however, that the amount of such
reduction for any such dividend period shall not exceed the amount determined by
multiplying (i) the aggregate liquidation preference of the average number of
Preferred Shares outstanding during the dividend period, by (ii) the percentage
of the aggregate net asset value of the Fund which the fee payable to Putnam
during such dividend period pursuant to the Management Contract would constitute
without giving effect to such reduction. Putnam has agreed to waive its
investment management fee for the three-month period commencing November 26,
1993. See "Investment Management Contract."

5
<PAGE> 9

ADMINISTRATIVE SERVICE FEES

The Fund pays Putnam a quarterly administrative service fee at the annual
rate of 0.20% of the first $500 million of the average net asset value of the
Fund, 0.17% of the next $500 million, 0.16% of the next $500 million and 0.15%
of any excess over $1.5 billion of such average net asset value pursuant to an
Administrative Services Contract between the Fund and Putnam. The net asset
value upon which the administrative service fee is calculated includes net
assets attributable to any outstanding Preferred Shares (not treating the
liquidation preference of the Preferred Shares as a liability). If dividends
payable on the Preferred Shares during any dividend period plus expenses
attributable to the Preferred Shares for that period exceed the gross income of
the Fund during that period attributable to the investment of the proceeds of
the Preferred Shares, then the administrative service fee payable to Putnam for
that period will be reduced by an amount equal to the product of such excess and
a fraction, the numerator of which shall be the fee otherwise payable to Putnam
pursuant to the Administrative Services Contract and the denominator of which
shall be the sum of the fee otherwise payable to Putnam pursuant to the
Administrative Services Contract and the management fee otherwise payable to
Putnam under the Management Contract between the Fund and Putnam; provided,
however, that the amount of such reduction for any such period shall not exceed
the amount determined by multiplying (i) the aggregate liquidation preference of
the average number of Preferred Shares outstanding during that period, by (ii)
the percentage of the aggregate net asset value of the Fund which the fee
payable to Putnam during such period pursuant to the Administrative Services
Contract would constitute without giving effect to such reduction. Putnam has
agreed to waive its administrative service fee for the three-month period
commencing November 26, 1993. See "Administrative Services Contract."

DIVIDENDS AND DIVIDEND PERIODS

The Applicable Dividend Rate on Preferred Shares for the Initial Dividend
Period ending February , 1995, will be % per annum. For each Dividend
Period thereafter, except as otherwise described herein, the Applicable Dividend
Rate on the Preferred Shares will be the dividend rate per annum determined by
the Remarketing Agent in its sole discretion (which discretion will be
conclusive and binding on all holders) in accordance with the remarketing
procedures described below. See "Remarketing -- Remarketing Procedures --
Applicable Dividend Rates." After the Initial Dividend Period for Preferred
Shares, each subsequent Dividend Period will generally consist of 28 days (a
"28-day Dividend Period"), unless the Fund elects, prior to any Remarketing, a
Special Dividend Period. A "Special Dividend Period" is a Dividend Period
consisting of a specified number of days (other than 28), evenly divisible by
seven and not fewer than seven nor more than 364 (a "Short Term Dividend
Period"), or a Dividend Period consisting of a specified period of one whole
year or more but not greater than five years (a "Long Term Dividend Period").
Dividends on Preferred Shares will be cumulative from their Date of Original
Issue and will be payable, when, as and if declared by the Trustees, commencing
on March 1, 1994, and generally on each Dividend Payment Date thereafter. See
"Description of Preferred Shares -- Dividends -- Dividend Payment Dates." The
holder of a Preferred Share may elect to tender such share or hold such share
for the next Dividend Period by providing notice to the Remarketing Agent in
connection with the Remarketing for that Dividend Period. See "Remarketing --
Remarketing Procedures."

If the holder of a Preferred Share fails to make such an election, he shall
continue to hold such share for the subsequent Dividend Period at the Applicable
Dividend Rate determined in the Remarketing for such Dividend Period; provided
that, (i) if there is no Remarketing Agent, or the Remarketing Agent is not
required to conduct a Remarketing, or the Remarketing Agent is unable to
remarket in the Remarketing on the Remarketing Date all Preferred Shares
tendered (or deemed tendered) to it at a price of $50,000 per share, then the
next Dividend Period for all Preferred Shares shall be a 28-day Dividend Period
and the Applicable Dividend Rate therefor shall be the applicable Maximum
Dividend Rate for a 28-day Dividend Period, and (ii) if such current Dividend
Period is a Special Dividend Period of more than 90 days or the succeeding
Dividend Period has been designated by the Trustees as a Special Dividend Period
of more than 90 days, then such holder will be deemed to have elected to tender
the shares.

If the Fund has elected a Special Dividend Period, but the Remarketing
Agent is unable to remarket in the Remarketing for that Special Dividend Period
all Preferred Shares tendered (or deemed tendered) to it

6
<PAGE> 10

for that Special Dividend Period at a price of $50,000 per share, then the next
Dividend Period will instead be a 28-day Dividend Period and the Applicable
Dividend Rate therefor shall be the applicable Maximum Dividend Rate.

<TABLE>
Except during a Non-Payment Period, the Applicable Dividend Rate for any
Dividend Period will not exceed the applicable Maximum Dividend Rate. The
Maximum Dividend Rate for Preferred Shares will depend on the credit rating or
ratings assigned to such shares. The Maximum Dividend Rate for any Dividend
Period will be the Applicable Percentage (specified below) of the Reference Rate
on the applicable Remarketing Date. "Reference Rate" means (i) with respect to a
28-day Dividend Period or a Short Term Dividend Period having 28 or fewer days,
the higher of the applicable "AA" Composite Commercial Paper Rate and the
Taxable Equivalent of the Short-Term Municipal Bond Rate, (ii) with respect to
any Short Term Dividend Period having more than 28 but fewer than 183 days, the
applicable "AA" Composite Commercial Paper Rate, (iii) with respect to any Short
Term Dividend Period having 183 or more but fewer than 365 days, the U.S.
Treasury Bill Rate and (iv) with respect to any Long Term Dividend Period, the
applicable U.S. Treasury Note Rate. The "Applicable Percentage" on any
Remarketing Date will be determined based on the lower of the credit rating or
ratings assigned on such date to Preferred Shares by Moody's and S&P (or if
Moody's or S&P or both shall not make such rating available, the equivalent of
either or both of such ratings by a Substitute Rating Agency or two Substitute
Rating Agencies or in the event that only one such rating shall be available,
such rating) as follows:

<CAPTION>
APPLICABLE
PERCENTAGE
OF REFERENCE
MOODY'S S&P RATE
------- --- ------------
<S> <C> <C>
"aa3" or higher AA- or higher 110%
"a3" to "a1" A- to A+ 125%
"baa3" to "baa1" BBB- to BBB+ 150%
"ba3" to "ba1" BB- to BB+ 200%
Below "ba3" Below BB- 250%
</TABLE>

provided, however, that in the event the Fund has notified the Paying Agent and
the Remarketing Agent of its intent to allocate income taxable for federal
income tax purposes to the Preferred Shares prior to the Remarketing Agent
establishing the Applicable Dividend Rate for such shares, the applicable
percentage in the foregoing table shall be divided by the quantity 1 minus the
Gross-Up Tax Rate (as hereinafter defined). If the ratings for the Preferred
Shares are split between two of the foregoing credit rating categories, the
lower rating will determine the prevailing rating.

There is no minimum Applicable Dividend Rate in respect of any Dividend
Period.

The Applicable Dividend Rate for any Dividend Period commencing during any
Non-Payment Period, and the rate used to calculate any applicable late charge,
will generally be 250% of the Reference Rate (or 300% of such rate if the Fund
has provided a Tax Notification to the Remarketing Agent with respect to that
Dividend Period).

So long as a certificate representing Preferred Shares is held by the
Securities Depository, dividends with respect to such shares will be paid to the
Securities Depository or its nominee as the record holder of such shares. The
Securities Depository is responsible for crediting such dividends to the
accounts of the Agent Members of the beneficial owners of such shares, and the
Agent Members will be responsible for holding or disbursing such payments on the
applicable Dividend Payment Date to such owners in accordance with the
instructions of such owners. If a certificate representing Preferred Shares is
not held by the Securities Depository, dividends on such shares will be paid
directly to the record holder in same-day funds. The Fund shall have no
obligation, including any obligation to provide notice or to make any payment
(in respect of any dividend or otherwise), to any person (including without
limitation any holder of any beneficial interest in Preferred Shares, whether or
not such interest is reflected on the share transfer books of the Paying Agent)
other than the holders of record of the Preferred Shares shown on the share
records of the Paying Agent from time to time.

7
<PAGE> 11

ADVANCE NOTICE OF ALLOCATION OF TAXABLE INCOME; INCLUSION OF TAXABLE INCOME IN
DIVIDEND

Dividends paid by the Fund, to the extent paid from tax exempt interest
earned on tax-exempt securities and properly designated as exempt-interest
dividends, will be exempt from Federal income tax, subject to the possible
application of the Federal alternative minimum tax. The Internal Revenue Service
(the "IRS") has taken the position in a published ruling that the Fund is
required for each taxable year to allocate net capital gain and other income
subject to regular Federal income tax, if any, proportionately between the
Common Shares and the Preferred Shares in accordance with the percentage of
total Fund distributions received by each such class of shares with respect to
such year. Whenever the Fund intends to include any net capital gain or other
income subject to regular Federal income tax in a dividend on Preferred Shares
solely because the Fund, in its judgment, believes it is required, in order to
comply with the IRS's published position, to allocate taxable income to
Preferred Shares, the Fund may notify the Remarketing Agent of the amount to be
so included prior to the Remarketing establishing the Applicable Dividend Rate
for such dividend. Alternatively, if the Fund has not provided the notice
referred to in the preceding sentence, and nevertheless intends to include such
income in a dividend on Preferred Shares, it will increase the dividend by an
amount such that the return (determined on the basis of the assumptions set
forth in this Prospectus) to a holder of Preferred Shares with respect to such
dividend (as so increased and after giving effect to Federal income tax at the
Gross-Up Tax Rate) equals the Applicable Dividend Rate (or, in the case where
the notice referred to above has been given but the Fund intends to include an
additional amount of such taxable income, the after-tax return the Applicable
Dividend Rate would have produced without the inclusion of additional taxable
income). Neither the underlying dividend nor the additional amount referred to
in the preceding sentence will be increased to compensate for the fact that they
may be subject to state and local taxes. The "Gross-Up Tax Rate" shall be equal
to the sum of (i) the percentage of the taxable income included in the dividend
that is taxable for Federal income tax purposes as ordinary income, multiplied
by the greater of (A) the highest marginal Federal corporate income tax rate
(without regard to the phase-out of graduated rates) applicable to ordinary
income and (B) the highest marginal Federal individual income tax rate
applicable to ordinary income (including any surtax but without regard to any
phase-out of personal exemptions or any limitation on itemized deductions), and
(ii) the percentage of the taxable income included in the dividend that is
taxable for Federal income tax purposes as long-term capital gain, multiplied by
the greater of (A) the highest marginal Federal corporate income tax rate
(without regard to the phase-out of graduated rates) applicable to long-term
capital gain and (B) the highest marginal Federal individual income tax rate
applicable to long-term capital gain (including any surtax but without regard to
any phase-out of personal exemptions or any limitation on itemized deductions).
If for any reason it is determined after the payment of any dividend that a
portion of that dividend was subject to Federal income tax, the Fund will not be
required to pay any additional amount to compensate for any tax payable on the
dividend (other than Additional Dividends payable under the circumstances
described in this Prospectus). See "Taxation" and "Remarketing -- Remarketing
Schedule; Advance Notice of Allocation of Taxable Income; Inclusion of Taxable
Income in Dividend."

If the Fund characterizes retroactively all or a portion of a dividend
already paid on Preferred Shares as consisting of net capital gain or other
income subject to regular Federal income tax solely because (i) the Fund has
redeemed all or a portion of the outstanding Preferred Shares or has liquidated
and (ii) the Fund, in its judgment, believes it is required, in order to comply
with the published position of the IRS described above, to allocate such taxable
income to the Preferred Shares, the Fund will pay Additional Dividends
(calculated assuming a rate of tax equal to the Gross-up Tax Rate) to holders of
Preferred Shares whose dividends were so recharacterized. Such Additional
Dividends will not include an amount to compensate for the fact that the
Additional Dividends or the amount so recharacterized may be subject to state
and local taxes. Additional Dividends will be payable only in the foregoing
circumstances. See "Description of Preferred Shares -- Dividends -- Additional
Dividends."

The Fund will not be required to provide any notice of the prospective
inclusion of, or increase any dividend on Preferred Shares (including through
the payment of an Additional Dividend) as a result of the inclusion of, any
taxable income in any dividend other than in the circumstances described above.
No provision will be made to compensate holders of Preferred Shares for any
alternative minimum tax liability in

8
<PAGE> 12

respect of distributions on Preferred Shares. See "Description of Preferred
Shares -- Dividends" and "Taxation."

REMARKETING

Prospective purchasers should carefully review the remarketing procedures
described below and more fully detailed in this Prospectus, including the
Appendices hereto, and should note that (i) an election to tender Preferred
Shares cannot be revoked except as provided in the Bylaws and as more fully
described in this Prospectus, (ii) each Remarketing will be conducted through
telephonic communications, (iii) settlement for purchases and sales in a
Remarketing will be made on the Settlement Date, and (iv) each prospective
purchaser and each holder of Preferred Shares will be bound by the remarketing
procedures, including the Remarketing Agent's determination of the Applicable
Dividend Rate pursuant to the remarketing procedures.

Remarketing Schedule. Each Remarketing for Preferred Shares will take
place over a two-Business Day period consisting of the Remarketing Date
(normally a ) and the Settlement Date (normally a ). An example of the
time sequence of the events in a normal remarketing schedule is provided in
Appendix A hereto. The first Remarketing Date for the Preferred Shares will be
, .

Remarketing Date. By 9:00 a.m., New York City time, on each Remarketing
Date for Preferred Shares, the Remarketing Agent will, after canvassing the
market and considering prevailing market conditions, provide to holders of
Preferred Shares subject to Tender and Dividend Reset non-binding indications of
the Applicable Dividend Rate for the next succeeding 28-day Dividend Period or
Special Dividend Period, as the case may be. THE ACTUAL APPLICABLE DIVIDEND RATE
FOR SUCH DIVIDEND PERIOD MAY BE GREATER THAN OR LESS THAN THE RATE INDICATED IN
SUCH NON-BINDING INDICATIONS (BUT NOT GREATER THAN THE APPLICABLE MAXIMUM
DIVIDEND RATE) AND WILL NOT BE DETERMINED UNTIL AFTER A HOLDER IS REQUIRED TO
ELECT TO HOLD OR TENDER ITS PREFERRED SHARES OR A NEW PURCHASER IS REQUIRED TO
AGREE TO PURCHASE PREFERRED SHARES. By 12:00 noon, New York City time, on such
Remarketing Date, each holder of Preferred Shares subject to Tender and Dividend
Reset must notify the Remarketing Agent of its desire on a share-by-share basis,
either to tender such share at a price of $50,000 per share or to continue to
hold such share for the next Dividend Period (whether a 28-Day Dividend Period
or a Special Dividend Period). Any holder or prospective purchaser may
informally indicate to the Remarketing Agent its Applicable Dividend Rate
preferences. However, any such notice given to the Remarketing Agent to tender
or hold shares for a particular Dividend Period is irrevocable and may not be
conditioned upon the level at which the Applicable Dividend Rate is set.
Accordingly, the Applicable Dividend Rate with respect to a Dividend Period may
be greater or less than such rate preferences. Any such notice may not be
revoked by the holder; provided that, the Remarketing Agent may, in its sole
discretion, (i) at the request of a holder that has tendered one or more
Preferred Shares to the Remarketing Agent, waive such holder's tender and
thereby enable such holder to continue to hold such share or shares for the next
Dividend Period, as agreed to by the holder and the Remarketing Agent at such
time, so long as such tendering holder has indicated that it would accept the
new Applicable Dividend Rate for such Dividend Period, and (ii) at the request
of a holder that has elected to hold one or more of its Preferred Shares, waive
such holder's election with respect thereto, either such waiver to be contingent
upon the Remarketing Agent's being able to remarket all shares tendered to it in
such Remarketing. Subject to the last sentence of this paragraph, holders of
Preferred Shares that fail on a Remarketing Date for such shares to elect to
tender or hold such shares will be deemed to have elected to continue to hold
such shares for the next Dividend Period if each of the current Dividend Period
and the next Dividend Period is a 28-day Dividend Period or a Special Dividend
Period of 90 days or less. If, on a Remarketing Date for Preferred Shares, the
current Dividend Period is a Special Dividend Period of more than 90 days, or
the succeeding Dividend Period has been designated by the Trustees as a Special
Dividend Period of more than 90 days, then holders of such shares that fail to
elect to tender or hold such shares will be deemed to have elected to tender
such shares.

9
<PAGE> 13

therefor or to sell its shares outside a Remarketing. In such case, the
remarketing procedures may require an allocation of Preferred Shares on a pro
rata basis, to the extent practicable, or by lot, as determined by the
Remarketing Agent in its sole discretion, which may result in a holder's selling
a number of Preferred Shares that is less than the number of Preferred Shares
specified in such holder's tender order. See "Remarketing -- Remarketing
Procedures Allocation of Shares; Failure to Remarket at $50,000 Per Share,"
"Remarketing -- Restrictions on Transfer" and "Remarketing -- The Remarketing
Agent".

Settlement Date. On a Settlement Date for Preferred Shares, which will be
the first Business Day following the related Remarketing Date and which will be
the first day of the new Dividend Period, each person purchasing Preferred
Shares as a result of a Remarketing must pay, or cause its Agent Member to pay
on its behalf, the purchase price against delivery of such shares by the holder
thereof or its Agent Member.

After the initial sale of Preferred Shares through this offering,
settlement for purchases and sales of Preferred Shares in a Remarketing will
generally be made with respect to each Preferred Share through the Securities
Depository on the related Settlement Date therefor in accordance with its normal
procedures, which provide for payment in same-day funds.

Preferred Shares tendered in a Remarketing will be purchased solely out of
the proceeds received from purchasers of Preferred Shares in such Remarketing.
Neither the Fund, nor the Paying Agent or the Remarketing Agent will be
obligated to provide funds to make payment upon any holder's tender in a
Remarketing unless, in the case of the Paying Agent or the Remarketing Agent,
the shares are purchased for its own account. Tendered Preferred Shares will
also be subject to purchase in a Remarketing by the Remarketing Agent for its
own account or as nominee for others, although the Remarketing Agent is not
obligated to purchase any shares.

Remarketing Agent. The Remarketing Agent for Preferred Shares initially
will be Smith Barney Shearson Inc. Performance by the Remarketing Agent will be
subject to certain conditions. The Remarketing Agent may not terminate the
Remarketing Agreement except in accordance with the procedures set forth in such
agreement. See "Remarketing -- The Remarketing Agent".

RESTRICTIONS ON TRANSFER

Unless, during a Non-Payment Period, the Fund has chosen to waive this
requirement, Preferred Shares will be held only by book entry through the
Securities Depository. The Securities Depository maintains an account for each
Agent Member, which, in turn, will maintain records of its clients' beneficial
ownership. The Paying Agent will maintain a record of certain beneficial owners
of Preferred Shares, for purposes of determining such owners entitled to
participate in Remarketings and for certain other purposes. The Paying Agent
will only record transfers of such beneficial ownership, in a Remarketing or
otherwise, of which it is notified in accordance with its procedures in effect
from time to time. The Fund intends that any certificate for Preferred Shares
will bear a legend to the effect that such certificate is issued subject to
certain provisions restricting transfers of such shares. See "Remarketing --
Restrictions on Transfer".

SECONDARY MARKET

The Remarketing Agent has advised the Fund that it currently intends to
make a secondary trading market in the Preferred Shares outside of Remarketings.
The Remarketing Agent would earn customary brokerage commissions for trades in
the secondary market, which would be in addition to the annual remarketing fee
paid by the Fund. The Remarketing Agent, however, has no obligation to make a
secondary market in the Preferred Shares outside of Remarketings, and there can
be no assurance that a secondary market for Preferred Shares will exist at any
particular time or, if it does exist, that it will provide holders with
liquidity of investment. The Preferred Shares will not be registered on any
stock exchange or on the National Association of Securities Dealers Automated
Quotation System. If the Remarketing Agent purchases Preferred Shares in the
secondary market or in a Remarketing, it may be in a position of holding for its
own account or as nominee for others Preferred Shares at the time it determines
the Applicable Dividend Rate in a Remarketing therefor, and may tender such
shares in such Remarketing. See "Remarketing -- Restrictions on Transfer --
Secondary Market".

10
<PAGE> 14

ASSET MAINTENANCE; RATING AGENCY REQUIREMENTS

Under the Bylaws of the Fund (the "Bylaws"), the Fund must maintain 1940
Act Preferred Shares Asset Coverage of at least 200%. See "Investment Objective
and Policies -- Asset Maintenance".

In connection with their respective ratings of the Preferred Shares,
Moody's and S&P have each established asset coverage guidelines which are
incorporated into the Bylaws to ensure the payment of the liquidation preference
and the Fund's other obligations in respect of its outstanding Preferred Shares.
These guidelines require the Fund among other things to maintain
investment-grade assets with a value (discounted in accordance with each rating
agency's guidelines) equal to the Preferred Shares Basic Maintenance Amount.
They also impose restrictions on the securities in which the Fund may invest,
limit the Fund's use of futures, options and forward commitments, and prohibit
the use of borrowing for leverage and the Fund's entering into short sales,
securities lending and reverse repurchase agreements. These requirements are
explained in greater detail in Appendix B. If the Fund fails to meet such asset
maintenance requirements and such failure is not cured, the Fund will be
required under certain circumstances to redeem some or all of the Preferred
Shares. See "Description of Preferred Shares -- Redemption," below.

In connection with its rating of the Preferred Shares, S&P has established
dividend coverage guidelines, which are incorporated into the Bylaws, requiring
the Fund to maintain a sufficient level of highly liquid assets to ensure
certain dividend payments and expense payments with respect to the Preferred
Shares. Like the Preferred Shares Basic Maintenance Amount requirements, these
Minimum Liquidity Level guidelines impose limitations on the Fund's investment
activities. The Minimum Liquidity Level requirements are explained in greater
detail in Appendix B.

MANDATORY REDEMPTION

If the Preferred Shares Basic Maintenance Amount or the 1940 Act Preferred
Shares Asset Coverage is not maintained or restored as specified herein, the
Preferred Shares will be subject to mandatory redemption on a date specified by
the Trustees, out of funds legally available therefor, at the redemption price
of $50,000 per share plus an amount equal to dividends thereon (whether or not
earned or declared) accumulated but unpaid to the date fixed for redemption. Any
such redemption will be limited to the number of Preferred Shares necessary to
restore the Preferred Shares Basic Maintenance Amount or the 1940 Act Preferred
Shares Asset Coverage, as the case may be. See "Description of Preferred Shares
- -- Redemption".

OPTIONAL REDEMPTION

Except as described under "Description of Preferred Shares -- Redemption",
Preferred Shares are redeemable, in whole or in part, at the option of the Fund,
on the next succeeding scheduled Dividend Payment Date (except during the
Initial Dividend Period or a Non-Call Period) applicable to Preferred Shares
called for redemption, out of funds legally available therefor, at the
redemption price of $50,000 per share plus an amount equal to dividends thereon
accumulated but unpaid to the date fixed for redemption plus any premium
accruing during a Premium Call Period.

LIQUIDATION PREFERENCE

The liquidation preference of the Preferred Shares will be $50,000 per
share plus accumulated but unpaid dividends, if any. See "Description of
Preferred Shares -- Dividends -- Dividend Payments" and "Description of
Preferred Shares -- Liquidation/Bankruptcy".

VOTING RIGHTS

The Bylaws require that the holders of Preferred Shares, voting as a
separate class, have the right to elect at least two Trustees at all times and
to elect a majority of the Trustees at any time two years' dividends on the
Preferred Shares are unpaid. The holders of Preferred Shares will vote as a
separate class on certain other matters as required under the Bylaws, the 1940
Act and Massachusetts law. See "Description of Preferred

11
<PAGE> 15

Shares -- Voting Rights" and "Description of Preferred Shares -- Certain
Provisions in the Declaration of Trust".

RATINGS

It is a condition to their issuance that the Preferred Shares be issued
with a rating of "aaa" from Moody's and AAA from S&P.

12
<PAGE> 16

THE FUND

Putnam Investment Grade Municipal Trust III (the "Fund") is a closed-end,
diversified management investment company registered under the Investment
Company Act of 1940, as amended (the "1940 Act"). The Fund was organized as a
Massachusetts business trust on September 23, 1993. A copy of the Agreement and
Declaration of Trust (the "Agreement and Declaration of Trust"), which is
governed by Massachusetts law, is on file with the Secretary of State of The
Commonwealth of Massachusetts. As a recently organized entity, the Fund has a
limited operating history. The Fund's principal office is located at One Post
Office Square, Boston, Massachusetts 02109, and its telephone number is (617)
292-1000.

The Fund commenced operations on November 26, 1993 upon the closing of an
initial public offering of 4,000,000 of its common shares of beneficial interest
(together with all other common shares, the "Common Shares"). The net proceeds
of such offering were approximately $56,092,223, after payment of organizational
and offering expenses and the underwriting discount.

INVESTMENT MANAGER AND ADMINISTRATOR

The Fund's investment manager and administrator is Putnam Investment
Management, Inc. ("Putnam"), a Delaware corporation with offices at One Post
Office Square, Boston, Massachusetts 02109. Putnam is a wholly owned subsidiary
of Putnam Investments, Inc., a holding company which is in turn wholly owned by
Marsh & McLennan Companies, Inc., a publicly owned holding company whose
principal businesses are international insurance and reinsurance brokerage,
employee benefit consulting and investment management.

Putnam has been managing mutual funds since 1937. The firm serves as the
investment manager for the funds in the Putnam family, with approximately $64
billion in assets in over three million shareholder accounts as of December 31,
1993, including approximately $17 billion invested in tax exempt securities. In
addition to the Fund, Putnam manages sixteen closed-end funds, nine of which,
Putnam Investment Grade Municipal Trust, Putnam Investment Grade Municipal Trust
II, Putnam California Investment Grade Municipal Trust, Putnam New York
Investment Grade Municipal Trust, Putnam Tax-Free Health Care Fund, Putnam
Managed Municipal Trust, Putnam Investment Grade Intermediate Municipal Trust,
Putnam Municipal Opportunities Trust and Putnam High Yield Municipal Trust,
invest primarily in tax exempt securities. The Putnam Advisory Company, Inc., an
affiliate, manages domestic and foreign institutional accounts and foreign
mutual funds. Another affiliate, Putnam Fiduciary Trust Company, provides
investment advice to institutional clients under its banking and fiduciary
powers. Putnam and its affiliates managed over $90 billion in assets as of
December 31, 1993.

Putnam performs a detailed credit analysis on all of the tax exempt
securities in which a fund invests. Putnam currently employs seven portfolio
managers dedicated to the tax exempt securities market, supported by ten
investment analysts and other research personnel. Their investment analysis is
supported by Putnam's computer modeling techniques and issuer data base. The two
portfolio managers who will be primarily responsible for the day-to-day
management of the Fund's portfolio are identified under "Trustees and Officers"
below. Putnam considers a tax exempt security's rating by a nationally
recognized rating service as only one factor in its analysis of the security.

USE OF PROCEEDS

The net proceeds of this offering are estimated to be $9,680,000, after
payment of the sales load and offering expenses.

The net proceeds will be invested in accordance with the Fund's investment
objective and policies during a period estimated not to exceed three months from
the completion of the offering, depending on market conditions and the
availability of appropriate securities. Pending such investment, the proceeds
will be invested in high quality, short-term money market instruments.

13
<PAGE> 17

<TABLE>

CAPITALIZATION

The following table sets forth the capitalization of the Fund as of
December 31, 1993, and as adjusted to give effect to the issuance of the
Preferred Shares offered hereby.

<CAPTION>
AS
ACTUAL ADJUSTED
---------- ----------
<S> <C> <C>
Shareholders' Equity:
Preferred Shares, without par value; no shares authorized,
issued and outstanding (6,000 Preferred Shares authorized,
200 shares issued and outstanding, as adjusted, at $50,000
per share liquidation preference)........................... $ -- $10,000,000
----------- -----------
Common Shares, without par value; unlimited shares
authorized; 4,007,092 shares issued and outstanding......... $56,256,537 $55,936,537
----------- -----------
Undistributed net investment income.............................. $ 281,822 $ 281,822
----------- -----------
Net unrealized appreciation of investments....................... $ 1,022,837 $ 1,022,837
----------- -----------
Accumulated net realized loss on investments..................... $ (2,040) $ (2,040)
----------- -----------
Net assets....................................................... $57,559,156 $67,239,156
----------- -----------
----------- -----------
</TABLE>

<TABLE>

PORTFOLIO COMPOSITION

As of December 31, 1993, 100% of the Fund's portfolio was invested in
investment grade tax exempt securities. The following table sets forth certain
information with respect to the composition of the Fund's investment portfolio
as of December 31, 1993.

<CAPTION>
NUMBER MARKET
S&P* MOODY'S* OF ISSUES VALUE PERCENT
- -------------------------------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
AAA Aaa 4 $12,204,375 21.6%
AA, AA+, AA- Aa, Aa1 1 $ 3,333,750 5.9
A, A- A 7 $25,277,094 44.8
BBB, BBB+, BBB- Baa, Baa1 5 $12,647,000 22.4
SP-1 VMIG-1 1 $ 3,000,000 5.3
BB, BB+, BB- Ba, Ba1 --
B, B- B --
CCC, CCC+, CCC Caa, Caa1 --
Not rated --
--
---------- ---------
Total 18 $56,462,219 100%
--
--
---------- ---------
---------- ---------

- ---------------
<FN>
* In the event that Moody's and S&P have not assigned comparable ratings to a
security, the information presented assumes that both rating agencies assigned
the higher of the two ratings actually assigned.

</TABLE>

INVESTMENT OBJECTIVE AND POLICIES

The Fund's investment objective is to seek as high a level of current
income exempt from federal income tax as the Fund's investment manager believes
is consistent with preservation of capital.

The Fund intends to pursue its objective by investing in a diversified
portfolio of investment grade tax exempt securities which Putnam believes does
not involve undue risk to income or principal. Investment grade tax exempt
securities are rated BBB or higher by Standard & Poor's Corporation ("S&P") or
Fitch Investors Service, Inc. ("Fitch") or Baa or higher by Moody's Investors
Service, Inc. ("Moody's") (or equivalently rated by another nationally
recognized rating service) in the case of long-term obligations, and have
equivalent ratings in the case of short-term obligations. The Fund may also
invest up to 20% of its total assets in non-rated tax exempt securities
determined by Putnam, at the time of investment, to be of comparable quality to
rated securities in which the Fund may invest. Tax exempt securities rated BBB
by S&P or Fitch or Baa by Moody's (and non-rated securities of comparable
quality) are considered medium grade securities and have

14
<PAGE> 18

speculative characteristics. For a description of the four highest ratings of
each of the rating agencies, see Appendix C to this Prospectus.

An investment in the Fund may not be appropriate for all investors, and
there is no assurance that the Fund will achieve its investment objective. The
Fund is designed primarily as a long-term investment and not as a trading
vehicle.

TAX EXEMPT SECURITIES

"Tax exempt securities" are obligations issued by or on behalf of states,
territories and possessions of the United States and the District of Columbia
and their political subdivisions, agencies and instrumentalities, the interest
on which, in the opinion of bond counsel or other counsel to the issuer of such
securities, is at the time of issuance not includable in gross income for
federal income tax purposes. Under normal market conditions, at least 80% of the
Fund's assets will be invested in tax exempt securities. The foregoing is a
fundamental policy and cannot be changed without shareholder approval. However,
the Fund may invest a portion of its assets in tax exempt securities that pay
interest that is subject to the federal alternative minimum tax for individuals.
Such investments will not be treated as tax exempt securities for the purpose of
the 80% test. Investors should thus consider the possible effect of the federal
alternative minimum tax on an investment in the Fund. The suitability of the
Fund for investors who may be (or may become as a result of investment in the
Fund) subject to the federal alternative minimum tax will depend upon a
comparison of the yield likely to be provided from the Fund with the yield from
comparable tax exempt investments not subject to the federal alternative minimum
tax and with the yield from comparable fully taxable investments, in light of
each such investor's tax position. See "Taxation." Subject to the limitations
set forth in this Prospectus, the Fund may engage in certain hedging
transactions involving the use of futures contracts, options on futures
contracts, and options on indices of fixed-income securities and on U.S.
Government securities. Such hedging transactions may give rise to taxable gains.

Tax exempt securities include long-term obligations, often called bonds, as
well as short-term notes, participation certificates, municipal leases and tax
exempt commercial paper. The terms of certain of these tax exempt securities may
from time to time include elements of instruments (such as futures and options)
that may be used by the Fund in its hedging activities. See "Other Investment
Practices -- Futures and Options." The Fund may also invest in securities
representing interests in tax exempt securities, known as inverse floating
obligations or residual interest bonds. Often, inverse floating obligations are
created by selling two complementary interests in previously issued fixed-rate
tax exempt securities: a floating rate obligation and the inverse floating
obligation. In other cases, the issuer will itself issue directly the two
complementary obligations. Inverse floating obligations or residual interest
bonds generally pay interest rates that vary inversely to changes in the
interest rates of specified short-term tax exempt securities or an index of
short-term tax exempt securities. The interest rates on inverse floating
obligations or residual interest bonds will typically decline as short-term
market interest rates increase and increase as short-term market rates decline.
Such securities have the effect of providing a degree of investment leverage,
since they will generally increase or decrease in value in response to changes
in market interest rates at a rate which is a multiple of the rate at which
fixed-rate tax exempt securities of comparable maturity and credit quality
increase or decrease in response to such changes. As a result, the market values
of inverse floating obligations and residual interest bonds will generally be
more volatile than the market values of fixed-rate tax exempt securities of
comparable maturity and credit quality. Because inverse floating obligations
represent a relatively recent innovation in the municipal securities market,
there is a lack of historical data concerning the attributes of such securities
under all market conditions. In seeking to limit the risks associated with the
less liquid secondary market for inverse floating obligations, the Fund will
only purchase such securities if, pursuant to their terms or the terms of the
complementary instruments, such securities may be recombined with the
complementary floating rate obligation. Also, to seek to limit credit risk, the
Fund will only purchase inverse floating obligations which are themselves rated,
or which represent components of fixed-rate tax exempt securities that are rated
AAA (or

15
<PAGE> 19

an equivalent rating) by S&P, Fitch, Moody's, or another nationally recognized
rating service. To seek to limit the interest rate risk of these securities, the
Fund may purchase inverse floating obligations with shorter-term maturities or
which contain limitations on the extent to which the interest rate may vary. The
Fund will not invest more than 25% of its total assets in inverse floating
obligations. In addition, at any time when Preferred Shares are outstanding, the
Fund will not invest more than 15% of its total assets in such obligations.

Long-term tax exempt securities generally provide a higher yield than
short-term tax exempt securities of comparable quality, and therefore, the Fund
generally expects to be invested primarily in long-term tax exempt securities.
The Fund may, however, be primarily invested in short-term tax exempt securities
when yields on such securities are greater than yields available on long-term
tax exempt securities, to stabilize net asset value, for temporary defensive
purposes, and during a period of up to three months from the closing of this
offering as Putnam selects long-term tax exempt securities to purchase for its
portfolio.

The two principal classifications of tax exempt bonds are "general
obligation" bonds and "revenue" or "special obligation" bonds, which include
"industrial revenue bonds" and "private activity bonds." General obligation
bonds are secured by the issuer's pledge of its faith, credit and taxing power
for the payment of interest and the repayment of principal, and, accordingly,
the capacity of the issuer of a general obligation bond as to the timely payment
of interest and the repayment of principal when due is affected by the issuer's
maintenance of its tax base. Revenue or special obligation bonds are payable
only from the revenues derived from a particular facility or class of facilities
or, in some cases, from the proceeds of a special tax or other specific revenue
source such as from the users of the facility being financed; accordingly, the
timely payment of interest and the repayment of principal in accordance with the
terms of the revenue or special obligation bond is a function of the economic
viability of such facility or such revenue source. Although the ratings of S&P,
Fitch or Moody's of the tax exempt securities in the Fund's portfolio are
relative and subjective, and are not absolute standards of quality, such ratings
reflect the assessment of S&P, Fitch or Moody's, as the case may be, at the time
of issuance of the rating, of the issuer's ability or the economic viability of
the special revenue source with respect to the timely payment of interest and
the repayment of principal in accordance with the terms of the obligation, but
do not reflect an assessment of the market value of the obligation. The Fund
will not necessarily dispose of a security when its rating is reduced below its
rating at the time of purchase, although Putnam will monitor the investment to
determine whether continued investment in the security is consistent with the
Fund's investment objective. The rating services undertake no obligation to
update their ratings of securities. See Appendix C.

Also included within the general category of tax exempt securities are
participations in lease obligations or installment purchase contract obligations
(hereinafter collectively called "lease obligations") of municipal authorities
or entities. Although lease obligations do not constitute general obligations of
the municipality for which the municipality's taxing power is pledged, a lease
obligation is ordinarily backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide that
the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. In addition to the "non-appropriation" risk, these securities
represent a relatively new type of financing that has not yet developed the
depth of marketability associated with more conventional securities. Although
"non-appropriation" lease obligations are secured by the leased property,
disposition of the property in the event of foreclosure might prove difficult.
In addition, the tax treatment of such obligations in the event of
non-appropriation is unclear.

Participation certificates are obligations issued by state and local
governments or authorities to finance the acquisition of equipment and
facilities. They may represent participations in a lease, an installment
purchase contract, or a conditional sales contract. Some municipal leases and
participation certificates may not be readily marketable.

Tax exempt securities may have fixed or variable interest rates. The Fund
may purchase floating and variable rate demand notes, which are securities
normally having a stated maturity in excess of one year, but which permit the
holder to tender the notes for purchase at the principal amount thereof. The
interest rate on

16
<PAGE> 20

a floating rate demand note is based on a known interest index and adjusts
automatically as that index rate changes. The interest rate on a variable rate
demand note is adjusted at specified intervals according to an agreed upon
formula. There generally is no secondary market for these notes, although they
generally may be tendered for redemption at face value.

From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on various types of tax exempt securities, and such proposals may well
be introduced in the future. If adopted, such proposals could have the effect of
limiting the availability of suitable investments for the Fund. If it appeared
that the availability of tax exempt securities for investment by the Fund and
the value of the Fund's portfolio could be materially affected by such changes
in law, the Trustees of the Fund would reevaluate its investment objective and
policies and consider changes in the structure of the Fund or its dissolution.

The market value of the Fund's investments will change in response to
changes in interest rates and other factors. During periods of falling interest
rates, the values of long-term fixed-income securities generally increase.
Conversely, during periods of rising interest rates, the values of such
securities generally decline. The magnitude of these fluctuations will generally
be greater at times when the Fund's average maturity is longer. Changes in
interest rates will over time affect the Fund's yield. During periods of rising
interest rates, the Fund's yield will likely rise as amounts received by the
Fund from repayments of principal are reinvested by the Fund in investments
paying higher interest rates. Conversely, during times of falling interest
rates, the Fund's yield will likely decline, as it reinvests such amounts in
investments paying lower interest rates. Changes by nationally recognized rating
services in the credit ratings of tax exempt securities, and in the ability of
an issuer to make payments of interest and principal, will also affect the value
of the Fund's investments. Changes in the value of portfolio securities will not
affect interest income derived from those securities but will affect the Fund's
net asset value.

Putnam believes that, in general, the secondary market for tax exempt
securities is less liquid than that for taxable fixed-income securities.
Consequently, the ability of the Fund to buy and sell tax exempt securities may,
at any particular time and with respect to any particular securities, be
limited. The publicly available information about the financial condition of an
issuer of tax exempt securities may not be as extensive as comparable
information about corporations whose securities are publicly traded. Obligations
of issuers of tax exempt securities may be subject to provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the United States Bankruptcy Code and applicable state laws, which could
limit the ability of the Fund to recover payments of principal or interest on
such obligations.

From time to time, the Fund's investments in tax exempt securities may
include securities as to which the Fund, by itself or together with other funds
or accounts managed by Putnam and its affiliates, holds a major portion or all
of an issue of tax exempt securities. Because there may be relatively few
potential purchasers for such investments (including the Fund's investments in
inverse floating obligations), especially under adverse market or economic
conditions or in the event of adverse changes in the condition of the issuer,
and, in some cases, there may be contractual restrictions on resales, the Fund
may find it more difficult to sell such securities at a time when Putnam
believes it is advisable to do so or may be able to sell such securities only at
prices lower than if such securities were more widely held. At times, it may
also be more difficult to determine the fair value of such securities for
purposes of computing the Fund's net asset value. In addition, in order to
enforce its rights in the event of a default in the payment of interest or
repayment of principal or both, the Fund may be required to take possession of
and manage the assets securing the issuer's obligations on such securities,
which may increase the Fund's operating expenses and adversely affect the net
asset value of the Fund. Any income derived from the Fund's ownership or
operation of such assets will not be tax exempt. In addition, the Fund's
intention to qualify as a "regulated investment company" under the Code may
limit the extent to which the Fund may exercise its rights by taking possession
of such assets, because as a regulated investment company, the Fund is subject
to certain limitations on its investments and on the nature of its income.

17
<PAGE> 21

Certain tax exempt securities held by the Fund may permit the issuer at its
option to "call," or redeem, its securities. If an issuer were to redeem tax
exempt securities held by the Fund during a time of declining interest rates,
any gain that the Fund might otherwise realize on another disposition of its
investment may be reduced and the Fund may not be able to reinvest the proceeds
in tax exempt securities providing as high a level of investment return as the
securities redeemed.

The Fund may invest up to 20% of its total assets in non-rated tax exempt
securities determined by Putnam at the time of investment to be of comparable
quality to rated securities in which the Fund may invest. The Fund will be more
dependent upon Putnam's investment analysis of such non-rated tax exempt
securities than in the case of rated securities. See "Investment Objective and
Policies."

SELECTION OF INVESTMENTS

Putnam will buy and sell securities for the Fund's portfolio with a view to
seeking a high level of current income exempt from federal income tax, and will
select securities constituting a portfolio which Putnam believes does not
involve undue risk to income or principal considered in relation to the
particular investment policies of the Fund. As a result, the Fund will not
necessarily invest in the highest yielding tax exempt securities permitted by
its investment policies if Putnam determines that market risks or credit risks
associated with such investments would subject the Fund's portfolio to excessive
risk. The potential for realization of capital gains resulting from possible
changes in interest rates will not be a major consideration. Although under
current market conditions Putnam expects to invest in a portfolio of longer-term
tax exempt securities, Putnam will be free to take full advantage of the entire
range of maturities offered by tax exempt securities and may adjust the average
maturity of the Fund's portfolio from time to time, depending on its assessment
of the relative yields available on securities of different maturities and its
expectations of future changes in interest rates.

The Fund will not generally invest more than 25% of its total assets in any
one industry. Governmental issuers of municipal securities are not considered
part of any "industry." However, municipal securities backed only by the assets
and revenues of nongovernmental users may, for this purpose, be deemed to be
related to the industry in which such nongovernmental users engage, and the 25%
limitation would apply to such obligations. It is nonetheless possible that the
Fund may invest more than 25% of its assets in a broader segment of the
municipal securities market, such as revenue obligations of hospitals and other
health care facilities, housing agency revenue obligations, or airport revenue
obligations. This would be the case only if Putnam determines that the yields
available from obligations in a particular segment of the market justified the
additional risks associated with a large investment in such segment. Although
such obligations could be supported by the credit of governmental users or by
the credit of nongovernmental users engaged in a number of industries, economic,
business, political and other developments generally affecting the revenues of
such users (for example, proposed legislation or pending court decisions
affecting the financing of such projects and market factors affecting the demand
for their services or products) may have a general adverse effect on all
municipal securities in such a market segment. The Fund reserves the right to
invest more than 25% of its assets in industrial development bonds or private
activity bonds (subject to the limitation that under normal market conditions
not more than 20% of the Fund's assets will be invested in private activity
bonds the interest on which may be subject to federal alternative minimum tax
for individuals) or in securities of issuers located in the same state, although
it has no present intention to invest more than 25% of its assets in issuers
located in the same state and current rating agency requirements applicable to
the Fund in seeking a rating of the Preferred Shares may limit such investment.
If the Fund were to invest more than 25% of its assets in issuers located in the
same state, it would be more susceptible to adverse economic, business or
regulatory conditions in that state.

The Fund will not invest more than 5% of its total assets in the tax exempt
securities of any single issuer, except that up to 25% of the Fund's total
assets may be invested without regard to this limitation. As a result, up to 25%
of the Fund's total assets could be invested in tax exempt securities of a
single issuer, with the result that the Fund's portfolio could be subject to
greater risks than that of a fund investing in a more broadly diversified
portfolio.

18
<PAGE> 22

DEFENSIVE STRATEGIES

At times, Putnam may judge that conditions in the markets for tax exempt
securities make pursuing the Fund's basic investment strategy inconsistent with
the best interests of its Shareholders. At such times Putnam may use alternative
strategies, primarily designed to reduce fluctuations in the value of the Fund's
assets. In implementing these "defensive" strategies, the Fund may invest
substantially all of its assets in high-quality tax exempt obligations. If these
high-quality tax exempt obligations are not available or, in Putnam's judgment,
do not afford sufficient protection against adverse market conditions, the Fund
may invest in taxable obligations. Such taxable obligations may include:
obligations of the U.S. Government, its agencies or instrumentalities; other
debt securities rated within the four highest grades by either S&P or Moody's;
commercial paper rated in the highest grade by either rating service;
certificates of deposit and bankers' acceptances; repurchase agreements with
respect to any of the foregoing investments; or any other investment-grade
quality fixed-income securities that Putnam considers consistent with such
strategy. To the extent that the use of certain of these strategies produces
taxable income, this taxable income will be distributed to Common and Preferred
Shareholders based on each class's proportionate share of such income as
determined according to the percentage of total dividends paid by the Fund
during a particular year that are paid to such class. Such strategies may, under
certain circumstances, require the Fund to pay additional amounts to holders of
Preferred Shares to reduce the effect of allocations of taxable income on such
holders' return (see "Remarketing -- Remarketing Schedule; Advance Notice of
Allocation of Taxable Income; Inclusion of Taxable Income in Dividend"), or to
pay Additional Dividends (hereinafter defined) on Preferred Shares, thus
reducing the amount of income available for distributions on Common Shares. It
is impossible to predict when, or for how long, the Fund will use these
alternative strategies. See "Taxation."

PORTFOLIO TURNOVER

Putnam will buy and sell securities for the Fund to further its investment
objective. The investment policies of the Fund may lead to frequent changes in
investments, particularly in periods of rapidly fluctuating interest rates. The
Fund's investments may also be traded to take advantage of perceived short-term
disparities in market values or yields among securities of comparable quality
and maturity. From time to time, consistent with its investment objective, the
Fund may sell securities in anticipation of a market decline or buy securities
in anticipation of a market rise.

The Fund's portfolio turnover rate may be higher at times than that of
other investment companies. Although it is impossible to predict portfolio
turnover rate, based on its experience in managing similar investments, Putnam
expects that the annual portfolio turnover rate of the Fund will not exceed 100%
after the initial investment of the proceeds of this offering in accordance with
its investment objective and policies. Portfolio turnover generally involves
some expense to the Fund, including brokerage commissions or dealer mark-ups and
other transaction costs on the sale of securities and reinvestment in other
securities. Such transactions may result in the realization of taxable capital
gains.

RATING AGENCY GUIDELINES

The composition of the Fund's portfolio will reflect guidelines established
by Moody's and S&P in connection with the Fund's receipt of a rating for such
shares on their date of original issue of at least "aaa" by Moody's and AAA by
S&P. Moody's and S&P, nationally recognized statistical rating organizations,
issue ratings for various securities reflecting the perceived creditworthiness
of such securities. The guidelines described under "Investment Objective and
Policies -- Asset Maintenance" and in Appendix B have been developed by Moody's
and S&P in connection with issuances of asset-backed and similar securities,
including debt obligations and variable rate preferred stocks, generally on a
case-by-case basis through discussions with the issuers of these securities. The
guidelines are generally designed to ensure that assets underlying outstanding
debt or preferred stock will be sufficiently varied and will be of sufficient
quality and amount to justify investment-grade ratings. The guidelines do not
have the force of law but have been adopted by the Fund in order to satisfy
current requirements necessary for Moody's and S&P to issue the above-described
ratings for Preferred Shares, which ratings are generally relied upon by
institutional investors in purchasing

19
<PAGE> 23

such securities. The guidelines include a set of tests for portfolio composition
and asset coverage that supplement (and in some cases are more restrictive than)
the applicable requirements under the 1940 Act.

ASSET MAINTENANCE

The Fund will be required to satisfy a number of asset maintenance
requirements under the terms of the Bylaws. These requirements are summarized
below.

1940 Act Preferred Shares Asset Coverage. The Fund will be required under
the Bylaws to maintain, as of the last Business Day of each month in which any
Preferred Shares are outstanding, asset coverage of at least 200% with respect
to outstanding senior securities which are stock, including the Preferred Shares
(or such other asset coverage as may in the future be specified in or under the
1940 Act as the minimum asset coverage for senior securities which are shares of
a closed-end investment company as a condition of paying dividends on its common
shares) ("1940 Act Preferred Shares Asset Coverage"). If the Fund fails to
maintain 1940 Act Preferred Shares Asset Coverage and such failure is not cured
as of the last Business Day of the month following the date of such failure (the
"1940 Act Cure Date"), the Fund will be required under certain circumstances to
redeem certain of the Preferred Shares. See "Description of Preferred Shares --
Redemption" below.

<TABLE>

Based on the composition of the Fund's portfolio at December 31, 1993, 1940
Act Preferred Shares Asset Coverage with respect to the Preferred Shares,
following the issuance of all Preferred Shares offered hereby and after giving
effect to the deduction of the sales load and offering costs for the Preferred
Shares estimated at $320,000, would be computed as follows:

<S> <C> <C> <C> <C>
Value of Fund assets less
liabilities not constituting
senior securities $67,239,156
- ------------------------------ = ----------- = 672%
Senior securities $10,000,000
representing indebtedness
plus liquidation value
of the Preferred Shares
</TABLE>

Preferred Shares Basic Maintenance Amount. In connection with their
respective ratings of the Preferred Shares, Moody's and S&P have each
established asset coverage guidelines which are incorporated into the Bylaws to
ensure the payment of the liquidation preference and the Fund's other
obligations in respect of its outstanding Preferred Shares. These guidelines
require the Fund among other things to maintain investment-grade assets with a
value (discounted in accordance with each rating agency's guidelines) equal to
the Preferred Shares Basic Maintenance Amount. These guidelines impose
restrictions on the securities in which the Fund may invest, limit the Fund's
use of futures, options and forward commitments, and prohibit the use of
borrowing for leverage and the Fund's entering into short sales, securities
lending and reverse repurchase agreements. These requirements are explained in
greater detail in Appendix B. If the Fund fails to meet such requirements and
such failure is not cured, the Fund will be required under certain circumstances
to redeem some or all of the Preferred Shares. See "Description of Preferred
Shares -- Redemption," below.

Minimum Liquidity Level. In connection with its rating of the Preferred
Shares, S&P has established dividend coverage guidelines which are incorporated
into the Bylaws requiring the Fund to maintain a sufficient level of highly
liquid assets to ensure certain dividend payments and certain expense payments
with respect to the Preferred Shares. Like the Preferred Shares Basic
Maintenance Amount requirements, these Minimum Liquidity Level guidelines impose
limitations on the Fund's investment activities. The Minimum Liquidity Level
requirements are explained in greater detail in Appendix B.

General. The Fund may, but is not required to, adopt any modifications to
these guidelines that may hereafter be established by Moody's or S&P. Failure to
adopt any such modifications, however, may result in a change in the ratings
described above or a withdrawal of ratings altogether. In addition, any rating
agency providing a rating for the Preferred Shares may, at any time, change or
withdraw any such rating. As set forth in the Bylaws, the Trustees may, without
shareholder approval, modify certain definitions or restrictions which

20
<PAGE> 24

have been adopted by the Fund pursuant to the rating agency guidelines, provided
in certain cases the Trustees have obtained written confirmation from Moody's
and S&P that any such change would not impair the ratings then assigned by
Moody's and S&P to the Preferred Shares.

As recently described by Moody's and S&P, a preferred stock rating is an
assessment of the capacity and willingness of an issuer to pay preferred stock
obligations. The ratings on the Preferred Shares are not recommendations to
purchase, hold or sell Preferred Shares, inasmuch as the ratings do not comment
as to market price or suitability for a particular investor. Nor do the rating
agency guidelines address the likelihood that a holder of Preferred Shares will
be able to sell such shares in a Remarketing. The ratings are based on current
information furnished to Moody's and S&P by the Fund and Putnam and information
obtained from other sources. The ratings may be changed, suspended or withdrawn
as a result of changes in, or the unavailability of, such information. The
Common Shares have not been rated by a nationally recognized statistical rating
organization.

OTHER INVESTMENT PRACTICES

The Fund may engage in the following incidental investment practices, some
of which may result in taxable income, and each of which may involve certain
special risks. The investment guidelines imposed by Moody's and S&P limit, and
in some cases prohibit, the Fund's use of certain of these investment practices
without the express authorization of the applicable rating agency.

Futures and Options. The Fund may purchase and sell financial futures
contracts and options in an effort to hedge against changes in the values of
tax-exempt securities the Fund owns or expects to purchase. There can be no
assurance that the Fund's hedging transactions will be effective. For so long as
Preferred Shares are rated by Moody's, the Fund will not purchase or sell
futures contracts or write, purchase or sell options on futures contracts or
write put or call options (except covered call or put options) on portfolio
securities unless it receives written confirmation from Moody's that engaging in
such transactions would not impair the rating then assigned to the Preferred
Shares by Moody's, except that the Fund may purchase or sell exchange-traded
futures contracts based on the Municipal Index or Treasury Bonds and purchase or
sell exchange-traded put options on such futures contracts and purchase, write
or sell exchange-traded call options on such futures contracts (collectively
"Moody's Hedging Transactions"), subject to the limitations described in
Appendix B. For so long as the Preferred Shares are rated by S&P, the Fund will
not purchase or sell futures contracts or write, purchase or sell options on
futures contracts or write put options (except covered put options) or call
options (except covered call options) on portfolio securities unless it receives
written confirmation from S&P that engaging in such transactions will not impair
the rating then assigned to the Preferred Shares by S&P, except that the Fund
may purchase or sell futures contracts based on the Municipal Index or Treasury
Bonds with remaining maturities of ten years or more and write, purchase or sell
put and call options on such contracts (collectively "S&P Hedging Transactions")
subject to the limitations described in Appendix B.

Futures contracts on the Long-Term Municipal Bond Index are traded on the
Chicago Board of Trade and may, as described below, be used for hedging purposes
by the Fund. However, because the market for such contracts currently lacks
liquidity, for the purposes of hedging, the Fund, subject to any limitations
imposed from time to time by Moody's and S&P, may purchase and sell futures
contracts and related options with respect to U.S. Government securities,
including U.S. Treasury bills, notes and bonds and may purchase and sell options
directly on U.S. Government securities. Putnam believes that, under certain
market conditions, price movements in U.S. Government securities futures and
related options and in options on U.S. Government securities may correlate
closely with price movements in tax exempt securities and may, as a result,
provide hedging opportunities for the Fund. Such futures and options would be
used in a way similar to the Fund's use of index futures and options described
below.

The Long-Term Municipal Bond Index, made up of high-quality tax exempt
municipal securities with a remaining term to maturity of 19 years or longer, is
intended to represent a numerical measure of market performance for long-term
tax exempt bonds. The Fund, subject to any limitations imposed from time to time
by Moody's and S&P, may purchase and sell futures contracts on this index (or
any other tax exempt bond

21
<PAGE> 25

index approved for trading by the Commodity Futures Trading Commission) to hedge
against general changes in market values of tax exempt securities which the Fund
owns or expects to purchase. For example, if Putnam expected interest rates to
increase, the Fund might sell futures contracts on an index. If rates did
increase, the value of tax exempt securities held by the Fund would decline, but
this decline would be generally offset in whole or in part by an increase in the
value of the Fund's position in the index futures contracts. If, on the other
hand, the Fund held cash reserves and short-term investments pending anticipated
investment in tax exempt securities, and Putnam expected interest rates to
decline, the Fund might purchase index futures contracts. The Fund could thus
take advantage of the anticipated rise in the values of tax exempt securities
without actually buying them until the market had stabilized. The Fund may also
purchase and sell put and call options on index futures for hedging purposes. If
and when trading commences in put and call options on tax exempt bond indices
directly, the Fund may also purchase or sell these options for similar hedging
purposes. The Fund will only purchase or sell futures or options when, in the
opinion of Putnam, price movements in such futures and options are likely to
correlate closely with price movements in the tax exempt securities which are
the subject of a hedge.

The Fund will not purchase or sell financial futures contracts or options
on futures contracts if, as a result, the sum of initial margin deposits on the
Fund's existing futures contracts and related options plus premiums paid for
outstanding options on futures contracts purchased by the Fund would exceed 5%
of the Fund's net assets. (For options that are "in-the-money" at the time of
purchase, the amount by which the option is "in-the-money" is excluded from this
calculation.)

The successful use of futures and options will usually depend on Putnam's
ability to forecast interest rate movements correctly. The Fund's ability to
hedge its portfolio positions through transactions in futures and options also
depends on the degree of correlation between movements in the prices of such
financial futures and options and movements in the prices of the underlying
municipal bond index or U.S. Government securities or of the tax exempt
securities which are the subject of a hedge. The successful use of futures and
options also depends on the availability of a liquid secondary market to enable
the Fund to close out its positions on a timely basis. There can be no assurance
that such a market will exist at a particular time. In the case of options
purchased by the Fund, the risk of loss is limited to the premium paid, whereas
in the case of options written by the Fund and in the case of futures
transactions, the risk of loss is limited only to the extent that increases in
the value of the Fund's investments during the period of the futures contract or
option may offset losses on the futures contracts or options over the same
period. Certain provisions of the Code limit the Fund's ability to engage in
futures and options transactions. See Appendix D for more detailed information
about these practices, including limitations designed to reduce risks.

Forward commitments. The Fund may make contracts to purchase securities
for a fixed price at a future date beyond customary settlement time ("forward
commitments") if it holds, and maintains until the settlement date in a
segregated account, cash or high-grade debt obligations in an amount sufficient
to meet the purchase price, or if it enters into offsetting contracts for the
forward sale of other securities it owns. Forward commitments may be considered
securities in themselves, and involve a risk of loss if the value of the
security to be purchased declines prior to the settlement date, which risk is in
addition to the risk of decline in value of the Fund's other assets. Where such
purchases are made through dealers, the Fund relies on the dealer to consummate
the sale. The dealer's failure to do so may result in the loss to the Fund of an
advantageous yield or price. Although the Fund will generally enter into forward
commitments with the intention of acquiring portfolio securities or for delivery
pursuant to option contracts it has entered into, the Fund may dispose of a
commitment prior to settlement if Putnam deems it appropriate to do so. The Fund
may realize capital gains or losses upon the sale of forward commitments.

Repurchase agreements. The Fund may enter into repurchase agreements with
respect to up to 25% of its total assets (taken at current value). A repurchase
agreement is a contract under which the Fund acquires a security for a
relatively short period (usually not more than one week) subject to the
obligation of the seller to repurchase and the Fund to resell such security at a
fixed time and price (representing the Fund's cost plus interest). It is the
Fund's present intention to enter into repurchase agreements only with
commercial banks and registered broker-dealers and only with respect to
obligations of the U.S. Government or its agencies or instrumentalities.
Repurchase agreements may also be viewed as loans made by the Fund which are

22
<PAGE> 26

collateralized by the securities subject to repurchase. Putnam will monitor such
transactions to ensure that the value of the underlying securities will be at
least equal at all times to the total amount of the repurchase obligation,
including the interest factor. If the seller defaults, the Fund could realize a
loss on the sale of the underlying security to the extent that the proceeds of
the sale, including accrued interest, are less than the resale price provided in
the agreement including interest. In addition, if the seller should be involved
in bankruptcy or insolvency proceedings, the Fund may incur delay and costs in
selling the underlying security or may suffer a loss of principal and interest
if the Fund is treated as an unsecured creditor and required to return the
underlying collateral to the seller's estate. The Fund's investments in
repurchase agreements generally will give rise to taxable income.

Certain Restrictions. For so long as Preferred Shares are rated by S&P or
Moody's, the Fund will not, unless it has received any required written
confirmation from S&P or Moody's, as the case may be, that such action would not
impair the ratings then assigned to the Preferred Shares by S&P or Moody's, as
the case may be, (i) borrow money except for the purpose of clearing
transactions in portfolio securities, (ii) engage in short sales of securities,
(iii) lend any portfolio securities, (iv) issue any class or series of shares of
beneficial interest ranking prior to or on a parity with the Preferred Shares
with respect to the payment of dividends or the distribution of assets upon
liquidation of the Fund, (v) merge or consolidate into or with any other
corporation or entity, (vi) engage in reverse repurchase agreements, or (vii)
designate a new Pricing Service.

INVESTMENT RESTRICTIONS

The Fund has adopted the following investment restrictions which may not be
changed without the affirmative vote of a "majority of the outstanding voting
securities" of the Fund, which is defined in the 1940 Act to mean the
affirmative vote of the lesser of (1) more than 50% of the outstanding Common
Shares and of the outstanding Preferred Shares of the Fund, each voting as a
separate class, or (2) 67% or more of the Common Shares and of the outstanding
Preferred Shares, each voting as a separate class, present at a meeting if more
than 50% of the outstanding Shares of each class are represented at the meeting
in person or by proxy. The Fund may not:

1. Issue senior securities, as defined in the 1940 Act, other than
shares of beneficial interest with preference rights, except to the extent
such issuance might be involved with respect to borrowings described under
restriction 2 below or with respect to transactions involving financial
futures, options, and other financial instruments.

2. Borrow money in excess of 10% of the value (taken at the lower of
cost or current value) of its total assets (not including the amount
borrowed) at the time the borrowing is made, and then only from banks as a
temporary measure (not for leverage) in situations which might otherwise
require the untimely disposition of portfolio investments or for
extraordinary or emergency purposes. Such borrowings will be repaid before
any additional investments are purchased.

3. Pledge, hypothecate, mortgage, or otherwise encumber its assets in
excess of 15% of its total assets (taken at the lower of cost and current
value) in connection with borrowings permitted by restriction 2 above.

4. Purchase securities on margin, except such short-term credits as
may be necessary for the clearance of purchases and sales of securities,
and except that it may make margin payments in connection with transactions
in futures contracts, options, and other financial instruments.

5. Make short sales of securities or maintain a short position for
the account of the Fund unless at all times when a short position is open
it owns an equal amount of such securities or owns securities which,
without payment of any further consideration, are convertible into or
exchangeable for securities of the same issue as, and in equal amount to,
the securities sold short.

6. Underwrite securities issued by other persons except to the extent
that, in connection with the disposition of its portfolio investments, it
may be deemed to be an underwriter under the federal securities laws.

23
<PAGE> 27

7. Purchase or sell real estate, although it may purchase securities
of issuers which deal in real estate, securities which are secured by
interests in real estate, and securities representing interests in real
estate, and it may acquire and dispose of real estate or interests in real
estate acquired through the exercise of its rights as a holder of debt
obligations secured by real estate or interests therein.

8. Purchase or sell commodities or commodity contracts, except that
it may purchase or sell financial futures contracts or options.

9. Make loans, except by purchase of debt obligations in which the
Fund may invest consistent with its investment policies and by entering
into repurchase agreements with respect to not more than 25% of its total
assets (taken at current value).

10. Invest in securities of any issuer, if, to the knowledge of the
Fund, officers and Trustees of the Fund and officers and directors of
Putnam who beneficially own more than 0.5% of the securities of that issuer
together own more than 5% of such securities.

11. With respect to 75% of its total assets, invest in securities of
any issuer if, immediately after such investment, more than 5% of the total
assets of the Fund (taken at current value) would be invested in the
securities of such issuer; provided that this limitation does not apply to
securities of the U.S. Government or its agencies or instrumentalities.

12. Acquire more than 10% of the voting securities of any issuer.

13. Invest more than 25% of the value of its total assets in
securities of issuers in any one industry. (Securities of the U.S.
Government, its agencies, or instrumentalities, and securities backed by
the credit of a governmental entity are not considered to represent
industries.)

14. Invest in the securities of registered open-end investment
companies, except as they may be acquired as part of a merger or
consolidation or acquisition of assets.

15. Buy or sell oil, gas, or other mineral leases, rights, or royalty
contracts, although it may purchase securities of issuers which deal in,
represent interests in, or are secured by interests in such leases, rights,
or contracts, and it may acquire or dispose of such leases, rights, or
contracts acquired through the exercise of its rights as a holder of debt
obligations secured thereby.

16. Make investments for the purpose of gaining control of a
company's management.

All percentage limitations on investments will apply at the time of
investment and shall not be considered violated unless an excess or deficiency
occurs or exists immediately after and as a result of such investment. Except
for the investment restrictions listed above and the Fund's policy under normal
market conditions to invest at least 80% of its total assets in tax exempt
securities, the other investment policies described in this Prospectus are not
fundamental and may be changed by approval of the Trustees. As a matter of
policy, the Trustees would not materially change the Fund's investment objective
without Shareholder approval.

TRUSTEES AND OFFICERS

The Trustees of the Fund are responsible for the general oversight of the
Fund's business. The initial Trustees and executive officers of the Fund and
their principal occupations during the last five years are set forth below. The
mailing address of each of the officers and Trustees is One Post Office Square,
Boston, Massachusetts 02109.

TRUSTEES

George Putnam, Chairman and President. Chairman and Director of Putnam
Investment Management, Inc., and Putnam Mutual Funds Corp. Director of American
Public Broadcasting, Inc., The Boston Company, Inc., Boston Safe Deposit and
Trust Company, Freeport McMoRan, Inc., General Mills, Inc., Houghton Mifflin
Company, Marsh & McLennan Companies, Inc., and Rockefeller Group, Inc.(a)

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

(a) Trustee who is an "interested person" (as defined in the 1940 Act) of the
Fund, Putnam, and/or Putnam Mutual Funds Corp.

24
<PAGE> 28

William F. Pounds, Vice Chairman. Professor of Management, Alfred P. Sloan
School of Management, Massachusetts Institute of Technology. Director of Fisher
Price, Inc., IDEXX, M/A-COM, Inc., EG&G, Inc., and Sun Company, Inc.

Jameson Adkins Baxter, Trustee. President, Baxter Associates, Inc.
(consultants to management). Director of Banta Corporation, Avondale Federal
Savings Bank and ASHTA Chemicals, Inc. Chairman of the Board of Trustees, Mount
Holyoke College.

Hans H. Estin, Trustee. Vice Chairman, North American Management Corp. (a
registered investment adviser). Director of The Boston Company, Inc. and Boston
Safe Deposit and Trust Co.

John A. Hill, Trustee. Chairman and Managing Director, First Reserve
Corporation (a registered investment adviser). Director of Lantana Corporation,
Maverick Tube Corporation, Snyder Oil Corporation, and various First Reserve
Funds.

Robert E. Patterson, Trustee. Executive Vice President, Cabot Partners
Limited Partnership (a registered investment adviser).

George Putnam, III, Trustee. President, New Generation Research, Inc.(a)

Elizabeth T. Kennan, Trustee. President, Mount Holyoke College. Director
of NYNEX Corporation, Northeast Utilities and the Kentucky Home Life Insurance
Companies. Trustee, the University of Notre Dame.

Lawrence J. Lasser, Trustee and Vice President. President, Chief Executive
Officer and Director of Putnam Investments, Inc. and Putnam Investment
Management, Inc. Director of Marsh & McLennan Companies, Inc. and
INROADS/Central New England, Inc.(a)

Donald S. Perkins, Trustee. Director of various corporations, including
American Telephone & Telegraph Company, AON Corp., Cummins Engine Company, Inc.,
Illinois Power Company, Inland Steel Industries, Inc., K Mart Corporation,
LaSalle Street Fund, Inc., Springs Industries, Inc., TBG, Inc. and Time Warner
Inc.

A.J.C. Smith, Trustee. Chairman, Chief Executive Officer and Director,
Marsh & McLennan Companies, Inc.(a)

W. Nicholas Thorndike, Trustee. Director of various corporations and
charitable organizations, including Providence Journal Co. Also, Trustee and
President, Massachusetts General Hospital and Trustee of Eastern Utilities
Associates.(b)

OFFICERS

Charles E. Porter, Executive Vice President. Managing Director of Putnam
Investments, Inc. and Putnam Investment Management, Inc. Executive Vice
President of the Putnam funds.

Patricia C. Flaherty, Senior Vice President. Senior Vice President of the
Putnam funds.

Gordon H. Silver, Vice President. Director and Senior Managing Director of
Putnam Investment Management, Inc. and Putnam Investments, Inc. Vice President
of the Putnam funds.

William N. Shiebler, Vice President. Director and Senior Managing Director
of Putnam Investments, Inc. President and Director of Putnam Mutual Funds Corp.
Vice President of the Putnam funds.

John R. Verani, Vice President. Senior Vice President of Putnam Investment
Management, Inc. and Putnam Investments, Inc. Vice President of the Putnam
funds.

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

(a) Trustee who is an "interested person" (as defined in the 1940 Act) of
the Fund, Putnam, and/or Putnam Mutual Funds Corp.

(b) Trustee who, during the offering of the Preferred Shares, may be deemed
to be an "interested person" of the Fund and of the Underwriter by
reason of owning, beneficially or in a fiduciary capacity, publicly
traded securities issued by the Underwriter or by a company controlling
the Underwriter.

25
<PAGE> 29

Robert F. Lucey, Vice President. President and Director of Putnam
Fiduciary Trust Company. Senior Managing Director of Putnam Investments, Inc.
Vice President of the Putnam funds.

Gary N. Coburn, Vice President. Senior Managing Director of Putnam
Investment Management, Inc. and Putnam Investments, Inc. Vice President of
certain of the Putnam funds.

James E. Erickson, Vice President. Managing Director of Putnam Investment
Management, Inc. Vice President of certain of the Putnam funds.

Thomas C. Goggins, Vice President. Vice President of Putnam Investment
Management, Inc.

Paul M. O'Neil, Vice President. Vice President of Putnam Investments, Inc.
and Putnam Investment Management, Inc. Vice President of the Putnam funds.

John D. Hughes, Treasurer. Treasurer of the Putnam funds.

Paul G. Bucuvalas, Assistant Treasurer. Assistant Treasurer of the Putnam
funds.

Beverly Marcus, Clerk. Clerk of the Putnam funds.

Except as stated below, the principal occupations of the officers and
Trustees for the last five years have been with the employers as shown above,
although in some cases they have held different positions with such employers.
Prior to November 1990, Mr. Shiebler was President and Chief Operating Officer
of the InterCapital Division of Dean Witter Reynolds.

Mr. Erickson and Mr. Goggins are primarily responsible for the day-to-day
management of the Fund's portfolio. Mr. Erickson has been employed by Putnam
Investment Management, Inc. for in excess of the past five years in the
management of tax exempt funds in the Putnam family of funds. Mr. Goggins has
been employed by Putnam Investment Management, Inc. since June 1, 1993. From
1989 to 1993, Mr. Goggins was a Portfolio Manager, and from 1987 to 1989, an
Analyst at Transamerica Investment Services, Inc.

Each of the Trustees is a Trustee of all the other Putnam funds, and each
receives fees for his or her services from each of such funds. Each Trustee of
the Fund receives an annual fee, initially expected not to exceed $2,000, and an
additional fee for each Trustees' meeting attended. Trustees who are not
interested persons of Putnam and who serve on committees of the Trustees receive
additional fees for attendance at certain committee meetings. Such fees are
determined from time to time based primarily on the relative net assets of the
Fund and of the other Putnam funds.

The Agreement and Declaration of Trust of the Fund provides that the Fund
will indemnify its Trustees and officers against liabilities and expenses
incurred in connection with litigation in which they may be involved because of
their offices with the Fund, except if it is determined in the manner specified
in the Agreement and Declaration of Trust that they have not acted in good faith
in the reasonable belief that their actions were in the best interests of the
Fund or that such indemnification would relieve any officer or Trustee of any
liability to the Fund or its Shareholders by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of his or her duties. The Fund,
at its expense, provides liability insurance for the benefit of its Trustees and
officers.

<TABLE>
PRINCIPAL HOLDERS OF SECURITIES

Except as set forth in the following tables, no person or "group" (as
defined by regulation of the Securities and Exchange Commission) was known to
the Fund to be the beneficial or record owner of 5% or more of the Common Shares
of the Fund as of December 31, 1993.

<CAPTION>
AMOUNT OF
NAME AND ADDRESS RECORD OWNERSHIP PERCENT
---------------- ---------------- -------
<S> <C> <C>
Smith Barney Shearson Inc.................................. 1,644,931 41.0%
PaineWebber Incorporated................................... 779,000 19.4%
</TABLE>

As of December 31, 1993, the officers and Trustees of the Fund owned less
than 1% of the outstanding Common Shares.

26
<PAGE> 30

INVESTMENT MANAGEMENT CONTRACT

Under a Management Contract between the Fund and Putnam, subject to such
policies as the Trustees may determine, Putnam, at its own expense, furnishes
continuously an investment program for the Fund and makes investment decisions
on behalf of the Fund. Subject to the control of the Trustees, Putnam also
places all orders for the purchase and sale of the Fund's portfolio securities.

As compensation for the services rendered, facilities furnished and
expenses borne by Putnam, the Fund pays Putnam a quarterly fee based on the
Fund's average net asset value (determined as described below), at the annual
rate of 0.50% of the first $500 million of the average net asset value of the
Fund, 0.43% of the next $500 million, 0.39% of the next $500 million and 0.35%
of any excess over $1.5 billion of such average net asset value. If dividends
payable on the Preferred Shares during any dividend period plus expenses
attributable to the Preferred Shares for that period exceed the gross income of
the Fund during that period attributable to the investment of the proceeds of
the Preferred Shares, then the fee payable to Putnam for that period will be
reduced by an amount equal to the product of such excess and a fraction, the
numerator of which shall be the fee otherwise payable to Putnam pursuant to the
Management Contract and the denominator of which shall be the sum of the fee
otherwise payable to Putnam pursuant to the Management Contract and the
administrative service fee otherwise payable to Putnam under the Administrative
Services Contract, described below, between the Fund and Putnam; provided,
however, that the amount of such reduction for any such dividend period shall
not exceed the amount determined by multiplying (i) the aggregate liquidation
preference of the average number of Preferred Shares outstanding during the
dividend period, by (ii) the percentage of the aggregate net asset value of the
Fund which the fee payable to Putnam during such period pursuant to the
Management Contract would constitute without giving effect to such reduction.
The net asset value upon which the investment management fee is calculated
includes net assets attributable to any outstanding Preferred Shares (not
treating the liquidation preference of the Preferred Shares as a liability).
Average net asset value is to be determined by taking the average of the weekly
determinations of the net asset value, determined at the close of the last
business day of each week, for each week which ends during the quarter. Putnam
has advanced or will advance certain of the Fund's organizational and offering
expenses, which will be repaid by the Fund. Putnam will waive its management fee
under the Management Contract for the three-month period commencing November 26,
1993.

The Management Contract provides that Putnam shall not be subject to any
liability to the Fund or to any Shareholder of the Fund for any act or omission
in the course of or connected with rendering services to the Fund in the absence
of willful misfeasance, bad faith, gross negligence, or reckless disregard of
its duties on the part of Putnam.

The Management Contract may be terminated without penalty by vote of the
Trustees or the Shareholders of the Fund, or by Putnam, on 30 days' written
notice. It may be amended only by a vote of the Shareholders of the Fund. The
Management Contract also terminates without payment of any penalty in the event
of its assignment. The Management Contract provides that it will continue in
effect only so long as such continuance is approved at least annually by vote of
either the Trustees or the Shareholders, and, in either case, by a majority of
the Trustees who are not "interested persons" of Putnam or the Fund. In each of
the foregoing cases, the vote of the Shareholders is the affirmative vote of a
"majority of the outstanding voting securities" as defined in the 1940 Act. See
"Investment Restrictions."

Putnam has entered into an agreement with Smith Barney Shearson Inc. for
various services, including services with respect to the Fund's market
performance and general economic and interest rate conditions. Putnam from its
own assets (and not from the assets of the Fund) will pay Smith Barney Shearson
Inc. a fee for such services in an amount up to 0.15% of the net assets of the
Fund. Smith Barney Shearson Inc. will have no responsibility with respect to the
Fund's investments or administration.

27
<PAGE> 31

ADMINISTRATIVE SERVICES CONTRACT

The Fund pays Putnam a quarterly administrative service fee at the annual
rate of 0.20% of the first $500 million of the average net asset value of the
Fund, 0.17% of the next $500 million, 0.16% of the next $500 million and 0.15%
of any excess over $1.5 billion of such average net asset value pursuant to an
Administrative Services Contract between the Fund and Putnam. If dividends
payable on the Preferred Shares during any dividend period plus expenses
attributable to the Preferred Shares for that period exceed the gross income of
the Fund during that period attributable to the investment of the proceeds of
the Preferred Shares, then the administrative service fee payable to Putnam for
that period will be reduced by an amount equal to the product of such excess and
a fraction, the numerator of which shall be the fee otherwise payable to Putnam
pursuant to the Administrative Services Contract and the denominator of which
shall be the sum of the fee otherwise payable to Putnam pursuant to the
Administrative Services Contract and the management fee otherwise payable to
Putnam under the Management Contract between the Fund and Putnam; provided,
however, that the amount of such reduction for any such period shall not exceed
the amount determined by multiplying (i) the aggregate liquidation preference of
the average number of Preferred Shares outstanding during that period, by (ii)
the percentage of the aggregate net asset value of the Fund which the fee
payable to Putnam during such period pursuant to the Administrative Services
Contract would constitute without giving effect to such reduction. The net asset
value upon which the administrative service fee is calculated includes net
assets attributable to any outstanding Preferred Shares (not treating the
liquidation preference of the Preferred Shares as a liability). Average net
asset value is to be determined by taking the average of the weekly
determination of net asset value, determined at the close of the last business
day of each week, for each week which ends during the quarter. Putnam will waive
its administrative service fee for the three-month period commencing November
26, 1993.

Under the terms and conditions of the Administrative Services Contract, in
addition to the fee paid to Putnam, the Fund reimburses Putnam for a portion of
the compensation and related expenses of certain officers of the Fund and their
assistants who provide certain administrative services for the Fund and the
other funds in the Putnam family, each of which bears an allocated share of the
foregoing costs. The aggregate amount of all such payments and reimbursements
will be determined annually by the Trustees. Putnam pays all other salaries of
officers of the Fund. The Fund pays all expenses not otherwise borne by Putnam
including, without limitation, legal, custody and shareholder servicing
expenses.

The Administrative Services Contract provides that Putnam shall not be
subject to any liability to the Fund or to any Shareholder of the Fund for any
act or omission in the course of or connected with rendering services to the
Fund in the absence of willful misfeasance, bad faith, gross negligence, or
reckless disregard of its duties on the part of Putnam.

PORTFOLIO TRANSACTIONS

INVESTMENT DECISIONS

Investment decisions for the Fund and for the other investment advisory
clients of Putnam and its affiliates, The Putnam Advisory Company, Inc. and
Putnam Fiduciary Trust Company, are made with a view to achieving their
respective investment objectives. Investment decisions are the product of many
factors in addition to basic suitability for the particular client involved.
Thus, a particular security may be bought or sold for certain clients even
though it could have been bought or sold for other clients at the same time.
Likewise, a particular security may be bought for one or more clients when one
or more clients are selling the security. In some instances, one client may sell
a particular security to another client. Sometimes, two or more clients
simultaneously purchase or sell the same security, in which event each day's
transactions in such security are, insofar as possible, averaged as to price and
allocated between such clients in a manner which in Putnam's opinion is
equitable to each and in accordance with the amount being purchased or sold by
each. There may be circumstances when purchases or sales of portfolio securities
for one or more clients will have an adverse effect on other clients.

28
<PAGE> 32

BROKERAGE AND RESEARCH SERVICES

Most purchases and sales of portfolio investments by the Fund will be with
underwriters of or dealers in tax exempt securities, acting as principal. In
such cases, the price paid by the Fund usually will include an undisclosed
dealer commission or markup. Accordingly, the Fund will not ordinarily pay
significant brokerage commissions, but may pay underwriting commissions on
underwritten offerings. In such offerings, the price paid by the Fund will
include a disclosed, fixed commission or discount retained by the underwriter or
dealer. Transactions on U.S. stock exchanges and other agency transactions
involve the payment by the Fund of negotiated brokerage commissions. Such
commissions vary among different brokers. Also, a particular broker may charge
different commissions according to such factors as the difficulty and size of
the transaction.

Putnam will place orders for the purchase and sale of portfolio securities
for the Fund and will buy and sell securities for the Fund through a substantial
number of broker-dealers. In so doing, Putnam will use its best efforts to
obtain for the Fund the most favorable price and execution available, except to
the extent it may be permitted to pay higher brokerage commissions as described
below. In seeking the most favorable price and execution, Putnam, having in mind
the Fund's best interests, considers all factors it deems relevant, including
price, the size of the transaction, the nature of the market for the security,
the amount of the commission, the timing of the transaction taking into account
market prices and trends, the reputation, experience and financial stability of
the broker-dealer involved, and the quality of service rendered by the
broker-dealer in other transactions.

It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional investors
to receive "brokerage and research services" (as defined in the Securities
Exchange Act of 1934, as amended) from broker-dealers which execute portfolio
transactions for the clients of such advisers and from third parties with which
such broker-dealers have arrangements. Consistent with this practice, Putnam
receives brokerage and research services from many broker-dealers with which
Putnam places the Fund's portfolio transactions and from third parties with
which these broker-dealers have arrangements. These services include such
matters as general economic and security market reviews, industry and company
reviews, evaluations of securities, recommendations as to the purchase and sale
of securities, newspapers, magazines, pricing services, quotation services, news
services and personal computers utilized by Putnam's managers and analysts.
Where the services referred to above are not used exclusively by Putnam for
research purposes, Putnam, based upon its own allocations of expected use, bears
that portion of the cost of these services which directly relates to their
non-research use. Some of these services are of value to Putnam and its
affiliates, The Putnam Advisory Company, Inc. and Putnam Fiduciary Trust
Company, in advising various of their clients (including the Fund), although not
all of these services are necessarily useful and of value in managing the Fund.
The management fee paid by the Fund is not reduced because Putnam and its
affiliate receive these services even though Putnam might otherwise be required
to purchase some of these services for cash.

As permitted by Section 28(e) of the Securities Exchange Act of 1934, as
amended, and by the Management Contract, Putnam may cause the Fund to pay a
broker-dealer which provides brokerage and research services to Putnam an amount
of disclosed commission for effecting a securities transaction for the Fund in
excess of the commission which another broker-dealer would have charged for
effecting that transaction. Putnam's authority to cause the Fund to pay any such
greater commissions is also subject to such policies as the Trustees may adopt
from time to time.

The Management Contract provides that the fee payable to Putnam by the Fund
will be reduced by an amount equal to any commissions, fees, brokerage, or
similar payments received by Putnam or an affiliate in connection with the
purchase and sale of portfolio securities of the Fund, less any direct expenses
approved by the Trustees. Putnam seeks to reduce for the Fund soliciting dealer
fees on the tender of the Fund's portfolio securities in tender or exchange
offers. Any such reductions are likely to be minor in amount.

Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to seeking the most favorable price and
execution available and such other policies as the Trustees may determine,
Putnam may consider sales of Common Shares of the Fund by underwriters and
dealers in

29
<PAGE> 33

this offering (and, if permitted by law, sales of the other Putnam funds) as a
factor in the selection of broker-dealers to execute portfolio transactions for
the Fund.

DETERMINATION OF NET ASSET VALUE

The Fund will determine the net asset value of its Common Shares at least
once each week as of the close of business on the last day on which the New York
Stock Exchange is open. Net asset value will be determined by dividing the value
of all assets of the Fund (including accrued interest and dividends), less all
liabilities (including accrued expenses) and the liquidation value of any
outstanding Preferred Shares, by the total number of Common Shares outstanding.
Tax exempt securities will be 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 Fund believes that reliable market quotations are
generally not readily available for purposes of valuing its portfolio
securities. As a result, it is likely that most of the valuations provided by
such pricing service will be based upon fair market value determined on the
basis of the factors listed above. Non-tax exempt securities for which market
quotations are readily available will be stated at market value. Short-term
investments having remaining maturities of 60 days or less are stated at
amortized cost, which approximates market value. All other securities and assets
will be valued at their fair value following procedures approved by the
Trustees.

If any securities held by the Fund are restricted as to resale, Putnam will
determine their fair value following procedures approved by the Trustees. The
Trustees periodically review such valuations and procedures. The fair value of
such securities generally will be determined as the amount which the Fund could
reasonably expect to realize from an orderly disposition of such securities over
a reasonable period of time. The valuation procedures applied in any specific
instance are likely to vary from case to case. However, consideration is
generally given to the financial position of the issuer and other fundamental
analytical data relating to the investment and to the nature of the restrictions
on disposition of the securities (including any registration expenses that might
be borne by the Fund in connection with such disposition). In addition, specific
factors are also generally considered such as the cost of the investment, the
market value of any unrestricted securities of the same class (both at the time
of purchase and at the time of valuation), the size of the holding, the prices
of any recent transactions or offers with respect to such securities, and any
available analysts' reports regarding the issuer.

REMARKETING

GENERAL

The Bylaws provide that the Applicable Dividend Rate for each Preferred
Share for each Dividend Period therefor (except the Initial Dividend Period)
will be (i) unless such Dividend Period commences during a Non-Payment Period
(described below under "Description of Preferred Shares -- Dividends --
Non-Payment Period; Late Charge"), equal to the lower of (a) the rate per annum
that the Remarketing Agent determines on the Remarketing Date preceding the
first day of such Dividend Period pursuant to the procedures set forth in the
Bylaws and (b) the applicable Maximum Dividend Rate or (ii) if such Dividend
Period commences during a Non-Payment Period, equal to the Non-Payment Period
Rate which is a multiple (generally 200%) of the Reference Rate described below
under "Remarketing -- Remarketing Procedures -- Reference Rate." Each Dividend
Period commencing during a Non-Payment Period will be a 28-day Dividend Period,
the Preferred Shares will not be subject to Tender and Dividend Reset and the
holders of Preferred Shares will not be able to tender their shares in a
Remarketing. See "Description of Preferred Shares -- Dividends -- Non-Payment
Period; Late Charge".

The Fund will enter into a Paying Agent Agreement with IBJ Schroeder Bank &
Trust Company. The Paying Agent Agreement will provide, among other things, that
the Paying Agent will (i) act as transfer agent, registrar, dividend and
redemption price disbursing agent, settlement agent and agent for certain

30
<PAGE> 34

notifications (including notices of redemption) with respect to the Preferred
Shares and (ii) carry out certain other procedures. See "Description of
Preferred Shares -- Redemption".

REMARKETING SCHEDULE; ADVANCE NOTICE OF ALLOCATION OF TAXABLE INCOME; INCLUSION
OF TAXABLE INCOME
IN DIVIDEND

Each Remarketing for the Preferred Shares will take place over a
two-Business Day period consisting of the Remarketing Date (normally a Thursday)
and the Settlement Date (normally a Friday).

If, for example, Thursday or Friday of a particular week is not a Business
Day, the normal remarketing schedule will be adjusted as follows: (i) if
Thursday is not a Business Day, Wednesday shall be the Remarketing Date and
Friday shall be the Settlement Date; and (ii) if Friday is not a Business Day,
Thursday shall be the Remarketing Date and Monday shall be the Settlement Date.
If, for any reason, neither of the foregoing clauses can be given effect, the
Remarketing Agent shall, in its sole discretion, adjust the remarketing schedule
as appropriate to complete such Remarketing.

A description of the time sequence of the events in a normal remarketing
schedule is provided in Appendix A to this Prospectus.

The Internal Revenue Service has taken the position in a published ruling
that the Fund is required for each taxable year to allocate net capital gain and
other income subject to regular Federal income tax, if any, proportionately
between the Common Shares and the Preferred Shares in accordance with the
percentage of total Fund distributions received by each such class of shares
with respect to such year. Whenever the Fund intends to include any net capital
gain or other income subject to regular Federal income tax in a dividend on
Preferred Shares solely because the Fund, in its judgment, believes it is
required, in order to comply with the published position of the Internal Revenue
Service, to allocate taxable income to such shares, the Fund may notify the
Remarketing Agent of the amount to be so included at least five Business Days
prior to the Remarketing Date on which the Applicable Dividend Rate for such
dividend is to be established. Alternatively, if the Fund has not provided the
notice referred to in the preceding sentence, and nevertheless intends to
include such income in a dividend on Preferred Shares solely because the Fund,
in its judgment, believes it is required, in order to comply with the published
position of the Internal Revenue Service, to allocate such income to Preferred
Shares, it will (i) increase the dividend by an amount such that the return to a
holder of Preferred Shares with respect to such dividend (as so increased and
after giving effect to Federal income tax at the Gross-Up Tax Rate) equals the
Applicable Dividend Rate and (ii) notify the Paying Agent of the additional
amount to be included in the dividend at least five Business Days prior to the
applicable Dividend Payment Date. In the event the Fund has provided notice of
an inclusion of taxable income in an upcoming dividend on Preferred Shares as
referred to above, yet, after giving such notice the Fund intends to include
additional taxable income in such dividend solely because, in the judgment of
the Fund, it is required to do so in order to comply with the IRS's published
ruling, the Fund will (i) increase the dividend by an amount such that the
return to a holder of Preferred Shares with respect to such dividend (as so
increased and after giving effect to Federal income tax at the Gross-Up Tax
Rate) shall equal the return such holder of Preferred Shares would have
received, after application of Federal income tax (at the greater of the maximum
Federal individual or corporate income tax rate applicable to the character of
income reflected in such notice), if such additional amount of taxable income
had not been included in such dividend (and such dividend had not been increased
to take account of any additional taxable income) and (ii) notify the Paying
Agent of the additional amount to be included in the dividend at least five
Business Days prior to the applicable Dividend Payment Date. Neither the
underlying dividend nor the additional amounts referred to in the two preceding
sentences will be increased to compensate for the fact that they may be subject
to state and local taxes. The Gross-Up Tax Rate shall be equal to the sum of (i)
the percentage of the taxable income included in the dividend that is taxable
for Federal income tax purposes as ordinary income, multiplied by the greater of
(A) the highest marginal Federal corporate income tax rate (without regard to
the phase-out of graduated rates) applicable to ordinary income and (B) the
highest marginal Federal individual income tax rate applicable to ordinary
income (including any surtax but without regard to any phase-out of personal
exemptions or any limitation on itemized deductions), and (ii) the percentage of
the taxable income included in the dividend that is taxable for Federal income
tax purposes as long-term capital gain, multiplied by the greater of (A) the
highest

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<PAGE> 35

marginal Federal corporate income tax rate (without regard to the phase-out of
graduated rates) applicable to long-term capital gain and (B) the highest
marginal Federal individual income tax rate applicable to long-term capital gain
(including any surtax but without regard to any phase-out of personal exemptions
or any limitation on itemized deductions). If for any reason it is determined
after the payment of any dividend that a portion of that dividend was subject to
Federal income tax, the Fund will not be required to pay any additional amount
to compensate for any tax payable on the dividend (other than Additional
Dividends payable under the circumstances described in this Prospectus). The
Fund will not be required to provide any notice of the prospective inclusion of,
or increase any dividend on Preferred Shares as a result of the inclusion of,
any taxable income in any dividend (other than in the circumstances described
above and in the circumstances under which the Fund is required to pay
Additional Dividends). No provision will be made to compensate holders of
Preferred Shares for any alternative minimum tax liability in respect of
distributions on Preferred Shares. See "Description of Preferred Shares --
Dividends -- Additional Dividends."

THE REMARKETING AGENT

The Remarketing Agent for the Preferred Shares initially will be Smith
Barney Shearson Inc.

The Fund will enter into a Remarketing Agreement with the Remarketing Agent
which will provide, among other things, that the Remarketing Agent will follow
certain procedures for remarketing Preferred Shares on behalf of holders thereof
as provided in the Bylaws for the purpose of determining the Applicable Dividend
Rate that will enable the Remarketing Agent to remarket Preferred Shares
tendered to it at a price of $50,000 per share for a 28-day Dividend Period or a
Special Dividend Period, as the case may be. See "Remarketing -- Remarketing
Procedures -- Applicable Dividend Rates" below. Each periodic operation of such
procedures with respect to Preferred Shares is referred to as a "Remarketing".
Under certain circumstances, Preferred Shares tendered in a Remarketing may be
tendered or purchased by the Remarketing Agent for its own account. See
"Remarketing -- Remarketing Procedures -- Tender by Holders" below.

For its services in determining the Applicable Dividend Rate and
remarketing Preferred Shares for a 28-day Dividend Period, the Remarketing Agent
will receive from the Fund a fee for such period calculated at a rate equal to
approximately .25% per annum of the average amount of Preferred Shares
outstanding during the Dividend Period. If the Dividend Period is a Special
Dividend Period, the Fund will instead pay to the Remarketing Agent a fee, to be
determined by mutual consent of the Fund and the Remarketing Agent, based on the
selling concession that would be applicable to an underwriting of a fixed or
variable rate preferred stock issue with a similar dividend period. The
Remarketing Agent will pay to selected broker-dealers a portion of the fees
described above, reflecting shares sold through such broker-dealers to
purchasers in Remarketings.

The Fund and Putnam have agreed to indemnify the Remarketing Agent against
certain liabilities arising out of or in connection with its duties under the
Remarketing Agreement.

Any Remarketing Agent may resign and be discharged from its duties with
respect to the Preferred Shares under a Remarketing Agreement by giving at least
60 days' prior notice in writing to the Fund, the Securities Depository, the
Paying Agent and each other Remarketing Agent, if any, and the Fund may remove a
Remarketing Agent under a Remarketing Agreement by giving at least 60 days'
prior notice in writing to such Remarketing Agent, the Securities Depository,
the Paying Agent and any other Remarketing Agent of such removal; provided that
if (i) the resigning or removed Remarketing Agent is at the time the sole
Remarketing Agent, or (ii) each other Remarketing Agent elects to resign or is
removed within one week of delivery of such notice, then neither any such
resignation nor any such removal will be effective until a successor remarketing
agent which is a nationally recognized broker-dealer shall have entered into a
remarketing agreement with the Fund in which such successor remarketing agent
shall have agreed to conduct Remarketings with respect to the Preferred Shares
in accordance with the terms and conditions of the Bylaws.

A Remarketing Agent may also terminate a Remarketing Agreement or may
resign by giving notice in writing to the Fund, the Securities Depository, the
Paying Agent and each other Remarketing Agent, if any, if any of the following
events has occurred and has not been cured prior to the proposed date of such
termination or resignation (in each case for a period of 30 days after notice
thereof has been given to the Fund specifying the condition or event): (i) the
rating of the Preferred Shares shall have been downgraded or withdrawn by a

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<PAGE> 36

national rating service, the effect of which, in the opinion of the Remarketing
Agents or Remarketing Agent, as the case may be, is to affect materially and
adversely the market price of such Preferred Shares or the ability of the
Remarketing Agents or Remarketing Agent, as the case may be, to remarket such
shares; (ii) all of the Preferred Shares shall have been called for redemption;
or (iii) without the prior written consent of the Remarketing Agent or
Remarketing Agents, as the case may be, the Agreement and Declaration of Trust,
the Bylaws or the Paying Agent Agreement shall have been amended in any manner
that, in the opinion of the Remarketing Agent or Remarketing Agents, as the case
may be, materially changes the nature of the Preferred Shares or the remarketing
procedures with respect thereto.

The Remarketing Agent is not obligated to set the Applicable Dividend Rate
or Rates on Preferred Shares or to remarket such shares during a Non-Payment
Period as provided in the Bylaws or at any time that certain conditions
specified in the Remarketing Agreement have not been met or any of the events
set forth in clauses (i), (ii) or (iii) of the immediately preceding paragraph
has occurred.

RESTRICTIONS ON TRANSFER

General. The Paying Agent will maintain a record of certain beneficial
owners of Preferred Shares, for purposes of determining such owners entitled to
participate in Remarketings and for certain other purposes. The Paying Agent
will only record transfers of such beneficial ownership, in a Remarketing or
otherwise, of which it is notified in accordance with its procedures in effect
from time to time.

Book Entry Only. DTC initially will act as Securities Depository for the
Agent Members with respect to Preferred Shares. Except as discussed below, as
long as DTC is the Securities Depository, one certificate for the outstanding
Preferred Shares will be registered in the name of Cede & Co. ("Cede") as
nominee of the Securities Depository, and Cede will be the holder of record of
all Preferred Shares. Such certificate will bear a legend to the effect that
such certificate is issued subject to the provisions contained in the Bylaws.
Unless the Fund shall have waived this requirement during a Non-Payment Period,
Preferred Shares may be held only in book entry form through the Securities
Depository (which, either directly or through a nominee, will be the registered
owner of Preferred Shares as described above), and the Fund will issue
stop-transfer instructions to the Paying Agent for the Preferred Shares to this
effect. If the Fund shall have waived the foregoing requirement during a
Non-Payment Period, a holder of Preferred Shares may obtain a certificate or
certificates for such shares. The Fund is advised that DTC is a New
York-chartered limited purpose trust company, which performs services for its
participants (including the Agent Members), some of which (and/or their
representatives) own DTC. The Fund is advised further that DTC maintains lists
of its participants and will maintain as record holder the positions (beneficial
ownership interests) held by each Agent Member in the Preferred Shares, whether
such Agent Member is a holder for its own account or as a nominee for another
holder. The Fund shall have no obligation, including without limitation any
obligation to provide notice or to make any payment (in respect of any dividend
or otherwise), to any person (including without limitation any holder of any
beneficial interest in Preferred Shares, whether or not such interest is
reflected on the share transfer books of the Paying Agent) other than the
holders of record of the Preferred Shares shown on the share transfer books of
the Paying Agent from time to time. The share transfer books of the Fund as kept
by the Paying Agent shall be conclusive as to who is the holder of record of any
Preferred Shares at any time and as to the number of Preferred Shares held from
time to time by any such holder. No Remarketing Agent, Paying Agent, Securities
Depository, or Agent Member will have any obligation to any person having any
interest in any Preferred Share other than the holder of record and the
beneficial owner thereof as shown from time to time on the share transfer books
kept by the Paying Agent. The Paying Agent shall have no obligation to record
any transfer of record or beneficial ownership in any share unless and until it
shall have received proper notice and evidence of such transfer and the right of
the transferee in accordance with the Paying Agent's procedures in effect from
time to time.

Secondary Market. The Remarketing Agent has advised the Fund that it
currently intends to make a secondary trading market in the Preferred Shares
outside of Remarketings. However, the Remarketing Agent has no obligation to
make a secondary market in the Preferred Shares outside of Remarketings, and
there can be no assurance that a secondary market for Preferred Shares will
develop or, if it does develop, that it will provide holders with liquidity of
investment. The Preferred Shares will not be registered on any stock exchange

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<PAGE> 37

or on the National Association of Securities Dealers Automated Quotation System.
If a Remarketing Agent purchases Preferred Shares in the secondary market or in
a Remarketing, it may be in a position of holding for its own account or as
nominee for others Preferred Shares subject to a Remarketing at the time it
determines the Applicable Dividend Rate in such Remarketing and may tender such
shares in such Remarketing.

REMARKETING PROCEDURES

Tender by Holders. Each share of Preferred Shares is subject to Tender and
Dividend Reset only on the relevant Remarketing Date at the end of each Dividend
Period applicable to such share.

Except during a Non-Payment Period, by 12:00 noon, New York City time, on
the Remarketing Date in the Remarketing at the end of each Dividend Period, the
holder of a Preferred Share may elect to tender such share or hold such share
for the next Dividend Period. If the holder of such Preferred Share elects to
hold such share, such holder shall hold such Preferred Share at the Applicable
Dividend Rate for a 28-day Dividend Period or a Special Dividend Period if the
succeeding Dividend Period with respect to such share has been designated by the
Trustees as a Special Dividend Period, provided that, except during a
Non-Payment Period, if (i) there is no Remarketing Agent, (ii) the Remarketing
Agent is not required to conduct a Remarketing or (iii) the Remarketing Agent is
unable to remarket in the Remarketing on such Remarketing Date all such
Preferred Shares tendered (or deemed tendered) to it at a price of $50,000 per
share, then the next Dividend Period for all Preferred Shares shall be a 28-day
Dividend Period and the Applicable Dividend Rate therefor shall be the
applicable Maximum Dividend Rate.

Preferred Shares may be tendered only in a Remarketing which commences on
the Remarketing Date immediately prior to the end of the current Dividend Period
with respect thereto. By 9:00 a.m., New York City time, on such Remarketing
Date, the Remarketing Agent will, after canvassing the market and considering
prevailing market conditions at the time for such shares and similar securities,
provide to holders of such shares non-binding indications of the Applicable
Dividend Rate for the next succeeding 28-day Dividend Period or Special Dividend
Period, as the case may be. THE ACTUAL APPLICABLE DIVIDEND RATE FOR SUCH
DIVIDEND PERIOD MAY BE GREATER OR LESS THAN THE RATE INDICATED IN SUCH
NON-BINDING INDICATIONS (BUT NOT GREATER THAN THE APPLICABLE MAXIMUM DIVIDEND
RATE) AND WILL NOT BE DETERMINED UNTIL AFTER A HOLDER IS REQUIRED TO ELECT TO
HOLD OR SELL ITS PREFERRED SHARES AND A NEW PURCHASER IS REQUIRED TO AGREE TO
PURCHASE PREFERRED SHARES. See Appendix A.

By 12:00 noon, New York City time, on any Remarketing Date with respect to
the Preferred Shares, each holder of Preferred Shares must notify the
Remarketing Agent of its desire (on a share-by-share basis) either to tender
such share at a price of $50,000 per share or to continue to hold such share for
the next 28-day Dividend Period or, if applicable, the designated Special
Dividend Period. Holders of such Preferred Shares who do not provide such notice
shall be deemed to have elected (i) to hold all their Preferred Shares if the
current Dividend Period and succeeding Dividend Period is a 28-day Dividend
Period or a Special Dividend Period of 90 days or less, and (ii) to tender all
their Preferred Shares if the current Dividend Period or succeeding Dividend
Period is a Special Dividend Period of more than 90 days. Any holder or
prospective purchaser may informally indicate to the Remarketing Agent its
Applicable Dividend Rate preferences. However, any notice given to the
Remarketing Agent to tender or hold shares for a particular Dividend Period is
irrevocable and may not be conditioned upon the level at which Applicable
Dividend Rates are set. Accordingly, the Applicable Dividend Rate with respect
to a Dividend Period may be greater or less than such rate preferences. Any
notice of tender may not be revoked, except that the Remarketing Agent may, in
its sole discretion, (i) at the request of a tendering holder that has tendered
one or more Preferred Shares to the Remarketing Agent, waive such holder's
tender, and thereby enable such holder to continue to hold such share or shares
for a 28-day Dividend Period or a designated Special Dividend Period, as agreed
to by the holder and the Remarketing Agent at such time, so long as such
tendering holder has indicated to the Remarketing Agent that it would accept the
new Applicable Dividend Rate for such Dividend Period, such waiver to be
contingent upon the Remarketing Agent's being able to remarket all shares
tendered to it in such Remarketing, and (ii) at the request of a holder that has
elected to hold one or more of its Preferred Shares, waive such holder's

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<PAGE> 38

election with respect thereto, such waiver to be contingent upon the Remarketing
Agent's being able to remarket all shares tendered to it in such Remarketing.

When Preferred Shares are tendered in a Remarketing therefor, the
Remarketing Agent is required to use its best efforts to remarket such tendered
shares on behalf of the holders thereof, but there can be no assurance that the
Remarketing Agent will be able to remarket all Preferred Shares tendered. See
"Remarketing -- Remarketing Procedures -- Allocation of Shares; Failure to
Remarket at $50,000 Per Share" below. Each holder's right to tender Preferred
Shares in a Remarketing therefor is limited to the extent that (i) the
Remarketing Agent conducts a Remarketing pursuant to the terms of the
Remarketing Agreement, (ii) shares tendered have not been called for redemption,
and (iii) the Remarketing Agent is able to find purchasers for tendered
Preferred Shares at an Applicable Dividend Rate for a 28-day Dividend Period or
a designated Special Dividend Period, as the case may be, not in excess of any
applicable Maximum Dividend Rate. If the Remarketing Agent is unable to find a
purchaser or purchasers for all Preferred Shares tendered in a Remarketing
therefor, the shares to be sold in such Remarketing will be selected either pro
rata or by lot from among all the tendered shares. See "Remarketing --
Remarketing Procedures -- Allocation of Shares; Failure to Remarket at $50,000
Per Share" below. Each purchase or sale in a Remarketing will be made for
settlement on the related Settlement Date. See "Remarketing -- Remarketing
Procedures -- Notification of Results; Settlement" below and Appendix A.

There can be no assurance that the Remarketing Agent will be able to
remarket all Preferred Shares tendered in a Remarketing therefor. If any
Preferred Shares so tendered are not remarketed, a holder thereof may be
required to continue to hold some or all of its shares until at least the end of
the next Dividend Period therefor or to sell such shares outside a Remarketing.
See "Remarketing -- Remarketing Procedures -- Allocation of Shares; Failure to
Remarket at $50,000 Per Share" below, and "Remarketing -- Restrictions on
Transfer" and "Remarketing -- The Remarketing Agent" above.

Tendered Preferred Shares will also be subject to purchase in a Remarketing
therefor by the Remarketing Agent. If the Remarketing Agent holds Preferred
Shares for its own account after a Remarketing, it is required to establish an
Applicable Dividend Rate in such Remarketing that is no higher than the
Applicable Dividend Rate that would have been set if the Remarketing Agent did
not hold or had not purchased such shares. The Remarketing Agent may purchase
Preferred Shares for its own account in a Remarketing only if the Remarketing
Agent purchases for its own account or the account of others all tendered (or
deemed tendered) Preferred Shares subject to Tender and Dividend Reset but not
sold to other purchasers in such Remarketing. The Remarketing Agent is not
obligated to purchase any Preferred Shares that would otherwise remain unsold in
a Remarketing. If the Remarketing Agent holds any Preferred Shares immediately
prior to a Remarketing and if all other Preferred Shares subject to Tender and
Dividend Reset and tendered for sale by other owners have been sold in such
Remarketing, then the Remarketing Agent may sell in such Remarketing such number
of its shares which are subject to Tender and Dividend Reset as there are
outstanding orders to purchase that have not been filled by shares tendered for
sale on behalf of accounts other than that of the Remarketing Agent. See
"Remarketing -- Restrictions on Transfer -- Secondary Market" above. Neither the
Fund, nor the Paying Agent or the Remarketing Agent will be obligated in any
case to provide funds to make payment to any holder upon such holder's tender of
its Preferred Shares in any Remarketing. If the Remarketing Agent purchases
Preferred Shares in the secondary market or in a Remarketing, it may be in the
position of holding for its own account or as nominee for others Preferred
Shares subject to Tender and Dividend Reset in a Remarketing at the time it
determines the Applicable Dividend Rate in such Remarketing and may tender such
shares in such Remarketing.

Applicable Dividend Rates. By 3:00 p.m., New York City time, on each
Remarketing Date, the Remarketing Agent will determine the Applicable Dividend
Rate to the nearest one-thousandth (0.001) of one percent per annum for the next
28-day Dividend Period (or, if designated, a Special Dividend Period, provided
that, if the Remarketing Agent is unable to remarket on such Remarketing Date
all such tendered shares in a Remarketing at a price of $50,000 per share, then
the Remarketing Agent will assign no shares to any Special Dividend Period).

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<PAGE> 39

The Applicable Dividend Rate for each such Dividend Period, except as
otherwise described herein, will be the dividend rate per annum that the
Remarketing Agent determines to be the lowest rate that will enable it to
remarket on behalf of the holders thereof the Preferred Shares subject to Tender
and Dividend Reset in such Remarketing and tendered to it on such Remarketing
Date at a price of $50,000 per share. The Applicable Dividend Rate for Preferred
Shares will be determined as aforesaid by the Remarketing Agent in its sole
discretion and will be conclusive and binding on the Fund and all holders of
Preferred Shares. In determining such Applicable Dividend Rate, the Remarketing
Agent will, after taking into account market conditions as reflected in the
prevailing dividend yields on fixed and variable rate taxable and tax exempt
debt securities and the prevailing dividend yields of fixed and variable rate
preferred stocks determined for the purpose of providing non-binding indications
of the Applicable Dividend Rates to holders and potential purchasers of
Preferred Shares, (i) consider the number of Preferred Shares tendered in the
applicable Remarketing and the number of Preferred Shares prospective purchasers
are willing to purchase and (ii) contact by telephone or otherwise current and
prospective holders of the Preferred Shares subject to Tender and Dividend Reset
to ascertain the dividend rates at which they would be willing to hold such
shares. If no Applicable Dividend Rate shall have been established on a
Remarketing Date for the next 28-day Dividend Period, or Special Dividend
Period, if any, for any reason (other than because there is no Remarketing
Agent, the Remarketing Agent is not required to conduct a Remarketing pursuant
to the terms of the Remarketing Agreement or the Remarketing Agent is unable to
remarket on the Remarketing Date all Preferred Shares tendered (or deemed
tendered) to it at a price of $50,000 per share), then the Remarketing Agent, in
its sole discretion, shall, except during a Non-Payment Period, after taking
into account market conditions as reflected in the prevailing yields on fixed
and variable rate taxable and tax exempt debt securities and the prevailing
dividend yields of fixed and variable rate preferred stock, determine the
Applicable Dividend Rate that would be the rate per annum that would be the
initial dividend rate fixed in an offering on such Remarketing Date, assuming in
each case a comparable dividend period, issuer and security. If a Remarketing
for Preferred Shares does not take place because there is no Remarketing Agent,
the Remarketing Agent is not required to conduct a Remarketing or the
Remarketing Agent is unable to remarket in the Remarketing all such Preferred
Shares tendered (or deemed tendered) to it at a price of $50,000 per share,
then, except during a Non-Payment Period, the Applicable Dividend Rate for the
subsequent Dividend Period for such shares will be the applicable Maximum
Dividend Rate for a 28-day Dividend Period and such subsequent Dividend Period
shall be a 28-day Dividend Period.

Except during a Non-Payment Period, the Applicable Dividend Rate for any
Dividend Period for Preferred Shares will not be more than the Maximum Dividend
Rate applicable to such shares.

The Maximum Dividend Rate for Preferred Shares will be the "Applicable
Percentage" (as described below) of the Reference Rate. The Remarketing Agent
will round each Maximum Dividend Rate to the nearest one-thousandth (0.001) of
one percent per annum, with any such number ending in five ten-thousandths
(0.0005) of one percent being rounded upwards to the nearest one-thousandth
(0.001) of one percent. The Remarketing Agent will not round the applicable
Reference Rate as part of its calculation of any Maximum Dividend Rate.

"Reference Rate" means (i) with respect to a Dividend Period having 28 or
fewer days, the higher of the applicable "AA" Composite Commercial Paper Rate
and the Taxable Equivalent of the Short-Term Municipal Bond Rate, (ii) with
respect to any Short Term Dividend Period having more than 28 but fewer than 183
days, the applicable "AA" Composite Commercial Paper Rate, (iii) with respect to
any Short Term Dividend Period having 183 or more but fewer than 365 days, the
U.S. Treasury Bill Rate, and (iv) with respect to any Long Term Dividend Period,
the applicable U.S. Treasury Note Rate.

" 'AA' Composite Commercial Paper Rate," on any date of determination,
means (i) the Interest Equivalent of the rate on commercial paper placed on
behalf of issuers whose corporate bonds are rated "AA" by S&P or "Aa" by Moody's
or the equivalent of such rating by another nationally-recognized rating agency,
as such rate is made available on a discount basis or otherwise by the Federal
Reserve Bank of New York for the Business Day immediately preceding such date,
or (ii) in the event that the Federal Reserve Bank of New York does not make
available such a rate, then the arithmetic average of the Interest Equivalent of
the rate on commercial paper placed on behalf of such issuers, as quoted on a
discount basis or otherwise by the

36
<PAGE> 40

Commercial Paper Dealers to the Remarketing Agent for the close of business on
the Business Day immediately preceding such date. If one of the Commercial Paper
Dealers does not quote a rate required to determine the "AA" Composite
Commercial Paper Rate, the "AA" Composite Commercial Paper Rate will be
determined on the basis of the quotation or quotations furnished by any
Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers
selected by the Fund to provide such rate or rates not being supplied by the
Commercial Paper Dealer. If the number of Dividend Period days (in each case
determined without regard to any adjustment in the length of a Dividend Period
or the remarketing schedule in respect of non-Business Days) shall be (i) 7 or
more days but fewer than 49 days, such rate shall be the Interest Equivalent of
the 30-day rate on such commercial paper; (ii) 49 or more days but fewer than 70
days, such rate shall be the Interest Equivalent of the 60-day rate on such
commercial paper; (iii) 70 or more days but fewer than 85 days, such rate shall
be the arithmetic average of the Interest Equivalent of the 60-day and 90-day
rates on such commercial paper; (iv) 85 or more days but fewer than 99 days,
such rate shall be the Interest Equivalent of the 90-day rate on such commercial
paper; (v) 99 or more days but fewer than 120 days, such rate shall be the
arithmetic average of the Interest Equivalent of the 90-day and 120-day rates on
such commercial paper; (vi) 120 or more days but fewer than 141 days, such rate
shall be the Interest Equivalent of the 120-day rate on such commercial paper;
(vii) 141 or more days but fewer than 162 days, such rate shall be the
arithmetic average of the Interest Equivalent of the 120-day and 180-day rates
on such commercial paper; and (viii) 162 or more days but fewer than 183 days,
such rate shall be the Interest Equivalent of the 180-day rate on such
commercial paper.

"Taxable Equivalent of the Short-Term Municipal Bond Rate" on any date
means 90% of the quotient of (A) the per annum rate expressed on an Interest
Equivalent basis equal to the Kenny S&P 30-day High Grade Index or any
comparable index based upon 30-day yield evaluations at par of bonds the
interest on which is excludable for regular Federal income tax purposes under
the Code of "high grade" component issuers selected by Kenny Information Systems
Inc. or any successor thereto from time to time selected by the Fund in its
discretion, which component issuers shall include, without limitation, issuers
of general obligation bonds but shall exclude any bonds the interest on which
constitutes an item of tax preference under Section 57(a)(5) of the Code, or
successor provisions, for purposes of the "alternative minimum tax" (as defined
in the Code) (the "Kenny Index"), made available for the Business Day
immediately preceding such date but in any event not later than 8:30 a.m., New
York City time, on such date by Kenny Information Systems Inc. or any successor
thereto, divided by (B) 1.00 minus the Marginal Tax Rate (expressed as a
decimal); provided, however, that if the Kenny Index is not made so available by
8:30 a.m., New York City time, on such date by Kenny Information Systems Inc. or
any successor, the Taxable Equivalent of the Short-Term Municipal Bond Rate
shall mean the quotient of (A) the per annum rate expressed on an Interest
Equivalent basis equal to the most recent Kenny Index so made available divided
by (B) 1.00 minus the Marginal Tax Rate (expressed as a decimal).

"U.S. Treasury Bill Rate" on any date means (i) the Interest Equivalent of
the rate on the actively traded Treasury Bill with a maturity most nearly
comparable to the length of the related Dividend Period, as such rate is made
available on a discount basis or otherwise on the Business Day immediately
preceding such date by the Federal Reserve Bank of New York in its Composite
3:30 p.m. Quotations for U.S. Government Securities report for such Business
Day, or (ii) if such yield as so calculated is not available, the Alternate
Treasury Bill Rate on such date. "Alternate Treasury Bill Rate" on any date
means the Interest Equivalent of the yield as calculated by reference to the
arithmetic average of the bid price quotations of the actively traded Treasury
Bill with a maturity most nearly comparable to the length of the related
Dividend Period, as determined by bid price quotations as of any time on the
Business Day immediately preceding such date, obtained from at least three
recognized primary U.S. Government securities dealers selected by the
Remarketing Agent.

"U.S. Treasury Note Rate" on any date means (i) the yield as calculated by
reference to the bid price quotation of the actively traded, current coupon
Treasury Note with a maturity most nearly comparable to the length of the
related Dividend Period, as such bid price quotation is published on the
Business Day immediately preceding such date by the Federal Reserve Bank of New
York in its Composite 3:30 p.m. Quotations for U.S. Government Securities report
for such Business Day, or (ii) if such yield as so calculated

37
<PAGE> 41

is not available, the Alternate Treasury Note Rate on such date. "Alternate
Treasury Note Rate" on any date means the yield as calculated by reference to
the arithmetic average of the bid price quotations of the actively traded,
current coupon Treasury Note with a maturity most nearly comparable to the
length of the related Dividend Period, as determined by the bid price quotations
as of any time on the Business Day immediately preceding such date, obtained
from at least three recognized primary U.S. Government securities dealers
selected by the Remarketing Agent.

<TABLE>
The Maximum Dividend Rate for Preferred Shares will depend on the credit
rating or ratings assigned to such shares. The Applicable Percentage for the
Preferred Shares on each Remarketing Date will be determined based on the lower
of the credit rating or ratings assigned on such date to the Preferred Shares by
Moody's and S&P (or if Moody's or S&P or both shall not make such rating
available, the equivalent of either or both of such ratings by a Substitute
Rating Agency or two Substitute Rating Agencies or, in the event that only one
such rating shall be available, such rating), as follows:

There is no minimum Applicable Dividend Rate in respect of any Dividend
Period.

ALLOCATION OF SHARES; FAILURE TO REMARKET AT $50,000 PER SHARE. If, in a
Remarketing of the Preferred Shares, the Remarketing Agent is unable to remarket
by 3:00 p.m., New York City time, on the Remarketing Date all Preferred Shares
tendered to it in such Remarketing (which are subject to Tender and Dividend
Reset in such Remarketing) at a price of $50,000 per share, (i) each holder that
tendered shares for sale will sell a number of Preferred Shares on a pro rata
basis, to the extent practicable, or by lot, as determined by the Remarketing
Agent in its sole discretion, based on the number of orders to purchase
Preferred Shares in such Remarketing, and (ii) the next Dividend Period for
Preferred Shares will be a 28-day Dividend Period and the Applicable Dividend
Rate for such Dividend Period will be the Maximum Dividend Rate for a 28-day
Dividend Period.

If the allocation procedures described above would result in the sale of a
fraction of a Preferred Share, the Remarketing Agent will, in its sole
discretion, round up or down the number of Preferred Shares sold by each holder
on the applicable Remarketing Date so that each share sold by each holder shall
be a whole Preferred Share, and the total number of shares sold equals the total
number of shares purchased on such Remarketing Date.

NOTIFICATION OF RESULTS; SETTLEMENT. By telephone at approximately 3:30
p.m., New York City time, on each Remarketing Date with respect to Preferred
Shares, the Remarketing Agent will advise each holder of tendered Preferred
Shares and each purchaser thereof (or the Agent Member thereof who in turn will
advise such holder or purchaser) (i) of the number of shares such holder or
purchaser is to sell or purchase and (ii) to give instructions to its Agent
Member to deliver such shares against payment therefor or to pay the purchase
price against delivery as appropriate. The Remarketing Agent will also advise
each holder or purchaser that is to continue to hold, or to purchase, shares
with a Dividend Period beginning on the Business Day following such Remarketing
Date of the Applicable Dividend Rate.

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<PAGE> 42

The transactions described above will be executed on the Settlement Date
through the Securities Depository in accordance with the Securities Depository's
procedures, and the accounts of the respective Agent Members of the Securities
Depository will be debited and credited and shares delivered by book entry as
necessary to effect the purchases and sales of Preferred Shares, in each case as
determined in the related Remarketing. Purchasers of Preferred Shares will make
payment through their Agent Members in same-day funds to the Securities
Depository against delivery by book entry of Preferred Shares through their
Agent members. The Securities Depository will make payment in accordance with
its procedures, which currently provide for payment in same-day funds. If the
certificates for Preferred Shares are not held by the Securities Depository or
its nominee, payment with respect to such shares will be made in same-day funds
to the Paying Agent against delivery of such certificates.

If any holder selling Preferred Shares in a Remarketing fails to deliver
such shares, the Agent Member of such selling holder and of any other person
that was to have purchased Preferred Shares in such Remarketing may deliver to
any such other person a number of whole Preferred Shares that is less than the
number of shares that otherwise was to be purchased by such person. In such
event, the number of Preferred Shares to be so delivered will be determined by
such Agent Member. Delivery of such lesser number of Preferred Shares will
constitute good delivery.

As long as the Securities Depository or Cede or any other nominee therefor
holds the certificate or certificates representing the Preferred Shares, no
share certificates will need to be delivered by any selling holder to reflect
any transfer of Preferred Shares effected in a Remarketing.

The Remarketing Agent may, in its sole discretion, modify the settlement
procedures set forth above with respect to any Remarketing of Preferred Shares
so long as any such modification does not adversely affect any holders of such
shares.

DESCRIPTION OF PREFERRED SHARES

The following is a brief description of the terms of the Preferred Shares.
This description does not purport to be complete and is subject to and qualified
in its entirety by reference to the Fund's Bylaws. A copy of the Bylaws has been
filed as an exhibit to the Registration Statement of which this Prospectus is a
part and may be inspected, and copies thereof may be obtained, as described
under "Additional Information". Capitalized terms used herein and not otherwise
defined shall have the meanings ascribed to them in the Glossary immediately
preceding the Appendices hereto, or in Appendix B.

GENERAL

The Agreement and Declaration of Trust currently authorizes the issuance of
an unlimited number of shares of beneficial interest in the Fund in such classes
and series as may be provided for in the Bylaws. The Agreement and Declaration
of Trust provides for the issuance of an unlimited number of Common Shares, and
currently the Bylaws provide for the issuance of up to 6,000 shares of Preferred
Shares. All Preferred Shares will have a liquidation preference of $50,000 per
share plus an amount equal to accumulated but unpaid dividends (whether or not
earned or declared). As of the date of this Prospectus, there were issued and
outstanding 4,007,092 Common Shares. See "Description of Common Shares" for
additional information as to the Common Shares.

The Preferred Shares, when issued and sold through this offering, will,
except as described below under "Description of Preferred Shares -- Certain
Provisions in the Agreement and Declaration of Trust", be fully paid and
nonassessable, will not be convertible into Common Shares or other capital
shares of the Fund and will have no preemptive rights. The Preferred Shares will
not be subject to any sinking fund but will be redeemable under the
circumstances described below under "Description of Preferred Shares --
Redemption".

39
<PAGE> 43

DIVIDENDS

General. The Bylaws provide generally that holders of Preferred Shares
will be entitled to receive, when, as and if declared by the Fund, out of funds
legally available therefor, cumulative cash dividends, at the rate per annum set
forth on the cover page hereof for the Initial Dividend Period, and thereafter
at the Applicable Dividend Rate for the applicable Dividend Period, payable on
the respective dates set forth below and, except as described below, set by the
Remarketing Agent in accordance with the remarketing procedures described under
"Remarketing". See "Remarketing -- Remarketing Procedures -- Applicable Dividend
Rates" and Appendix A.

Initial Dividend Payment Dates and Dividend Period. The Initial Dividend
Period for the Preferred Shares will commence on the Date of Original Issue and
end on February , 1995. Dividends for the Initial Dividend Period for
Preferred Shares will be paid when, as and if declared, on March 1, 1994 (the
"First Initial Dividend Payment Date"), the first day of each calendar month
thereafter during the Initial Dividend Period through the first day of the last
calendar month in the Initial Dividend Period, subject to certain exceptions,
and on February , 1995 (the "Last Initial Dividend Payment Date", together
with the First Initial Dividend Payment Date and the other Dividend Payment
Dates referred to in this sentence, the "Initial Dividend Payment Dates").
Dividends for each Dividend Period for Preferred Shares thereafter will be
payable when, as and if declared, on each Dividend Payment Date, subject to
certain exceptions.

Subsequent Dividend Periods for the Preferred Shares. After the Initial
Dividend Period for each Preferred Share, a Dividend Period therefor will
commence on each (but not the final) Dividend Payment Date for such share;
provided, however, that any Dividend Payment Date, other than the last Dividend
Payment Date during such Dividend Period, occurring after commencement of and
during a Special Dividend Period of more than 35 days will not give rise to a
new Dividend Period. Each subsequent Dividend Period for Preferred Shares will
comprise, beginning with and including the date on which it commences, 28
consecutive days or, in the event the Fund has designated such Dividend Period
as a Special Dividend Period, such number of consecutive days as specified by
the Fund; provided that such number of days to be specified shall be a multiple
of seven and not more than 364 in the case of a Short Term Dividend Period and
shall consist of at least one full year (but not more than five years) in the
case of a Long Term Dividend Period. Notwithstanding the foregoing, any
adjustment of the remarketing schedule or of the length of a Dividend Period as
provided herein shall cause an adjustment of the relevant Settlement Date, if
necessary, so that such Settlement Date will be the first day of the next
Dividend Period.

Except during a Non-Payment Period, by 12:00 noon, New York City time, on
the Remarketing Date at the end of the Initial Dividend Period applicable to a
Preferred Share, and by 12:00 noon on the Remarketing Date at the end of each
subsequent Dividend Period applicable to a Preferred Share, the holder of such
share may elect to tender such share or to hold such share for the next Dividend
Period (i.e., a 28-day Dividend Period or a Special Dividend Period, as the case
may be). If the holder of such Preferred Share elects to hold such share for the
next Dividend Period or fails to elect to tender or hold such share on such
Remarketing Date, such holder will continue to hold such share at the Applicable
Dividend Rate determined in such Remarketing for the next Dividend Period;
provided that, (i) if there is no Remarketing Agent, the Remarketing Agent is
not required to conduct a Remarketing or the Remarketing Agent is unable to
remarket in the Remarketing on such Remarketing Date all Preferred Shares
tendered to it at a price of $50,000 per share, then the next Dividend Period
for such share and for all other Preferred Shares will be a 28-day Dividend
Period and the Applicable Dividend Rate therefor will be the Maximum Dividend
Rate for a 28-day Dividend Period, and (ii) if such current Dividend Period is a
Special Dividend Period of more than 90 days or the succeeding Dividend Period
has been designated by the Trustees as a Special Dividend Period of more than 90
days, then a holder who fails to elect to tender or hold a Preferred Share will
be deemed to have elected to tender the shares. If a Preferred Share is tendered
(or deemed tendered) but not sold in a Remarketing, the holder of such share
will hold such share for a 28-day Dividend Period at the Maximum Dividend Rate
therefor.

Special Dividend Periods for Preferred Shares. With respect to each
Dividend Period, the Fund may, at its sole option and to the extent permitted by
law, by telephonic or written notice (a "Request for Special

40
<PAGE> 44

Dividend Period") to the Remarketing Agent, request that the next succeeding
Dividend Period for Preferred Shares will be a number of days (other than 28),
evenly divisible by seven, and not fewer than seven nor more than 364 in the
case of a Short Term Dividend Period or a period of not less than one whole year
and not greater than five years in the case of a Long Term Dividend Period,
specified in such notice, provided that the Fund may not give a Request for a
Special Dividend Period of greater than 28 days (and any such request shall be
null and void) unless the Fund has given written notice thereof to Moody's and
S&P and unless, with respect to the Preferred Shares, full cumulative dividends,
any amounts due with respect to redemptions, and any Additional Dividends
payable prior to such date have been paid in full and, for any Remarketing
occurring after the initial Remarketing, all shares tendered were remarketed in
the last occurring Remarketing. Such Request for Special Dividend Period, in the
case of a Short Term Dividend Period, shall be given on or prior to the fourth
Business Day but not more than seven Business Days prior to a Remarketing Date
for the Preferred Shares and, in the case of a Long Term Dividend Period, shall
be given on or prior to the 14th day but not more than 28 days prior to a
Remarketing Date for Preferred Shares. Upon receiving such a Request for Special
Dividend Period, the Remarketing Agent shall determine (i) whether given the
factors set forth below it is advisable that the Fund issue a Notice of Special
Dividend Period for Preferred Shares as contemplated by such Request for Special
Dividend Period, (ii) the Optional Redemption Price of the Preferred Shares
during such Special Dividend Period and, (iii) the Specific Redemption
Provisions and shall give the Fund written notice (a "Response") of its
determination by no later than the third Business Day prior to such Remarketing
Date. In making such determination, the Remarketing Agent will consider (i)
existing short-term and long-term market rates and indices of such short-term
and long-term rates, (ii) existing market supply and demand for short-term and
long-term securities, (iii) existing yield curves for short-term and long-term
securities comparable to the Preferred Shares, (iv) industry and financial
conditions which may affect the Preferred Shares, (v) the investment objective
of the Fund, and (vi) the Dividend Periods and dividend rates at which current
and potential beneficial holders of Preferred Shares would remain or become
beneficial holders. If the Remarketing Agent shall not give the Fund a Response
by such third Business Day or if the Response states that given the factors set
forth above it is not advisable that the Fund give a Notice of Special Dividend
Period for Preferred Shares, the Fund may not give a Notice of Special Dividend
Period in respect of such Request for Special Dividend Period. In the event the
Response indicates that it is advisable that the Fund give a Notice of Special
Dividend Period for the Preferred Shares, the Fund may by no later than the
second Business Day prior to such Remarketing Date give a notice (a "Notice of
Special Dividend Period") to the Remarketing Agent and to the Securities
Depository, which notice will specify (i) the duration of the Special Dividend
Period, (ii) the Optional Redemption Price as specified in the related Response,
and (iii) the Specific Redemption Provisions, if any, as specified in the
related Response. The Fund shall not give a Notice of Special Dividend Period,
or, if such Notice of Special Dividend Period shall have already been given,
shall give telephonic or written notice of its revocation (a "Notice of
Revocation") to the Remarketing Agent (in the case of clauses (x) and (y)) and
the Securities Depository (in the case of clauses (x), (y) and (z)) on or prior
to the Business Day prior to the relevant Remarketing Date if (x) either the
1940 Act Preferred Shares Asset Coverage is not satisfied or the Fund shall fail
to maintain S&P Eligible Assets and Moody's Eligible Assets each with an
aggregate Discounted Value at least equal to the Preferred Shares Basic
Maintenance Amount, in each case on each of the two Valuation Dates immediately
preceding the Business Day prior to the relevant Remarketing Date on an actual
basis and on a pro forma basis giving effect to the proposed Special Dividend
Period (using as a pro forma dividend rate with respect to such Special Dividend
Period the dividend rate which the Remarketing Agent shall advise the Fund is an
approximately equal rate for securities similar to the Preferred Shares with an
equal dividend period), provided that (unless Moody's advises the Fund to the
contrary), in calculating the aggregate Discounted Value of Moody's Eligible
Assets for this purpose, the Moody's Exposure Period shall be deemed to be one
week longer than the Moody's Exposure Period that would otherwise apply as of
the date of the Notice, (y) sufficient funds for the payment of dividends
payable on the immediately succeeding Dividend Payment Date for the Preferred
Shares have not been irrevocably deposited with the Paying Agent by the close of
business on the third Business Day preceding the Remarketing Date or (z) the
Remarketing Agent advises the Fund that after consideration of the factors
listed above it has concluded that it is advisable to give a Notice of
Revocation. If the Fund is prohibited from giving a Notice of Special Dividend
Period as a result of the factors enumerated in clause (x), (y), or (z) of the
preceding sentence or if the Fund gives a Notice of Revocation

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<PAGE> 45

with respect to a Notice of Special Dividend Period for Preferred Shares, the
next succeeding Dividend Period for Preferred Shares will be a 28-day Dividend
Period, provided that if the then-current Dividend Period is a Special Dividend
Period of less than 28 days, the next succeeding Dividend Period for such shares
will be the same length as the current Dividend Period.

In the event all Preferred Shares for which the Fund has given a Notice of
Special Dividend Period tendered are not remarketed or a Remarketing is not held
for any reason, the Fund may not again give a Notice of Special Dividend Period
(and any such attempted notice shall be null and void) until all Preferred
Shares tendered in any subsequent Remarketing with respect to a 28-day Dividend
Period have been remarketed.

Dividend Payment Dates. Dividends on each Preferred Share will accumulate
from its Date of Original Issue and will be payable, when, as and if declared by
the Trustees, on the applicable Dividend Payment Dates. The Dividend Payment
Dates will be: (i) with respect to the Initial Dividend Period for Preferred
Shares, the Initial Dividend Payment Dates, (ii) with respect to any 28-day
Dividend Period and any Short Term Dividend Period of 35 or fewer days, the day
next succeeding the last day thereof; and (iii) with respect to any Short Term
Dividend Period of more than 35 days and with respect to any Long Term Dividend
Period, the first Business Day of each calendar month during such Short Term
Dividend Period or Long Term Dividend Period and the day next succeeding the
last day of such period (each such date referred to in clause (i), (ii) or (iii)
being herein referred to as a "Normal Dividend Payment Date"), except that if
such Normal Dividend Payment Date is not a Business Day, then (i) the Dividend
Payment Date shall be the first Business Day next succeeding such Normal
Dividend Payment Date if such Normal Dividend Payment Date is a Monday, Tuesday,
Wednesday or Thursday, or (ii) the Dividend Payment Date shall be the first
Business Day next preceding such Normal Dividend Payment Date if such Normal
Dividend Payment Date is a Friday, and in each case the length of the current
Dividend Period will be adjusted accordingly. If, however, in the case of clause
(ii) in the preceding sentence the Securities Depository shall make available to
its participants and members in funds immediately available in New York City on
Dividend Payment Dates the amount due as dividends on such Dividend Payment
Dates (and the Securities Depository shall have so advised the Fund), and if the
Normal Dividend Payment Date is not a Business Day, then the Dividend Payment
Date shall be the next succeeding Business Day and the length of the current
Dividend Period will be adjusted accordingly. Although any particular Dividend
Payment Date may not occur on the originally scheduled date because of the
exceptions discussed above, the next succeeding Dividend Payment Date, subject
to such exceptions, will occur on the next following originally scheduled date.
If for any reason a Dividend Payment Date cannot be fixed as described above,
then the Trustees shall fix the Dividend Payment Date and the length of the
current Dividend Period will be adjusted accordingly, if necessary. The Initial
Dividend Period, 28-day Dividend Periods and Special Dividend Periods are
hereinafter sometimes referred to as "Dividend Periods." Each dividend payment
date determined as provided above is hereinafter referred to as a "Dividend
Payment Date."

Dividend Payments. So long as there is a Securities Depository with
respect to the Preferred Shares, each dividend on Preferred Shares will be paid
to the Securities Depository or its nominee as the record holder of all such
shares, and such payment shall for all purposes discharge the Fund's obligations
in respect of such payment. The Securities Depository is responsible for
crediting the accounts of the Agent Members of the beneficial owners of
Preferred Shares in accordance with the Securities Depository's procedures. Each
Agent Member will be responsible for holding or disbursing such payments to the
holders of the Preferred Shares for which it is acting in accordance with the
instructions of such holders. If, and as long as, neither the Securities
Depository nor its nominee is the record holder of a Preferred Share, dividends
thereon will be paid in same-day funds directly to the record holder thereof in
accordance with the instructions of such holder. Dividends on any share in
arrears with respect to any past Dividend Payment Date may be declared and paid
at any time, without reference to any regular Dividend Payment Date, to the
holders thereof as of a date not exceeding five Business Days preceding the date
of payment thereof as may be fixed by the Trustees. Any dividend payment made on
Preferred Shares will be first credited against the dividends accumulated but
unpaid (whether or not earned or declared) with respect to the earliest Dividend
Payment Date on which dividends were not paid. Holders of Preferred Shares will
not be entitled to any dividends, whether payable in cash, property or shares,
in excess of full cumulative dividends thereon. Except for the late charge
described under "Description of

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<PAGE> 46

Preferred Shares -- Dividends -- Non-Payment Period; Late Charge" below and
Additional Dividends described under "Description of Preferred Shares --
Dividends -- Additional Dividends" below, holders of Preferred Shares will not
be entitled to any additional amount in respect of any dividend payment on any
Preferred Shares which may be in arrears.

The amount of cash dividends per Preferred Share payable (if declared) on
each Dividend Payment Date for each 28-day Dividend Period and the Dividend
Payment Date or Dates for each Short Term Dividend Period shall be computed by
the Fund by multiplying the Applicable Dividend Rate for such Dividend Period by
a fraction, the numerator of which will be the number of days in such Dividend
Period such shares were outstanding from and including the Date of Original
Issue or the preceding Dividend Payment Date, as the case may be, to and
including the day preceding such Dividend Payment Date and the denominator of
which will be 365, multiplying the amount so obtained by $50,000, and rounding
the amount so obtained to the nearest cent. During the Initial Dividend Period
and any Long Term Dividend Period, the amount of dividends per share payable on
any Dividend Payment Date shall be computed by multiplying the Applicable
Dividend Rate by a fraction, the numerator of which shall be the number of days
from either the Date of Original Issue, with respect to the Initial Dividend
Period, or otherwise from the last Dividend Payment Date, and the denominator of
which is 360, multiplying the amount so obtained by $50,000, and rounding the
amount so obtained to the nearest cent. For example, if the number of days from
and including the Date of Original Issue or the preceding Dividend Payment Date,
as the case may be, to and including the day preceding such Dividend Payment
Date is less than 30 and such days do not constitute a full calendar month, then
the amount of dividends per share payable on such Dividend Payment Date shall be
computed by multiplying the Applicable Dividend Rate for such Dividend Period by
a fraction, the numerator of which will be such number of days and the
denominator of which will be 360, multiplying the amount so obtained by $50,000,
and rounding the amount so obtained to the nearest cent.

In the event that the Remarketing Agent, the Paying Agent, the Securities
Depository, any Agent Member, and any beneficial owner fails for any reason to
perform any of its obligations in respect of a remarketing or otherwise, no
holder of record of, or of any beneficial interest in, any Preferred Shares
shall have any right in respect thereof against the Fund or any Trustee or
officer of the Fund, and the sole obligation of the Fund in respect of the
determination of the amount and the payment of any dividend shall be to pay to
the Paying Agent, for the benefit of the holders of record of the Preferred
Shares, dividends when due at the Applicable Dividend Rate notified to it from
time to time.

Non-Payment Period; Late Charge. A Non-Payment Period will commence on and
include the day on which the Fund fails to (i) declare, prior to 12:00 noon, New
York City time, on any Dividend Payment Date for a Preferred Share, for payment
on or (to the extent permitted below) within three Business Days after such
Dividend Payment Date to the person who held such share as of 12:00 noon, New
York City time, on the Business Day preceding such Dividend Payment Date, the
full amount of any dividend on such Preferred Share payable on such Dividend
Payment Date or (ii) deposit, irrevocably in trust, in same-day funds, with the
Paying Agent by 12:00 noon, New York City time, (A) on or (to the extent
permitted below) within three Business Days after any Dividend Payment Date for
a Preferred Share the full amount of any dividend on such share (whether or not
earned or declared) payable on such Dividend Payment Date or (B) on or (to the
extent permitted below) within three Business Days after any redemption date for
a Preferred Share called for redemption, the redemption price of $50,000 per
share plus the full amount of any dividends thereon (whether or not earned or
declared) accumulated but unpaid to such redemption date plus, in the case of an
optional redemption, the premium, if any, payable as the result of the
designation of a Premium Call Period. Such Non-Payment Period will end on and
include the Business Day on which, by 12:00 noon, New York City time, all unpaid
dividends and unpaid redemption prices shall have been so deposited or shall
have otherwise been made available to the applicable holders in same-day funds;
provided that a Non-Payment Period will not end during the first seven days
thereof unless the Fund shall have given at least three days' written notice to
the Paying Agent, the Remarketing Agent and the Securities Depository and
thereafter will not end unless the Fund shall have given at least fourteen days'
written notice to the Paying Agent, the Remarketing Agent, the Securities
Depository and all holders of shares. The Applicable Dividend Rate for each
Dividend Period for Preferred Shares, commencing during a Non-Payment Period,
will be equal to the Non-Payment Period Rate and any Preferred Shares for which
a Special Dividend Period would otherwise have commenced on the first day of or
during a Non-Payment Period will have a 28-day Dividend Period. The "Non-Payment
Period

43
<PAGE> 47

Rate", initially, will be 250% of the applicable Reference Rate (or 300% of such
rate if the Fund has provided notification to the Remarketing Agent prior to the
Remarketing Date establishing the Applicable Dividend Rate for any dividend that
net capital gain or other taxable income will be included in such dividend on
Preferred Shares). The initial Non-Payment Period Rate may be changed from time
to time by the Fund without shareholder approval, but only in the event the Fund
receives written confirmation from Moody's and S&P that any such change would
not impair the ratings then assigned by Moody's and S&P to Preferred Shares. Any
dividend on Preferred Shares due on any Dividend Payment Date for such shares
(if, prior to 12:00 noon, New York City time, on such Dividend Payment Date, the
Fund has declared such dividend payable on or within three Business Days after
such Dividend Payment Date to the persons who held such shares as of 12:00 noon,
New York City time, on the Business Day preceding such Dividend Payment Date) or
redemption price with respect to such shares not paid to such persons when due
may (if such non-payment occurs because the Fund is prevented from doing so by
the Bylaws or applicable law) be paid pro rata to such persons in the same form
of funds by 12:00 noon, New York City time, on any of the first three Business
Days after such Dividend Payment Date or due date, as the case may be, and will
incur a late charge to be paid therewith to such persons and calculated for such
period of non-payment at the Non-Payment Period Rate applied to the amount of
such non-payment based on the actual number of days comprising such period
divided by 365. Such late charge will be taxable as interest. If the Fund fails
to pay a dividend on a Dividend Payment Date or to redeem any Preferred Shares
on the date set for such redemption (otherwise than because it is prevented from
doing so by the Bylaws or by applicable law), the preceding sentence shall not
apply and the Applicable Dividend Rate for the Dividend Period commencing during
such Non-Payment Period resulting from such failure shall be the Non-Payment
Period Rate. During a Non-Call Period, Preferred Shares subject to such Non-Call
Period will not be subject to redemption at the option of the Fund, but may be
subject to mandatory redemption as provided below. See "Description of Preferred
Shares -- Redemption" below.

RESTRICTIONS ON DIVIDENDS AND OTHER PAYMENTS. Under the 1940 Act, the Fund
may not declare dividends or make other distributions on the Common Shares or
purchase any such shares if, at the time of the declaration, distribution or
purchase, as applicable (and after giving effect thereto), asset coverage (as
defined in the 1940 Act) with respect to the outstanding Preferred Shares would
be less than 200% (or such other percentage as may in the future be required by
law). Based on the composition of the Fund's portfolio at December 31, 1993,
asset coverage with respect to Preferred Shares would have been approximately
672% after issuance of the Preferred Shares offered hereby.

In addition, for so long as any Preferred Shares are outstanding, the Fund
will not declare, pay or set apart for payment any dividend or other
distribution (other than a dividend or distribution paid in shares of, or
options, warrants or rights to subscribe for or purchase, Common Shares or other
shares, if any, ranking junior to the Preferred Shares as to dividends and upon
liquidation) in respect of Common Shares or any other shares of the Fund ranking
junior to or on a parity with the Preferred Shares as to dividends or upon
liquidation, or call for redemption, redeem, purchase or otherwise acquire for
consideration any Common Shares or any other such junior shares or parity shares
(except by conversion into or exchange for shares of the Fund ranking junior to
the Preferred Shares as to dividends and upon liquidation), unless (1) full
cumulative dividends on Preferred Shares through their most recent Dividend
Payment Date shall have been paid or shall have been declared and sufficient
funds for the payment thereof deposited with the Paying Agent, (2) the Fund has
redeemed the full number of Preferred Shares required to be redeemed by any
provision for mandatory redemption contained in the Bylaws, (3) immediately
after such transaction the aggregate Discounted Value of Moody's Eligible Assets
and S&P Eligible Assets would be at least equal to the Preferred Shares Basic
Maintenance Amount and (4) the Fund meets the requirements imposed by the 1940
Act. See "Investment Objective and Policies -- Asset Maintenance", "Description
of Preferred Shares -- Redemption" and Appendix B.

Under the Code the Fund must, among other things, distribute each year at
least 90% of the sum of its investment company taxable income and net tax-exempt
income in order to maintain its qualification for tax treatment as a regulated
investment company. The foregoing limitations on dividends, distributions and

44
<PAGE> 48

purchases may under certain circumstances impair the Fund's ability to maintain
such qualification. See "Taxation".

Upon any failure by the Fund to pay dividends on the Preferred Shares for
two years or more, the holders of the Preferred Shares will acquire certain
additional voting rights. See "Description of Preferred Shares -- Voting Rights"
below. Such rights shall be the exclusive remedy of the holders of Preferred
Shares upon any failure to pay dividends on shares of the Fund.

Additional Dividends. In the event of a redemption of all or a portion of
the outstanding Preferred Shares or the liquidation of the Fund, the Fund may,
after the close of its fiscal year, be required, in order to comply with the
published position of the Internal Revenue Service described earlier in this
Prospectus concerning the allocation of various types of income between a fund's
classes and series of shares, to characterize all or a portion of a dividend
paid to holders of Preferred Shares during such fiscal year as net capital gain
or other income subject to regular Federal income tax, without having either
given advance notice of the inclusion of such income in such dividend prior to
the setting of the Applicable Dividend Rate for such dividend or included an
additional amount in the dividend to offset the tax effect of the inclusion
therein of such taxable income. Accordingly, if the Fund characterizes
retroactively all or a portion of a dividend already paid on Preferred Shares as
consisting of net capital gain or other income subject to regular Federal income
tax solely because (i) the Fund has redeemed all or a portion of the outstanding
Preferred Shares or has liquidated and (ii) the Fund, in its judgment, believes
it is required, in order to comply with the published position of the Internal
Revenue Service described above, to allocate such taxable income to the
Preferred Shares (the amount so characterized referred to herein as a
"Retroactive Taxable Allocation"), the Fund will, within 90 days after the end
of such fiscal year, provide notice of the Retroactive Taxable Allocation made
with respect to the dividend to the Paying Agent and to each holder who received
such dividend (initially Cede as nominee of the Securities Depository) at such
holder's address as the same appears or last appeared on the share books of the
Fund. The Fund will, within 30 days after such notice is given to the Paying
Agent, pay to the Paying Agent (who will then distribute to such holders), out
of funds legally available therefor, an amount equal to the aggregate of the
Additional Dividends (as defined below) payable to holders of Preferred Shares
in respect of such dividend. See "Taxation."

An "Additional Dividend" in respect of any dividend means payment to a
present or former holder of a Preferred Share of an amount which, giving effect
to the Retroactive Taxable Allocation made with respect to such dividend, would
cause such holder's after-tax return (taking into account both the dividend and
the Additional Dividend and assuming such holder is taxable at the Gross-Up Tax
Rate) to be equal to the after-tax return which the holder would have realized
if such retroactive allocation of taxable income had not been made. Such
Additional Dividend shall be calculated (i) without consideration being given to
the time value of money, (ii) assuming that no holder of Preferred Shares is
subject to the Federal alternative minimum tax with respect to dividends
received from the Fund, and (iii) assuming that the holder of the Preferred
Share in respect of which a Retroactive Taxable Allocation was made is taxable
at the Gross-Up Tax Rate. An Additional Dividend will not include any amount to
compensate for the fact that either the Additional Dividend or the Retroactive
Taxable Allocation may be subject to state and local taxes. (For a description
of the Gross-Up Tax Rate, see "Remarketing -- Remarketing Schedule; Advance
Notice of Allocation of Taxable Income; Inclusion of Taxable Income in
Dividend.") Except as provided in this "Description of Preferred Shares --
Dividends -- Additional Dividends," the Fund will not distribute any additional
amounts with respect to dividends previously paid to holders of Preferred
Shares. See "Taxation."

Special Dividends. The Fund may declare "special dividends" on Preferred
Shares in order to comply with any distribution requirements or the Code,
provided that the declaration of a special dividend shall not cause the Fund to
fail to maintain the Preferred Shares Basic Maintenance Amount or the 1940 Act
Preferred Shares Asset Coverage. See "Taxation."

REDEMPTION

Optional Redemption. The Fund may at its option after giving the requisite
Notice of Redemption, redeem Preferred Shares, in whole or in part, on the next
succeeding scheduled Dividend Payment Date

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<PAGE> 49

applicable to those Preferred Shares called for redemption, out of funds legally
available therefor, at a redemption price (the "Optional Redemption Price") of
$50,000 per share plus an amount equal to dividends thereon accumulated but
unpaid to the date fixed for redemption plus the premium, if any, resulting from
the designation of a Premium Call Period; provided that no Preferred Share may
be redeemed at the option of the Fund during (A) the Initial Dividend Period
with respect to such share or (B) a Non-Call Period to which such share is
subject; provided further that optional redemptions pursuant to this paragraph
shall not cause the Fund to fail to maintain the Preferred Shares Basic
Maintenance Amount or the 1940 Act Preferred Shares Asset Coverage. In addition,
holders of Preferred Shares may be entitled to receive Additional Dividends in
the event of the redemption of such Preferred Shares to the extent provided
above under "Description of Preferred Shares -- Dividends -- Additional
Dividends". For so long as S&P rates the Preferred Shares, the Fund may not give
a Notice of Redemption relating to an optional redemption as described in this
paragraph unless, at the time of giving such Notice of Redemption, the Fund has
available Deposit Securities with maturity or tender dates not later than the
day preceding the applicable redemption date and having a Discounted Value not
less than the amount due by reason of the redemption of Preferred Shares on such
redemption date.

Mandatory Redemption. The Fund will be required to redeem, at a redemption
price (the "Mandatory Redemption Price") equal to $50,000 per share plus an
amount equal to accumulated but unpaid dividends (whether or not earned or
declared) to the date fixed by the Trustees for redemption, certain of the
Preferred Shares to the extent permitted under the 1940 Act and Massachusetts
law, if the Fund fails to maintain the Preferred Shares Basic Maintenance Amount
or the 1940 Act Preferred Shares Asset Coverage and such failure is not cured on
or before the Preferred Shares Basic Maintenance Cure Date or the 1940 Act Cure
Date (herein referred to as a "Cure Date"), as the case may be. In addition,
holders of Preferred Shares may be entitled to receive Additional Dividends in
the event of the redemption of such Preferred Shares to the extent provided
above under "Description of Preferred Shares -- Dividends -- Additional
Dividends". The number of Preferred Shares to be redeemed will be equal to the
lesser of (a) the minimum number of Preferred Shares the redemption of which, if
deemed to have occurred immediately prior to the opening of business on such
Cure Date, would, together with all other shares of beneficial interest of the
Fund having preference rights subject to redemption or retirement, result in the
satisfaction of the Preferred Shares Basic Maintenance Amount or the 1940 Act
Preferred Shares Asset Coverage, as the case may be, on such Cure Date (provided
that, if there is no such minimum number of shares the redemption of which would
have such result, all Preferred Shares then outstanding will be redeemed), and
(b) the maximum number of Preferred Shares, together with all other shares of
beneficial interest of the Fund having preference rights subject to redemption
and retirement, that can be redeemed out of funds expected to be legally
available therefor.

The Fund is required to effect such a Mandatory Redemption not later than
35 days after such Cure Date, except that if the Fund does not have funds
legally available for the redemption of all of the required number of Preferred
Shares which are subject to Mandatory Redemption or the Fund otherwise is unable
to effect such redemption on or prior to 35 days after such Cure Date, the Fund
will redeem those Preferred Shares which it was unable to redeem on the earliest
practicable date on which it is able to effect such redemption.

Any Preferred Share will be subject to Mandatory Redemption regardless of
whether such share is subject to a Non-Call Period, provided that Preferred
Shares subject to a Non-Call Period will only be subject to redemption to the
extent that the other Preferred Shares (not subject to a Non-Call Period) are
not available to satisfy the number of shares required to be redeemed. In such
event, such shares subject to a Non-Call Period will be selected for redemption
in an ascending order of outstanding Non-Call Period (with shares with the
lowest number of days remaining in the Non-Call Period to be called first) and
by lot in the event of shares having equal outstanding Non-Call Periods.

Allocation. If fewer than all the outstanding Preferred Shares are to be
redeemed, the number of Preferred Shares to be so redeemed will be a whole
number of shares and will be determined by the Trustees (subject to the
provisions described above under "Description of Preferred Shares -- Redemption
- -- Mandatory Redemption"), provided that (i) no such Preferred Share will be
subject to optional redemption on any Dividend Payment Date during a Non-Call
Period to which it is subject and (ii) Preferred Shares

46
<PAGE> 50

subject to a Non-Call Period will be subject to Mandatory Redemption only on the
basis described above under "Description of Preferred Shares -- Redemption --
Mandatory Redemption". Unless certificates representing Preferred Shares are
held by persons other than the Securities Depository or its nominee, the
Securities Depository, upon receipt of such Notice of Redemption, will determine
by lot (or otherwise in accordance with procedures in effect at that time) the
number of Preferred Shares to be redeemed from the account of each Agent Member
(which may include an Agent Member, including the Remarketing Agent, holding
shares for its own account) and notify the Paying Agent of such determination.
The Paying Agent, upon receipt of such notice, will in turn determine by lot the
number of shares to be redeemed from the accounts of the holders of the shares
whose Agent Members have been selected by the Securities Depository. In doing
so, the Paying Agent may determine that shares will be redeemed from the
accounts of some holders, which may include the Remarketing Agent, without
shares being redeemed from the accounts of other holders. Notwithstanding the
foregoing, if any certificates for Preferred Shares are not held by the
Securities Depository or its nominee, the Preferred Shares to be redeemed will
be selected by the Paying Agent by lot.

Notice of Redemption. Any Notice of Redemption with respect to Preferred
Shares will be given by the Fund via telephone to the Paying Agent, the
Securities Depository (and any other registered holder of such shares) and the
Remarketing Agent not later than 1:00 p.m., New York City time (and later
confirmed in writing), on a day not less than 20 nor more than 30 days, or such
shorter period as may be provided for under applicable law, prior to the
earliest date upon which any such redemption may occur and, in the case of a
Mandatory Redemption, not less than 20 nor more than 30 days prior to the
redemption date established by the Trustees and specified in such notice. In the
case of a partial redemption, the Paying Agent will use its reasonable efforts
to provide telephonic notice to each beneficial holder (as shown on the records
of such ownership maintained by it) of Preferred Shares called for redemption
not later than the close of business on the Business Day on which the Paying
Agent determines the shares to be redeemed (as described above) (or, during a
Non-Payment Period with respect to such shares, not later than the close of
business on the Business Day immediately following the day on which the Paying
Agent receives Notice of Redemption from the Fund). Such telephonic notice will
be confirmed promptly in writing to each such beneficial holder of Preferred
Shares called for redemption, the Remarketing Agent and the Securities
Depository not later than the close of business on the Business Day immediately
following the day on which the Paying Agent determines the shares to be
redeemed. In the case of a redemption in whole, the Paying Agent will use its
reasonable efforts to provide telephonic notice to each holder of Preferred
Shares called for redemption not later than the close of business on the
Business Day immediately following the day on which the Paying Agent receives a
Notice of Redemption from the Fund. Such telephonic notice will be confirmed
promptly in writing to each holder of Preferred Shares called for redemption,
the Remarketing Agent and the Securities Depository not later than the close of
business on the second Business Day following the day on which the Paying Agent
receives notice of redemption.

Every Notice of Redemption and other redemption notice with respect to the
Preferred Shares will state: (a) the redemption date, (b) the number of
Preferred Shares to be redeemed, (c) the redemption price, (d) that dividends on
the Preferred Shares to be redeemed will cease to accumulate as of such
redemption date and (e) the provision of the Agreement and Declaration of Trust
or the Bylaws pursuant to which such shares are being redeemed. No defect in the
Notice of Redemption or other redemption notice or in the transmittal or the
mailing thereof will affect the validity of the redemption proceedings, except
as required by applicable law. The Paying Agent will use its reasonable efforts
to cause the publication of a redemption notice in an Authorized Newspaper
within two Business Days of the date of the Notice of Redemption, but failure so
to publish such notification will not affect the validity or effectiveness of
any such redemption proceedings.

Other Redemption Procedures. To the extent that any redemption for which
Notice of Redemption has been given is not made by reason of the absence of
legally available funds therefor, such redemption will be made as soon as
practicable to the extent such funds become available. Failure to redeem
Preferred Shares will be deemed to exist at any time after the date specified
for redemption in a Notice of Redemption when the Fund shall have failed, for
any reason whatsoever, to deposit with the Paying Agent funds with respect to
any shares for which such Notice of Redemption has been given.

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<PAGE> 51

Upon the deposit of funds sufficient to redeem Preferred Shares with the
Paying Agent and the giving of Notice of Redemption, all rights of the holders
of the shares so called for redemption will cease and terminate, except the
right of the holders thereof to receive the Optional Redemption Price or
Mandatory Redemption Price, as the case may be, but without any interest or
other additional amount (except for Additional Dividends described above under
"Description of Preferred Shares -- Dividends -- Additional Dividends"), and
such shares will no longer be deemed outstanding for any purpose. The Fund will
be entitled to receive from the Paying Agent, promptly after the date fixed for
redemption, any cash deposited with the Paying Agent in excess of (i) the
aggregate redemption price of the Preferred Shares called for redemption on such
date and (ii) all other amounts to which holders of Preferred Shares called for
redemption may be entitled. The Fund will be entitled to receive, from time to
time after the date fixed for redemption, any interest on the funds so
deposited. Any funds that are unclaimed at the end of 90 days from such
redemption date will, to the extent permitted by law, be repaid to the Fund,
after which time the holders of Preferred Shares so called for redemption will
look only to the Fund for payment of the redemption price and all other amounts
to which they may be entitled. If any such unclaimed funds are repaid to the
Fund, the Fund shall invest such unclaimed funds in Deposit Securities with a
maturity of no more than one Business Day.

Except as described above with respect to redemptions, nothing contained in
the Bylaws limits any legal right of the Fund or any affiliate of the Fund to
purchase or otherwise acquire any Preferred Shares at any price.

The Fund has the right in certain circumstances to arrange for others to
purchase from the holders thereof Preferred Shares which are to be redeemed as
described above.

The Remarketing Agent may, in its sole discretion, modify the procedures
concerning notification of redemption described above with respect to Preferred
Shares so long as any such modification does not adversely affect the holders of
the Preferred Shares or materially alter the obligation of the Paying Agent
without obtaining its consent and so long as the Fund receives written
confirmation from S&P that any such modifications would not impair the ratings
then assigned by S&P to the Preferred Shares.

LIQUIDATION/BANKRUPTCY

Upon a liquidation, dissolution or winding up of the affairs of the Fund,
whether voluntary or involuntary, the holders of Preferred Shares then
outstanding will be entitled, whether from capital or surplus, before any assets
of the Fund will be distributed among or paid over to the holders of the Common
Shares or any other class or series of shares of the Fund ranking junior to the
Preferred Shares as to liquidation payments, to be paid an amount equal to the
liquidation preference with respect to such shares. The liquidation preference
for the Preferred Shares is $50,000 per share plus an amount equal to all
dividends thereon (whether or not earned or declared) accumulated but unpaid to
but excluding the date of final distribution in same-day funds. After any such
payment, the holders of Preferred Shares will not be entitled to any further
participation in any distribution of assets of the Fund, except to the extent
that they may be entitled to Additional Dividends to the extent provided above
in "Description of Preferred Shares -- Dividends -- Additional Dividends." If,
upon any such liquidation, dissolution or winding up of the Fund, the assets of
the Fund shall be insufficient to make such full payment to the holders of
Preferred Shares and to the holders of any shares of beneficial interest of the
Fund having preference rights ranking as to liquidation, dissolution or winding
up on a parity with the Preferred Shares, then such assets will be distributed
among the holders of Preferred Shares and such parity holders ratably in
accordance with the respective amounts which would by payable on such Preferred
Shares and any other such preferred shares if all amounts thereof were paid in
full.

Neither the consolidation nor the merger of the Fund with or into any
entity or entities nor a reorganization of the Fund alone nor the sale, lease or
transfer by the Fund of all or substantially all of its assets shall be deemed
to be a dissolution or liquidation of the Fund.

The Fund has no intention to file a voluntary petition in bankruptcy so
long as the value of its assets is, and is reasonably foreseen as being, greater
than its liabilities.

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<PAGE> 52

VOTING RIGHTS

Except as indicated below and as set forth below under "Description of
Preferred Shares -- Certain Provisions in the Agreement and Declaration of
Trust" or except as expressly required by applicable law or expressly set forth
in the Agreement and Declaration of Trust or Bylaws, each holder of Preferred
Shares and each holder of Common Shares shall be entitled to one vote for each
share held on each matter submitted to a vote of shareholders of the Trust, and
the holders of outstanding Preferred Shares and of Common Shares shall vote
together as a single class.

Holders of Preferred Shares (along with the holders of any other preferred
shares of the Fund), voting as a class, will be entitled to elect two of the
Fund's Trustees and the remaining Trustees will be elected by holders of the
Common Shares and the Preferred Shares (along with the holders of any other
preferred shares of the Fund) voting together as a single class. If at any time
dividends on the Fund's Preferred Shares shall be unpaid in an amount equal to
two full years' dividends thereon or if at any time holders of any preferred
shares of the Fund other than the Preferred Shares are entitled to elect a
majority of the Trustees of the Fund, then the number of Trustees shall
automatically be increased by the smallest number that, when added to the two
Trustees elected exclusively by the holders of Preferred Shares as described
above, would constitute a majority of the Trustees as so increased and at a
special meeting of shareholders which will be called and held as soon as
practicable, and at all subsequent meetings at which Trustees are to be elected,
the holders of Preferred Shares (along with the holders of any other preferred
shares of the Fund), voting as a separate class, will be entitled to elect the
smallest number of additional Trustees that, together with the two Trustees
which such holders will be in any event entitled to elect, constitutes a
majority of the total number of Trustees of the Fund as so increased. The terms
of office of the persons who are Trustees at the time of that election will
continue. If the Fund thereafter shall pay, or declare and set apart for
payment, in full all dividends payable on all outstanding Preferred Shares for
all past Dividend Periods, the voting rights stated in the preceding sentence
shall cease (subject always to revesting in the event of the further occurrence
of the circumstances described above), and the terms of office of all the
additional Trustees elected by the holders of Preferred Shares (but not of the
Trustees with respect to whose election the holders of Common Shares were
entitled to vote or the two Trustees the holders of Preferred Shares have the
right to elect in any event) will terminate automatically.

The affirmative vote of the holders of a majority of the outstanding
Preferred Shares, voting separately as a class, would be required to amend,
alter or repeal any of the preferences, rights or powers of the Preferred Shares
so as to affect materially and adversely such preferences, rights or powers, or
increase or decrease the number of Preferred Shares authorized to be issued.
Unless a higher percentage is provided for as described below under "Description
of Preferred Shares -- Certain Provisions in the Agreement and Declaration of
Trust", the affirmative vote of the holders of a majority of the outstanding
Preferred Shares, voting as a class, will be required to approve any plan of
reorganization adversely affecting such shares or any action requiring a vote of
security holders under Section 13(a) of the 1940 Act including, among other
things, changes in the investment restrictions described under "Investment
Restrictions".

The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding Preferred Shares shall have been redeemed or shall
no longer be deemed to be outstanding.

CERTAIN PROVISIONS IN THE AGREEMENT AND DECLARATION OF TRUST

The Agreement and Declaration of Trust and Bylaws include provisions that
could have the effect of limiting the ability of other entities or persons to
acquire control of the Fund, or to cause it to engage in certain transactions or
to modify its structure. The affirmative vote of at least two-thirds of the
outstanding Common Shares and Preferred Shares, each voting separately as a
class, is required to authorize any of the following actions: (1) merger or
consolidation of the Fund, (2) sale of all or substantially all of the assets of
the Fund, (3) liquidation or dissolution of the Fund, (4) conversion of the Fund
to an open-end investment company, or (5) amendment of the Agreement and
Declaration of Trust to reduce the two-thirds vote required to authorize the
actions in (1) through (5), unless with respect to any of the foregoing such
action has been authorized by the affirmative vote of two-thirds of the total
number of Trustees then in office, in which case the affirmative vote of a
majority of the outstanding shares of each class is required.

49
<PAGE> 53

The Trustees have determined that the two-thirds voting requirements
described above, which are greater than the minimum requirements under the 1940
Act, are in the best interests of the Fund and its shareholders generally.

Under Massachusetts law, shareholders of the Fund could, under certain
circumstances, be held personally liable for the obligations of the Fund.
However, the Agreement and Declaration of Trust disclaims shareholder liability
for acts or obligations of the Fund and requires that notice of such disclaimer
be given in each agreement, obligation or instrument entered into or executed by
the Fund or the Trustees. The Agreement and Declaration of Trust provides for
indemnification out of Fund property for all loss and expense of any shareholder
held personally liable for the obligations of the Fund. Thus, the risk of a
shareholder's incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund would be unable to meet its
obligations. The likelihood of such circumstances is remote.

REPURCHASE OF SHARES; CONVERSION TO OPEN-END STATUS

Shares of closed-end investment companies often trade at a discount to
their net asset values, and the Fund's Common Shares may likewise trade at a
discount to their net asset value. The market price of the Fund's Common Shares
will be determined by such factors as relative demand for and supply of such
Common Shares in the market, the Fund's net asset value, general market and
economic conditions, and other factors beyond the control of the Fund. Although
the Fund's Common shareholders will not have the right to redeem their Shares,
the Fund may take action to repurchase Common Shares in the open market or make
tender or repurchase offers for its Common Shares at their net asset value. This
may have the effect of reducing any market discount from net asset value. The
Fund's ability to repurchase or to tender for its Common Shares may be limited
by asset coverage requirements and other restrictions in respect of the
Preferred Shares outstanding at the time. The Fund may, by vote of its Common
shareholders and holders of Preferred Shares (each voting as a separate class),
be converted to an open-end investment company, which would make the Fund's
Common Shares redeemable upon demand of shareholders at the Common Shares' net
asset value. Conversion to an open-end company would require the redemption of
the Preferred Shares. Certain provisions of the Fund's Agreement and Declaration
of Trust discussed above may have the effect of depriving Common shareholders of
an opportunity to sell their Shares at a premium over prevailing market prices
and may have the effect of inhibiting the Fund's conversion to open-end status.

The Fund has no present intention of taking any such action. There is no
assurance that if action is undertaken to repurchase or tender for Common
Shares, that such action will result in the Common Shares' trading at a price
which approximates their net asset value. Although Common Share repurchases and
tenders could have a favorable effect on the market price of the Fund's Common
Shares, it should be recognized that the acquisition of Common Shares by the
Fund will decrease the total assets of the Fund and, therefore, have the effect
of increasing the Fund's expense ratio. Any Common Share repurchases or tender
offers will be made in accordance with requirements of the Securities Exchange
Act of 1934, as amended, and the 1940 Act. If the Fund were to make a tender or
repurchase offer for its Common Shares, Shareholders would receive any notice
thereof required by applicable law, including any required information
describing the offer and the means by which Shareholders might submit their
Common Shares. If the Fund converted to an open-end company, it could be
required to liquidate its portfolio investments to meet requests for redemption,
and its Common Shares would no longer be listed on the American Stock Exchange.

HOLDERS OF RECORD; HOLDERS OF BENEFICIAL INTEREST

The Fund shall have no obligation, including without limitation any
obligation to provide notice or to make any payment (in respect of any dividend
or otherwise), to any person (including without limitation any holder of any
beneficial interest in Preferred Shares, whether or not such interest is
reflected on the share transfer books of the Paying Agent) other than the
holders of record of the Preferred Shares shown on the share records of the
Paying Agent from time to time. The record books of the Fund as kept by the
Paying Agent shall be conclusive as to who is the holder of record of any
Preferred Share at any time and as to the number of Preferred Shares held from
time to time by any such holder. No Remarketing Agent, Paying Agent, Securities
Depository, or Agent Member will have any obligation to any person having any
interest in

50
<PAGE> 54

any Preferred Shares other than the holder of record and the beneficial owner
thereof as shown from time to time on the share transfer books kept by the
Paying Agent. The Paying Agent shall have no obligation to record any transfer
of record or beneficial ownership in any share unless and until it shall have
received proper notice and evidence of such transfer and the right of the
transferee in accordance with the Paying Agent's procedures in effect from time
to time.

SPECIAL CONSIDERATIONS RELATING TO PREFERRED SHARES

The 1940 Act Preferred Shares Asset Coverage requirement and the rating
agency asset maintenance guidelines require that the Fund maintain certain asset
levels with respect to the Preferred Shares. See "Investment Objective and
Policies -- Asset Maintenance" and Appendix B. In the event that the Fund's
assets fall below these levels, the Fund may be required to redeem some or all
of the then outstanding Preferred Shares. See "Description of Preferred Shares
- -- Redemption".

The credit rating of the Preferred Shares could be reduced while an
investor holds the Preferred Shares. A decrease in the rating of the Preferred
Shares may reflect a reduction in the Fund's ability to pay dividends and/or the
redemption price and liquidation value in respect of the Preferred Shares in
accordance with the terms of the Preferred Shares.

The actual Applicable Dividend Rate for any dividend period after the
Initial Dividend Period for Preferred Shares may be greater than or less than
the rate indicated in the non-binding indications of the Applicable Dividend
Rate furnished to holders of Preferred Shares (but, except during a Non-Payment
Period, not greater than the applicable Maximum Dividend Rate) and will not be
determined until after a holder is required to elect to hold or tender its
Preferred Shares.

There can be no assurance that the Remarketing Agent will be able to
remarket all Preferred Shares tendered in a Remarketing. If any Preferred Shares
tendered in a Remarketing are not remarketed, a holder thereof may be required
to hold some or all of its shares at least until the end of the next Dividend
Period therefor (or longer if Remarketings continue to fail) or to sell its
shares outside a Remarketing. In such case, the remarketing procedures may
require an allocation of Preferred Shares on a pro rata basis, to the extent
practicable, or by lot, as determined by the Remarketing Agent in its sole
discretion, which may result in a holder's selling a number of Preferred Shares
that is less than the number of Preferred Shares specified in such holder's
tender order. Thus, under certain circumstances, Preferred Shares may be
illiquid investments. See "Remarketing -- Remarketing Procedures -- Allocation
of Shares; Failure to Remarket at $50,000 Per Share," "Remarketing --
Restrictions on Transfer" and "Remarketing -- The Remarketing Agent".

Neither the Remarketing Agent nor the Fund is obligated to purchase
Preferred Shares in a Remarketing or otherwise, nor is the Fund required to
redeem Preferred Shares in the event of failed Remarketings.

The Remarketing Agent has advised the Fund that it currently intends to
maintain a secondary trading market in the Preferred Shares outside of
Remarketings; however, it has no obligation to do so and there can be no
assurance that a secondary market for the Preferred Shares will develop or, if
it does develop, that it will provide liquidity of investment. The Preferred
Shares will not be registered on any stock exchange or on the National
Association of Securities Dealers Automated Quotation system.

DESCRIPTION OF COMMON SHARES

The Trustees of the Fund have authority to issue an unlimited number of
Common Shares. The Common Shares outstanding are fully paid and nonassessable by
the Fund, except as set forth under "Description of Preferred Shares -- Certain
Provisions in the Agreement and Declaration of Trust." The Fund's Common Shares
have no preemptive, conversion, exchange or redemption rights. Each Common Share
has one vote, with fractional shares voting proportionately. Common Shares are
freely transferable.

The Fund has no present intention of offering additional Common Shares in
addition to the shares already issued. Any offerings of its Common Shares, if
made, will require approval of the Fund's Trustees. Any additional offering will
not be sold at a price per Common Share below the then current net asset value

51
<PAGE> 55

per share (exclusive of underwriting discounts and commissions) except in
connection with an offering to existing Common shareholders or with the consent
of a majority of the Fund's outstanding Common Shares.

The Common Shares have traded on the American Stock Exchange (the
"Exchange") since November 19, 1993. For the period November 19, 1993
(commencement of trading) through January 21, 1994, the average weekly trading
volume of the Common Shares was 50,633 shares.

At January 21, 1994, the net asset value per Common Share was $14.35 and
the closing price per share of Common Shares on the Exchange was $13.50.

<TABLE>

The following table shows the amount of (i) shares authorized, (ii) shares
held by the Fund for its own account and (iii) shares outstanding for each class
of authorized securities of the Fund as of the date of this Prospectus.

<CAPTION>
AMOUNT
OUTSTANDING
AMOUNT HELD (EXCLUSIVE OF
BY FUND FOR AMOUNT HELD
AMOUNT ITS OWN BY FUND FOR
TITLE OF CLASS AUTHORIZED ACCOUNT ITS OWN ACCOUNT)
-------------- ---------- ------------ ----------------
<S> <C> <C> <C>
Common Shares..................... Unlimited -0- 4,007,092
Preferred Shares.................. 6,000 -0- -0-
</TABLE>

TAXATION

The following discussion is based on the advice of Ropes & Gray and
reflects provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), existing Treasury regulations, rulings published by the Internal
Revenue Service, and other applicable authority as of the date of this
Prospectus. These authorities are subject to change by legislative or
administrative action. The following discussion is only a summary of some of the
important federal tax considerations generally applicable to investments in the
Fund. There may be other federal tax considerations applicable to particular
investors. In addition, income earned through an investment in the Fund may be
subject to state and local taxes. Prospective shareholders are therefore urged
to consult their tax advisors with respect to the tax consequences to them of an
investment in the Fund.

TAXATION OF THE FUND

The Fund intends to qualify each year for taxation as a regulated
investment company under Subchapter M of the Code. If the Fund so qualifies, the
Fund will not be subject to federal income tax on income distributed timely to
its Shareholders in the form of dividends or capital gain distributions.

Qualification for taxation as a regulated investment company under the Code
requires, among other things, that the Fund distribute to its Shareholders each
year (or in distributions attributable to such year) at least 90% of the sum of
its net exempt-interest income, its taxable net investment income (including,
generally, taxable interest, dividends and certain other income, less certain
expenses), and the excess, if any, of net short-term capital gains over net
long-term capital losses (the "Distribution Requirement"). If the Fund does not
qualify for taxation as a regulated investment company, the Fund's income will
be taxed at the Fund level, and all distributions from earnings and profits,
including distributions of net exempt-interest income and the excess of net
long-term capital gains over net short-term capital losses, will be taxable to
Shareholders as ordinary income. In addition, in order to requalify as a
regulated investment company, the Fund may be required to recognize unrealized
gains, pay substantial taxes and interest, and make certain distributions.

If at any time when Preferred Shares are outstanding the Fund does not meet
applicable asset coverage requirements, the Fund will be required to suspend
distributions to Common Shareholders until the requisite asset coverage is
restored. Any such suspension may prevent the Fund from satisfying the
Distribution Requirement and may cause the Fund to pay a 4% federal excise tax
(imposed on regulated investment companies that fail to distribute for a given
calendar year, generally, at least 98% of their net investment income for such
calendar year and capital gain net income for the one-year period ending October
31st of such year). The Fund may redeem Preferred Shares or pay "special
dividends" to the holders of the Preferred

52
<PAGE> 56

Shares in an effort to comply with the Distribution Requirement and to avoid the
excise tax. See "Description of Preferred Shares."

The Fund's investments and hedging activities are subject to certain
special tax rules. One such rule provides that in order to qualify for taxation
as a regulated investment company, less than 30% of the Fund's gross income must
be derived from the sale or other disposition of certain assets (including tax
exempt securities, financial futures contracts and options) held for less than
three months (the "Three-Month Rule"). Accordingly, the Fund will be restricted
in selling assets held, or considered to have been held, for less than three
months. Certain Code rules governing the Fund's hedging transactions may affect
the Fund's holding periods in its assets and may, therefore, affect the Fund's
ability to comply with the Three-Month Rule. Code rules may also alter the
timing and character of certain income, gains and losses realized by the Fund
with respect to its transactions in futures contracts, options and certain other
investments. These rules could affect the amount, timing and character of
distributions to Shareholders. In addition, the Fund's investment in securities
issued at a discount and certain other obligations will (and investments in
securities purchased at a discount may) require the Fund to accrue and
distribute income not yet received. In order to generate sufficient cash to make
the requisite distributions, the Fund may be required to sell securities in its
portfolio that it otherwise would have continued to hold.

TAXATION OF SHAREHOLDERS

Dividends and Other Distributions. Assuming that the Fund qualifies for
taxation as a regulated investment company under subchapter M of the Code and
that, at the close of each quarter of the Fund's taxable year, at least 50% of
the value of the Fund's total assets consists of obligations the interest on
which is exempt from federal income tax under Code Section 103(a), the Fund will
qualify to pay "exempt-interest dividends" to its Shareholders to the extent of
its exempt-interest income (less applicable expenses). Distributions that the
Fund properly designates as exempt-interest dividends are treated by
Shareholders as interest excludable from their gross income for federal income
tax purposes but may be taxable for federal alternative minimum tax purposes
(discussed below) and state and local tax purposes.

In order for any distributions to holders of Preferred Shares to be
eligible to be treated as exempt-interest dividends, the Preferred Shares must
be treated as equity for Federal income tax purposes. Based in part on certain
representations made by the Fund to Ropes & Gray relating to the lack of any
present intention to redeem or purchase Preferred Shares at any time in the
future, it is the opinion of Ropes & Gray that the Preferred Shares will
constitute equity for Federal income tax purposes. This opinion relies in part
on a published ruling of the Internal Revenue Service stating that certain
auction rate preferred stock similar in many material respects to the Preferred
Shares represents equity. The opinion of Ropes & Gray represents only its best
legal judgment and is not binding on the Internal Revenue Service or the courts.
If the Internal Revenue Service were successfully to assert that variable rate
preferred stock such as the Preferred Shares should be treated as debt for
Federal income tax purposes, dividends on Preferred Shares would be treated as
taxable interest for Federal income tax purposes. In such event, dividends on
Preferred Shares would not be increased by the Fund and holders of Preferred
Shares would not be entitled to any additional distributions from the Fund
(including any Additional Dividends) to offset the effect of paying Federal
income tax on Fund distributions so recharacterized as interest. Ropes & Gray
has advised the Fund that, should the Internal Revenue Service pursue in court
the position that the Preferred Shares should be treated as debt for Federal
income tax purposes, the Internal Revenue Service would be unlikely to prevail.

The receipt of exempt-interest dividends may affect the portion, if any, of
a person's Social Security and Railroad Retirement benefits that will be
includible in gross income subject to federal income tax. Under current law, up
to one-half of Social Security and Railroad Retirement benefits may be included
in gross income in cases where the recipient's combined income, consisting of
adjusted gross income (with certain adjustments), tax exempt interest income and
one-half of any Social Security and Railroad Retirement benefits, exceeds a base
amount ($25,000 for a single individual and $32,000 for married individuals
filing a joint return). In addition, effective beginning in 1994, up to 85% of a
recipient's benefits may be included in gross income if the recipient's combined
income, measured as under current law, exceeds a higher base

53
<PAGE> 57

amount ($34,000 for a single individual and $44,000 for married individuals
filing a joint return). Shareholders receiving Social Security or Railroad
Retirement benefits should consult their tax advisors.

Under the Code, the interest on certain "private activity bonds" issued
after August 7, 1986 is treated as a preference item and is (after reduction by
applicable expenses) included in alternative minimum taxable income. The Fund
will furnish to Shareholders annually a report indicating the percentage of Fund
income treated as a preference item for alternative minimum tax purposes. In
addition, for corporations, alternative minimum taxable income is increased by a
percentage of the amount by which an alternative measure of income that includes
interest on all tax exempt securities exceeds the amount otherwise determined to
be alternative minimum taxable income. Accordingly, the portion of the Fund's
dividends that would otherwise be tax exempt to the Shareholders may cause an
investor to be subject to the federal alternative minimum tax or may increase
the tax liability of an investor who is subject to such tax. Investors should
thus consider the possible effect of an investment in the Fund on their federal
alternative minimum tax liability.

The Code imposes a deductible tax (the "Environmental Tax") at a rate of
0.12% on a corporation's alternative minimum taxable income (computed without
regard to the alternative minimum tax net operating loss deduction) in excess of
$2,000,000. Exempt-interest dividends paid by the Fund that are included in a
corporate Shareholder's alternative minimum taxable income may subject corporate
Shareholders of the Fund to the Environmental Tax.

Exempt-interest dividends attributable to interest received on certain
private activity bonds and certain industrial development bonds will not be tax
exempt to any Shareholders who are, within the meaning of Section 147(a) of the
Code, "substantial users" of the facilities financed by such obligations or
bonds or who are "related persons" of such substantial users.

All or a portion of interest on indebtedness incurred or continued by a
Shareholder to purchase or carry Fund Shares will not be deductible by the
Shareholder. The portion of interest that is not deductible is equal to the
total interest paid or accrued on the indebtedness multiplied by the percentage
of the Fund's total distributions (which does not include distributions of the
excess of net long-term capital gains over net short-term capital losses) paid
to the Shareholder that are exempt-interest dividends. Under rules used by the
Internal Revenue Service for determining when borrowed funds are considered used
for the purpose of purchasing or carrying particular assets, the purchase of
Preferred Shares may be considered to have been made with borrowed funds even
though such funds are not directly traceable to the purchase of Preferred
Shares.

Distributions of net investment income that do not qualify as
exempt-interest dividends, and distributions of certain other ordinary income
and the excess, if any, of net short-term capital gains over net long-term
capital losses, will be taxable to Shareholders as ordinary income, and will not
qualify for the corporate dividends-received deduction. Distributions of the
excess, if any, of net long-term capital gains over net short-term capital
losses will be taxable to Shareholders as long-term capital gains, without
regard to how long a Shareholder has held shares of the Fund, and will not
qualify for the corporate dividends-received deduction.

Due to certain of the Fund's hedging and other investment activities, the
net investment income calculated for accounting purposes and distributed to
Shareholders may in certain circumstances exceed or be less than the Fund's net
tax exempt and taxable income. If the Fund distributes amounts in excess of the
Fund's earnings and profits (which provides the measure of the Fund's dividend
paying capacity for tax purposes) such distributions to Shareholders will be
treated as a return of capital to the extent of the Shareholder's basis in his
or her Preferred Shares, and thereafter as gain from the sale or exchange of a
capital asset. A return of capital is not taxable to a Shareholder and has the
effect of reducing the Shareholder's basis in the relevant shares. However,
because Fund expenses attributable to earning tax exempt income do not reduce
the Fund's current earnings and profits, a portion of any distribution in excess
of the Fund's net tax exempt and taxable income may be considered paid out of
the Fund's earnings and profits and may therefore be taxable as a dividend (even
though that portion economically represents a return of the Fund's capital).

The Internal Revenue Service has taken the position in a published revenue
ruling indicating that the Fund is required to designate distributions paid with
respect to each of its two classes of shares -- the

54
<PAGE> 58

Common and the Preferred Shares -- as consisting of a portion of each type of
income distributed by the Fund. The portion of each type of income deemed
received by the holders of each class of shares will be equal to the portion of
total Fund distributions received by such class. Thus, the Fund will designate
dividends paid as exempt-interest dividends in a manner that allocates such
dividends among the holders of the Common Shares and the Preferred Shares in
proportion to the total dividends paid to each such class during or with respect
to the taxable year, or otherwise as required by applicable law. Capital gain
distributions and other income subject to regular Federal income tax will
similarly be allocated between the two classes. In the opinion of Ropes & Gray,
under current law, the manner in which the Fund intends to allocate items of its
tax exempt interest income, net capital gain, and other income subject to
regular Federal income tax, if any, between its two classes of shares will be
respected for Federal income tax purposes. Whenever the Fund intends to include
any net capital gain or other income subject to regular Federal income tax in a
dividend on Preferred Shares solely because the Fund, in its judgment, believes
it is required, in order to comply with the published position of the Internal
Revenue Service, to allocate such income to such shares, the Fund may notify the
Remarketing Agent of the amount of taxable income to be so included prior to the
Remarketing establishing the Applicable Dividend Rate for such dividend.
Alternatively, if the Fund has not provided the notice referred to in the
preceding sentence, and nevertheless intends to include such income in a
dividend on Preferred Shares solely because the Fund, in its judgment, believes
it is required, in order to comply with the published position of the Internal
Revenue Service, to allocate such income to such shares, it will increase the
dividend by an amount such that the return to a holder of Preferred Shares with
respect to such dividend (as so increased and after giving effect to Federal
income tax at the Gross-Up Tax Rate) equals the Applicable Dividend Rate. If the
Fund has provided notice of an inclusion of taxable income in an upcoming
dividend on Preferred Shares as referred to above, yet, after giving such notice
the Fund intends to include additional taxable income in such dividend solely
because, in the judgment of the Fund, it is required to do so in order to comply
with the IRS's published rulings, the Fund will (i) increase the dividend by an
amount such that the return to a holder of Preferred Shares with respect to such
dividend (as so increased and after giving effect to Federal income tax at the
Gross-Up Tax Rate) shall equal the return such holder of Preferred Shares would
have received, after application of Federal income tax (at the greater of the
maximum regular Federal individual or corporate income tax rate applicable to
the character of the income reflected in the notice), if such additional amount
of taxable income had not been included in such dividend (and such dividend had
not been increased to take account of any additional amount of taxable income)
and (ii) notify the Paying Agent of the additional amount to be included in the
dividend at least five Business Days prior to the applicable Dividend Payment
Date. Neither the underlying dividend nor the additional amounts referred to in
the preceding two sentences will be increased to compensate for the fact that
they may be subject to state and local taxes. If for any reason it is determined
after the payment of any dividend that a portion of that dividend was subject to
Federal income tax, the Fund will not be required to pay any additional amount
to compensate for any tax payable on the dividend (other than Additional
Dividends payable under the circumstances described in this Prospectus). If the
Fund characterizes retroactively all or a portion of a dividend already paid on
Preferred Shares as consisting of net capital gain or other income subject to
regular Federal income tax solely because (i) the Fund has redeemed all or a
portion of the outstanding Preferred Shares or has liquidated and (ii) the Fund,
in its judgment, believes it is required, in order to comply with the published
position of the Internal Revenue Service, to allocate such taxable income to the
Preferred Shares, the Fund will pay Additional Dividends (calculated assuming a
rate of tax equal to the Gross-Up Tax Rate) to holders of Preferred Shares whose
dividends were so recharacterized. Such Additional Dividends will not include
any amount to compensate for the fact that the Additional Dividends or the
Retroactive Taxable Allocation may themselves be subject to state and local
taxes. The Fund will not be required to provide any notice of the prospective
inclusion of, or increase any dividend on Preferred Shares (including through
the payment of an Additional Dividend) as a result of the inclusion of, any
taxable income in any dividend other than in the circumstances described above.
No provision will be made to compensate holders of Preferred Shares for any
alternative minimum tax liability in respect of distributions on Preferred
Shares.

Existing authorities, including the revenue ruling discussed in the above
paragraph, do not specifically address whether dividends (including Additional
Dividends) that are paid following the close of a taxable year, but that are
treated for tax purposes as derived from the income of such prior taxable year,
are treated as

55
<PAGE> 59

dividends "paid" during such prior taxable year for purposes of determining each
class's proportionate share of a particular type of income. The Fund currently
intends to treat such dividends as having been "paid" in the prior taxable year
for purposes of determining each class's proportionate share of a particular
type of income with respect to such prior taxable year. Existing authorities
also do not specifically address the allocation of taxable income among the
dividends paid to holders of a class of shares during or with respect to a
taxable year. It is possible that the Internal Revenue Service could disagree
with the Fund's position concerning the treatment of dividends paid after the
close of a taxable year or with the Fund's method of allocation, in which case
the Internal Revenue Service could attempt to recharacterize a portion of the
dividends paid to the holders of Preferred Shares and designated by the Fund as
exempt-interest dividends as consisting instead of capital gains or other
taxable income. If the Internal Revenue Service were to prevail with respect to
any such attempted recharacterization, holders of Preferred Shares could be
subject to tax on amounts so recharacterized and the Fund could be subject to
Federal income and excise tax. In such event, no additional amounts (including
Additional Dividends) would be paid by the Fund with respect to dividends so
recharacterized to compensate for any additional tax owed by holders of
Preferred Shares. Ropes & Gray has advised the Fund that, should the Internal
Revenue Service attempt to so recharacterize amounts allocated by the Fund to
Preferred Shares, the Internal Revenue Service would be unlikely to prevail.
However, such advice represents only Ropes & Gray's best legal judgment and is
not binding on the Internal Revenue Service or the courts.

Any dividend declared by the Fund in October, November or December and
payable to holders of Preferred Shares of record on a date in such a month
generally is deemed to have been received by such holder on December 31 of such
year, provided that the dividend actually is paid during January of the
following year.

The Fund will notify Shareholders each year of the amount and tax status of
dividends and other distributions, including the amount of any distribution of
net capital gains.

The Code provides that every Shareholder required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Fund) during the taxable
year.

Sale or Redemption of Shares. In certain circumstances, the sale or
exchange of Preferred Shares may give rise to gain or loss. In general, any gain
or loss realized upon a taxable disposition of Preferred Shares by a shareholder
will be treated as long-term capital gain or loss if the shares have been held
for more than twelve months, and otherwise as short-term capital gain or loss.
However, if a shareholder buys Preferred Shares and sells them at a loss within
six months, any loss will be disallowed for Federal income tax purposes to the
extent of any exempt-interest dividends received on such shares. In addition,
any loss (not already disallowed as provided in the preceding sentence) realized
upon a taxable disposition of Preferred Shares held for six months or less will
be treated as long-term, rather than short-term, capital loss to the extent of
any capital gain distributions received by the shareholder with respect to those
shares. All or a portion of any loss realized upon a taxable disposition of
Preferred Shares will be disallowed if other Preferred Shares are purchased
within 30 days before or after the disposition. In such a case, the basis of the
newly purchased Preferred Shares will be adjusted to reflect the disallowed
loss.

The Fund may, at its option, redeem Preferred Shares in whole or in part,
and may be required to redeem Preferred Shares in order to maintain the
requisite Preferred Shares Basic Maintenance Amount and the 1940 Act Preferred
Shares Asset Coverage. Gain or loss, if any, resulting from a redemption of
Preferred Shares will generally be treated as gain or loss from the sale or
exchange of a capital asset under Code section 302, but in certain circumstances
the amount distributed in redemption may be treated instead as a distribution of
cash which is taxable to the extent of Fund earnings and profits as an ordinary
dividend.

From time to time the Fund may make a tender or repurchase offer for its
Common Shares. It is expected that the terms of any such offer will require a
tendering shareholder to tender all Common Shares, and dispose of all Preferred
Shares, held or considered under Code rules to be held by such shareholder.
Shareholders who tender all Common Shares and dispose of all Preferred Shares
held, or considered held, by them will be treated as having sold such shares and
generally will realize a capital gain or loss. If, however, a shareholder
tenders fewer than all of its Common Shares, or retains a substantial portion of
its Preferred Shares, such shareholder may be treated as having received a
taxable dividend upon the tender of its Common

56
<PAGE> 60

Shares. In such a case, there is a remote risk that non-tendering shareholders
(including holders of Preferred Shares) will be treated as having received
taxable distributions from the Fund. Likewise, if the Fund redeems some but not
all of the Preferred Shares held by a holder of Preferred Shares and such holder
of Preferred Shares is treated as having received a taxable dividend upon such
redemption, there is a remote risk that holders of Common Shares and
non-redeeming holders of Preferred Shares will be treated as having received
taxable distributions from the Fund.

If, in connection with the selection of a Long-Term Dividend Period, the
Fund provides that a Premium Call Period will follow a Non-Call Period, and the
premium to be paid upon redemption during the Premium Call Period exceeds a
reasonable penalty for early redemption, it is possible that the holders of
Preferred Shares will be required to accrue such premium as a dividend (to the
extent of Fund earnings and profits) over the term of the Non-Call Period under
regulations to be issued by the Treasury Department.

Backup Withholding. The Fund generally is required to withhold and remit
to the U.S. Treasury 31% of the taxable dividends and other distributions paid
to any individual and other non-corporate Shareholder who fails to furnish the
Fund with a correct taxpayer identification number, who has underreported
dividends or interest income, or who fails to certify to the Fund that he or she
is not subject to such withholding. An individual's taxpayer identification
number is his or her social security number.

<TABLE>

UNDERWRITING

UNDERWRITERS

Subject to the terms and conditions of the Underwriting Agreement relating
to the Preferred Shares (the "Underwriting Agreement"), the Fund has agreed to
sell to Smith Barney Shearson Inc., 1345 Avenue of the Americas, New York, New
York 10105 (the "Underwriter") and the Underwriter has agreed to purchase from
the Fund all of the number of Preferred Shares, if any Preferred Shares are
taken, set forth opposite its name below:

<CAPTION>
NUMBER OF
PREFERRED
UNDERWRITER SHARES
---------
<S> <C>
Smith Barney Shearson Inc............................... 200
---
Total......................................... 200
---
---
</TABLE>

The Underwriter proposes to offer the Preferred Shares in part directly to
the public at the initial public offering set forth on the cover page of this
Prospectus, and in part to certain securities dealers at such price less a
concession of $ per share. The sales load of $ per share is equal to
% of the initial public offering price. The Underwriter may allow, and such
dealers may reallow, a concession to certain brokers and dealers. After the
Preferred Shares are released for sale to the public, the offering price and
other selling terms may from time to time be varied by the Underwriter.

The Fund and Putnam have agreed to indemnify the Underwriter against
certain liabilities, including liabilities under the Securities Act of 1933.

The Underwriter may enter into agreements with other broker-dealers who are
members of the National Association of Securities Dealers, Inc. ("Selected
Dealers") who will purchase Preferred Shares from the Underwriter.

Smith Barney Shearson Inc. will act as the initial Remarketing Agent and
may also provide information to be used in ascertaining the applicable AA
Composite Commercial Paper Rate. The Fund anticipates that the Underwriters may
act as brokers or dealers in connection with the execution of portfolio
transactions from the Fund after they have ceased to be Underwriters and may act
as brokers while they are Underwriters.

57
<PAGE> 61

INITIAL SETTLEMENT

Payment by each initial purchaser of Preferred Shares will be made by such
purchaser's Agent Member on the Date of Original Issue of such shares to the
Underwriters in same-day funds. At the closing date, the Underwriters will
accept delivery of the Preferred Shares offered hereby and will thereafter
deposit such shares in the Underwriters' account at the Securities Depository.
Immediately thereafter, on such Date of Original Issue, the Securities
Depository will deliver (by book entry) the Preferred Shares purchased by each
purchaser from the Underwriters' Account to the account of such purchaser's
Agent Member against payment for such Preferred Shares to the account of the
Underwriters of an amount equal to the purchase price from the account of such
Agent Member.

CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT, AND REGISTRAR

The Fund's custodian is Putnam Fiduciary Trust Company, an affiliate of
Putnam (the "Custodian"). The transfer agent, dividend disbursing agent and
registrar for the Common Shares is Putnam Investor Services, a division of
Putnam Fiduciary Trust Company (the "Transfer Agent"). The principal business
address of the Custodian and the Transfer Agent is One Post Office Square,
Boston, Massachusetts 02109. The transfer agent, dividend disbursing agent and
registrar for the Preferred Shares will be IBJ Schroeder Bank & Trust Company.

LEGAL MATTERS

Certain legal matters in connection with the Common Shares offered hereby
will be passed upon for the Fund by Ropes & Gray, Boston, Massachusetts and for
the Underwriters by Skadden, Arps, Slate, Meagher & Flom, Chicago, Illinois.
Skadden, Arps, Slate, Meagher & Flom also acts as counsel to Putnam Investment
Management, Inc. and certain of its affiliates in connection with other matters.

EXPERTS

The November 10, 1993 Statement of Assets and Liabilities of the Fund
included in this Prospectus has been so included in reliance on the report of
Coopers & Lybrand, independent accountants, given on the authority of said firm
as experts in accounting and auditing.

ADDITIONAL INFORMATION

Further information concerning these securities may be found in the
Registration Statement, of which this Prospectus constitutes a part, on file
with the Securities and Exchange Commission.

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<PAGE> 62

REPORT OF INDEPENDENT ACCOUNTANTS

To the Trustees of
Putnam Investment Grade Municipal Trust III:

We have audited the accompanying statement of assets and liabilities of
Putnam Investment Grade Municipal Trust III as of November 10, 1993. This
financial statement is the responsibility of the Fund's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of assets and liabilities is
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statement of assets and
liabilities. Our procedures included confirmation of cash held by the custodian
as of November 10, 1993. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall statement of assets and liabilities presentation. We
believe that our audit of the statement of assets and liabilities provides a
reasonable basis for our opinion.

In our opinion, the statement of assets and liabilities referred to above
presents fairly, in all material respects, the financial position of Putnam
Investment Grade Municipal Trust III as of November 10, 1993 in conformity with
generally accepted accounting principles.

COOPERS & LYBRAND

Boston, Massachusetts
November 11, 1993

59
<PAGE> 63

PUTNAM INVESTMENT GRADE MUNICIPAL TRUST III

STATEMENT OF ASSETS AND LIABILITIES
November 10, 1993

<TABLE>
<S> <C>
ASSETS
Cash........................................................................... $100,000.00
Deferred organization expenses (Note 1)........................................ $ 27,157.00
-----------
$127,157.00
LIABILITIES
Accrued expenses............................................................... $ 27,157.00
Commitments (Notes 1 and 2).................................................... $ --
-----------
$ 27,157.00
NET ASSETS, applicable to 7,092,199 common shares of beneficial interest
without par value issued and outstanding; unlimited number of common shares
authorized................................................................... $100,000.00
-----------
NET ASSET VALUE PER COMMON SHARE............................................... $ 14.10
-----------
-----------
</TABLE>

NOTES TO FINANCIAL STATEMENT

NOTE 1. ORGANIZATION

The Fund was organized as a Massachusetts business trust on September 23,
1993, and is registered under the Investment Company Act of 1940, as amended, as
a closed-end, diversified management investment company. The Fund has had no
operations other than those relating to organizational matters, and the initial
capital contribution of $100,000 has been made by Putnam Investments, Inc.
Certain expenses incurred by the Fund in connection with its organization and
its initial public offering have been or will be paid initially by Putnam
Investment Management, Inc. ("Putnam"), the Fund's investment manager; however,
the Fund will reimburse Putnam for such costs. Organizational costs, estimated
at $27,157, have been capitalized and will be amortized by the Fund over a
period not to exceed 60 months from the date the Fund commences operations;
offering costs will be charged to capital upon completion of this offering.

NOTE 2. MANAGEMENT CONTRACT AND ADMINISTRATIVE SERVICES CONTRACT

The Fund has entered into a Management Contract with Putnam. As
compensation for the services rendered, facilities furnished, and expenses borne
by Putnam, the Fund will pay Putnam a fee, computed and paid quarterly, at the
annual rate of 0.50% of the first $500 million of the average net asset value of
the Fund, 0.43% of the next $500 million, 0.39% of the next $500 million, and
0.35% of any excess over $1.5 billion of such average net asset value.

The Fund has entered into an Administrative Services Contract with Putnam.
As compensation for the services rendered, facilities furnished, and expenses
borne by Putnam, the Fund will pay Putnam a fee, computed and paid quarterly, at
the annual rate of 0.20% of the first $500 million of the average net asset
value of the Fund, 0.17% of the next $500 million, 0.16% of the next $500
million, and 0.15% of any excess over $1.5 billion of such average net asset
value.

NOTE 3. PREFERRED SHARES

The Fund intends to issue preferred shares in one or more series or
classes. It is anticipated that the terms of any such preferred shares would
likely provide for a dividend rate which is based on short-or medium-term
interest rates and for the periodic redetermination of the dividend rate at
short-or medium-term intervals through an auction or remarketing procedure. Such
procedures are expected to involve the payment of fees by the Fund to its agents
in connection with such procedures. At all times when preferred shares are
outstanding, the Fund will be required to meet the asset coverage requirements
of the Investment Company Act of 1940 and the guidelines established by a rating
agency which may undertake to rate such preferred shares.

60
<PAGE> 64
<TABLE>

PUTNAM INVESTMENT GRADE MUNICIPAL TRUST III

PORTFOLIO OF INVESTMENTS OWNED

DECEMBER 31, 1993 (UNAUDITED)

MUNICIPAL BONDS AND NOTES (98.1%)(A)

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

<CAPTION>
PRINCIPAL
AMOUNT RATINGS(B) VALUE
- ---------- ---------- ----------
<C> <S> <C> <C>
ALASKA (6.9%)
$3,500,000 Valdez Marine Term Rev. Bonds, 7 1/8s, 12/1/25............ A $3,976,875
----------
</TABLE>

<TABLE>
<C> <S> <C> <C>
CALIFORNIA (20.6%)
5,000,000 Beverly Hills Pub. Fin. Auth. Lease Rev. Bonds, Ser. A,
Municipal Bond Insurance Assn. (MBIA), 5.65s, 6/1/15.... AAA 5,250,000
2,500,000 CA Edl. Fac. Auth. Rev. (Pepperdine Univ.), MBIA 5 1/2s,
6/1/19.................................................. AAA 2,509,375
3,000,000 Orange Cnty. Ser. C, Financial Guaranty Insurance Co.
(FGIC), Variable Rate Demand Note 4.25s, 8/1/17......... VMIG1 3,000,000
1,000,000 San Diego Cnty. Wtr. Auth. Rev. Bonds, FGIC, 8.548s,
4/23/08................................................. AAA 1,107,500
----------
11,866,875
----------
ILLINOIS (4.3%)
2,000,000 IL Hlth. Fac. Auth. Rev. Bonds (Glenoaks), Ser. D, 9 1/2s,
11/15/15................................................ Baa 2,447,500
----------
MAINE (3.5%)
2,000,000 Skowhegan Poll. Control Rev. Bonds (Scott Paper Co.
Project), 5.9s, 11/1/13................................. A 2,042,500
----------
MASSACHUSETTS (15.3%)
4,300,000 MA State Hlth. & Edl. Fac. Auth. Rev. Bonds (New England
Baptist Hosp.) Ser. B, 7.35s, 7/1/17.................... A 4,891,250
3,725,218 MA State Hsg. Fin. Agcy., Ser. A, 6 3/8s, 4/1/21.......... A 3,925,218
----------
8,816,468
----------
MINNESOTA (5.8%)
3,000,000 Minneapolis & St. Paul Hsg. & Redev. Auth. Hlth Care Sys.
Rev. Bonds, Ser. A, MBIA, 6 3/4s, 8/15/14............... AAA 3,337,500
----------
NEVADA (3.3%)
1,700,000 Clark Cnty. Indl. Rev. Bonds (Nevada Power Co. Project)
Ser. C, 7.2s, 10/1/22................................... Baa 1,887,000
----------
NEW YORK (10.6%)
4,000,000 NY City, General Obligation Bonds, Ser. D, 5 3/4s,
8/15/15................................................. A 3,985,000
2,000,000 NY City Hlth. & Hosp. Auth. Loc. Gov't. Rev. Bonds, Ser.
A, 6.3s, 2/15/20........................................ Baa 2,107,500
----------
6,092,500
----------
SOUTH CAROLINA (8.7%)
5,000,000 SC State Pub. Svc. Auth. Rev. Bonds, 7.79s, 7/1/21 (c).... AAA/P 4,981,250
----------
SOUTH DAKOTA (5.7%)
3,000,000 SD Student Loan Assistance Corp. Student Loan Rev. Bonds,
Ser. B, 7 5/8s, 8/1/06.................................. A 3,292,500
----------
TEXAS (3.9%)
2,000,000 Gulf Coast Waste Disp. Auth. Rev. Bonds, 7.45s, 5/1/26.... Baa 2,220,000
----------
WASHINGTON (5.8%)
3,000,000 WA State Pub. Pwr. Supply Syst. Rev. Bonds (Nuclear
Project No. 2), Ser. B 7s, 7/1/21....................... AA 3,333,750
----------
</TABLE>

61
<PAGE> 65

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT RATINGS(B) VALUE
- ---------- ---------- -----
<C> <S> <C> <C>
WEST VIRGINIA(3.7%)
$2,000,000 Mason Cnty. Poll. Control Rev. Bonds (Appalachian Pwr. Co.
Project), Ser. J, 6.6s, 10/1/22......................... A $ 2,167,501
-----------
Total Investments (cost $55,439,382)...................... $56,462,219
-----------
<FN>

NOTES

(a) Percentages indicated are based on total net assets of $57,559,156, which
correspond to a net asset value per share of $14.36.

(b) The Moody's and Standard & Poor's ratings indicated are believed to be the
most recent ratings available at December 31, 1993 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 ratings the agencies would ascribe to these securities at December
31, 1993. Securities rated by Putnam and unrated by Moody's or Standard &
Poor's are indicated by "/P".

(c) Restricted as to public resale. At the date of acquisition these securities
were valued at cost. There were no outstanding unrestricted securities of
the same class as those held. Total market value of restricted securities
owned at December 31, 1993 was $4,981,250 or 8.7% of net assets.

The rates shown on Variable Rate Demand Notes (VRDN) are the current rates
at December 31, 1993 which are subject to change based on the terms of the
security.

</TABLE>

62
<PAGE> 66
w

PUTNAM INVESTMENT GRADE MUNICIPAL TRUST III

STATEMENT OF ASSETS AND LIABILITIES

DECEMBER 31, 1993 (UNAUDITED)

<TABLE>
<S> <C> <C>
ASSETS
Investments in securities, at value (identified cost $55,439,382).............. $56,462,219
Cash........................................................................... 2,742,677
Interest receivable............................................................ 1,058,337
Unamortized organization expense............................................... 26,666
-----------
Total assets......................................................... 60,289,899
LIABILITIES
Payable for securities purchased................................... $2,448,069
Payable for compensation of Trustees............................... 271
Payable for investor servicing and custodian fees.................. 8,137
Payable for administrative services................................ 633
Payable for organization expense................................... 270,620
Other accrued expenses............................................. 3,013
----------
Total liabilities.................................................... 2,730,743
-----------
Net Assets..................................................................... $57,559,156
-----------
-----------
REPRESENTED BY
Paid-in capital................................................................ $56,256,537
Undistributed net investment income............................................ 281,822
Accumulated net realized loss on investments................................... (2,040)
Net unrealized appreciation of investments..................................... 1,022,837
-----------
Total-Representing net assets applicable to capital shares outstanding......... $57,559,156
-----------
-----------
Net asset value per share ($57,559,156 divided by 4,007,092 shares)............ $14.36
</TABLE>

63
<PAGE> 67

GLOSSARY

" 'AA' Composite Commercial Paper Rate" has the meaning specified on page
36 of this Prospectus.

"Additional Dividend" has the meaning specified on page 45 of this
Prospectus.

"Agent Member" means a designated member of the Securities Depository that
will maintain records for a beneficial owner of one or more Preferred Shares.

"Applicable Dividend Rate" means, with respect to the Initial Dividend
Period, the rate of dividend per annum established by the Trustees, by a duly
authorized committee thereof or by any of the President, the Vice Chairman, any
Executive Vice President or the Treasurer of the Fund and, for each subsequent
Dividend Period, means the rate of dividend per annum that (i) except for a
Dividend Period commencing during a Non-Payment Period, will be equal to the
lower of the rate of dividend per annum that the Remarketing Agent advises
results on the Remarketing Date preceding the first day of such Dividend Period
from implementation of the remarketing procedures set forth in the Bylaws and
the Maximum Dividend Rate or (ii) for each Dividend Period commencing during a
Non-Payment Period, will be equal to the Non-Payment Period Rate.

"Applicable Percentage" has the meaning described on page 38 of this
Prospectus.

"Authorized Newspaper" means a newspaper of general circulation in the
English language generally published on Business Days in The City of New York.

"Business Day" means a day on which the New York Stock Exchange, Inc. is
open for trading, and is not a day on which banks in The City of New York are
authorized or obligated by law to close.

"Bylaws" means the Bylaws of the Trust, as amended from time to time.

"Cede" means Cede & Co., the nominee of DTC in whose name the Preferred
Shares initially will be registered.

"Closing Transaction" means the termination of a futures contract or option
position by taking a position opposite thereto.

"Code" means the Internal Revenue Code of 1986, as amended.

"Commercial Paper Dealers" means Smith Barney Shearson Inc. and such other
dealers as the Fund may from time to time appoint, or in lieu of any thereof,
their respective affiliates or successors.

"Commission" means the Securities and Exchange Commission.

"Common Shares" means the common shares of beneficial interest of the Fund.

"Date of Original Issue" means, with respect to any Preferred Shares, the
date on which the Fund originally issues such share.

"Deposit Securities" has the meaning set forth on page B-1 of this
Prospectus.

"Discount Factor" means a Moody's Discount Factor or a S&P Discount Factor,
as the case may be.

"Discounted Value" has the meaning set forth on page B-1 of this
Prospectus.

"Dividend Coverage Amount" has the meaning set forth on page B-1 of this
Prospectus.

"Dividend Coverage Assets" has the meaning set forth on page B-1 of this
Prospectus.

"Dividend Payment Date" has the meaning set forth on page 42 of this
Prospectus.

"Dividend Period" has the meaning set forth on pages 3 and 40 of this
Prospectus.

"DTC" means The Depository Trust Company.

"Exempt-Interest Dividend" has the meaning set forth on page 53 of this
Prospectus.

64
<PAGE> 68

"FIRST INITIAL DIVIDEND PAYMENT DATE" has the meaning set forth on page 40
of this Prospectus.

"FORWARD COMMITMENT" has the meaning set forth on page 22 of this
Prospectus.

"FUND" means Putnam Investment Grade Municipal Trust III, a Massachusetts
business trust, which is the issuer of the Preferred Shares.

"GROSS-UP TAX RATE" has the meaning set forth on pages 8 and 31-32 of this
Prospectus.

A "HOLDER" of Preferred Shares means, unless the context otherwise
requires, a person who is listed in the records of the Paying Agent as the
beneficial owner of one or more Preferred Shares.

"INITIAL DIVIDEND PAYMENT DATE" and "Initial Dividend Payment Dates" have
the meanings set forth on page 40 of this Prospectus.

"INITIAL DIVIDEND PERIOD" means, with respect to Preferred Shares, the
period commencing on and including the Date of Original Issue thereof and ending
on the date set forth on the front cover of this Prospectus.

"INITIAL MARGIN" means the amount of cash or securities deposited with a
broker as a margin payment at the time of purchase or sale of a futures contract
or an option hereon.

"INTEREST EQUIVALENT" means a yield on a 360-day basis of a discount basis
security which is equal to the yield on an equivalent interest-bearing security.

"IRS" means the Internal Revenue Service.

"LAST INITIAL DIVIDEND PAYMENT DATE" has the meaning set forth on page 40
of this Prospectus.

"LONG TERM DIVIDEND PERIOD" has the meaning set forth on page 6 of this
Prospectus.

"MANDATORY REDEMPTION PRICE" has the meaning set forth on page 46 of this
Prospectus.

"MARGINAL TAX RATE" means the maximum marginal regular Federal individual
income tax rate applicable to ordinary income or the maximum marginal regular
Federal corporate income tax rate, whichever is greater.

"MAXIMUM DIVIDEND RATE" has the meaning set forth on page 36 of this
Prospectus.

"MAXIMUM POTENTIAL ADDITIONAL DIVIDEND LIABILITY" has the meaning set forth
on page B-2 of this Prospectus.

"MINIMUM LIQUIDITY LEVEL" has the meaning set forth on page B-2 of this
Prospectus.

"MOODY'S" means Moody's Investors Service, Inc.

"MOODY'S DISCOUNT FACTOR" has the meaning set forth on page B-2 of this
Prospectus.

"MOODY'S ELIGIBLE ASSET" has the meaning set forth on page B-3 of this
Prospectus.

"MOODY'S EXPOSURE PERIOD" has the meaning set forth on page B-3 of this
Prospectus.

"MOODY'S HEDGING TRANSACTION" has the meaning set forth on page B-3 of this
Prospectus.

"MOODY'S VOLATILITY FACTOR" has the meaning set forth on page B-4 of this
Prospectus.

"MUNICIPAL INDEX" means The Bond Buyer Municipal Bond Index.

"1940 ACT" means the Investment Company Act of 1940, as amended.

"1940 ACT CURE DATE" has the meaning set forth on page 20 of this
Prospectus.

"1940 ACT PREFERRED SHARES ASSET COVERAGE" has the meaning set forth on
page 20 of this Prospectus.

"NON-CALL PERIOD" has the meaning described under "Specific Redemption
Provisions" below.

"NON-PAYMENT PERIOD" has the meaning set forth on page 43 of this
Prospectus.

65
<PAGE> 69

"Non-Payment Period Rate" has the meaning set forth on pages 43-44 of this
Prospectus.

"Notice of Redemption" has the meaning set forth on page 47 of this
Prospectus.

"Notice of Revocation" has the meaning set forth on page 41 of this
Prospectus.

"Notice of Special Dividend Period" has the meaning set forth on page 41 of
this Prospectus.

"Optional Redemption Price" has the meaning set forth on page 46 of this
Prospectus.

"Paying Agent" means IBJ Schroeder Bank & Trust Company, or any successor
company or entity, which has entered into a Paying Agent Agreement with the Fund
to act, among other things, as the transfer agent, registrar, dividend and
redemption price disbursing agent, settlement agent and agent for certain
notifications for the Fund in connection with the Preferred Shares of each
series in accordance with such agreement.

"Paying Agent Agreement" has the meaning set forth on page 30 of this
Prospectus.

"Preferred Shares" means the Municipal Income Preferred Shares.

"Premium Call Period" has the meaning specified in "Specific Redemption
Provisions" below.

"Preferred Shares Basic Maintenance Amount" has the meaning set forth on
page B-4 of this Prospectus.

"Receivables for Municipal Bonds Sold," for purposes of determining Moody's
Eligible Assets and, for purposes of determining S&P Eligible Assets, has the
meaning set forth on pages B-2 and B-5, respectively, of this Prospectus.

A "record holder" of Preferred Shares shall mean the Securities Depository
or its nominee or such other person or persons listed in the share transfer
books of the Fund as the registered holder of one or more Preferred Shares.

"Reference Rate" has the meaning set forth on page 7 of this Prospectus.

"Remarketing" means each periodic operation of the process for remarketing
Preferred Shares, as described in this Prospectus.

"Remarketing Agent" means Smith Barney Shearson Inc. and any additional or
successor companies or entities which have entered into an agreement with the
Fund to follow the remarketing procedures for the purposes of determining the
Applicable Dividend Rate.

"Remarketing Agreement" has the meaning set forth on page 32 of this
Prospectus.

"Remarketing Date" means any date on which (i) each holder of Preferred
Shares must provide to the Remarketing Agent irrevocable telephonic notice of
intent to tender shares in a Remarketing, and (ii) the Remarketing Agent (a)
determines the Applicable Dividend Rate for the ensuing Dividend Period, (b)
notifies holders, purchasers and tendering holders of Preferred Shares by
telephone, telex or otherwise of the results of the Remarketing and (c)
announces the Applicable Dividend Rate.

"Request for Special Dividend Period" has the meaning set forth on pages
40-41 of this Prospectus.

"Response" has the meaning set forth on page 41 of this Prospectus.

"Retroactive Taxable Allocation" has the meaning set forth on page 45 of
this Prospectus.

"S&P" means Standard & Poor's Corporation.

"S&P Discount Factor" has the meaning set forth on page B-5 of this
Prospectus.

"S&P Eligible Asset" has the meaning set forth on page B-5 of this
Prospectus.

"S&P Exposure Period" has the meaning set forth on page B-6 of this
Prospectus.

"S&P Hedging Transaction" has the meaning set forth on page B-6 of this
Prospectus.

66
<PAGE> 70

"S&P Volatility Factor" has the meaning set forth on page B-6 of this
Prospectus.

"Securities Depository" means DTC or any successor company or other entity
selected by the Fund as securities depository for Preferred Shares that agrees
to follow the procedures required to be followed by such securities depository
in connection with the shares of such series of Preferred Shares.

"Settlement Date" means the first Business Day after a Remarketing Date
applicable to a Preferred Share.

"Short Term Dividend Period" has the meaning set forth on page 6 of this
Prospectus.

"Special Dividend Period" means a Dividend Period established by the Fund
for Preferred Shares as described on page 6 of this Prospectus.

"Specific Redemption Provisions" means, with respect to a Special Dividend
Period of 365 or more days, either, or any combination of, the designation of
(i) a period (a "Non-Call Period") determined by the Trustees, after
consultation with the Remarketing Agent, during which the Preferred Shares
subject to such Dividend Period shall not be subject to redemption at the option
of the Fund and (ii) a period (a "Premium Call Period"), consisting of a number
of whole years and determined by the Trustees, after consultation with the
Remarketing Agent, during each year of which the Preferred Shares subject to
such Dividend Period shall be redeemable at the Trust's option at a price per
share equal to $50,000 plus accumulated but unpaid dividends plus an applicable
premium, as determined by the Trustees after consultation with the Remarketing
Agent.

"Substitute Commercial Paper Dealers" means such substitute commercial
paper dealers as the Trust may from time to time appoint or, in lieu of any
thereof, their respective affiliates or successors.

"Substitute Rating Agency" and "Substitute Rating Agencies" shall mean a
nationally recognized statistical rating organization or two nationally
recognized statistical rating organizations selected by the Fund to act as the
substitute rating agency or substitute rating agencies, as the case may be, to
determine the credit ratings of the Preferred Shares.

"Taxable Equivalent of the Short-Term Municipal Bond Rate" has the meaning
set forth on page 37 of this Prospectus.

"Tender and Dividend Reset" means the process pursuant to which Preferred
Shares may be tendered in a Remarketing or held and become subject to the new
Applicable Dividend Rate determined by the Remarketing Agents in such
Remarketing.

"Treasury Bonds" means United States Treasury Bonds with remaining
maturities of ten years or more.

"Trustees" means the Trustees of the Fund.

"28-day Dividend Period" has the meaning set forth on page 6 of this
Prospectus.

"U.S. Treasury Bill Rate" has the meaning set forth on page 37 of this
Prospectus.

"U.S. Treasury Note Rate" has the meaning set forth on page 37 of this
Prospectus.

"Valuation Date" has the meaning set forth on page B-6 of this Prospectus.

"Variation Margin" has the meaning set forth on page B-6 of this
Prospectus.

67
<PAGE> 71

APPENDIX A

NORMAL SCHEDULE FOR REMARKETING PREFERRED SHARES

The normal schedule for remarketing Preferred Shares is described below. As
described in this Prospectus, the events occurring on each day of a normal
remarketing schedule are subject to change in the event that certain days are
not Business Days. All references herein to a particular time of day shall be to
New York City time.

<TABLE>
<S> <C>
Remarketing Date
9:00 a.m. Deadline for the Remarketing Agent to make available to holders of
Preferred Shares non-binding indications of Applicable Dividend Rate
for the next succeeding 28-day Dividend Period or, if applicable,
Special Dividend Period.
12:00 noon Deadline for each holder of Preferred Shares to provide to the
Remarketing Agent irrevocable telephonic notice of intent to tender
Preferred Shares for sale in the current Remarketing. Remarketing of
tendered shares of Preferred Shares formally commences.
3:00 p.m. Deadline for completion of Remarketing. The Remarketing Agent
determines the Applicable Dividend Rate for the Dividend Period.
3:30 p.m. The Remarketing Agent notifies holders, purchasers and tendering
holders of Preferred Shares by telephone, telex or otherwise of the
results of the Remarketing. Applicable Dividend Rate is announced.
Settlement Date (next New Dividend Period begins. In addition, Preferred Shares which have
following Business Day) been tendered and sold in a Remarketing are delivered against
payment through the Securities Depository.
</TABLE>

A-1
<PAGE> 72

APPENDIX B

RATING AGENCY REQUIREMENTS

This Appendix sets out certain procedures from the Bylaws of the Fund
containing conditions determined by S&P and Moody's which the Fund must meet in
order to maintain its AAA/"aaa" rating. Generally, these requirements, among
other things, impose limitations on the securities in which the Fund may invest
(and the amount of its portfolio which may be invested in various types of
securities and securities of various issuers), limit the Fund's use of futures,
options and forward commitments and may require the Fund to redeem Preferred
Shares as described generally in the Prospectus under "Description of Preferred
Shares -- Redemption." Any capitalized terms used in this Appendix but not
defined herein are defined elsewhere in the Prospectus.

DEFINITIONS

"Anticipation Notes" shall mean the following Municipal Bonds: revenue
anticipation notes, tax anticipation notes, tax and revenue anticipation notes,
grant anticipation notes and bond anticipation notes.

"Deposit Securities" means cash and Municipal Bonds rated at least AAA,
A-1+ or SP-1+ by S&P.

"Discounted Value" means (i) with respect to an S&P Eligible Asset, the
quotient of the Market Value thereof divided by the applicable S&P Discount
Factor and (ii) with respect to a Moody's Eligible Asset, the lower of par and
the quotient of the Market Value thereof divided by the applicable Moody's
Discount Factor.

"Dividend Coverage Amount," as of any Valuation Date, means (A) (i) the
aggregate amount of cash dividends that will accumulate on all Preferred Shares
and Other Preferred Shares, in each case to (but not including) the Business Day
following the first Dividend Payment Date for Preferred Shares that follows such
Valuation Date plus (ii) the aggregate amount of all liabilities existing on
such Valuation Date which are payable on or prior to the Business Day following
such first Dividend Payment Date less (B) the sum of (i) the combined Market
Value of Deposit Securities irrevocably deposited with the Paying Agent for the
payment of cash dividends on all Preferred Shares and Other Preferred Shares,
(ii) the book value of receivables for Municipal Bonds sold as of or prior to
such Valuation Date, if such receivables are due within five Business Days of
such Valuation Date and in any event on or prior to such Dividend Payment Date,
and (iii) interest on Municipal Bonds owned by the Fund which is scheduled to be
paid on or prior to such Dividend Payment Date.

"Dividend Coverage Assets," as of any Valuation Date, means Deposit
Securities with maturity or tender payment dates not later than the day
preceding the Business Day following the first Dividend Payment Date for
Preferred Shares that follows such Valuation Date.

"Independent Accountant" means a nationally recognized accountant, or firm
of accountants, that is, with respect to the Fund, an independent public
accountant or firm of independent public accountants under the Securities Act of
1933, as amended.

"Initial Margin" means the amount of cash or securities deposited with a
broker as a margin payment at the time of purchase or sale of a futures contract
or an option thereon.

"Market Value" of any asset of the Fund means the market value thereof
determined by the Pricing Service. The Market Value of any asset shall include
any interest accrued thereon. The Pricing Service shall value portfolio
securities at the mean between the quoted bid and asked price or the yield
equivalent when quotations are readily available. Securities for which
quotations are not readily available shall be valued at fair value as determined
by the Pricing Service using methods which include consideration of: yields or
prices of municipal bonds of comparable quality, type of issue, coupon, maturity
and rating; indications as to value from dealers; and general market conditions.
The Pricing Service may employ electronic data processing techniques and/or a
matrix system to determine valuations. In the event the Pricing Service is
unable to value a security, the security shall be valued at the lower of two
dealer bids obtained by the Fund from dealers who are

B-1
<PAGE> 73

members of the National Association of Securities Dealers, Inc. and make a
market in the security, at least one of which shall be in writing. Futures
contracts and options are valued at closing prices for such instruments
established by the exchange or board of trade on which they are traded, or if
market quotations are not readily available, are valued at fair value on a
consistent basis using methods determined in good faith by the Trustees.

"Maximum Potential Additional Dividend Liability," as of any Valuation
Date, means the aggregate amount of Additional Dividends that would be payable
with respect to the Preferred Shares if the Fund were to make Retroactive
Taxable Allocations, with respect to any fiscal year, estimated based upon
dividends paid and the amount of undistributed realized net capital gain and
other income subject to regular Federal income tax earned by the Fund, as of the
end of the calendar month immediately preceding such Valuation Date and assuming
such Additional Dividends are fully taxable.

"Minimum Liquidity Level" means, as of any Valuation Date, an aggregate
Market Value of Dividend Coverage Assets not less than the Dividend Coverage
Amount.

<TABLE>
"Moody's Discount Factor" means, for purposes of determining the Discounted
Value of any Municipal Bond which constitutes a Moody's Eligible Asset, the
percentage determined by reference to (a) the rating by Moody's or S&P on such
Bond and (b) the Moody's Exposure Period, in accordance with the table set forth
below:

RATING CATEGORY
<CAPTION>
MOODY'S EXPOSURE
PERIOD AAA(1) AA(1) A(1) BAA(1) OTHER(2) VMIG-1(1),(3) SP-1+(4)
---------------- ------ ----- ---- ------ -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
7 weeks or less...... 151% 159% 168% 202% 229% 136% 148%
8 weeks or less but
greater than 7
weeks.............. 154 164 173 205 235 137 149
9 weeks or less but
greater than 8
weeks.............. 158 169 179 209 242 138 150
<FN>
- ---------------
(1) Moody's rating.

(2) Municipal Bonds not rated by Moody's but rated BBB-, BBB or BBB+ by S&P.

(3) Municipal Bonds rated MIG-1, VMIG-1 or P-1 by Moody's, which do not mature
or have a demand feature at par exercisable within the Moody's Exposure
Period and which do not have a long-term rating. For the purpose of the
definition of Moody's Eligible Assets, these securities will have an
assumed rating of "A" by Moody's.

(4) Municipal Bonds rated SP-1+ or A-1+ by S&P which do not mature or have a
demand feature at par exercisable within the Moody's Exposure Period and
which do not have a long-term rating. For the purpose of the definition of
Moody's Eligible Assets, these securities will have an assumed rating of "A"
by Moody's.

</TABLE>

Notwithstanding the foregoing, (i) no Moody's Discount Factor will be
applied to short-term Municipal Bonds, so long as such Municipal Bonds are rated
at least MIG-1, VMIG-1 or P-1 by Moody's and mature or have a demand feature at
par exercisable within the Moody's Exposure Period, and the Moody's Discount
Factor for such Bonds will be 125% if such Bonds are not rated by Moody's but
are rated A-1+ or SP-1+ or AA by S&P and mature or have a demand feature at par
exercisable within the Moody's Exposure Period, and (ii) no Moody's Discount
Factor will be applied to cash or to Receivables for Municipal Bonds Sold.
"Receivables for Municipal Bonds Sold," for purposes of calculating Moody's
Eligible Assets as of any Valuation Date, means the aggregate of the following:
(i) the book value of receivables for Municipal Bonds sold as of or prior to
such Valuation Date if such receivables are due within five Business Days of
such Valuation Date, and if the trades which generated such receivables are (x)
settled through clearing house firms with respect to which the Fund has received
prior written authorization from Moody's or (y) with counterparties having a
Moody's long-term debt rating of at least Baa3; and (ii) the Discounted Value of
Municipal Bonds sold (applying the relevant Moody's Discount Factor to such
Bonds) as of or prior to such

B-2
<PAGE> 74

Valuation Date which generated such receivables, if such receivables are due
within five Business Days of such Valuation Date but do not comply with either
of conditions (x) or (y) of the preceding clause (i).

"Moody's Eligible Asset" means cash, Receivables for Municipal Bonds Sold,
a short-term Municipal Bond rated VMIG-1, MIG-1 or P-1 by Moody's or SP-1+ or
A-1+ by S&P or a Municipal Bond that (i) pays interest in cash; (ii) is publicly
rated Baa or higher by Moody's or, if not rated by Moody's but rated by S&P, is
rated at least BBB-by S&P (provided that, for purposes of determining the
Moody's Discount Factor applicable to any such S&P-rated Municipal Bond, such
Municipal Bond (excluding any short-term Municipal Bond and any Municipal Bond
rated BBB-, BBB or BBB+) will be deemed to have a Moody's rating which is one
full rating category lower than its S&P rating); (iii) does not have its Moody's
rating suspended by Moody's; and (iv) is part of an issue of Municipal Bonds of
at least $10,000,000. In addition, Municipal Bonds in the Fund's portfolio will
be included as Moody's Eligible Assets only to the extent they meet the
following diversification requirements:

<TABLE>
<CAPTION>
MAXIMUM STATE
MINIMUM MAXIMUM OR TERRITORY
ISSUE SIZE UNDERLYING CONCENTRATION
RATING ($ MILLIONS) OBLIGOR (%)(1) (%)(1)(3)
------ ------------ -------------- -------------
<S> <C> <C> <C>
Aaa............................................ 10 100 100
Aa............................................. 10 20 60
A.............................................. 10 10 40
Baa............................................ 10 6 20
Other(2)....................................... 10 4 12
<FN>
- ---------------
(1) The referenced percentages represent maximum cumulative totals for the
related rating category and each lower rating category.

(2) Municipal Bonds not rated by Moody's but rated BBB-, BBB or BBB+ by S&P.

(3) Territorial bonds (other than those issued by Puerto Rico and counted
collectively) of any territory are limited to 10% of Moody's Eligible
Assets.
</TABLE>

When the Fund sells a Municipal Bond and agrees to repurchase it at a
future date, such Bond will constitute a Moody's Eligible Asset and the amount
the Fund is required to pay upon repurchase of such Bond will count as a
liability for purposes of calculating the Preferred Shares Basic Maintenance
Amount. When the Fund purchases a Municipal Bond and agrees to sell it at a
future date to another party, cash receivable by the Fund in connection
therewith will constitute a Moody's Eligible Asset if the long-term debt of such
other party is rated at least A2 by Moody's and such agreement has a term of 30
days or less; otherwise such Bond will constitute a Moody's Eligible Asset.

Notwithstanding the foregoing, an asset will not be considered a Moody's
Eligible Asset if it is (i) held in a margin account, (ii) subject to any
material lien, mortgage, pledge, security interest or security agreement of any
kind, (iii) held for the purchase of a security pursuant to a Forward Commitment
or (iv) irrevocably deposited by the Fund for the payment of dividends or
redemption.

"Moody's Exposure Period" means the period commencing on and including a
given Valuation Date and ending 48 days thereafter.

"Moody's Hedging Transaction" has the meaning described on page B-9 of this
Prospectus.

B-3
<PAGE> 75

<TABLE>
"MOODY'S VOLATILITY FACTOR" means 302% as long as there has not been
enacted an increase to the Marginal Tax Rate. If an increase is enacted to the
Marginal Tax Rate but not yet implemented, the Moody's Volatility Factor shall
be as follows:

<CAPTION>
% CHANGE IN MOODY'S VOLATILITY
MARGINAL TAX RATE FACTOR
----------------- ------------------
<S> <C>
5%............................................ 323%
5% but 10%............................................ 347%
10% but 15%............................................ 373%
15% but 20%............................................ 402%
20% but 25%............................................ 436%
25% but 30%............................................ 474%
30% but 35%............................................ 518%
35% but 40%............................................ 570%
</TABLE>

Notwithstanding the foregoing, the Moody's Volatility Factor may mean such
other potential dividend rate increase factor as Moody's advises the Fund in
writing is applicable.

"OTHER PREFERRED SHARES" means all Municipal Income Preferred Shares of the
Fund other than the Preferred Shares offered here.

"PREFERRED SHARES BASIC MAINTENANCE AMOUNT," as of any Valuation Date,
means the dollar amount equal to (i) the sum of (A) the product of the number of
Preferred Shares and Other Preferred Shares outstanding on such Valuation Date
multiplied by the sum of (a) $50,000 and (b) any applicable redemption premium
per share attributable to the designation of a Premium Call Period; (B) the
aggregate amount of cash dividends (whether or not earned or declared) that will
have accumulated for each Preferred Share and Other Preferred Shares
outstanding, in each case, to (but not including) the end of the Dividend Period
for Preferred Shares and Other Preferred Shares in which such Valuation Date
occurs or to (but not including) the 49th day after such Valuation Date,
whichever is sooner; (C) the aggregate amount of cash dividends that would
accumulate at the Maximum Dividend Rate applicable to a Dividend Period of 28
days on any Preferred Shares and Other Preferred Shares outstanding from the end
of such Dividend Period through the 49th day after such Valuation Date,
multiplied by the larger of the Moody's Volatility Factor and the S&P Volatility
Factor, determined from time to time by Moody's and S&P, respectively (except
that if such Valuation Date occurs during a Non-Payment Period, the cash
dividend for purposes of calculation would accumulate at the then current
Non-Payment Period Rate); (D) the amount of anticipated expenses of the Fund for
the 90 days subsequent to such Valuation Date; (E) the amount of the Fund's
Maximum Potential Additional Dividend Liability as of such Valuation Date; and
(F) any current liabilities as of such Valuation Date to the extent not
reflected in any of (i)(A) through (i)(E) (including, without limitation, any
amounts due and payable by the Fund pursuant to repurchase agreements and any
payables for Municipal Bonds purchased as of such Valuation Date) less (ii)
either (A) the Discounted Value of any of the Fund's assets, or (B) the face
value of any of the Fund's assets if such assets mature prior to or on the date
of redemption of Preferred Shares or payment of a liability and are either
securities issued or guaranteed by the United States Government or, with respect
to Moody's, have a rating assigned by Moody's of at least Aaa, P-1, VMIG-1 or
MIG-1 and, with respect to S&P, have a rating assigned by S&P of at least AAA,
SP-1+ or A-1+, in both cases irrevocably deposited by the Fund for the payment
of the amount needed to redeem Preferred Shares subject to redemption or any of
(i)(B) through (i)(F).

"PREFERRED SHARES BASIC MAINTENANCE CURE DATE," with respect to the failure
by the Fund to satisfy the Preferred Shares Basic Maintenance Amount as of a
given Valuation Date, means the sixth Business Day following such Valuation
Date.

"PREFERRED SHARES BASIC MAINTENANCE REPORT" means a report signed by the
President, Treasurer or any Executive Vice President or Vice President of the
Fund which sets forth, as of the related Valuation Date, the assets of the Fund,
the Market Value and the Discounted Value thereof (seriatim and in the
aggregate), and the Preferred Shares Basic Maintenance Amount.

B-4
<PAGE> 76

"PRICING SERVICE" means Muller Investdata Corp., or any successor company
or entity, or any other entity designated from time to time by the Trustees.
Notwithstanding the foregoing, the Trustees will not designate a new Pricing
Service unless the Fund has received a written confirmation from Moody's and S&P
that such action would not impair the ratings then assigned by Moody's and S&P
to Preferred Shares.

"QUARTERLY VALUATION DATE" means the last Business Day of each fiscal
quarter of the Fund in each fiscal year of the Fund, commencing April 30, 1994.

<TABLE>
"S&P DISCOUNT FACTOR"
means, for purposes of determining the Discounted
Value of any Municipal Bond which constitutes an S&P Eligible Asset, the
percentage determined by reference to (a) the rating by S&P or Moody's on such
Bond and (b) the S&P Exposure Period, in accordance with the table set forth
below:

<CAPTION>
S&P RATING CATEGORY
---------------------------------
S&P EXPOSURE PERIOD AAA AA A BBB
- ---------------------------------------------------------- --- --- --- ---
<S> <C> <C> <C> <C>
40 Business Days.......................................... 190% 195% 210% 250%
22 Business Days.......................................... 170 175 190 230
10 Business Days.......................................... 155 160 175 215
7 Business Days.......................................... 150 155 170 210
3 Business Days.......................................... 130 135 150 190
</TABLE>

Notwithstanding the foregoing, (i) the S&P Discount Factor for short-term
Municipal Bonds will be 115%, so long as such Municipal Bonds are rated A-1+ or
SP-1+ by S&P and mature or have a demand feature exercisable in 30 days or less,
or 125% if such Municipal Bonds are not rated by S&P but are rated VMIG-1, P-1
or MIG-1 by Moody's and such short-term Municipal Bonds referred to in this
clause (i) shall qualify as S&P Eligible Assets; provided, however, such
short-term Municipal Bonds rated by Moody's but not rated by S&P having a demand
feature exercisable in 30 days or less must be backed by a letter of credit,
liquidity facility or guarantee from a bank or other financial institution
having a short-term rating of at least
A-1+ from S&P; and further provided that such short-term Municipal Bonds rated
by Moody's but not rated by S&P may comprise no more than 50% of short-term
Municipal Bonds that qualify as S&P Eligible Assets and (ii) no S&P Discount
Factor will be applied to cash or to Receivables for Municipal Bonds Sold.
"Receivables for Municipal Bonds Sold," for purposes of calculating S&P Eligible
Assets as of any Valuation Date, means the book value of receivables for
Municipal Bonds sold as of or prior to such Valuation Date if such receivables
are due within five Business Days of such Valuation Date. For purposes of the
foregoing, Anticipation Notes rated SP-1+ or, if not rated by S&P, rated VMIG-1
by Moody's, whether or not they mature or have a demand feature exercisable in
30 days and which do not have a long-term rating, shall be considered to be
short-term Municipal Bonds and shall qualify as S&P Eligible Assets.

"S&P ELIGIBLE ASSET" means cash, Receivables for Municipal Bonds Sold or a
Municipal Bond that (i) is issued by any of the 50 states, any territory or
possession of the United States, the District of Columbia, and any political
subdivision, instrumentality, county, city, town, village, school district or
agency (such as authorities and special districts created by the states) of any
of the foregoing and certain federally sponsored agencies such as local housing
authorities; (ii) is interest bearing and pays interest at least semi-annually;
(iii) is payable with respect to principal and interest in United States
Dollars; (iv) is publicly rated BBB or higher by S&P or, except in the case of
Anticipation Notes that are grant anticipation notes or bond anticipation notes
which must be rated by S&P to be included in S&P Eligible Assets, if not rated
by S&P but rated by Moody's, is rated at least A by Moody's (provided that such
Moody's-rated Municipal Bonds will be included in S&P Eligible Assets only to
the extent the Market Value of such Municipal Bonds does not exceed 50% of the
aggregate Market Value of the S&P Eligible Assets; and further provided that,
for purposes of determining the S&P Discount Factor applicable to any such
Moody's-rated Municipal Bond, such Municipal Bond will be deemed to have an S&P
rating which is one full rating category lower than its Moody's rating); (v) is
not part of a private placement of Municipal Bonds; and (vi) is part of an issue
of Municipal Bonds with an original issue size of at least $20 million or, if of
an issue with an original issue size below $20 million (but in no event below
$10 million), is issued by an issuer with a total of at least $50 million of
securities outstanding. Notwithstanding the foregoing:

B-5
<PAGE> 77

(1) Municipal Bonds of any one issuer will be considered S&P Eligible
Assets only to the extent the Market Value of such Municipal Bonds does not
exceed 10% of the aggregate Market Value of the S&P Eligible Assets,
provided that 2% is added to the applicable S&P Discount Factor for every
1% by which the Market Value of such Municipal Bonds exceeds 5% of the
aggregate Market Value of the S&P Eligible Assets; and

(2) Municipal Bonds issued by issuers in any one state or territory
will be considered S&P Eligible Assets only to the extent the Market Value
of such Municipal Bonds does not exceed 20% of the aggregate Market Value
of S&P Eligible Assets.

"S&P Exposure Period" means the maximum period of time following a
Valuation Date, including the Valuation Date and the Preferred Shares Basic
Maintenance Cure Date, that the Fund has to cure any failure to maintain, as of
such Valuation Date, a Discounted Value of its portfolio at least equal to the
Preferred Shares Basic Maintenance Amount.

"S&P Hedging Transactions" has the meaning described below.

"S&P Volatility Factor" means 198% during the Initial Dividend Period.
Thereafter, "S&P Volatility Factor" means, depending on the applicable Reference
Rate, the following:

<TABLE>
<CAPTION>
REFERENCE RATE
-------------------------------------------------------------------
<S> <C>
Taxable Equivalent of the Short-Term Municipal Bond Rate........... 277%
30-day "AA" Composite Commercial Paper Rate........................ 228%
60-day "AA" Composite Commercial Paper Rate........................ 228%
90-day "AA" Composite Commercial Paper Rate........................ 222%
120-day "AA" Composite Commercial Paper Rate....................... 222%
180-day "AA" Composite Commercial Paper Rate....................... 217%
1-year U.S. Treasury Bill Rate..................................... 198%
2-year U.S. Treasury Note Rate..................................... 185%
3-year U.S. Treasury Note Rate..................................... 178%
4-year U.S. Treasury Note Rate..................................... 171%
5-year U.S. Treasury Note Rate..................................... 169%
</TABLE>

Notwithstanding the foregoing, the S&P Volatility Factor may mean such other
potential dividend rate increase factor as S&P advises the Trust in writing is
applicable.

"Valuation Date" means, for purposes of determining whether the Fund is
maintaining the Preferred Shares Basic Maintenance Amount and the Minimum
Liquidity Level, each Business Day commencing with the Date of Original Issue.

"Variation Margin" means, in connection with an outstanding futures
contract or option thereon owned or sold by the Fund, the amount of cash or
securities paid to or received from a broker (subsequent to the Initial Margin
payment) from time to time as the price of such futures contract or option
fluctuates.

Notwithstanding the foregoing, the Trustees may, without the vote or
consent of the Holders of Preferred Shares, from time to time amend, alter or
repeal certain of the foregoing definitions (or definitions of other terms
contained in the Fund's Bylaws) and any such amendment, alteration or repeal
will be deemed not to affect the preferences, rights or powers of Preferred
Shares or the Holders thereof, provided the Trustees receive written
confirmation from both Moody's and S&P, that any such amendment, alteration or
repeal would not impair the ratings then assigned to Preferred Shares by the
rating agency providing such confirmation.

PREFERRED SHARES BASIC MAINTENANCE AMOUNT

BASIC REQUIREMENT. The Fund shall maintain, on each Valuation Date, and
shall verify to its satisfaction that it is maintaining on such Valuation Date,
S&P Eligible Assets having an aggregate Discounted Value equal to or greater
than the Preferred Shares Basic Maintenance Amount and Moody's Eligible Assets
having an aggregate Discounted Value equal to or greater than the Preferred
Shares Basic

B-6
<PAGE> 78

Maintenance Amount. Upon any failure to maintain the required Discounted Value,
the Fund will use its best efforts to alter the composition of its portfolio to
reattain the Preferred Shares Basic Maintenance Amount on or prior to the
Preferred Shares Basic Maintenance Cure Date. If, on any Valuation Date, the
Fund shall have Moody's Eligible Assets with a Discounted Value which exceeds
the Preferred Shares Basic Maintenance Amount by not more than 5%, the Adviser
shall not alter the composition of the Fund's portfolio unless it determines
that such action will not cause the Fund to have Moody's Eligible Assets with a
Discounted Value less than the Preferred Shares Basic Maintenance Amount.

REPORTING REQUIREMENTS. The Fund will deliver a Preferred Shares Basic
Maintenance Report to the Remarketing Agent, the Paying Agent, Moody's and S&P
as of (i) each Quarterly Valuation Date, (ii) the first day of a Special
Dividend Period, and (iii) any other time when specifically requested by either
Moody's or S&P, in each case at or before 5:00 p.m., New York City time, on the
third Business Day after such day.

At or before 5:00 p.m., New York City time, on the third Business Day after
a Valuation Date on which the Fund fails to maintain Moody's Eligible Assets or
S&P Eligible Assets, as the case may be, with an aggregate Discounted Value
which exceeds the Preferred Shares Basic Maintenance Amount by 5% or more or to
satisfy the Preferred Shares Basic Maintenance Amount, the Fund shall complete
and deliver to the Remarketing Agent, the Paying Agent, Moody's and S&P a
Preferred Shares Basic Maintenance Report as of the date of such failure.

At or before 5:00 p.m., New York City time, on the third Business Day after
a Valuation Date on which the Fund cures any failure to satisfy the Preferred
Shares Basic Maintenance Amount, the Fund shall complete and deliver to the
Remarketing Agent, the Paying Agent, Moody's and S&P a Preferred Shares Basic
Maintenance Report as of the date of such cure.

A Preferred Shares Basic Maintenance Report or Accountant's Confirmation
will be deemed to have been delivered to the Remarketing Agents, the Paying
Agent, Moody's and S&P if the Remarketing Agent, the Paying Agent, Moody's and
S&P receive a copy or telecopy, telex or other electronic transcription thereof
and on the same day the Fund mails to the Remarketing Agent, the Paying Agent,
Moody's and S&P for delivery on the next Business Day the full Preferred Shares
Basic Maintenance Report. A failure by the Fund to deliver a Preferred Shares
Basic Maintenance Report shall be deemed to be delivery of a Preferred Shares
Basic Maintenance Report indicating that the Discounted Value for all assets of
the Fund is less than the Preferred Shares Basic Maintenance Amount, as of the
relevant Valuation Date.

Whenever the Fund delivers a Preferred Shares Basic Maintenance Report to
S&P as described above, it shall also deliver a Certificate of Minimum Liquidity
to the Remarketing Agent and the Paying Agent.

Within ten Business Days after the date of delivery to the Remarketing
Agents, the Paying Agent, S&P and Moody's of a Preferred Shares Basic
Maintenance Report relating to a Quarterly Valuation Date, the Independent
Accountant will confirm in writing to the Remarketing Agent, the Paying Agent,
S&P and Moody's (i) the mathematical accuracy of the calculations reflected in
such Report (and in any other Preferred Shares Basic Maintenance Report,
randomly selected by the Independent Accountant, that was delivered by the Fund
during the quarter ending on such Quarterly Valuation Date); (ii) that, in such
Report (and in such randomly selected Report), (a) the Fund determined in
accordance with the Bylaws whether the Fund had, at such Quarterly Valuation
Date (and at the Valuation Date addressed in such randomly selected Report), S&P
Eligible Assets of an aggregate Discounted Value at least equal to the Preferred
Shares Basic Maintenance Amount and Moody's Eligible Assets of an aggregate
Discounted Value at least equal to the Preferred Shares Basic Maintenance
Amount, (b) the aggregate amount of Dividend Coverage Assets equals or exceeds
the Dividend Coverage Amount, and (c) it has obtained confirmation from the
Pricing Service that the Market Value of portfolio securities as determined by
the Pricing Service equals the mean between the quoted bid and asked prices or
the yield equivalent (when quotations are readily available); (iii) that the
Fund has excluded from the Preferred Shares Basic Maintenance Report assets not
qualifying as Eligible Assets; and (iv) with respect to such confirmation to
Moody's, that the Fund has satisfied the requirements described below imposed by
Moody's with respect to transactions in options, futures and forward commitments
as of the Quarterly Valuation Date (and at the Valuation Date addressed in such
randomly selected Report) (such confirmation is herein called the "Accountant's
Confirmation"). In preparing the Accountant's Confirmation,

B-7
<PAGE> 79

the Independent Accountant shall be entitled to rely, without further
investigation, on such interpretations of law by the Fund as may have been
necessary for the Fund to perform the computations contained in the Preferred
Shares Basic Maintenance Report.

Within ten Business Days after the date of delivery to the Remarketing
Agent, the Paying Agent, S&P and Moody's of a Preferred Shares Basic Maintenance
Report relating to any Valuation Date on which the Fund failed to satisfy the
Preferred Shares Basic Maintenance Amount, the Independent Accountant will
provide to the Remarketing Agents, the Paying Agent, S&P and Moody's an
Accountant's Confirmation as to such Preferred Shares Basic Maintenance Report.

Within ten Business Days after the date of delivery to the Remarketing
Agent, the Paying Agent, S&P and Moody's of a Preferred Shares Basic Maintenance
Report relating to any Valuation Date on which the Fund cured any failure to
satisfy the Preferred Shares Basic Maintenance Amount, the Independent
Accountant will provide to the Remarketing Agents, the Paying Agent, S&P and
Moody's an Accountant's Confirmation as to such Preferred Shares Basic
Maintenance Report.

If any Accountant's Confirmation delivered as required above shows that an
error was made in the Preferred Shares Basic Maintenance Report for a particular
Valuation Date for which such Accountant's Confirmation was required to be
delivered, or shows that a lower aggregate Discounted Value for the aggregate of
all S&P Eligible Assets or Moody's Eligible Assets, as the case may be, of the
Fund was determined by the Independent Accountant, the calculation or
determination made by such Independent Accountant shall be final and conclusive
and shall be binding on the Fund, and the Fund shall accordingly amend and
deliver the Preferred Shares Basic Maintenance Report to the Remarketing Agents,
the Paying Agent, S&P and Moody's promptly following receipt by the Fund of such
Accountant's Confirmation.

At or before 5:00 p.m., New York City time, on the first Business Day after
the Date of Original Issue of the Preferred Shares, the Fund will complete and
deliver to Moody's and S&P a Preferred Shares Basic Maintenance Report as of the
close of business on such Date of Original Issue. Within five Business Days of
such Date of Original Issue, the Independent Accountant will provide to Moody's
and S&P an Accountant's Confirmation as to such Preferred Shares Basic
Maintenance Report.

At or before 5:00 p.m., New York City time, on the first Business Day
following any date on which the Fund repurchases any outstanding Common Shares,
the Fund will complete and deliver to Moody's and S&P a Preferred Shares Basic
Maintenance Report as of the close of business on the date of the repurchase.

MINIMUM LIQUIDITY LEVEL

For so long as any Preferred Shares are rated by S&P, the Fund shall be
required to maintain the Minimum Liquidity Level.

As of each Valuation Date, as long as any Preferred Shares are rated by
S&P, the Fund shall determine (i) the Market Value of the Dividend Coverage
Assets owned by the Fund as of that Valuation Date, (ii) the Dividend Coverage
Amount on that Valuation Date, and (iii) whether the Minimum Liquidity Level is
met as of that Valuation Date. The calculations of the Dividend Coverage Assets,
the Dividend Coverage Amount and whether the Minimum Liquidity Level is met
shall be set forth in a certificate (a "Certificate of Minimum Liquidity") dated
as of the Valuation Date and deliverable to S&P as provided herein. The
Preferred Shares Basic Maintenance Report and the Certificate of Minimum
Liquidity may be combined in one certificate. The Fund shall cause a Certificate
of Minimum Liquidity to be delivered to S&P not later than the close of business
on the third Business Day after a Valuation Date with respect to which a
Preferred Shares Basic Maintenance Report must be delivered. The Minimum
Liquidity Level shall be deemed to be met as of any Valuation Date if the Fund
has timely delivered a Certificate of Minimum Liquidity relating to such date
which states that the same has been met and which is not manifestly inaccurate.
In the event that a Certificate of Minimum Liquidity is not delivered to S&P
when required, the Minimum Liquidity Level shall be deemed not to have been met
as of the applicable date.

B-8
<PAGE> 80

If the Minimum Liquidity Level is not met as of any Valuation Date, then
the Fund shall purchase or otherwise acquire Dividend Coverage Assets to the
extent necessary so that the Minimum Liquidity Level is met as of the fifth
Business Day following such Valuation Date. The Fund shall, by such fifth
Business Day, provide to S&P a Certificate of Minimum Liquidity setting forth
the calculations of the Dividend Coverage Assets and the Dividend Coverage
Amount and showing that the Minimum Liquidity Level is met as of such fifth
Business Day together with a report of the custodian of the Fund's assets
confirming the amount of the Fund's Dividend Coverage Assets as of such fifth
Business Day.

FUTURES AND OPTIONS TRANSACTIONS; FORWARD CONTRACTS

S&P GUIDELINES. For so long as any Preferred Shares are rated by S&P, the
Fund will not purchase or sell futures contracts, write, purchase or sell
options on futures contracts or write put options (except covered put options)
or call options (except covered call options) on portfolio securities unless it
receives written confirmation from S&P that engaging in such transactions will
not impair the rating then assigned to the Preferred Shares by S&P, except that
the Fund may purchase or sell futures contracts based on the Bond Buyer
Municipal Bond Index (the "Municipal Index") or United States Treasury Bonds
with remaining maturities of ten years or more ("Treasury Bonds") and write,
purchase or sell put and call options on such contracts (collectively "S&P
Hedging Transactions"), subject to the following limitations:

(A) the Fund will not engage in any S&P Hedging Transaction based on
the Municipal Index (other than transactions which terminate a futures
contract or option held by the Fund by the Fund's taking an opposite
position thereto ("Closing Transactions")), which would cause the Fund at
the time of such transaction to own or have sold (1) 1,001 or more
outstanding futures contracts based on the Municipal Index, (2) outstanding
futures contracts based on the Municipal Index and on Treasury Bonds
exceeding in number 25% of the quotient of the Market Value of the Fund's
total assets divided by $100,000 or (3) outstanding futures contracts based
on the Municipal Index exceeding in number 10% of the average number of
daily traded futures contracts based on the Municipal Index in the thirty
days preceding the time of effecting such transaction as reported by The
Wall Street Journal;

(B) the Fund will not engage in any S&P Hedging Transaction based on
Treasury Bonds (other than Closing Transactions) which would cause the Fund
at the time of such transaction to own or have sold (1) outstanding futures
contracts based on Treasury Bonds and on the Municipal Index exceeding in
number 25% of the quotient of the Market Value of the Fund's total assets
divided by $100,000 or (2) outstanding futures contracts based on Treasury
Bonds exceeding in number 10% of the average number of daily traded futures
contracts based on Treasury Bonds in the thirty days preceding the time of
effecting such transaction as reported by The Wall Street Journal;

(C) the Fund will engage in Closing Transactions to close out any
outstanding futures contract which the Fund owns or has sold or any
outstanding option thereon owned by the Fund in the event (i) the Fund does
not have S&P Eligible Assets with an aggregate Discounted Value equal to or
greater than the Preferred Shares Basic Maintenance Amount on two
consecutive Valuation Dates and (ii) the Fund is required to pay Variation
Margin on the second such Valuation Date;

(D) the Fund will engage in a Closing Transaction to close out any
outstanding futures contract or option thereon in the month prior to the
delivery month under the terms of such futures contract or option thereon
unless the Fund holds the securities deliverable under such terms; and

(E) when the Fund writes a futures contract or option thereon
(including a futures contract or option thereon which requires delivery of
an underlying security), it will either maintain an amount of cash, cash
equivalents or short-term, fixed-income securities in a segregated account
with the Fund's custodian, so that the amount so segregated plus the amount
of Initial Margin and Variation Margin held in the account of or on behalf
of the Fund's broker with respect to such futures contract or option equals
the Market Value of the futures contract or option, or, in the event the
Fund writes a futures contract or option thereon which requires delivery of
an underlying security, it shall hold such underlying security in its
portfolio.

B-9
<PAGE> 81

For purposes of determining whether the Fund has S&P Eligible Assets with a
Discounted Value that equals or exceeds the Preferred Shares Basic Maintenance
Amount, such Discounted Value shall, unless the Fund receives written
confirmation from S&P to the contrary, be reduced by an amount equal to (i) 30%
of the aggregate settlement value, as marked to market, of any outstanding
futures contracts based on the Municipal Index which are owned by the Fund plus
(ii) 25% of the aggregate settlement value, as marked to market, of any
outstanding futures contracts based on Treasury Bonds which contracts are owned
by the Fund.

MOODY'S GUIDELINES. For so long as any Preferred Shares are rated by
Moody's, the Fund will not buy or sell futures contracts, write, purchase or
sell put or call options on futures contracts or write put or call options
(except covered call or put options) on portfolio securities unless it receives
written confirmation from Moody's that engaging in such transactions would not
impair the rating then assigned to the Preferred Shares by Moody's, except that
the Fund may purchase or sell exchange-traded futures contracts based on the
Municipal Index or Treasury Bonds and purchase, write or sell exchange-traded
put options on such futures contracts and purchase, write or sell
exchange-traded call options on such futures contracts (collectively "Moody's
Hedging Transactions"), subject to the following limitations:

(A) the Fund will not engage in any Moody's Hedging Transaction based
on the Municipal Index (other than Closing Transactions) which would cause
the Fund at the time of such transaction to own or have sold (1)
outstanding futures contracts based on the Municipal Index exceeding in
number 10% of the average number of daily traded futures contracts based on
the Municipal Index in the thirty days preceding the time of effecting such
transaction as reported by The Wall Street Journal or (2) outstanding
futures contracts based on the Municipal Index having a Market Value
exceeding the Market Value of Municipal Bonds constituting Moody's Eligible
Assets owned by the Fund;

(B) the Fund will not engage in any Moody's Hedging Transaction based
on Treasury Bonds (other than Closing Transactions) which would cause the
Fund at the time of such transaction to own or have sold in the aggregate
(1) outstanding futures contracts based on Treasury Bonds having an
aggregate Market Value exceeding 10% of the aggregate Market Value of all
Moody's Eligible Assets owned by the Fund and rated Aaa by Moody's, (2)
outstanding futures contracts based on Treasury Bonds having an aggregate
Market Value exceeding 50% of the aggregate Market Value of Moody's
Eligible Assets owned by the Fund and rated Aa by Moody's (or, if not rated
by Moody's but rated by S&P, rated AAA by S&P) or (3) outstanding futures
contracts based on Treasury Bonds having an aggregate Market Value
exceeding 90% of the aggregate Market Value of Moody's Eligible Assets
owned by the Fund and rated Baa or A by Moody's (or, if not rated by
Moody's but rated by S&P, rated A or AA by S&P) (for purposes of the
foregoing clauses (A) and (B), the Fund shall be deemed to own the number
of futures contracts that underlie any outstanding options written by the
Fund);

(C) the Fund will engage in Closing Transactions to close out any
outstanding futures contract based on the Municipal Index if the amount of
open interest in the Municipal Index as reported by The Wall Street Journal
is less than 5,000;

(D) the Fund will engage in a Closing Transaction to close out any
outstanding futures contract by no later than the fifth Business Day of the
month in which such contract expires and will engage in a Closing
Transaction to close out any outstanding option on a futures contract by no
later than the first Business Day of the month in which such option
expires;

(E) the Fund will engage in Moody's Hedging Transactions only with
respect to futures contracts or options thereon having the next settlement
date for such type of futures contract or option, or the settlement date
immediately thereafter;

(F) the Fund will not engage in options and futures transactions for
leveraging or speculative purposes unless Moody's shall advise the Fund
that to do so would not adversely affect Moody's then current rating of the
Preferred Shares; provided, however, that the Fund will not be deemed to
have engaged in a futures or options transaction for leveraging or
speculative purposes so long as it has done so otherwise in accordance with
the foregoing; and

B-10
<PAGE> 82

(G) the Fund will not enter into an option or futures transaction
unless, after giving effect thereto, the Fund would continue to have
Moody's Eligible Assets with an aggregate Discounted Value equal to or
greater than the Preferred Shares Basic Maintenance Amount.

For purposes of determining whether the Fund has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the Preferred Shares
Basic Maintenance Amount, the Discounted Value of Moody's Eligible Assets which
the Fund is obligated to deliver or receive pursuant to an outstanding futures
contract or option shall be as follows (unless the Fund receives written
confirmation to the contrary from Moody's): (i) assets subject to call options
written by the Fund which are either exchange-traded and "readily reversible" or
which expire within 48 days after the date as of which such valuation is made
shall be valued at the lesser of (a) Discounted Value and (b) the exercise price
of the call option written by the Fund; (ii) assets subject to call options
written by the Fund not meeting the requirements of clause (i) of this sentence
shall have no value; (iii) assets subject to put options written by the Fund
shall be valued at the lesser of (a) the exercise price and (b) the Discounted
Value of such security; and (iv) futures contracts shall be valued at the lesser
of (a) settlement price and (b) the Discounted Value of the subject security,
provided that, if a contract matures within 48 days after the date as of which
such valuation is made, where the Fund is the seller the contract may be valued
at the settlement price and where the Fund is the buyer the contract may be
valued at the Discounted Value of the subject securities.

For purposes of determining whether the Fund has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the Preferred Shares
Basic Maintenance Amount, the following amounts shall be added to the Preferred
Shares Basic Maintenance Amount required to be maintained by the Fund (unless
the Fund receives written confirmation to the contrary from Moody's): (i) 10% of
the exercise price of a written call option; (ii) the exercise price of any
written put option; (iii) where the Fund is the seller under a futures contract,
10% of the settlement price of the futures contract; (iv) where the Fund is the
purchaser under a futures contract, the settlement price of assets to be
purchased under such futures contract; (v) the settlement price of the
underlying futures contract if the Fund writes put options on a futures
contract; and (vi) 105% of the Market Value of the underlying futures contracts
if the Fund writes call options on futures contracts and does not own the
underlying contract.

For so long as any Preferred Shares are rated by Moody's, the Fund will not
enter into any contract to purchase securities for a fixed price at a future
date beyond customary settlement time (other than such contracts that constitute
Moody's Hedging Transactions that are permitted above) unless it receives
written confirmation from Moody's that engaging in such transactions would not
impair the rating then assigned to the Preferred Shares by Moody's except that
the Fund may enter into such contracts to purchase newly-issued securities on
the date such securities are issued ("Forward Commitments"), subject to the
following limitations:

(A) the Fund will maintain in a segregated account with its custodian
cash, cash equivalents or short-term, fixed income securities rated P-1,
MIG-1 or VMIG-1 by Moody's and maturing prior to the date of the Forward
Commitment with a face value that equals or exceeds the amount of the
Fund's obligations under any Forward Commitments to which it is from time
to time a party or long-term fixed income securities with a Discounted
Value that equals or exceeds the amount of the Fund's obligations under any
Forward Commitments to which it is from time to time a party; and

(B) the Fund will not enter into a Forward Commitment unless, after
giving effect thereto, the Fund would continue to have Moody's Eligible
Assets with an aggregate Discounted Value equal to or greater than the
Preferred Shares Basic Maintenance Amount.

For purposes of determining whether the Fund has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the Preferred Shares
Basic Maintenance Amount, the Discounted Value of all Forward Commitments to
which the Fund is a party and of all securities deliverable to the Fund pursuant
to such Forward Commitments shall be zero.

B-11
<PAGE> 83

APPENDIX C

DESCRIPTION OF BOND RATINGS

Moody's Investors Service, Inc. describes classifications of bonds as
follows:

AAA--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.

AA--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.

A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.

BAA--Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

Standard & Poor's Corporation describes classifications of bonds as
follows:

AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.

AA--Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of instances
they differ from the AAA issues only in small degree.

A--Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.

BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the higher rated categories.

Fitch Investors Service, Inc. describes classifications of bonds as
follows:

AAA--Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.

AA--Bonds considered to be investment grade and of very high quality. The
obligor's ability to pay interest and repay principal is very strong, although
not as strong as bonds rated "AAA." Because bonds rated in the "AAA" and "AA"
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated "F-1+."

A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.

BBB--Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on the bonds, and therefore,
impair timely payment.

C-1
<PAGE> 84

APPENDIX D

FUTURES AND RELATED OPTIONS

GENERAL CHARACTERISTICS OF FUTURES CONTRACTS AND RELATED OPTIONS

Subject to the limitations described in Appendix B and elsewhere in this
Prospectus, the Fund may purchase and sell financial futures contracts and
related options in order to hedge against a change in the values of securities
that the Fund owns or expects to purchase.

The sale of a financial futures contract generally creates an obligation by
the seller to deliver the type of financial instrument called for in the
contract in a specified delivery month for a stated price. (As described below,
however, index futures contracts do not require actual delivery of securities
making up an index.) The purchase of a financial futures contract creates an
obligation by the purchaser to take delivery of the underlying financial
instrument in a specified delivery month at a stated price. The specific
instruments delivered or taken, respectively, at settlement date are not
determined until at or near that date. The determination is made in accordance
with the rules of the exchange or board of trade on which the sale or purchase
of the futures contract was made. Futures contracts are traded only on commodity
exchanges or boards of trade -- known as "contracts markets" -- approved for
such trading by the Commodity Futures Trading Commission, and must be executed
through a futures commission merchant, or brokerage firm, which is a member of
the relevant contract market.

Although most futures contracts by their terms call for actual delivery or
acceptance of commodities or securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out a futures contract sale is effected by purchasing a futures contract for the
same aggregate amount of the specific type of financial instrument or commodity
and with the same delivery date. If the price of the initial sale of the futures
contract exceeds the price of the offsetting purchase, the seller is paid the
difference and realizes a gain. Conversely, if the price of the offsetting
purchase exceeds the price of the initial sale, the seller realizes a loss.
Similarly, the closing out of a futures contract purchase is effected by the
purchaser entering into a futures contract sale. If the offsetting sale price
exceeds the purchase price, the purchaser realizes a gain, and if the purchase
price exceeds the offsetting sale price, he realizes a loss.

When the Fund purchases or sells a futures contract, it is required to
deposit with the Fund's custodian an amount of cash and/or securities. This
amount is known as "initial margin." The nature of initial margin is similar to
a performance bond or good faith deposit that is returned to the Fund upon
termination of the contract, assuming the Fund satisfies its contractual
obligations.

Subsequent payments to and from the broker involved in the transaction
occur on a daily basis in a process known as "marking to market." These payments
are called "variation margin" and are made as the value of the futures contract
fluctuates. For example, when the Fund has purchased a futures contract and the
price of the underlying index or security has risen, that position may have
increased in value, in which event the Fund would receive from the broker a
variation margin payment. Conversely, when the Fund has purchased a futures
contract and the price of the underlying index or security has declined, the
position may be less valuable, in which event the Fund would be required to make
a variation margin payment to the broker.

When the Fund terminates a position in a futures contract, a final
determination of variation margin is made, additional cash is paid by or to the
Fund, and the Fund realizes a loss or a gain. Such closing transactions involve
additional commission costs.

INDEX FUTURES CONTRACTS AND OPTIONS. An index futures contract is a
contract to buy or sell units of a specified index at a specified future date at
a price agreed upon when the contract is made. Entering into a contract to buy
units of an index is commonly referred to as buying a contract or holding a long
position in the index. Entering into a contract to sell units of an index is
commonly referred to as selling a contract or holding a short position. A unit
is based on the current value of the index. For example, the Municipal Bond
Index futures contract currently traded on the Chicago Board of Trade is based
on The Bond Buyer Long-Term Municipal Bond Index. This Index is composed of 40
high quality federally tax exempt municipal securities with a remaining maturity
of 19 years or longer on the date of initial inclusion in the Index. The Index
assigns

D-1
<PAGE> 85

relative weightings to the tax exempt municipal securities included in the
Index, and the Index fluctuates with changes in the market values of those
bonds. The Long-Term Municipal Bond Index futures contract trades in units equal
to $1,000 times the value of the Index. Unlike U.S. Treasury securities futures
contracts which require the actual delivery of the underlying Treasury security
at a future date, no delivery of the actual bonds making up the Index will take
place under an index futures contract. Instead, settlement in cash must occur
upon the termination of the contract, with the settlement being based on the
difference between the contract price and the actual level of the Index at the
expiration of the contract. For example, if the Fund enters into a futures
contract to buy 50 units of the Index at a specified future date at a value of
90 and the value of the Index is 95 on that future date, the Fund will gain
$250,000 (50 units times a gain of 5 times $1,000).

Options on index futures contracts are similar to options on securities
except that options on index futures contracts give the purchaser (holder) the
right in return for the premium paid to assume a position in an index futures
contract (a long position if the option is a call and a short position if the
option is a put), rather than to purchase or sell the futures contract, at the
specified exercise price at any time during the period of the option. Upon
exercise of the option, the delivery of the index futures position by the writer
of the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account maintained with
respect to the option, which represents the amount by which the market price of
the index futures contract, at exercise, exceeds (in the case of a call) or is
less than (in the case of a put) the exercise price of the option on the index
futures contract. If an option is exercised on the last trading day prior to the
expiration date of the option, the settlement will be made on the expiration
date entirely in cash based on the difference between the exercise price of the
option and the closing level of the index on which the futures contracts are
based. Purchasers of options who fail to exercise their options prior to
expiration suffer a loss of the premium paid.

As an alternative to purchasing and selling call and put options on index
futures contracts, the Fund may purchase and sell call and put options on the
underlying indices themselves to the extent that such options are traded on
national securities exchanges. Such options would be used in a manner identical
to the use of options on index futures contracts.

U.S. TREASURY SECURITY FUTURES CONTRACTS AND RELATED OPTIONS. The Fund may
purchase and sell futures contracts and related options on U.S. Treasury
securities when, in the opinion of Putnam, price movements in Treasury security
futures and related options will correlate closely with price movements of the
tax exempt securities which are the subject of a hedge. U.S. Treasury securities
futures contracts require the seller to deliver, or the purchaser to take
delivery of, the type of U.S. Treasury security called for in the contract at a
specified date and price. Options on U.S. Treasury security futures contracts
give the purchaser the right in return for the premium paid to assume a position
in a U.S. Treasury futures contract at the specified option exercise price at
any time during the period of the option.

SPECIAL RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS

HEDGING RISKS. There are several risks in connection with the use by the
Fund of futures contracts and options on such contracts as a hedging device. One
risk arises in connection with the use of index futures contracts and options
because of the imperfect correlation between movements in the prices of the
index futures contracts and movements in the prices of securities which are the
subject of a hedge. In addition, to the extent the credit quality, maturity, and
other characteristics of the securities making up a bond index vary from those
of the Fund's portfolio securities, the correlation between changes in the
values of such indices and changes in the values of the Fund's portfolio
securities will be limited. As a result, the Fund's hedging transactions based
on such indices may not achieve their intended purposes and may result in losses
to the Fund. Putnam will attempt to reduce these risks by purchasing and
selling, to the extent possible, futures contracts and options, the movements of
which will, in its judgment, correlate closely with movements in the prices of
the Fund's portfolio securities sought to be hedged.

Successful use of index futures contracts and related options by the Fund
for hedging purposes is also subject to Putnam's ability to predict correctly
movements in the direction of the market. For example, it is possible that,
where the Fund has sold futures to hedge its portfolio against a decline in the
market, the index

D-2
<PAGE> 86

on which the futures are written may advance and the value of securities held in
the Fund's portfolio may decline. If this occurred, the Fund would lose money on
its futures positions and also experience a decline in value in its portfolio
securities. In addition, the prices of index futures and related options may not
correlate perfectly with movements in the underlying index due to certain market
distortions. First, all participants in the futures market are subject to margin
deposit requirements. Such requirements may cause investors to close futures
contracts through offsetting transactions which could distort the normal
relationship between the index and futures markets. Second, the margin
requirements in the futures market are less onerous than margin requirements in
the securities market in general, and as a result the futures market may attract
more speculators than the securities market does. Increased participation by
speculators in the futures market may also cause temporary price distortions.
Due to the possibility of price distortion, even a correct forecast of general
market trends by Putnam may still not result in a successful hedging transaction
over a short time period. However, while this could occur to a certain degree,
Putnam believes that over time the value of the Fund's portfolio will tend to
move in the same direction as the market indices which are intended to correlate
with the price movements of such securities.

Similarly, successful use of U.S. Treasury security futures contracts or
options on U.S. Government securities by the Fund is subject to Putnam's ability
to predict correctly movements in the direction of interest rates and other
factors affecting markets for debt securities. For example, if the Fund has sold
U.S. Treasury security futures contracts or bought put options in order to hedge
against the possibility of an increase in interest rates which would adversely
affect tax exempt securities held in its portfolio, and the price of the Fund's
tax exempt securities increase instead as a result of a decline in interest
rates, the Fund will lose part or all of the benefit of the increased value of
its securities which it has hedged because it will have offsetting losses in its
futures or options positions. In addition, in such situations, if the Fund has
insufficient cash, it may have to sell securities to meet daily maintenance
margin requirements at a time when it may be disadvantageous to do so.

There is also a risk that price movements in U.S. Treasury security futures
contracts and options will not correlate closely with price movements in markets
for tax exempt securities. For example, if the Fund has hedged against a decline
in the values of tax exempt securities by selling Treasury security futures or
buying put options and the values of treasury securities subsequently increase
while values of tax exempt securities decrease, the Fund would incur losses on
both the Treasury security futures contracts written by it or put options bought
by it and on tax exempt securities held in its portfolio. Putnam will seek to
reduce this risk by monitoring movements in markets for U.S. Treasury security
futures and options and for tax exempt securities closely. The Fund will only
purchase or sell Treasury security futures or options when, in the opinion of
Putnam, price movements in Treasury security futures and options will correlate
closely with price movements in tax exempt securities.

Compared to the purchase or sale of futures contracts, the purchase of call
or put options on futures contracts or on U.S. Government securities involves
less potential risk to the Fund because the maximum amount at risk is the
premium paid for the options (plus transaction costs). However, there may be
circumstances when the purchase of a call or put option would result in a loss
to the Fund when the purchase or sale of a futures contract would not, such as
when there is no movement in the price of the underlying securities or index.
The writing of an option on a futures contract or security involves risks
similar to those risks relating to the sale of futures contracts.

There is no assurance that higher than anticipated trading activity or
other unforeseen events might not, at times, render certain market clearing
facilities inadequate, and thereby result in the institution by exchanges of
special procedures which may interfere with the timely execution of customer
orders.

The Fund's use of hedging strategies may result in a higher portfolio
turnover rate and additional brokerage costs.

LIQUIDITY RISKS. To reduce or eliminate a hedge position held by the Fund
(including for the purpose of taking a subsequent position in the same futures
contract), the Fund may seek to close out a position. Trading in certain futures
contracts and options began only recently. The ability to establish and close
out positions will be subject to the development and maintenance of a liquid
market. It is not certain that this market will

D-3
<PAGE> 87

develop or continue to exist. Reasons for the absence of a liquid market on an
exchange include the following: (i) there may be insufficient trading interest
in certain contracts or options; (ii) restrictions may be imposed by an exchange
on opening transactions or closing transactions or both; (iii) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of contracts or options, or underlying securities; (iv)
unusual or unforeseen circumstances may interrupt normal operations on an
exchange; (v) the facilities of an exchange or a clearing corporation may not at
all times be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of contracts or options (or a particular
class or series of contracts or options), in which event the market on that
exchange (or in the class or series of contracts or options) would cease to
exist, although outstanding contracts or options on the exchange that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms. If a trading market
were to become unavailable, the Fund could no longer engage in closing
transactions, and may be required to maintain a position in a hedging instrument
at a time when Putnam would otherwise have closed out the position. As a result,
the Fund may be unable to limit the amount of any loss resulting from its
positions in such an instrument.

REGULATORY MATTERS

The Fund will not enter into any transactions involving futures or related
options until it has received all necessary regulatory approvals, including from
the Commodity Futures Trading Commission. There can be no assurance that such
approvals will be obtained.

D-4
<PAGE> 88

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

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE FUND, PUTNAM OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY
OTHER THAN THE PREFERRED SHARES OFFERED BY THIS PROSPECTUS, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE PREFERRED
SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE
INFORMATION PROVIDED HEREIN IS CORRECT AT ANY TIME SUBSEQUENT TO THE DATE
HEREOF. HOWEVER, IF ANY MATERIAL CHANGE OCCURS WHILE THIS PROSPECTUS IS REQUIRED
BY LAW TO BE DELIVERED, THIS PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED
ACCORDINGLY.

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

<TABLE>
TABLE OF CONTENTS

<CAPTION>
PAGE
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<S> <C>
Prospectus Summary.......................... 3
The Fund.................................... 13
Investment Manager and Administrator........ 13
Use of Proceeds............................. 13
Capitalization.............................. 14
Portfolio Composition....................... 14
Investment Objective and Policies........... 14
Other Investment Practices.................. 21
Investment Restrictions..................... 23
Trustees and Officers....................... 24
Principal Holders of Securities............. 26
Investment Management Contract.............. 27
Administrative Services Contract............ 28
Portfolio Transactions...................... 28
Determination of Net Asset Value............ 30
Remarketing................................. 30
Description of Preferred Shares............. 39
Description of Common Shares................ 51
Taxation.................................... 52
Underwriting................................ 57
Custodian, Transfer Agent, Dividend
Disbursing Agent and Registrar............ 58
Legal Matters............................... 58
Experts..................................... 58
Additional Information...................... 58
Report of Independent Accountants........... 59
Financial Statements........................ 60
Glossary.................................... 64
Appendix A.................................. A-1
Appendix B.................................. B-1
Appendix C.................................. C-1
Appendix D.................................. D-1
</TABLE>

[LOGO]

$10,000,000

PUTNAM INVESTMENT
GRADE MUNICIPAL TRUST III

MUNICIPAL INCOME

PREFERRED SHARES

200 SHARES

LIQUIDATION PREFERENCE

$50,000 PER SHARE

------------------------
PROSPECTUS
------------------------

SMITH BARNEY SHEARSON INC.

FEBRUARY , 1994

- ------------------------------------------------------
------------------------------------------------------
- ------------------------------------------------------
------------------------------------------------------
<PAGE> 89

PART C

OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS

(1) Financial Statements: included in Parts A and B:

(a) Report of Independent Accountants -- November 11, 1993.

(b) Statement of Assets and Liabilities -- November 10, 1993.

Included in Part C: None.

The Selected Financial Information, Statement of Operations, Statement of
Changes in Net Assets, and Schedules II through VII, inclusive, are omitted
because the required information is included in the financial statements
included in Part A or B, or because the conditions requiring their filing do not
exist.

<TABLE>
(2) Exhibits

<S> <C> <C>
(a) -- Agreement and Declaration of Trust*
(b)(1) -- Bylaws*
(2) -- Form of Amendment No. 1 to Bylaws -- Filed herewith.
(c) -- Inapplicable
(d)(1) -- Portions of Agreement and Declaration of Trust Relating to
Shareholders' Rights*
(2) -- Portions of Bylaws Relating to Shareholders' Rights*
(3) -- Portions of Amendment No. 1 to By-laws Relating to
Shareholders' Rights -- Filed herewith.
(e)(1) -- Form of Terms and Conditions of Dividend Reinvestment Plan*
(2) -- Form of Dividend Reinvestment Plan Agency Agreement*
(f) -- Inapplicable
(g) -- Form of Management Contract*
(h)(1) -- Form of Underwriting Agreement -- Filed herewith.
(2) -- Form of Underwriting Agreement, as to the offering of the
Registrant's common shares of beneficial interest*
(i) -- Inapplicable
(j) -- Form of Custodian Contract*
(k)(1) -- Form of Investor Servicing Agreement*
(2) -- Form of Administrative Services Contract*
(3) -- Form of Paying Agent Agreement -- Filed herewith.
(4) -- Form of Remarketing Agreement -- Filed herewith.
(l) -- Opinion and Consent of Ropes & Gray -- To be filed by
amendment.
(m) -- Inapplicable
(n) -- Consent of Independent Accountants -- Filed herewith.
(o) -- Inapplicable
(p) -- Form of Initial Capital Agreement*
(q) -- Inapplicable

<FN>
- ---------------

* Incorporated by reference to the Registrant's Registration Statement on Form
N-2 under the Securities Act of 1933 and the Investment Company Act of 1940
(File Nos. 33-50455 and 811-07099).
</TABLE>

<PAGE> 90

ITEM 25. MARKETING ARRANGEMENTS

Reference is made to the Form of Underwriting Agreement for Registrant's
preferred shares of beneficial interest to be filed by amendment to this
Registration Statement.

<TABLE>
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

<S> <C>
Securities and Exchange Commission fee......................... $ 3,449
Rating Agency Fees............................................. $ 30,000
Printing....................................................... $ 38,000
Accounting fees and expenses................................... $ 3,000
Legal fees..................................................... $ 80,000
Blue Sky fees and expenses..................................... $ 15,000
Miscellaneous.................................................. $ 551
--------
Total..................................................... $170,000
--------
--------
</TABLE>

ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT

None.

ITEM 28. NUMBER OF RECORD HOLDERS OF SECURITIES

As of December 31, 1993, there were 406 holders of record of the
Registrant's common shares of beneficial interest.

ITEM 29. INDEMNIFICATION

Article VIII of the Registrant's Agreement and Declaration of Trust
provides as follows:

Section 1. The Trust shall indemnify each of its Trustees and officers
(including persons who serve at the Trust's request as directors, officers or
trustees of another organization in which the Trust has any interest as a
shareholder, creditor or otherwise) (hereinafter referred to as a "Covered
Person") against all liabilities and expenses, including but not limited to
amounts paid in satisfaction of judgments, in compromise or as fines and
penalties, and counsel fees reasonably incurred by any Covered Person in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, before any court or administrative or
legislative body, in which such Covered Person may be or may have been involved
as a party or otherwise or with which such Covered Person may be or may have
been threatened, while in office or thereafter, by reason of being or having
been such a Covered Person except with respect to any matter as to which such
Covered Person shall have been finally adjudicated in any such action, suit or
other proceeding (a) not to have acted in good faith in the reasonable belief
that such Covered Person's action was in the best interests of the Trust or (b)
to be liable to the Trust or its Shareholders by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of such Covered Person's office. Expenses, including counsel fees so
incurred by any such Covered Person (but excluding amounts paid in satisfaction
of judgments, in compromise or as fines or penalties), shall be paid from time
to time by the Trust in advance of the final disposition of any such action,
suit or proceeding upon receipt of an undertaking by or on behalf of such
Covered Person to repay amounts so paid to the Trust if it is ultimately
determined that indemnification of such expenses is not authorized under this
Article, provided, however, that either (a) such Covered Person shall have
provided appropriate security for such undertaking, (b) the Trust shall be
insured against losses arising from any such advance payments or (c) either a
majority of the disinterested Trustees acting on the matter (provided that a
majority of the disinterested Trustees then in office act on the matter), or
independent legal counsel in a written opinion, shall have determined, based
upon a review of readily available facts (as opposed to a full trial type
inquiry), that there is reason to believe that such Covered Person will be found
entitled to indemnification under this Article.

COMPROMISE PAYMENT

Section 2. As to any matter disposed of (whether by a compromise payment,
pursuant to a consent decree or otherwise) without an adjudication by a court,
or by any other body before which the proceeding was brought, that such Covered
Person either (a) did not act in good faith in the reasonable belief that his or
her

2
<PAGE> 91

action was in the best interests of the Trust or (b) is liable to the Trust or
its Shareholders by reason of willful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the conduct of his or her
office, indemnification shall be provided if (a) approved as in the best
interests of the Trust, after notice that it involves such indemnification, by
at least a majority of the disinterested Trustees acting on the matter (provided
that a majority of the disinterested Trustees then in office act on the matter)
upon a determination, based upon a review of readily available facts (as opposed
to a full trial type inquiry), that such Covered Person acted in good faith in
the reasonable belief that his or her action was in the best interests of the
Trust and is not liable to the Trust or its Shareholders by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office, or (b) there has been obtained an
opinion in writing of independent legal counsel, based upon a review of readily
available facts (as opposed to a full trial type inquiry), to the effect that
such Covered Person appears to have acted in good faith in the reasonable belief
that his or her action was in the best interests of the Trust and that such
indemnification would not protect such Covered Person against any liability to
the Trust to which he or she would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office. Any approval pursuant to this
Section shall not prevent the recovery from any Covered Person of any amount
paid to such Covered Person in accordance with this Section as indemnification
if such Covered Person is subsequently adjudicated by a court of competent
jurisdiction not to have acted in good faith in the reasonable belief that such
Covered Person's action was in the best interests of the Trust or to have been
liable to the Trust or its Shareholders by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of such Covered Person's office.

INDEMNIFICATION NOT EXCLUSIVE

Section 3. The right of indemnification hereby provided shall not be
exclusive of or affect any other rights to which such Covered Person may be
entitled. As used in this Article VIII, the term "Covered Person" shall include
such person's heirs, executors and administrators, and a "disinterested Trustee"
is a Trustee who is not an "interested person" of the Trust as defined in
Section 2(a)(19) of the 1940 Act (or who has been exempted from being an
"interested person" by any rule, regulation or order of the Securities and
Exchange Commission) and against whom none of such actions, suits or other
proceedings or another action, suit or other proceeding on the same or similar
grounds is then or has been pending. Nothing contained in this Article shall
affect any rights to indemnification to which personnel of the Trust, other than
Trustees or officers, and other persons may be entitled by contract or otherwise
under law, nor the power of the Trust to purchase and maintain liability
insurance on behalf of any such person.

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

Reference is made to the Underwriting Agreement, filed with this
Pre-Effective Amendment No. 1 to the Registration Statement, which contains
provisions for the indemnification by the Underwriters and Putnam Investment
Management, Inc. of the Registrant and Trustees, officers and controlling
persons of the Registrant under certain circumstances. Insofar as
indemnification for liability arising under the Securities Act of 1933 may be
permitted to Trustees, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a Trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

3
<PAGE> 92

<TABLE>
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER

Except as set forth below, the directors and officers of the Registrant's
investment adviser have been engaged during the past two fiscal years in no
business, vocation or employment of a substantial nature other than as directors
or officers of the investment adviser or certain of its corporate affiliates.
Certain officers of the investment adviser serve as officers of some or all of
the Putnam funds. The address of the investment adviser, its corporate
affiliates and the Putnam funds is One Post Office Square, Boston, Massachusetts
02109.

<CAPTION>
NAME NON-PUTNAM BUSINESS AND OTHER CONNECTIONS
---- ------------------------------------------
<S> <C>
Christopher J. Ainley.............. Prior to March, 1992, Vice President, J.P. Morgan
Vice President Investment Management, 522 Fifth Avenue, New York, NY
10021

Gail S. Attridge................... Prior to November, 1993, International Analyst, Keystone
Vice President Custodian Funds, 200 Berkley Street, Boston, MA 02116
Delores Snyder Bamford............. Prior to June, 1992, Research Associate, Fidelity
Assistant Vice President Investments, 82 Devonshire St., Boston, MA 02109
Charles L. Beach................... Prior to May, 1992, Senior Analyst, Dean Witter
Assistant Vice President Investment Banking, One Financial Center, Boston, MA
02110
Edward P. Bousa.................... Prior to October, 1992, Vice President and Portfolio
Senior Vice President Manager, Fidelity Investments, 82 Devonshire St.,
Boston, MA 02109
Kathleen M. Brant.................. Prior to June, 1992, Global Bond Trader, Fidelity
Vice President Investments, 82 Devonshire St., Boston, MA 02109
Leslie J. Burke.................... Prior to February, 1992, Research Associate, Fidelity
Assistant Vice President Investments, 82 Devonshire St., Boston, MA 02109
Peter Carman....................... Prior to August, 1993, Chief Investment Officer,
Senior Managing Director Chairman, U.S. Equity Investment Policy Committee,
Member of Board of Directors, Sanford C. Bernstein &
Co., Inc., 767 Fifth Avenue, New York, NY 10153
Anna Coppola....................... Prior to May, 1993, Associate, Heidrick & Struggles, One
Assistant Vice President Post Office Square, Boston, MA 02109
Kathleen Crews..................... Prior to February, 1993, Assistant Vice President,
Assistant Vice President Alliance Capital Management, L.P., 1345 Avenue of the
Americas, New York, NY 10105
Kenneth L. Daly.................... Prior to September, 1993, Vice President, Fidelity
Senior Vice President Investments, 82 Devonshire St., Boston, MA 02109
Richard B. England................. Prior to December, 1992, Investment Officer, Aetna
Vice President Equity Investors, 151 Farmington Avenue, Hartford, CT
06156
Jonathan H. Francis................ Prior to March, 1993, President, J.H. Francis & Co., N.
Assistant Vice President Pheasant Lane, Westport, CT 06880
Judy P. Frodigh.................... Prior to June, 1992, Manager, Human Resources,
Vice President Massachusetts Financial Services, Inc., 500 Boylston
St., Boston, MA 02110
James F. Giblin.................... Prior to April, 1993, Managing Director, CIGNA Corp.
Senior Vice President Investments, Inc., 900 Cottage Grove Rd., Bloomfield,
CT 06152
Thomas C. Goggins.................. Prior to June, 1993, Portfolio Manager, Transamerica
Vice President Investment Services, 1150 South Olive Street, Los
Angeles, CA 90015
Corey A. Griffin................... Prior to June, 1992, Vice President, Coldwell Banker
Assistant Vice President Commercial Real Estate Services, 70-80 Lincoln St.,
Boston, MA 02111
</TABLE>

4
<PAGE> 93

<TABLE>
<CAPTION>
NAME NON-PUTNAM BUSINESS AND OTHER CONNECTIONS
---- -----------------------------------------
<S> <C>
Daniel J. Grim..................... Prior to May, 1993, Consultant, Connie Lee, 2445 M
Vice President Street N.W., Washington, D.C. 20037; Chief Operating
Officer, Boardwalk, Inc., Minocqua, WI 54548
Billy P. Han..................... Prior to December, 1992, Vice President, Scudder,
Assistant Vice President Stevens & Clark, Inc., 160 Federal Street, Boston, MA
02110
Stephon A. Jackson............... Prior to December, 1992, Analyst, Arco Investment
Assistant Vice President Management Co., 515 South Flower Street, Los Angeles,
CA 91030
David J. Jallits................. Prior to August, 1992, Vice President, Citibank Corp.,
Vice President 55 Water Street, New York, NY 10043
Jeffrey L. Knight................ Prior to March, 1993, Teacher, Greater Newburyport
Vice President Educational Collaborative, Newburyport, MA 01950
Jeffrey J. Kobylarz.............. Prior to May, 1993, Credit Analyst, Dean Witter
Vice President Reynolds, Inc., Two World Trade Center, New York, NY
10048
Ami T. Kuan...................... Prior to June, 1992, Equity Analyst, Fidelity
Assistant Vice President Investments, 82 Devonshire St., Boston, MA 02109
Lawrence J. Lasser............... Director, Marsh & McLennan Companies, Inc., 1221 Avenue
President, Director and Chief of the Americas, New York, NY 10020
Executive Officer Director, INROADS/Central New England, Inc., 99 Bedford
St., Boston, MA 02111
Robert A. Madore................. Prior to October, 1992, Senior Vice President and
Vice President Portfolio Manager, Fiduciary Capital Management, Inc.,
51 Sherman Hill Rd., Woodbury, CT 06798
Frederick S. Marius.............. Prior to September, 1992, Associate Attorney at Skadden,
Assistant Vice President and Arps, Slate, Meagher & Flom, One Beacon St., Boston, MA
Associate Counsel 02109
Andrew S. Matteis................ Prior to March, 1993, Vice President, Fitch Investors
Vice President Service, One State Street Plaza, New York, NY 10004
Michael J. Mufson................ Prior to June, 1993, Senior Equity Analyst, Stein Roe &
Vice President Farnum, One South Wacker Drive, Chicago, IL 60606
Warren Naphtal................... Prior to January, 1994, Managing Director, Continental
Senior Vice President Bank, 231 So. Lasalle St., Chicago, IL 60697
Jeffrey W. Netols................ Prior to February, 1993, Portfolio Analyst, Associated
Senior Vice President Bank, 200 N. Adams, Green Bay, WI 54307
Brian O'Keefe.................... Prior to December, 1993, Vice President -- Foreign
Vice President Exchange Trader, Bank of Boston, 100 Federal Street,
Boston, MA 02109
Pat G. Patel..................... Prior to April, 1993, Regional Manager, Zacks Investment
Assistant Vice President Research, 155 N. Wacker Drive, Chicago, IL 60606
</TABLE>

5
<PAGE> 94

<TABLE>
<CAPTION>
NAME NON-PUTNAM BUSINESS AND OTHER CONNECTIONS
---- -----------------------------------------
<S> <C>
George Putnam...................... Chairman and Director, Putnam Mutual
Chairman and Director Funds Corp.
Director, The Boston Company, Inc., One Boston Place,
Boston, MA 02108
Director, Boston Safe Deposit and Trust Company, One
Boston Place, Boston, MA 02108
Director, Freeport-McMoRan, Inc., 200 Park Avenue, New
York, NY 10166
Director, General Mills, Inc., 9200 Wayzata Boulevard,
Minneapolis, MN 55440
Director, Houghton Mifflin Company, One Beacon Street,
Boston, MA 02108
Director, Marsh & McLennan Companies, Inc., 1221 Avenue
of the Americas, New York, NY 10020
Director, Rockefeller Group, Inc., 1230 Avenue of the
Americas, New York, NY 10020
Christopher A. Ray............... Prior to January, 1993, Vice President and Portfolio
Vice President Manager at Scudder, Stevens & Clark, Inc., 160 Federal
Street, Boston, MA 02110
Charles A. Ruys de Perez......... Prior to August, 1992, Associate, Debevoise and
Vice President and Senior Plimpton, 875 Third Ave., New York, NY 19022
Counsel
Mark J. Siegel................... Prior to June, 1993, Vice President, Salomon Brothers
Vice President International, Ltd., Victoria Plaza, 111 Buckingham
Palace Road, London SW1W OSB, England
Joanne Soja...................... Prior to June, 1993, Managing Director/Portfolio
Senior Vice President Manager, Chancellor Capital Management, 153 East 53rd
Street, New York, NY 10002
Harlan R. Sonderling............. Prior to March, 1992, Vice President, Mutual of America
Vice President Life Insurance Company, 666 Fifth Avenue, New York, NY
10103
Douglas T. Terreson.............. Prior to October, 1992, Investment Analyst, Sunbank
Vice President Capital Management, 200 South Orange Avenue, Orlando, FL
32802
Bonnie L. Troped................. Prior to May, 1993, Assistant Vice President/Director of
Vice President Corporate Events, The Boston Company, One Boston
Place, Boston, MA 02108
F. Mark Turner................... Prior to November, 1992, Managing Director, Scudder
Managing Director Stevens & Clark, 160 Federal St., Boston, MA 02110
Thomas M. Turpin................. Prior to March, 1993, Vice President, The Boston
Senior Vice President Company, One Boston Place, Boston, MA 02108
John D. Weber.................... Prior to June, 1992, Associate, Citicorp Venture
Assistant Vice President Capital, Ltd. 399 Park Avenue, New York, NY 10043
</TABLE>

ITEM 31. LOCATION OF ACCOUNTS AND RECORDS

Persons maintaining physical possession of accounts, books and other
documents required to be maintained by Section 31(a) of the Investment Company
Act of 1940 and the Rules promulgated thereunder are Registrant's Clerk, Beverly
Marcus; Registrant's investment adviser, Putnam Investment Management, Inc.;
Registrant's transfer agent, dividend disbursing agent and registrar, Putnam
Investor Services; and Registrant's custodian, Putnam Fiduciary Trust Company.
The address of the Clerk, investment adviser and custodian is One Post Office
Square, Boston, Massachusetts 02109. The address of the transfer and dividend
disbursing agent is P.O. Box 41201, Providence, RI 02940-1203.

6
<PAGE> 95

ITEM 32. MANAGEMENT SERVICES

None.

ITEM 33. UNDERTAKINGS

(1) The Registrant undertakes to suspend offering of its shares until it
amends its prospectus if (1) subsequent to the effective date of its
Registration Statement, the net asset value declines more than 10 percent from
its net asset value as of the effective date of the Registration Statement or
(2) the net asset value increases to an amount greater than its net proceeds as
stated in the prospectus.

(2) Inapplicable.

(3) Inapplicable.

(4) Inapplicable.

(5) The undersigned registrant hereby undertakes that:

(a) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of a registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of the
registration statement as of the time it was declared effective.

(b) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

(6) Inapplicable.

(7) At such time as the Registrant determines to make a tender or
repurchase offer or to propose conversion of the Registrant to open-end status,
the Registrant will provide to shareholders a notice thereof containing all of
the information specified by Guide 2 or Guide 4 to Form N-2, as the case may be.

7
<PAGE> 96

NOTICE

A copy of the Agreement and Declaration of Trust of Putnam Investment Grade
Municipal Trust III is on file with the Secretary of State of The Commonwealth
of Massachusetts and notice is hereby given that this instrument is executed on
behalf of the Registrant by an officer of the Registrant as an officer and not
individually and that the obligations of or arising out of this instrument are
not binding upon any of the Trustees, officers or shareholders individually but
are binding only upon the assets and property of the Registrant.

8
<PAGE> 97

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on behalf of the undersigned, thereunto duly authorized,
in the City of Boston, and The Commonwealth of Massachusetts, on the 24th day of
January, 1994.

PUTNAM INVESTMENT GRADE
MUNICIPAL TRUST III

By: /S/ CHARLES E. PORTER
------------------------------------
Name: Charles E. Porter
Title: Executive Vice President

<TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on the 24th day of January, 1994.

<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* President and Chairman of the
.......................................... Board; Principal Executive
GEORGE PUTNAM Officer; Trustee

* Trustee; Vice Chairman
..........................................
WILLIAM F. POUNDS
* Treasurer and Principal
.......................................... Financial Officer
JOHN D. HUGHES
* Assistant Treasurer and
.......................................... Principal Accounting Officer
PAUL BUCUVALAS
* Trustee
..........................................
JAMESON ADKINS BAXTER
* Trustee
..........................................
HANS H. ESTIN
* Trustee
..........................................
JOHN A. HILL
* Trustee
..........................................
ELIZABETH T. KENNAN
</TABLE>

9
<PAGE> 98

<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Trustee
..........................................
LAWRENCE J. LASSER
* Trustee
..........................................
ROBERT E. PATTERSON
* Trustee
..........................................
DONALD S. PERKINS
* Trustee
..........................................
GEORGE PUTNAM, III
* Trustee
..........................................
A.J.C. SMITH
* Trustee
..........................................
W. NICHOLAS THORNDIKE

/S/ CHARLES E. PORTER
*By:......................................
CHARLES E. PORTER
ATTORNEY-IN-FACT
</TABLE>

10
<PAGE> 99
<TABLE>

POWER OF ATTORNEY

I, the undersigned Trustee of Putnam Investment Grade Municipal Trust III,
hereby severally constitute and appoint George Putnam, Charles E. Porter, Gordon
H. Silver, Edward A. Benjamin, Timothy W. Diggins and John W. Gerstmayr, and
each of them singly, my true and lawful attorneys, with full power to them and
each of them, to sign for me, and in my name and in the capacities indicated
below, the Registration Statement on Form N-2 of Putnam Investment Grade
Municipal Trust III and any and all amendments (including post-effective
amendments) to said Registration Statement and to file the same with all
exhibits thereto, and other documents in connection thereunder, with the
Securities and Exchange Commission, granting unto my said attorneys, and each of
them acting alone, full power and authority to do and perform each and every act
and thing requisite or necessary to be done in the premises, as fully to all
intents and purposes as he or she might or could do in person, and hereby ratify
and confirm all that said attorneys or any of them may lawfully do or cause to
be done by virtue thereof.

WITNESS my hand and common seal on the date set forth below.

<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JAMESON A. BAXTER
----------------------------------- Trustee January 24, 1994
JAMESON A. BAXTER
</TABLE>

11
<PAGE> 100
<TABLE>

POWER OF ATTORNEY

WITNESS my hand and common seal on the date set forth below.

<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ GEORGE PUTNAM, III Trustee October 7, 1993
-------------------------------------
GEORGE PUTNAM, III
</TABLE>

12
<PAGE> 101
<TABLE>

POWER OF ATTORNEY

WITNESS my hand and common seal on the date set forth below.

<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ A.J.C. SMITH Trustee January 24, 1994
-------------------------------------
A.J.C. SMITH
</TABLE>

13
<PAGE> 102
<TABLE>

EXHIBIT INDEX

<CAPTION>
EXHIBIT DESCRIPTION PAGE
- ------- ----------- ----
<C> <S> <C> <C>
(b)(2) -- Form of Amendment No. 1 to By-Laws
(d)(3) -- Portions of Amendment No. 1 to By-Laws Relating to
Shareholders' Rights
(h)(1) -- Form of Underwriting Agreement
(n) -- Consent of Independent Accountants
(k)(3) -- Form of Paying Agent Agreement
(4) -- Form of Remarketing Agreement
</TABLE>

<PAGE> 1
Exhibit 99(b)(2)

PUTNAM INVESTMENT GRADE MUNICIPAL TRUST III

AMENDMENT NO. 1 TO BYLAWS
<PAGE> 2
PUTNAM INVESTMENT GRADE MUNICIPAL TRUST III
AMENDMENT NO. 1 TO BYLAWS

<TABLE>
TABLE OF CONTENTS

<S> <C> <C>
PART I
DESIGNATION
1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2. Fractional Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
3. Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
4. Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
5. Liquidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
6. Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
7. 1940 Act Preferred Shares Asset Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
8. Preferred Shares Basic Maintenance Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
9. Minimum Liquidity Level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
10. Restrictions on Certain Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
11. Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
12. Futures and Options Transactions; Forward Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
13. Certain Other Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
14. Legally Available Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

PART II
REMARKETING PROCEDURES
1. Remarketing Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
2. Procedure for Tendering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
3. Determination of Applicable Dividend Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
4. Allocation of Shares; Failure to Remarket at $50,000 Per Share . . . . . . . . . . . . . . . . . . . . . . . . . 99
5. Notification of Results; Settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
6. Purchase of Preferred Shares by Remarketing Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
7. Applicable Dividend Rate During a Non-Payment Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
8. Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
9. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
10. Securities Depository; Shares Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
</TABLE>
<PAGE> 3

PUTNAM INVESTMENT GRADE MUNICIPAL TRUST III

Amendment No. 1 to By-laws -- Statement
creating Municipal Income Preferred Shares

WHEREAS, Section 1 of Article III of the Agreement and Declaration of
Trust dated September 23, 1993 of Putnam Investment Grade Municipal Trust III
(the "Declaration of Trust"), a copy of which is on file in the Office of the
Secretary of State of The Commonwealth of Massachusetts, provides that the
Trustees may, without shareholder approval, authorize one or more classes of
shares (which classes may be divided into two or more series), shares of each
such class or series having such preferences, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
redemption, as the Trustees may determine and as shall be set forth in the
By-laws; and
WHEREAS, pursuant to authority expressly vested in the Trustees of the
Trust by Section 1 of Article III of the Declaration of Trust, the Trustees
have authorized, in addition to the Trust's common shares, a class of 6,000
preferred shares of which 200 shares are now to be issued in one series of its
authorized preferred shares, without par value, liquidation preference $50,000
per share plus accumulated but unpaid

-1-
<PAGE> 4
dividends thereon, if any (whether or not earned or declared), designated
Municipal Income Preferred Shares.
NOW, THEREFORE, the By-laws of Putnam Investment Grade Municipal Trust
III are hereby amended as follows:
1. ARTICLE 12 shall be redesignated as ARTICLE 13.
2. A new ARTICLE 12 shall be added as follows:

-2-
<PAGE> 5
ARTICLE 12
Shares of Beneficial Interest
12. The Trust has an unlimited number of Common Shares, without par value,
which may be issued from time to time by the Trustees of the Trust.
12.1 Statement Creating Municipal Income Preferred Shares.
PART I
DESIGNATION
MUNICIPAL INCOME PREFERRED SHARES: A class of 200 shares of preferred
shares, without par value, liquidation preference $50,000 per share plus
accumulated but unpaid dividends, if any, thereon (whether or not earned or
declared), is hereby designated "Municipal Income Preferred Shares." Each
Preferred Share shall be issued on a date to be determined by the Trustees, by
any duly authorized committee thereof or by any of the President, the Vice
Chairman, any Executive Vice President or the Treasurer of the Trust; have such
initial dividend rate as shall be determined in advance of the issuance thereof
by the Trustees, by any duly authorized committee thereof or by any of the
President, the Vice Chairman, any Executive Vice President or the Treasurer of
the Trust; have an Initial Dividend Period and an Initial Dividend Payment Date
to be determined by the Trustees of the Trust, by a duly authorized committee
thereof or by any of the President, the Vice Chairman, any Executive Vice
President or the Treasurer of the Trust; be redeemed (unless such share shall
have been otherwise redeemed pursuant to paragraph 4 of Part I of this

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<PAGE> 6
Section 12.1 by the Trust on a date to be determined by the Trustees of the
Trust) at the option of the Trust at a redemption price of $50,000 per share
plus accumulated but unpaid dividends to the date fixed for redemption (whether
or not earned or declared) plus the premium, if any, resulting from the
designation of a Premium Call Period; and have such other preferences,
limitations and relative voting rights, in addition to those required by
applicable law or set forth in the Trust's Declaration of Trust applicable to
preferred shares of the Trust, as are set forth in Part I and Part II of this
Section 12.1.
1. Definitions. Unless the context or use indicates another or
different meaning or intent, in this Section 12.1 the following terms have the
following meanings, whether used in the singular or plural:
"'AA' Composite Commercial Paper Rate," on any date of determination,
means (i) the Interest Equivalent of the rate on commercial paper placed on
behalf of issuers whose corporate bonds are rated "AA" by S&P or "Aa" by
Moody's or the equivalent of such rating by another nationally recognized
rating agency, as such rate is made available on a discount basis or otherwise
by the Federal Reserve Bank of New York for the Business Day immediately
preceding such date, or (ii) in the event that the

-4-
<PAGE> 7
Federal Reserve Bank of New York does not make available such a rate, then the
arithmetic average of the Interest Equivalent of the rate on commercial paper
placed on behalf of such issuers, as quoted on a discount basis or otherwise by
the Commercial Paper Dealers to the Remarketing Agent for the close of business
on the Business Day immediately preceding such date. If one of the Commercial
Paper Dealers does not quote a rate required to determine the "AA" Composite
Commercial Paper Rate, the "AA" Composite Commercial Paper Rate will be
determined on the basis of the quotation or quotations furnished by any
Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers
selected by the Trust to provide such rate or rates not being supplied by the
Commercial Paper Dealer. If the number of Dividend Period days (in each case
determined without regard to any adjustment in the length of a Dividend Period
or in the remarketing schedule in respect of non-Business Days, as provided
herein) shall be (i) 7 or more days but fewer than 49 days, such rate shall be
the Interest Equivalent of the 30-day rate on such commercial paper; (ii) 49 or
more days but fewer than 70 days, such rate shall be the Interest Equivalent of
the 60-day rate on such commercial paper; (iii) 70 or more days but fewer than
85 days, such rate shall be the arithmetic average of the Interest Equivalent
of the 60-day and 90-day rates on such commercial paper; (iv) 85 or more days
but fewer than 99 days, such rate shall be the Interest Equivalent of the
90-day rate on such commercial paper; (v) 99 or more days but fewer than 120
days,

-5-
<PAGE> 8
such rate shall be the arithmetic average of the Interest Equivalent of the
90-day and 120-day rates on such commercial paper; (vi) 120 or more days but
fewer than 141 days, such rate shall be the Interest Equivalent of the 120-day
rate on such commercial paper; (vii) 141 or more days but fewer than 162 days,
such rate shall be the arithmetic average of the Interest Equivalent of the
120-day and 180-day rates on such commercial paper; and (viii) 162 or more days
but fewer than 183 days, such rate shall be the Interest Equivalent of the
180-day rate on such commercial paper.
"Accountant's Confirmation" has the meaning set forth in paragraph
8(g) of this Part I.
"Additional Dividend" has the meaning set forth in paragraph 3(k) of
this Part I.
"Adviser" means the Trust's investment manager which is Putnam
Investment Management, Inc.
"Agent Member" means a member of the Securities Depository that will
maintain records for a Beneficial Owner of one or more Preferred Shares.
"Alternate Treasury Bill Rate" has the meaning set forth under "U.S.
Treasury Bill Rate" below.
"Alternate Treasury Note Rate" has the meaning set forth under "U.S.
Treasury Note Rate" below.
"Anticipation Notes" shall mean the following Municipal Bonds:
revenue anticipation notes, tax anticipation notes, tax

-6-
<PAGE> 9
and revenue anticipation notes, grant anticipation notes and bond anticipation
notes.
"Applicable Dividend Rate" means, with respect to the Initial Dividend
Period, the rate of dividends per annum established by the Trustees, by a duly
authorized committee thereof or by any of the President, the Vice Chairman, any
Executive Vice President or the Treasurer of the Trust and, for each subsequent
Dividend Period, means the rate of dividend per annum that (i) except for a
Dividend Period commencing during a Non-Payment Period, will be equal to the
lower of the rate of dividend per annum that the Remarketing Agent advises
results on the Remarketing Date immediately preceding the first day of such
Dividend Period from implementation of the remarketing procedures set forth in
Part II hereof and the Maximum Dividend Rate or (ii) for each Dividend Period
commencing during a Non-Payment Period, will be equal to the Non-Payment Period
Rate.
"Applicable Percentage" has the meaning set forth under "Maximum
Dividend Rate" below.
"Authorized Newspaper" means a newspaper of general circulation in the
English language generally published on Business Days in The City of New York.
"Beneficial Owner" means a person that is listed as the beneficial
owner of one or more Preferred Shares in the records of the Paying Agent or,
with respect to any Preferred Share not registered in the name of the
Securities Depository on the share

-7-
<PAGE> 10
transfer books of the Trust, the person in whose name such share is so
registered.
"Business Day" means a day on which the New York Stock Exchange, Inc.
is open for trading, and which is not a day on which banks in The City of New
York are authorized or obligated by law to close.
"By-laws" means these By-laws of the Trust, as amended from time to
time.
"Certificate of Minimum Liquidity" has the meaning set forth in
paragraph 9(b) of this Part I.
"Closing Transactions" has the meaning set forth in paragraph 12(a) of
this Part I.
"Code" means the Internal Revenue Code of 1986, as amended from time
to time.
"Commercial Paper Dealers" means Smith Barney Shearson Inc. and such
other commercial paper dealer or dealers as the Trust may from time to time
appoint, or, in lieu of any thereof, their respective affiliates or successors.
"Common Shares" means the common shares of beneficial interest,
without par value, of the Trust.
"Date of Original Issue" means, with respect to any Preferred Share or
Other Preferred Shares, the date on which the Trust originally issues such
share.
"Declaration of Trust" means the Agreement and Declaration of Trust
dated September 23, 1993 of the Trust on file with the Secretary of State of
The Commonwealth of Massachusetts.

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<PAGE> 11
"Deposit Securities" means cash and Municipal Bonds rated at least
AAA, A-1+ or SP-1+ by S&P.
"Discounted Value" means (i) with respect to an S&P Eligible Asset,
the quotient of the Market Value thereof divided by the applicable S&P Discount
Factor and (ii) with respect to a Moody's Eligible Asset, the lower of par and
the quotient of the Market Value thereof divided by the applicable Moody's
Discount Factor.
"Dividend Coverage Amount," as of any Valuation Date, means (A)(i) the
aggregate amount of cash dividends that will accumulate on all Preferred Shares
and Other Preferred Shares, in each case to (but not including) the Business
Day following the first Dividend Payment Date for Preferred Shares that follows
such Valuation Date plus (ii) the aggregate amount of all liabilities existing
on such Valuation Date which are payable on or prior to the Business Day
following such first Dividend Payment Date less (B) the sum of (i) the combined
Market Value of Deposit Securities irrevocably deposited with the Paying Agent
for the payment of cash dividends on all Preferred Shares and Other Preferred
Shares, (ii) the value of Receivables for Municipal Bonds Sold as of or prior
to such Valuation Date, if such receivables are due within five Business Days
of such Valuation Date and in any event on or prior to such Dividend Payment
Date, and (iii) interest on Municipal Bonds owned by the Trust which is
scheduled to be paid on or prior to such Dividend Payment Date.

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<PAGE> 12
"Dividend Coverage Assets," as of any Valuation Date, means Deposit
Securities with maturity or tender payment dates not later than the day
preceding the Business Day following the first Dividend Payment Date for
Preferred Shares that follows such Valuation Date.
"Dividend Payment Date," with respect to Preferred Shares, means, (i)
with respect to the Initial Dividend Period for Preferred Shares, each Initial
Dividend Payment Date; (ii) with respect to any 28-day Dividend Period and any
Short Term Dividend Period of 35 or fewer days, the day next succeeding the
last day thereof; and (iii) with respect to any Short Term Dividend Period of
more than 35 days and with respect to any Long Term Dividend Period, the first
Business Day of each calendar month during such Short Term Dividend Period or
Long Term Dividend Period and the day next succeeding the last day of such
period (each such date referred to in clause (i), (ii) or (iii) being herein
referred to as a "Normal Dividend Payment Date"), except that if such Normal
Dividend Payment Date is not a Business Day, then (a) the Dividend Payment Date
shall be the first Business Day next succeeding such Normal Dividend Payment
Date if such Normal Dividend Payment Date is a Monday, Tuesday, Wednesday or
Thursday, or (b) the Dividend Payment Date shall be the first Business Day next
preceding such Normal Dividend Payment Date if such Normal Dividend Payment
Date is a Friday, and in each case the length of the current Dividend Period
will be adjusted accordingly, if necessary. If, however, in the case of clause

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<PAGE> 13
(b) in the preceding sentence, the Securities Depository shall make available
to its participants and members in funds immediately available in New York City
on Dividend Payment Dates the amount due as dividends on such Dividend Payment
Dates (and the Securities Depository shall have so advised the Trust), and if
the Normal Dividend Payment Date is not a Business Day, then the Dividend
Payment Date shall be the next succeeding Business Day and the length of the
current Dividend Period will be adjusted accordingly, if necessary. Although
any particular Dividend Payment Date may not occur on the originally scheduled
date because of the exceptions discussed above, the next succeeding Dividend
Payment Date, subject to such exceptions, will occur on the next following
originally scheduled date. If for any reason a Dividend Payment Date cannot be
fixed as described above, then the Trustees shall fix the Dividend Payment Date
and the length of the current Dividend Period will be adjusted accordingly, if
necessary. The Initial Dividend Period, 28-day Dividend Periods and Special
Dividend Periods are hereinafter sometimes referred to as "Dividend Periods."
Each dividend payment date determined as provided above is hereinafter referred
to as a "Dividend Payment Date."
"Dividend Period" means with respect to any Preferred Share, the
Initial Dividend Period for such share and thereafter a period which shall
commence on each (but not the final) Dividend Payment Date for such share;
provided, however, that any Dividend Payment Date occurring after commencement
of and during a Special

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<PAGE> 14
Dividend Period of more than 35 days, other than the last Dividend Payment Date
during such Dividend Period, will not give rise to a new Dividend Period.
Subject to the adjustment of Dividend Payment Dates as provided elsewhere
herein, each such subsequent Dividend Period for such share will be comprised
of, beginning with and including the day upon which it commences, 28
consecutive days; or in the case of a Special Dividend Period, the number of
consecutive days as shall be specified by the Trustees in accordance with the
provisions set forth in paragraph 3(j) of this Part I at the time the Trustees
designate a Special Dividend Period. Notwithstanding the foregoing, any
adjustment of the remarketing schedule or the length of a Dividend Period as
provided herein shall also cause an adjustment of the relevant Settlement Date,
if necessary, so that such Settlement Date will be the first day of the next
Dividend Period.
"First Initial Dividend Payment Date" means ____________.
"Forward Commitments" shall have the meaning specified in paragraph
12(c) of this Part I.
"Gross-Up Tax Rate" has the meaning set forth in paragraph 3(k) of
this Part I.
"Holder" means, with respect to any Preferred Share, the person whose
name appears on the share transfer books of the Trust as the registered holder
of such share.
"Independent Accountant" means a nationally recognized accountant, or
firm of accountants, that is, with respect to the

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<PAGE> 15
Trust, an independent public accountant or firm of independent public
accountants under the Securities Act of 1933, as amended.
"Initial Dividend Payment Date" means each of the First Initial
Dividend Payment Date, the Last Initial Dividend Payment Date and the first day
of each calendar month during the Initial Dividend Period.
"Initial Dividend Period" means, with respect to a Preferred Share,
the period commencing on and including the Date of Original Issue of such share
and ending on and including the day prior to the Last Initial Dividend Payment
Date.
"Initial Margin" means the amount of cash or securities deposited with
a broker as a margin payment at the time of purchase or sale of a futures
contract or an option thereon.
"Interest Equivalent" means a yield on a 360-day basis of a discount
basis security which is equal to the yield on an equivalent interest-bearing
security.
"Kenny Index" has the meaning set forth under "Taxable Equivalent of
the Short-Term Municipal Bond Rate."
"Last Initial Dividend Payment Date" means _____________.
"Long Term Dividend Period" means a Special Dividend Period consisting
of a specified period of one whole year or more but not greater than five
years.
"Mandatory Redemption Price" means $50,000 per Preferred Share plus an
amount equal to accumulated but unpaid dividends (whether or not earned or
declared) to the date fixed for redemption.

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<PAGE> 16
"Marginal Tax Rate" means the maximum marginal regular Federal
individual income tax rate applicable to ordinary income (including any surtax
but without regard to any phase-out of personal exemptions on any limitation on
itemized deductions) or the maximum marginal regular Federal corporate income
tax rate (without regard to the phase-out of graduated rates), whichever is
greater.
"Market Value" of any asset of the Trust means the market value
thereof determined by the Pricing Service. The Market Value of any asset shall
include any interest accrued thereon. The Pricing Service shall value
portfolio securities at the mean between the quoted bid and asked price or the
yield equivalent when quotations are readily available. Securities for which
quotations are not readily available shall be valued at fair value as
determined by the Pricing Service using methods which include consideration of
yields or prices of municipal bonds of comparable quality, type of issue,
coupon, maturity and rating; indications as to value from dealers; and general
market conditions. The Pricing Service may employ electronic data processing
techniques and/or a matrix system to determine valuations. In the event the
Pricing Service is unable to value a security, the security shall be valued at
the lower of two dealer bids obtained by the Trust from dealers who are members
of the National Association of Securities Dealers, Inc. and make a market in
the security, at least one of which shall be in writing. Futures contracts and
options are valued at closing

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<PAGE> 17
prices for such instruments established by the exchange or board of trade on
which they are traded, or if market quotations are not readily available, are
valued at fair value on a consistent basis using methods determined in good
faith by the Trustees.

<TABLE>

"Maximum Dividend Rate" for any Dividend Period shall be the
Applicable Percentage of the Reference Rate determined as of the relevant
Remarketing Date or the Date of Original Issue, as the case may be. The
Applicable Percentage on any date will be determined based on the lower of the
credit rating or ratings assigned on such date to Preferred Shares by Moody's
and S&P (or if Moody's or S&P or both shall not make such rating available, the
equivalent of either or both of such ratings by a Substitute Rating Agency or
two Substitute Rating Agencies or, in the event that only one such rating shall
be available, such rating) as follows:
<CAPTION>
Applicable
Percentage of
Credit Ratings Reference
- ---------------------------------- Rate -
Moody's S & P No Notification
- ---------------- -------------- ---------------
<S> <C> <C>
"aa3" or higher AA- or higher 110%
"a3" to "a1" A- to A+ 125%
"baa3" to "baa1" BBB- to BBB+ 150%
"ba3" to "ba1" BB- to BB+ 200%
Below "baa3" Below BBB- 250%
</TABLE>
provided, however, that in the event the Trust has notified the Paying Agent
and the Remarketing Agent of its intent to allocate income taxable for federal
income tax purposes to the Preferred Shares prior to the Remarketing Agent
establishing the Applicable Dividend Rate for such shares, the applicable
percentage in the foregoing table shall be divided by the quantity 1 minus the

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<PAGE> 18
Gross-Up Tax Rate. If the ratings for the Preferred Shares are split between
two of the foregoing credit rating categories, the lower rating will determine
the prevailing rating.
The Remarketing Agent shall round each applicable Maximum Dividend
Rate to the nearest one-thousandth (0.001) of one percent per annum, with any
such number ending in five ten-thousandths (0.0005) of one percent being
rounded upwards to the nearest one-thousandth (0.001) of one percent. The
Remarketing Agent shall not round the Reference Rate as part of its calculation
of any Maximum Dividend Rate.
"Maximum Potential Additional Dividend Liability," as of any Valuation
Date, means the aggregate amount of Additional Dividends that would be payable
with respect to the Preferred Shares if the Trust were to make Retroactive
Taxable Allocations, with respect to any fiscal year, estimated based upon
dividends paid and the amount of undistributed realized net capital gain and
other income subject to regular Federal income tax earned by the Trust, as of
the end of the calendar month immediately preceding such Valuation Date and
assuming such Additional Dividends are fully taxable.
"Minimum Liquidity Level" means, as of any Valuation Date, an
aggregate Market Value of Dividend Coverage Assets not less than the Dividend
Coverage Amount.
"Moody's" means Moody's Investors Service, Inc. or its successors.

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<PAGE> 19

<TABLE>

"Moody's Discount Factor" means, for purposes of determining the
Discounted Value of any Municipal Bond which constitutes a Moody's Eligible
Asset, the percentage determined by reference to (a) the rating by Moody's or
S&P on such Bond and (b) the Moody's Exposure Period, in accordance with the
table set forth below:
<CAPTION>
Rating Category
------------------------------------------------------------------------
Moody's Exposure Period Aaa(1) Aa(1) A(1) Baa(1) Other(2) VMIG-1(1),(3) SP-1(4)
- ----------------------- ------ ----- ---- ------ -------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
7 weeks or less . . . . . . . . . . . . . . . . . . . . 151% 159% 168% 202% 229% 136% 148%
8 weeks or less but
greater than 7 weeks . . . . . . . . . . . . . . . . . 154 164 173 205 235 137 149
9 weeks or less but
greater than 8 weeks . . . . . . . . . . . . . . . . . 158 169 179 209 242 138 150
- ---------------
<FN>
(1) Moody's rating.
(2) Municipal Bonds not rated by Moody's but rated BBB-, BBB or BBB+ by
S&P.
(3) Municipal Bonds rated MIG-1, VMIG-1 or P-1 by Moody's which do not
mature or have a demand feature at par exercisable within the Moody's
Exposure Period and which do not have a long-term rating. For the
purpose of the definition of Moody's Eligible Assets, these securities
will have an assumed rating of 'A' by Moody's.
(4) Municipal Bonds rated SP-1+ or A-1+ by S&P which do not mature or have
a demand feature at par exercisable within the Moody's Exposure Period
and which do not have a long-term rating. For the purposes of the
definition of Moody's Eligible Assets, these securities will have an
assumed rating of 'A' by Moody's.

</TABLE>

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<PAGE> 20
"Receivables for Municipal Bonds Sold," for purposes of calculating Moody's
Eligible Assets as of any Valuation Date, means the aggregate of the following:
(i) the book value of receivables for Municipal Bonds sold as of or prior to
such Valuation Date if such receivables are due within five Business Days of
such Valuation Date, and if the trades which generated such receivables are (x)
settled through clearing house firms with respect to which the Trust has
received prior written authorization from Moody's or (y) with counterparties
having a Moody's long-term debt rating of at least Baa3; and (ii) the
Discounted Value of Municipal Bonds sold (applying the relevant Moody's
Discount Factor to such Bonds) as of or prior to such Valuation Date which
generated such receivables, if such receivables are due within five Business
Days of such Valuation Date but do not comply with either of conditions (x) or
(y) of the preceding clause (i).
"Moody's Eligible Asset" means cash, Receivables for Municipal Bonds
Sold, a short-term Municipal Bond rated VMIG-1, MIG-1 or P-1 by Moody's or
SP-1+ or A-1+ by S&P or a Municipal Bond that (i) pays interest in cash; (ii)
is publicly rated Baa or higher by Moody's or, if not rated by Moody's but
rated by S&P, is rated at least BBB- by S&P (provided that, for purposes of
determining the Moody's Discount Factor applicable to any such S&P-rated
Municipal Bond, such Municipal Bond (excluding any short-term Municipal Bond
and any Municipal Bond rated BBB-, BBB or BBB+) will be deemed to have a
Moody's rating which is one

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<PAGE> 21
full rating category lower than its S&P rating); (iii) does not have its
Moody's rating suspended by Moody's; and (iv) is part of an issue of Municipal
Bonds of at least $10,000,000. In addition, Municipal Bonds in the Trust's
portfolio will be included as Moody's Eligible Assets only to the extent they
meet the following diversification requirements:
<TABLE>
<CAPTION>
Minimum Maximum Maximum State
Issue Size Underlying or Territory
Rating ($ Millions) Obligor (%)(1) Concentration(%)(1)(3)
- ------ ------------ -------------- ----------------------
<S> <C> <C> <C>
Aaa . . . . . . . . . . . . . . . . . . . . 10 100 100
Aa . . . . . . . . . . . . . . . . . . . . 10 20 60
A . . . . . . . . . . . . . . . . . . . . . 10 10 40
Baa . . . . . . . . . . . . . . . . . . . . 10 6 20
Other(2) . . . . . . . . . . . . . . . . . 10 4 12
- ----------------------
</TABLE>
(1) The referenced percentages represent maximum cumulative totals for the
related rating category and each lower rating category.
(2) Municipal Bonds not rated by Moody's but rated BBB-, BBB or BBB+ by S&P.
(3) Territorial bonds (other than those issued by Puerto Rico and counted
collectively) of any territory are limited to 10% of Moody's Eligible
Assets.

For purposes of the maximum underlying obligor requirement described above, any
such Bond backed by a guaranty, letter of credit or insurance issued by a third
party will be deemed to be issued by such third party if the issuance of such
third party credit is the sole determinant of the rating on such Bond.
When the Trust sells a Municipal Bond and agrees to repurchase it at a
future date, such Bond will constitute a Moody's Eligible Asset and the amount
the Trust is required to pay upon repurchase of such Bond will count as a
liability for purposes of calculating the Preferred Shares Basic Maintenance
Amount. When the Trust purchases a Municipal Bond and agrees to sell it at a
future date to another party, cash receivable by the

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<PAGE> 22
Trust in connection therewith will constitute a Moody's Eligible Asset if the
long-term debt of such other party is rated at least A2 by Moody's and such
agreement has a term of 30 days or less; otherwise such Bond will constitute a
Moody's Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Moody's
Eligible Asset if it is (i) held in a margin account, (ii) subject to any
material lien, mortgage, pledge, security interest or security agreement of any
kind, (iii) held for the purchase of a security pursuant to a Forward
Commitment or (iv) irrevocably deposited by the Trust for the payment of
dividends or redemption.
"Moody's Exposure Period" means the period commencing on and including a
given Valuation Date and ending 48 days thereafter.
"Moody's Hedging Transaction" has the meaning set forth in paragraph
12(b) of this Part I.
"Moody's Volatility Factor" means 302% as long as there has not been
enacted an increase to the Marginal Tax Rate. If an increase is enacted to the
Marginal Tax Rate but not yet implemented, the Moody's Volatility Factor shall
be as follows:

<TABLE>
<CAPTION>
% Change in Moody's Volatility
Marginal Tax Rate Factor
----------------- ------------------
<S> <C>
<5% 323%

>5% but <10% 347%

>10% but <15% 373%

>15% but <20% 402%

>20% but <25% 436%

>25% but <30% 474%

>30% but <35% 518%

>35% but <40% 570%

</TABLE>

-20-
<PAGE> 23
Notwithstanding the foregoing, the Moody's Volatility Factor may mean such
other potential dividend rate increase factor as Moody's advises the Trust in
writing is applicable.
"Municipal Bonds" means obligations issued by or on behalf of states,
territories and possessions of the United States and the District of Columbia
and their political subdivisions, agencies and instrumentalities, the interest
on which, in the opinion of bond counsel or other counsel to the issuer of such
securities, is at the time of issuance not includable in gross income for
Federal income tax purposes.
"Municipal Index" has the meaning set forth in paragraph 12(a) of this
Part I.
"1940 Act" means the Investment Company Act of 1940, as amended from
time to time.
"1940 Act Cure Date," with respect to the failure by the Trust to
maintain the 1940 Act Preferred Shares Asset Coverage (as required by paragraph
7 of this Part I) as of the last Business Day of each month, means the last
Business Day of the following month.
"1940 Act Preferred Shares Asset Coverage" means asset coverage, as
defined in section 18(h) of the 1940 Act, of at least 200% with respect to all
outstanding senior securities of the Trust which are shares, including all
outstanding Preferred Shares and Other Preferred Shares (or such other asset
coverage as may in the future be specified in or under the 1940 Act as the
minimum asset coverage for senior securities which are shares of

-21-
<PAGE> 24
a closed-end investment company as a condition of paying dividends on its
common shares).
"Non-Call Period" has the meaning described under "Specific Redemption
Provisions" below.
"Non-Payment Period" means any period commencing on and including the
day on which the Trust shall fail to (i) declare, prior to 12:00 noon, New York
City time, on any Dividend Payment Date for Preferred Shares, for payment on or
(to the extent permitted below) within three Business Days after such Dividend
Payment Date to the Holders of such shares as of 12:00 noon, New York City
time, on the Business Day preceding such Dividend Payment Date, the full amount
of any dividend on such shares payable on such Dividend Payment Date or (ii)
deposit, irrevocably in trust, in same-day funds, with the Paying Agent by
12:00 noon, New York City time, (A) on or (to the extent permitted below)
within three Business Days after any Dividend Payment Date for any Preferred
Shares the full amount of any dividend on such shares (whether or not earned or
declared) payable on such Dividend Payment Date or (B) on or (to the extent
permitted below) within three Business Days after any redemption date for any
Preferred Shares called for redemption, the Mandatory Redemption Price or
Optional Redemption Price, as the case may be, and ending on and including the
Business Day on which, by 12:00 noon, New York City time, all unpaid dividends
and unpaid redemption prices shall have been so deposited or shall have
otherwise been made available to Holders in same-day

-22-
<PAGE> 25
funds; provided that a Non-Payment Period shall not end during the first seven
days thereof unless the Trust shall have given at least three days' written
notice to the Paying Agent, the Remarketing Agent and the Securities Depository
and thereafter shall not end unless the Trust shall have given at least
fourteen days' written notice to the Paying Agent, the Remarketing Agent, the
Securities Depository and all Holders. Any dividend on Preferred Shares due on
any Dividend Payment Date for such shares (if, prior to 12:00 noon, New York
City time, on such Dividend Payment Date, the Trust has declared such dividend
payable on or within three Business Days after such Dividend Payment Date to
the Holders who held such shares as of 12:00 noon, New York City time, on the
Business Day preceding such Dividend Payment Date) or redemption price with
respect to Preferred Shares not paid to Holders when due may (if such
non-payment occurs because the Trust is prevented from doing so by these
By-laws or applicable law) be paid pro rata to such Holders in the same form of
funds by 12:00 noon, New York City time, on any of the first three Business
Days after such Dividend Payment Date or due date, as the case may be, provided
that such amount is accompanied by a late charge calculated for such period of
non-payment at the Non-Payment Period Rate applied to the amount of such
non-payment based on the actual number of days comprising such period divided
by 365.
"Non-Payment Period Rate" means 250% of the applicable Reference Rate
(or 300% of such rate if the Trust has provided

-23-
<PAGE> 26
notification to the Remarketing Agent prior to the Remarketing Date
establishing the Applicable Dividend Rate for the relevant dividend pursuant to
paragraph 3(m) hereof that net capital gain or other income subject to regular
Federal income tax will be included in such dividend on Preferred Shares),
provided that the Trustees shall have the authority to adjust, modify, alter or
change from time to time the Non-Payment Period Rate if the Trustees determine
and Moody's and S&P (or any Substitute Rating Agency in lieu of Moody's or S&P
in the event either of such parties shall not rate the Preferred Shares) advise
the Trust in writing that such adjustment, modification, alteration or change
will not adversely affect the then-current ratings of the Preferred Shares.
"Normal Dividend Payment Date" has the meaning set forth under
"Dividend Payment Date."
"Notice of Redemption" means any notice with respect to the redemption
of Preferred Shares pursuant to paragraph 4 of this Part I.
"Notice of Revocation" has the meaning set forth in paragraph 3(j) of
this Part I.
"Notice of Special Dividend Period" has the meaning set forth in
paragraph 3(j) of this Part I.
"Optional Redemption Price" shall mean $50,000 per share plus an
amount equal to accumulated but unpaid dividends (whether or not earned or
declared) to the date fixed for redemption plus

-24-
<PAGE> 27
any applicable redemption premium per share attributable to the designation of
a Premium Call Period.
"Other Preferred Shares" means the preferred shares of the Trust which
periodically adjust their dividend rate pursuant to periodic remarketings,
other than the Preferred Shares.
"Paragraph 3(a) Dividend" has the meaning set forth in paragraph 3(k)
of this Part I.
"Paying Agent" means IBJ Schroeder Bank & Trust Company, or any
successor company or entity, which has entered into a Paying Agent Agreement
with the Trust to act for the Trust, among other things, as the transfer agent,
registrar, dividend and redemption price disbursing agent, settlement agent and
agent for certain notifications in connection with the Preferred Shares in
accordance with such agreement.
"Paying Agent Agreement" means an agreement to be entered into between
the Trust and the Paying Agent.
"Preferred Shares" means the Municipal Income Preferred Shares.
"Preferred Shares Basic Maintenance Amount," as of any Valuation Date,
means the dollar amount equal to (i) the sum of
(A) the product of the number of Preferred Shares and Other Preferred Shares
outstanding on such Valuation Date multiplied by the sum of (a) $50,000 and (b)
any applicable redemption premium per share attributable to the designation of
a Premium Call Period; (B) the aggregate amount of cash dividends (whether or
not earned or declared) that will have accumulated for each

-25-
<PAGE> 28
Preferred Share and Other Preferred Shares outstanding, in each case, to (but
not including) the end of the Dividend Period for Preferred Shares and Other
Preferred Shares in which such Valuation Date occurs or to (but not including)
the 49th day after such Valuation Date, whichever is sooner; (C) the aggregate
amount of cash dividends that would accumulate at the Maximum Dividend Rate
applicable to a Dividend Period of 28 days on any Preferred Shares and Other
Preferred Shares outstanding from the end of such Dividend Period through the
49th day after such Valuation Date, multiplied by the larger of the Moody's
Volatility Factor and the S&P Volatility Factor, determined from time to time
by Moody's and S&P, respectively (except that if such Valuation Date occurs
during a Non-Payment Period, the cash dividend for purposes of calculation
would accumulate at the then current Non-Payment Period Rate); (D) the amount
of anticipated expenses of the Trust for the 90 days subsequent to such
Valuation Date; (E) the amount of the Trust's Maximum Potential Additional
Dividend Liability as of such Valuation Date; and (F) any current liabilities
as of such Valuation Date to the extent not reflected in any of (i)(A) through
(i)(E) (including, without limitation, any amounts due and payable by the Trust
pursuant to repurchase agreements and any payables for Municipal Bonds
purchased as of such Valuation Date) less (ii) either (A) the Discounted Value
of any of the Trust's assets, or (B) the face value of any of the Trust's
assets if such assets mature prior to or on the date of redemption of Preferred
Shares or

-26-
<PAGE> 29
payment of a liability and are either securities issued or guaranteed by the
United States Government or, with respect to Moody's, have a rating assigned by
Moody's of at least Aaa, P-1, VMIG-1 or MIG-1 and, with respect to S&P, have a
rating assigned by S&P of at least AAA, SP-1+ or A-1+, in both cases
irrevocably deposited by the Trust for the payment of the amount needed to
redeem Preferred Shares subject to redemption or any of (i)(B) through (i)(F).
"Preferred Shares Basic Maintenance Cure Date," with respect to the
failure by the Trust to satisfy the Preferred Shares Basic Maintenance Amount
(as required by paragraph 8(a) of this Part I) as of a given Valuation Date,
means the sixth Business Day following such Valuation Date.
"Preferred Shares Basic Maintenance Report" means a report signed by
the President, Treasurer or any Executive Vice President or Vice President of
the Trust which sets forth, as of the related Valuation Date, the assets of the
Trust, the Market Value and the Discounted Value thereof (seriatim and in the
aggregate), and the Preferred Shares Basic Maintenance Amount.
"Premium Call Period" has the meaning specified in "Specific
Redemption Provisions," below.
"Pricing Service" means Muller Investdata Corp., or any successor
company or entity, or any other entity designated from time to time by the
Trustees. Notwithstanding the foregoing, the Trustees will not designate a new
Pricing Service unless the Trust has received a written confirmation from
Moody's and S&P

-27-
<PAGE> 30
that such action would not impair the ratings then assigned by Moody's and S&P
to Preferred Shares.
"Quarterly Valuation Date" means the last Business Day of each fiscal
quarter of the Trust in each fiscal year of the Trust, commencing
______________.
"Receivables for Municipal Bonds Sold" for Moody's has the meaning set
forth under the definition of Moody's Discount Factor, and for S&P has the
meaning set forth under the definition of S&P Discount Factor.
"Reference Rate" means: (i) with respect to a Dividend Period having
28 or fewer days, the higher of the applicable "AA" Composite Commercial Paper
Rate and the Taxable Equivalent of the Short-Term Municipal Bond Rate, (ii)
with respect to any Short Term Dividend Period having more than 28 but fewer
than 183 days, the applicable "AA" Composite Commercial Paper Rate, (iii) with
respect to any Short Term Dividend Period having 183 or more but fewer than 365
days, the U.S. Treasury Bill Rate and (iv) with respect to any Long Term
Dividend Period, the applicable U.S. Treasury Note Rate.
"Remarketing" means each periodic operation of the process for
remarketing Preferred Shares as described in Part II hereof.
"Remarketing Agent" means Smith Barney Shearson Inc. and any
additional or successor companies or entities, if any, which have entered into
an agreement with the Trust to follow the remarketing procedures for the
purpose of determining the Applicable Dividend Rate.

-28-
<PAGE> 31
"Remarketing Agreement" means an agreement to be entered into between
the Trust and the Remarketing Agent.
"Remarketing Date" means any date on which (i) each Beneficial Owner
of Preferred Shares must provide to the Remarketing Agent irrevocable
telephonic notice of intent to tender shares in a Remarketing and (ii) the
Remarketing Agent (A) determines the Applicable Dividend Rate for the ensuing
Dividend Period, (B) notifies Holders, purchasers and tendering Beneficial
Owners of Preferred Shares by telephone, telex or otherwise of the results of
the Remarketing and (C) announces the Applicable Dividend Rate.
"Request for Special Dividend Period" has the meaning set forth in
paragraph 3(j) of this Part I.
"Response" has the meaning set forth in paragraph 3(j) of this Part I.
"Retroactive Taxable Allocation" has the meaning set forth in
paragraph 3(k) of this Part I.
"Right" has the meaning set forth in paragraph 3(k) of this Part I.
"S&P" means Standard & Poor's Corporation or its successors.
"S&P Discount Factor" means, for purposes of determining the
Discounted Value of any Municipal Bond which constitutes an S&P Eligible Asset,
the percentage determined by reference to (a) the rating by S&P or Moody's on
such Bond and (b) the S&P Exposure Period, in accordance with the table set
forth below:

-29-
<PAGE> 32

<TABLE>
<CAPTION>
S&P Rating Category
------------------------------------------------------
S&P Exposure Period AAA AA A BBB
- ------------------- --- -- - ---
<S> <C> <C> <C> <C>
40 Business Days . . . 190% 195% 210% 250%
22 Business Days . . . 170 175 190 230
10 Business Days . . . 155 160 175 215
7 Business Days . . . 150 155 170 210
3 Business Days . . . 130 135 150 190
</TABLE>

Notwithstanding the foregoing, (i) the S&P Discount Factor for short-term
Municipal Bonds will be 115%, so long as such Municipal Bonds are rated A-l+ or
SP-l+ by S&P and mature or have a demand feature exercisable in 30 days or
less, or 125% if such Municipal Bonds are not rated by S&P but are rated
VMIG-1, P-1 or MIG-1 by Moody's, and such short-term Municipal Bonds referred
to in this clause (i) shall qualify as S&P Eligible Assets; provided, however,
such short-term Municipal Bonds rated by Moody's but not rated by S&P having a
demand feature exercisable in 30 days or less must be backed by a letter of
credit, liquidity facility or guarantee from a bank or other financial
institution having a short-term rating of at least A-l+ from S&P; and further
provided that such short-term Municipal Bonds rated by Moody's but not rated by
S&P may comprise no more than 50% of short-term Municipal Bonds that qualify as
S&P Eligible Assets and (ii) no S&P Discount Factor will be applied to cash or
to Receivables for Municipal Bonds Sold. "Receivables for Municipal Bonds
Sold," for purposes of calculating S&P Eligible Assets as of any Valuation
Date, means the book value of receivables for Municipal Bonds sold as of or
prior to such Valuation Date if such receivables are due within five Business
Days of such

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<PAGE> 33
Valuation Date. For purposes of the foregoing, Anticipation Notes rated SP-l+
or, if not rated by S&P, rated VMIG-1 by Moody's, whether or not they mature or
have a demand feature exercisable in 30 days and which do not have a long-term
rating, shall be considered to be short-term Municipal Bonds and shall qualify
as S&P Eligible Assets.
"S&P Eligible Asset" means cash, Receivables for Municipal Bonds Sold
or a Municipal Bond that (i) is issued by any of the 50 states, any territory
or possession of the United States, the District of Columbia, and any political
subdivision, instrumentality, county, city, town, village, school district or
agency (such as authorities and special districts created by the states) of any
of the foregoing, and certain federally sponsored agencies such as local
housing authorities; (ii) is interest bearing and pays interest at least
semi-annually; (iii) is payable with respect to principal and interest in
United States Dollars; (iv) is publicly rated BBB or higher by S&P or, except
in the case of Anticipation Notes that are grant anticipation notes or bond
anticipation notes which must be rated by S&P to be included in S&P Eligible
Assets, if not rated by S&P but rated by Moody's, is rated at least A by
Moody's (provided that such Moody's-rated Municipal Bonds will be included in
S&P Eligible Assets only to the extent the Market Value of such Municipal Bonds
does not exceed 50% of the aggregate Market Value of the S&P Eligible Assets;
and further provided that, for purposes of determining the S&P Discount Factor
applicable to any such

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<PAGE> 34
Moody's-rated Municipal Bond, such Municipal Bond will be deemed to have an S&P
rating which is one full rating category lower than its Moody's rating); (v) is
not part of a private placement of Municipal Bonds; and (vi) is part of an
issue of Municipal Bonds with an original issue size of at least $20 million
or, if of an issue with an original issue size below $20 million (but in no
event below $10 million), is issued by an issuer with a total of at least $50
million of securities outstanding. Notwithstanding the foregoing:
(1) Municipal Bonds of any one issuer will be considered S&P
Eligible Assets only to the extent the Market Value of such Municipal
Bonds does not exceed 10% of the aggregate Market Value of the S&P
Eligible Assets, provided that 2% is added to the applicable S&P
Discount Factor for every 1% by which the Market Value of such
Municipal Bonds exceeds 5% of the aggregate Market Value of the S&P
Eligible Assets; and
(2) Municipal Bonds issued by issuers in any one state or
territory will be considered S&P Eligible Assets only to the extent
the Market Value of such Municipal Bonds does not exceed 20% of the
aggregate Market Value of S&P Eligible Assets.
"S&P Exposure Period" means the maximum period of time following a
Valuation Date, including the Valuation Date and the Preferred Shares Basic
Maintenance Cure Date, that the Trust has under this Section 12.1 to cure any
failure to maintain, as of

-32-
<PAGE> 35
such Valuation Date, a Discounted Value of its portfolio at least equal to the
Preferred Shares Basic Maintenance Amount (as described in paragraph 8(a) of
this Section 12.1).
"S&P Hedging Transactions" has the meaning set forth in paragraph
12(a) of this Section 12.1.
"S&P Volatility Factor" means 198% during the Initial Dividend Period.
Thereafter, "S&P Volatility Factor" means, depending on the applicable
Reference Rate, the following:
<TABLE>
<CAPTION>
Reference Rate
--------------
<S> <C>
Taxable Equivalent of the
Short-Term Municipal
Bond Rate . . . . . . . . . . . . . . 277%
30-day "AA" Composite
Commercial Paper Rate . . . . . . . . 228%
60-day "AA" Composite
Commercial Paper Rate . . . . . . . . 228%
90-day "AA" Composite
Commercial Paper Rate . . . . . . . . 222%
120-day "AA" Composite
Commercial Paper Rate . . . . . . . . 222%
180-day "AA" Composite
Commercial Paper Rate . . . . . . . . 217%
1-year U.S. Treasury
Bill Rate . . . . . . . . . . . . . . 198%
2-year U.S. Treasury
Note Rate . . . . . . . . . . . . . . 185%
3-year U.S. Treasury
Note Rate . . . . . . . . . . . . . . 178%
4-year U.S. Treasury
Note Rate . . . . . . . . . . . . . . 171%
5-year U.S. Treasury
Note Rate . . . . . . . . . . . . . . 169%
</TABLE>

Notwithstanding the foregoing, the S&P Volatility Factor may mean such other
potential dividend rate increase factor as S&P advises the Trust in writing is
applicable.
"Securities Depository" means The Depository Trust Company or any
successor company or other entity selected by the Trust as

-33-
<PAGE> 36
securities depository of the Preferred Shares that agrees to follow the
procedures required to be followed by such securities depository in connection
with the Preferred Shares.
"Service" means the Internal Revenue Service.
"Settlement Date" means the first Business Day after a Remarketing
Date applicable to a Preferred Share.
"Short Term Dividend Period" means a Special Dividend Period
consisting of a specified number of days (other than 28), evenly divisible by
seven and not fewer than seven or more than 364.
"Special Dividend Period" means a Dividend Period consisting of (i) a
specified number of days (other than 28), evenly divisible by seven and not
fewer than seven nor more than 364 or (ii) a specified period of one whole year
or more but not greater than five years (in each case subject to adjustment as
provided herein).
"Specific Redemption Provisions" means, with respect to a Special
Dividend Period of 365 or more days, either, or any combination of, the
designation of (i) a period (a "Non-Call Period") determined by the Trustees,
after consultation with the Remarketing Agent, during which the Preferred
Shares subject to such Dividend Period shall not be subject to redemption at
the option of the Trust and (ii) a period (a "Premium Call Period"), consisting
of a number of whole years and determined by the Trustees, after consultation
with the Remarketing Agent, during each year of which the Preferred Shares
subject to such Dividend Period shall be redeemable at the Trust's option at a
price per

-34-
<PAGE> 37
share equal to $50,000 plus accumulated but unpaid dividends plus an applicable
premium, as determined by the Trustees after consultation with the Remarketing
Agent.
"Substitute Commercial Paper Dealers" means such substitute commercial
paper dealer or dealers as the Trust may from time to time appoint or, in lieu
of any thereof, their respective affiliates or successors.
"Substitute Rating Agency" and "Substitute Rating Agencies" mean a
nationally recognized statistical rating organization or two nationally
recognized statistical rating organizations, respectively, selected by the
Trust to act as the substitute rating agency or substitute rating agencies, as
the case may be, to determine the credit ratings of the Preferred Shares.
"Taxable Equivalent of the Short-Term Municipal Bond Rate" on any date
means 90% of the quotient of (A) the per annum rate expressed on an Interest
Equivalent basis equal to the Kenny S&P 30-day High Grade Index or any
comparable index based upon 30-day yield evaluations at par of bonds the
interest on which is excludable for regular Federal income tax purposes under
the Code of "high grade" component issuers selected by Kenny Information
Systems Inc. (or any successor thereto from time to time selected by the Trust
in its discretion), which component issuers shall include, without limitation,
issuers of general obligation bonds but shall exclude any bonds the interest on
which constitutes an item of tax preference under Section 57(a)(5) of the Code,
or successor provisions, for purposes of the "alternative minimum

-35-
<PAGE> 38
tax," (as defined in the Code) (the "Kenny Index"), made available for the
Business Day immediately preceding such date but in any event not later than
8:30 A.M., New York City time, on such date by Kenny Information Systems Inc.
(or any such successor), divided by (B) 1.00 minus the Marginal Tax Rate
(expressed as a decimal); provided, however, that if the Kenny Index is not
made so available by 8:30 A.M., New York City time, on such date by Kenny
Information Systems Inc. (or any such successor), the Taxable Equivalent of the
Short-Term Municipal Bond Rate shall mean the quotient of (A) the per annum
rate expressed on an Interest Equivalent basis equal to the most recent Kenny
Index so made available, divided by (B) 1.00 minus the Marginal Tax Rate
(expressed as a decimal). No successor to Kenny Information Systems Inc. shall
be chosen without first obtaining written confirmation from Moody's and S&P
that the choice of such successor would not impair the rating then assigned to
the Preferred Shares by Moody's or S&P.
"Tender and Dividend Reset" means the process pursuant to which
Preferred Shares may be tendered in a Remarketing or held and become subject to
the new Applicable Dividend Rate determined by the Remarketing Agent in such
Remarketing.
"Treasury Bonds" shall have the meaning set forth in paragraph 12(a)
of this Part I.
"28-day Dividend Period" means, with respect to Preferred Shares, a
Dividend Period consisting of 28 days.

-36-
<PAGE> 39
"Trust" means Putnam Investment Grade Municipal Trust III, a
Massachusetts business trust.
"Trustees" means the Trustees of the Trust.
"U.S. Treasury Bill Rate" on any date of determination means (i) the
Interest Equivalent of the rate on the actively traded Treasury Bill with a
maturity most nearly comparable to the length of the related Dividend Period,
as such rate is made available on a discount basis or otherwise on the Business
Day immediately preceding such date by the Federal Reserve Bank of New York in
its Composite 3:30 P.M. Quotations for U.S. Government Securities report for
such Business Day, or (ii) if such yield as so calculated is not available, the
Alternate Treasury Bill Rate on such date. "Alternate Treasury Bill Rate" on
any date means the Interest Equivalent of the yield as calculated by reference
to the arithmetic average of the bid price quotations of the actively traded
Treasury Bill with a maturity most nearly comparable to the length of the
related Dividend Period, as determined by bid price quotations as of any time
on the Business Day immediately preceding such date, obtained from at least
three recognized primary U.S. Government securities dealers selected by the
Remarketing Agent.
"U.S. Treasury Note Rate" on any date of determination means (i) the
yield as calculated by reference to the bid price quotation of the actively
traded, current coupon Treasury Note with a maturity most nearly comparable to
the length of the related Dividend Period, as such bid price quotation is
published

-37-
<PAGE> 40
on the Business Day immediately preceding such date by the Federal Reserve Bank
of New York in its Composite 3:30 P.M. Quotations for U.S. Government
Securities report for such Business Day, or (ii) if such yield as so calculated
is not available, the Alternate Treasury Note Rate on such date. "Alternate
Treasury Note Rate" on any date means the yield as calculated by reference to
the arithmetic average of the bid price quotations of the actively traded,
current coupon Treasury Note with a maturity most nearly comparable to the
length of the related Dividend Period, as determined by the bid price
quotations as of any time on the Business Day immediately preceding such date,
obtained from at least three recognized primary U.S. Government securities
dealers selected by the Remarketing Agent.
"Valuation Date" means, for purposes of determining whether the Trust
is maintaining the Preferred Shares Basic Maintenance Amount and the Minimum
Liquidity Level, each Business Day commencing with the Date of Original Issue.
"Voting Period" has the meaning set forth in paragraph 6(b) of this
Part I.
"Variation Margin" means, in connection with an outstanding futures
contract or option thereon owned or sold by the Trust, the amount of cash or
securities paid to or received from a broker (subsequent to the Initial Margin
payment) from time to time as the price of such futures contract or option
fluctuates.

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<PAGE> 41
2. Fractional Shares. No fractional Preferred Shares shall be
issued.
3. Dividends. (a) The Holders of Preferred Shares as of 12:00
noon, New York City time, on the Business Day preceding the applicable Dividend
Payment Date, shall be entitled to receive, when, as and if declared by the
Trustees, out of funds legally available therefor, (i) cumulative dividends, at
the Applicable Dividend Rate, (ii) a Right (as defined in paragraph 3(k)) to
receive an Additional Dividend or Additional Dividends in certain
circumstances, and (iii) any additional amounts as set forth in paragraph 3(m).
Dividends on the Preferred Shares so declared and payable shall be paid in
preference to and in priority over any dividends declared and payable on the
Common Shares.
(b) Dividends on each Preferred Share shall accumulate from its
Date of Original Issue and will be payable, when, as and if declared by the
Trustees, on each Dividend Payment Date applicable to such Preferred Share.
(c) Each declared dividend shall be payable on the applicable
Dividend Payment Date to the Holder or Holders of such Preferred Shares as set
forth in paragraph 3(a). Dividends on Preferred Shares in arrears with respect
to any past Dividend Payment Date may be declared and paid at any time, without
reference to any regular Dividend Payment Date, pro rata to the Holders of such
shares as of a date not exceeding five Business Days preceding the date of
payment thereof as may be fixed by the Trustees. Any dividend payment made on
any Preferred Share shall

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<PAGE> 42
be first credited against the dividends accumulated but unpaid (whether or not
earned or declared) with respect to the earliest Dividend Payment Date on which
dividends were not paid.
(d) Neither Holders nor Beneficial Owners of Preferred Shares
shall be entitled to any dividends on the Preferred Shares, whether payable in
cash, property or stock, in excess of full cumulative dividends thereon (which
include any amounts actually due and payable pursuant to paragraph 3(k), 3(l)
or 3(m) of this Part I). Except as provided in paragraph 3(h) of this Part I,
neither Holders nor Beneficial Owners of Preferred Shares shall be entitled to
any interest, or other additional amount, on any dividend payment on any
Preferred Share which may be in arrears.
(e) Except as otherwise provided herein, the Applicable Dividend
Rate on each Preferred Share for each Dividend Period with respect to such
share shall be equal to the lower of the rate per annum that results from
implementation of the remarketing procedures described in Part II hereof and
the Maximum Dividend Rate.
(f) The amount of declared dividends for each Preferred Share
payable on each Dividend Payment Date for each 28-day Dividend Period and the
Dividend Payment Date or Dates for each Short-Term Dividend Period shall be
computed by the Trust by multiplying the Applicable Dividend Rate in effect
with respect to dividends payable on such share on such Dividend Payment Date
by a fraction the numerator of which shall be the number of days in such
Dividend Period such share was outstanding from and

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<PAGE> 43
including its Date of Original Issue or the preceding Dividend Payment Date, as
the case may be, to and including the day preceding such Dividend Payment Date,
and the denominator of which shall be 365, then multiplying the amount so
obtained by $50,000 and rounding the amount so obtained to the nearest cent.
During the Initial Dividend Period and any Long Term Dividend Period, the
amount of dividends per share payable on any Dividend Payment Date shall be
computed by multiplying the Applicable Dividend Rate by a fraction, the
numerator of which shall be the number of days from either the Date of Original
Issue, with respect to the Initial Dividend Period, or otherwise from the Last
Dividend Payment Date, and the denominator of which is 360, multiplying the
amount so obtained by $50,000, and rounding the amount so obtained to the
nearest cent. For example, if the number of days from and including the Date
of Original Issue or the preceding Dividend Payment Date, as the case may be,
to and including the day preceding such Dividend Payment Date is less than 30
and such days do not constitute a full calendar month, then the amount of
dividends per share payable on such Dividend Payment Date shall be computed by
multiplying the Applicable Dividend Rate for such Dividend Period by a
fraction, the numerator of which will be such number of days and the
denominator of which will be 360, multiplying the amount so obtained by
$50,000, and rounding the amount so obtained to the nearest cent.

Payment Date, the Trust shall deposit in same-day funds with the Paying Agent
the full amount of any dividend declared

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<PAGE> 44
and payable on such Dividend Payment Date on any Preferred Share.
(h) The Applicable Dividend Rate for each Dividend Period
commencing during a Non-Payment Period shall be equal to the Non-Payment Period
Rate and any Preferred Share for which a Special Dividend Period would
otherwise have commenced on the first day of or during a Non-Payment Period
shall have a 28-day Dividend Period. Any amount of any dividend due on any
Dividend Payment Date for any Preferred Shares (if, prior to 12:00 noon, New
York City time, on such Dividend Payment Date, the Trust has declared such
dividend payable on or within three Business Days after such Dividend Payment
Date to the Holders who held such Preferred Shares as of 12:00 noon, New York
City time, on the Business Day preceding such Dividend Payment Date) or
redemption price with respect to any Preferred Shares not paid to Holders when
due but paid to such Holders in the same form of funds by 12:00 noon, New York
City time, on any of the first three Business Days after such Dividend Payment
Date or due date, as the case may be, shall incur a late charge to be paid
therewith to such Holders and calculated for such period of non-payment at the
Non-Payment Period Rate applied to the amount of such non-payment based on the
actual number of days comprising such period divided by 365. If the Trust
fails to pay a dividend on a Dividend Payment Date or to redeem any Preferred
Shares on the date set for such redemption (otherwise than because it is
prevented from doing so by these By-laws or by applicable law), the preceding
sentence

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<PAGE> 45
shall not apply and the Applicable Dividend Rate for the Dividend Period
commencing during the Non-Payment Period resulting from such failure shall be
the Non-Payment Period Rate. For the purposes of the foregoing and paragraphs
3(g) and 4(g) of this Part I, payment to a person in New York Clearing House
(next-day) funds on any Business Day at any time shall be considered equivalent
to payment to such person in same-day funds at the same time on the next
Business Day, and any payment made after 12:00 noon, New York City time, on any
Business Day shall be considered to have been made instead in the same form of
funds and to the same person before 12:00 noon, New York City time, on the next
Business Day.
(i) Except during a Non-Payment Period, by 12:00 noon, New York
City time, on the Remarketing Date in the Remarketing at the end of the Initial
Dividend Period applicable to a Preferred Share, and by 12:00 noon, New York
City time, on the Remarketing Date in the Remarketing at the end of each
subsequent Dividend Period applicable to a Preferred Share, the Beneficial
Owner of such Preferred Share may elect to tender such share or hold such share
for the next Dividend Period to the extent provided in Part II hereof.
(j) The Trust may, at its sole option and to the extent permitted
by law, by telephonic or written notice (a "Request for Special Dividend
Period") to the Remarketing Agent, request that the next succeeding Dividend
Period for the Preferred Shares be the number of days (other than 28) evenly
divisible by seven, and

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<PAGE> 46
not fewer than seven or more than 364 in the case of a Short Term Dividend
Period or one whole year or more but not greater than five years in the case of
a Long Term Dividend Period, specified in such notice, provided that the Trust
may not give a Request for Special Dividend Period of greater than 28 days (and
any such request shall be null and void) unless the Trust has given written
notice thereof to Moody's and S&P and unless, with respect to the Preferred
Shares, full cumulative dividends, any amounts due with respect to redemptions,
and any Additional Dividends payable prior to such date have been paid in full
and, for any Remarketing occurring after the initial Remarketing, all shares
tendered were remarketed in the last occurring Remarketing. Such Request for
Special Dividend Period, in the case of a Short Term Dividend Period, shall be
given on or prior to the fourth Business Day but not more than seven Business
Days prior to a Remarketing Date and, in the case of a Long Term Dividend
Period, shall be given on or prior to the 14th day but not more than 28 days
prior to a Remarketing Date. Upon receiving such Request for a Special
Dividend Period, the Remarketing Agent shall determine (i) whether, given the
factors set forth below, it is advisable that the Trust issue a Notice of
Special Dividend Period for Preferred Shares as contemplated by such Request
for Special Dividend Period, (ii) the Optional Redemption Price of the
Preferred Shares during such Special Dividend Period and (iii) the Specific
Redemption Provisions and shall give the Trust written notice (a "Response") of
such

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<PAGE> 47
determination by no later than the third Business Day prior to such Remarketing
Date. In making such determination the Remarketing Agent shall consider (1)
existing short-term and long-term market rates and indices of such short-term
and long-term rates, (2) existing market supply and demand for short-term and
long-term securities, (3) existing yield curves for short-term and long-term
securities comparable to the Preferred Shares, (4) industry and financial
conditions which may affect the Preferred Shares, (5) the investment objective
of the Trust, and (6) the Dividend Periods and dividend rates at which current
and potential Beneficial Owners of Preferred Shares would remain or become
Beneficial Owners. If the Remarketing Agent does not give the Trust a Response
by such third Business Day or if the Response states that given the factors set
forth above it is not advisable that the Trust give a Notice of Special
Dividend Period, the Trust may not give a Notice of Special Dividend Period in
respect of such Request for Special Dividend Period. In the event the Response
indicates that it is advisable that the Trust give a Notice of Special Dividend
Period, the Trust may by no later than the second Business Day prior to such
Remarketing Date give a notice (a "Notice of Special Dividend Period") to the
Remarketing Agent, the Paying Agent and to the Securities Depository which
notice will specify (i) the duration of the Special Dividend Period, (ii) the
Optional Redemption Price as specified in the related Response and (iii) the
Specific Redemption Provisions, if any, as specified in the related

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<PAGE> 48
Response. The Trust shall not give a Notice of Special Dividend Period and, if
the Trust has given a Notice of Special Dividend Period, the Trust is required
to give telephonic or written notice of its revocation (a "Notice of
Revocation") to the Remarketing Agent (in the case of clauses (x) and (y)) and
the Securities Depository (in the case of clauses (x), (y) and (z)) on or prior
to the Business Day prior to the relevant Remarketing Date if (x) either the
1940 Act Preferred Shares Asset Coverage is not satisfied or the Trust shall
fail to maintain S&P Eligible Assets and Moody's Eligible Assets each with an
aggregate Discounted Value at least equal to the Preferred Shares Basic
Maintenance Amount, in each case on each of the two Valuation Dates immediately
preceding the Business Day prior to the relevant Remarketing Date on an actual
basis and on a pro forma basis giving effect to the proposed Special Dividend
Period (using as a pro forma dividend rate with respect to such Special
Dividend Period the dividend rate which the Remarketing Agent shall advise the
Trust is an approximately equal rate for securities similar to the Preferred
Shares with an equal dividend period), provided that (unless Moody's advises
the Trust to the contrary), in calculating the aggregate Discounted Value of
Moody's Eligible Assets for this purpose, the Moody's Exposure Period shall be
deemed to be one week longer than the Moody's Exposure Period that would
otherwise apply as of the date of the Notice of Special Dividend Period, (y)
sufficient funds for the payment of dividends payable on the immediately
succeeding

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<PAGE> 49
Dividend Payment Date for Preferred Shares have not been irrevocably deposited
with the Paying Agent by the close of business on the third Business Day
preceding the relevant Remarketing Date or (z) the Remarketing Agent advises
the Trust that after consideration of the factors listed above, it is advisable
to give a Notice of Revocation. If the Trust is prohibited from giving a
Notice of Special Dividend Period as a result of any of the factors enumerated
in clause (x), (y) or (z) of the prior sentence or if the Trust gives a Notice
of Revocation with respect to a Notice of Special Dividend Period for Preferred
Shares, the next succeeding Dividend Period for Preferred Shares will be a
28-day Dividend Period, provided that if the then current Dividend Period for
Preferred Shares is a Special Dividend Period of less than 28 days, the next
succeeding Dividend Period will be the same length as the current Dividend
Period. In addition, in the event all Preferred Shares tendered for which the
Trust has given a Notice of Special Dividend Period are not remarketed or a
Remarketing for Preferred Shares is not held for any reason, the Trust may not
again give a Notice of Special Dividend Period with respect to Preferred Shares
(and any such attempted notice shall be null and void) until all Preferred
Shares tendered in a subsequent Remarketing with respect to a 28-day Dividend
Period have been Remarketed.
(k) Simultaneously with the declaration of each dividend at the
Applicable Dividend Rate to a Holder determined as set forth in paragraph 3(a)
above (each, a "Paragraph 3(a) Dividend"), the

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<PAGE> 50
Trustees shall also declare a dividend to the same Holder consisting of one
right (a "Right") to receive an Additional Dividend in respect of such
Paragraph 3(a) Dividend. If, after the close of its fiscal year, the Trust
characterizes all or a portion of a Paragraph 3(a) Dividend paid on Preferred
Shares during such previous fiscal year as consisting of net capital gain or
other income subject to regular Federal income tax, without having either given
advance notice to the Remarketing Agent of the inclusion of such taxable income
in such Paragraph 3(a) Dividend prior to the setting of the Applicable Dividend
Rate for such Paragraph 3(a) Dividend or included an additional amount in the
Paragraph 3(a) Dividend to offset the tax effect of the inclusion therein of
such taxable income, in each case as provided in paragraph 3(m) hereof, and the
Trust so characterizes all or a portion of the Paragraph 3(a) Dividend solely
because (i) the Trust has redeemed all or a portion of the outstanding
Preferred Shares or the Trust has liquidated and (ii) the Trust, in its
judgment, believes it is required, in order to comply with a published position
of the Internal Revenue Service concerning the allocation of different types of
income between different classes and series of shares, Rev. Rul. 89-81, 1989-1
C.B. 226, to allocate such taxable income to the Preferred Shares (the amount
so characterized referred to herein as a "Retroactive Taxable Allocation"), the
Trust will, within 90 days after the end of such fiscal year, provide notice of
the Retroactive Taxable Allocation made with respect to the Paragraph 3(a)

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<PAGE> 51
Dividend to the Paying Agent and to each Holder who received such Paragraph
3(a) Dividend and the corresponding Right, at such Holder's address as the same
appears or last appeared on the share books of the Trust. The Trust will,
within 30 days after such notice is given to the Paying Agent, pay to the
Paying Agent (who will then distribute to such holders of Rights), out of funds
legally available therefor, an amount equal to the aggregate of the Additional
Dividends payable in respect of such Retroactive Taxable Allocation. The Trust
may direct the Paying Agent to invest any such available funds in Deposit
Securities (provided that such Deposit Securities are also rated at least P-1,
MIG-1 or VMIG-1 by Moody's) provided that the proceeds of any such investment
will be available in The City of New York at the opening of business on the
payment date for such Additional Dividends. All such funds (to the extent
necessary to pay the full amount of such Additional Dividends) shall be held in
trust for the benefit of the holders of Rights. An Additional Dividend or
Additional Dividends declared in respect of a Right shall be paid to the Holder
that received such Right, whether or not such Holder continues to own the
Preferred Shares in respect of which such Right was issued. Rights shall be
nontransferable except by operation of law, and no purported transfer of a
Right will be recognized by the Trust. No certificates will be issued
evidencing Rights.
An "Additional Dividend" in respect of any Paragraph 3(a) Dividend
means payment to a present or former Holder of a

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<PAGE> 52
Preferred Share of an amount which, giving effect to the Retroactive Taxable
Allocation made with respect to such Paragraph 3(a) Dividend, would cause such
Holder's after-tax return (taking into account both the Paragraph 3(a) Dividend
and the Additional Dividend and assuming such Holder is taxable at the Gross-Up
Tax Rate) to be equal to the after-tax return which the Holder would have
realized if the retroactive allocation of taxable income had not been made.
Such Additional Dividend shall be calculated (i) without consideration being
given to the time value of money; (ii) assuming that no Holder or former Holder
of Preferred Shares is subject to the Federal alternative minimum tax with
respect to dividends received from the Trust; and (iii) assuming that the
Holder of the Preferred Share in respect of which a Retroactive Taxable
Allocation was made is taxable at the Gross-Up Tax Rate. An Additional
Dividend will not include an amount to compensate for the fact that the
Additional Dividend or the retroactive allocation of taxable income may be
subject to state and local taxes. The Gross-Up Tax Rate shall be equal to the
sum of (i) the percentage of the taxable income included in the Paragraph 3(a)
Dividend that is taxable for Federal income tax purposes as ordinary income,
multiplied by the greater of (A) the highest marginal Federal corporate income
tax rate (without regard to the phase-out of graduated rates) applicable to
ordinary income and (B) the highest marginal Federal individual income tax rate
applicable to ordinary income (including any surtax but without regard to any
phase-out of personal exemptions

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<PAGE> 53
or any limitation on itemized deductions), and (ii) the percentage of the
taxable income included in the Paragraph 3(a) Dividend that is taxable for
Federal income tax purposes as long-term capital gain, multiplied by the
greater of (A) the highest marginal Federal corporate income tax rate (without
regard to the phase-out of graduated rates) applicable to long-term capital
gain and (B) the highest marginal Federal individual income tax rate applicable
to long-term capital gain (including any surtax but without regard to any
phase-out of personal exemptions or any limitation on itemized deductions).
Except as provided above, no Additional Dividend shall for any reason
be payable in respect of any Paragraph 3(a) Dividend previously paid to a
Holder. In particular, and without limiting the generality of the foregoing,
no Additional Dividend shall be payable as a result of any Internal Revenue
Service challenge to, among other things, the characterization of the Preferred
Shares as equity, the Trust's method of allocating various types of income
between dividends paid on different classes or series of shares or between
dividends paid on the same class or series of shares, or the designations made
by the Trust relating to distributions made with respect to an earlier taxable
year.
(l) The Trustees may in their sole discretion from time to time
declare a special dividend (each, a "special dividend") in an amount determined
in their sole judgment to be necessary or desirable to cause the Trust to
comply with any distribution requirements of the Code and thereby to avoid the
incurrence by

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<PAGE> 54
the Trust of any income or excise tax under the Code, provided that the
Trustees shall not declare a special dividend if the declaration thereof causes
the Trust to fail to maintain the Preferred Shares Basic Maintenance Amount or
the 1940 Act Preferred Shares Asset Coverage. Any such special dividend shall
be payable on a date specified by the Trustees to Holders of record on a date
specified by the Trustees consistent with these By-laws. The Trust shall
deposit with the Paying Agent sufficient funds for the payment of any such
special dividend not later than noon on the Business Day immediately preceding
the date on which such special dividend becomes payable and shall give the
Paying Agent irrevocable instructions to apply such funds and, if applicable,
the income and proceeds therefrom, to payment of such special dividends. The
Trust may direct the Paying Agent to invest any such available funds in Deposit
Securities (provided that such Deposit Securities are also rated at least P-1,
MIG-1 or VMIG-1 by Moody's) provided that the proceeds of any such investment
will be available in The City of New York at the opening of business on the
payment date for such special dividend. All such funds (to the extent
necessary to pay the full amount of such special dividend) shall be held in
trust for the benefit of the Holders.
(m) Whenever the Trust intends to include any net capital gain or
other income subject to regular Federal income tax in a dividend on Preferred
Shares solely because the Trust, in its judgment, believes it is required, in
order to comply with Rev.

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<PAGE> 55
Rul. 89-81 described in paragraph 3(k), to allocate taxable income to Preferred
Shares, the Trust may notify the Remarketing Agent of the amount to be so
included at least five Business Days prior to the Remarketing Date on which the
Applicable Dividend Rate for such dividend is to be established. In the event
the Trust has provided such notice to the Remarketing Agent, yet, after giving
such notice the Trust intends to include additional income subject to regular
Federal income tax beyond the amount set forth in such Notice in such dividend
because the Trust, in its sole judgment, believes it is required, in order to
comply with such Rev. Rul. 89- 81, to allocate such additional income to such
Preferred Shares, the Trust will (i) increase the dividend by an amount such
that the return to a Holder of Preferred Shares with respect to such dividend
(as so increased and after giving effect to Federal income tax at the Gross-Up
Tax Rate) shall equal the return such Holder of Preferred Shares would have
received, after application of Federal income tax (at the greater of the
maximum regular Federal individual or corporate income tax rate applicable to
the character of income reflected in such notice), if such additional amount of
taxable income had not been included in such dividend (and such dividend had
not been increased to take account of any additional amount of taxable income)
and (ii) notify the Paying Agent of the additional amount to be included in the
dividend at least five Business Days prior to the applicable Dividend Payment
Date. Alternatively, if the Trust has not provided the notice referred to in
the second

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<PAGE> 56
preceding sentence, and nevertheless intends to include income subject to
regular Federal income tax in a dividend on Preferred Shares solely because the
Trust, in its judgment, believes it is required, in order to comply with such
Rev. Rul. 89-81, to allocate such income to Preferred Shares, the Trust will
(i) increase the dividend by an amount such that the return to a Holder of
Preferred Shares with respect to such dividend (as so increased and after
giving effect to tax at the Gross-Up Tax Rate) equals the Applicable Dividend
Rate and (ii) notify the Paying Agent of the additional amount to be included
in the dividend at least five Business Days prior to the applicable Dividend
Payment Date. The Trust will not be required to notify any Holder of Preferred
Shares of the prospective inclusion of, or to increase any dividend as a result
of the inclusion of, any taxable income in any dividend other than as provided
in this paragraph 3(m) or in paragraph 3(k) of this Part I.
4. Redemption. Preferred Shares shall be redeemable by the Trust
as provided below:
(a) To the extent permitted under the 1940 Act, upon giving a
Notice of Redemption, the Trust at its option may redeem Preferred Shares, in
whole or in part, on the next succeeding scheduled Dividend Payment Date
applicable to those Preferred Shares called for redemption, out of funds
legally available therefor, at the Optional Redemption Price per share;
provided that no Preferred Share shall be subject to redemption pursuant to
this paragraph 4(a) on any Dividend Payment Date during (A)

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<PAGE> 57
the Initial Dividend Period with respect to such share or (B) a Non-Call Period
to which such share is subject; and provided further that the Trust shall
effect no redemption pursuant to this paragraph 4(a) if as a result of such
redemption the Trust shall have failed to maintain S&P Eligible Assets and
Moody's Eligible Assets with an aggregate Discounted Value at least equal to
the Preferred Shares Basic Maintenance Amount or to maintain the 1940 Act
Preferred Shares Asset Coverage. For so long as S&P rates the Preferred
Shares, the Trust may not give a Notice of Redemption relating to an optional
redemption as described in paragraph 4(a) unless, at the time of giving such
Notice of Redemption, the Trust has available Deposit Securities with maturity
or tender dates not later than the day preceding the applicable redemption date
and having a Discounted Value not less than the amount due to Holders by reason
of the redemption of Preferred Shares on such redemption date.
(b) The Trust shall redeem, out of funds legally available
therefor, at the Mandatory Redemption Price per share, certain of the Preferred
Shares, to the extent permitted under the 1940 Act, if the Trust fails to
maintain S&P Eligible Assets and Moody's Eligible Assets with an aggregate
Discounted Value at least equal to the Preferred Shares Basic Maintenance
Amount or to maintain the 1940 Act Preferred Shares Asset Coverage and such
failure is not cured on or before the Preferred Shares Basic Maintenance Cure
Date or the 1940 Act Cure Date (each herein referred to as a "Cure Date"), as
the case may be. The number of Preferred Shares

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<PAGE> 58
to be redeemed shall be equal to the lesser of (i) the minimum number of
Preferred Shares the redemption of which, if deemed to have occurred
immediately prior to the opening of business on the Cure Date, together with
all other Preferred Shares subject to redemption or retirement, would result in
the satisfaction of the Preferred Shares Basic Maintenance Amount or the 1940
Act Preferred Shares Asset Coverage, as the case may be, on such Cure Date
(provided that, if there is no such minimum number of Preferred Shares and
other Preferred Shares the redemption of which would have such result, all
Preferred Shares then outstanding shall be redeemed), and (ii) the maximum
number of Preferred Shares, together with all other Preferred Shares subject to
redemption or retirement, that can be redeemed out of funds expected to be
legally available therefor. In determining the number of Preferred Shares
required to be redeemed in accordance with the foregoing, the Trust shall
allocate the number required to be redeemed to satisfy the Preferred Shares
Basic Maintenance Amount or the 1940 Act Preferred Shares Asset Coverage, as
the case may be, pro rata among Preferred Shares, Other Preferred Shares and
other Preferred Shares subject to redemption provisions similar to those
contained in this paragraph 4(b). The Trust shall effect such redemption not
later than 35 days after such Cure Date, except that if the Trust does not have
funds legally available for the redemption of all of the required number of
Preferred Shares and other Preferred Shares which are subject to mandatory
redemption or the Trust otherwise

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<PAGE> 59
is unable to effect such redemption on or prior to 35 days after such Cure
Date, the Trust shall redeem those Preferred Shares and other Preferred Shares
which it was unable to redeem on the earliest practicable date on which it is
able to effect such redemption.
Any Preferred Share shall be subject to mandatory redemption
regardless of whether such share is subject to a Non-Call Period, provided that
Preferred Shares subject to a Non-Call Period will only be subject to
redemption to the extent that the other Preferred Shares are not available to
satisfy the number of shares required to be redeemed. In such event, such
shares subject to a Non-Call Period will be selected for redemption in an
ascending order of outstanding Non-Call Period (with shares with the lowest
number of days remaining in the period to be called first) and by lot in the
event of equal outstanding Non-Call Periods.
(c) Subject to paragraph 4(d) of this Part I, if fewer than all
the outstanding Preferred Shares are to be redeemed pursuant to this paragraph
4, the number of such Preferred Shares so to be redeemed shall be a whole
number of shares and shall be determined by the Trustees, and the Trust shall
give a Notice of Redemption as provided in paragraph 4(e) of this Part I,
provided that no such Preferred Share will be subject to optional redemption on
any Dividend Payment Date during a Non-Call Period to which it is subject and
Preferred Shares subject to a Non-Call Period will be subject to mandatory
redemption only on the

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<PAGE> 60
basis described under paragraph 4(b) of this Part I. Unless certificates
representing Preferred Shares are held by Holders other than the Securities
Depository or its nominee, the Securities Depository, upon receipt of such
notice, shall determine by lot (or otherwise in accordance with procedures in
effect at the time which shall be consistent with the 1940 Act) the number of
Preferred Shares to be redeemed from the account of each Agent Member (which
may include an Agent Member, including a Remarketing Agent, holding shares for
its own account) and notify the Paying Agent of such determination. The Paying
Agent, upon receipt of such notice, shall in turn determine by lot the number
of Preferred Shares to be redeemed from the accounts of the Beneficial Owners
of the Preferred Shares whose Agent Members have been selected by the
Securities Depository and give notice of such determination to the Remarketing
Agent. In doing so, the Paying Agent may determine that Preferred Shares shall
be redeemed from the accounts of some Beneficial Owners, which may include the
Remarketing Agent, without Preferred Shares being redeemed from the accounts of
other Beneficial Owners.
(d) Notwithstanding paragraph 4(c) of this Part I, if any
certificates representing Preferred Shares are held by Holders other than the
Securities Depository or its nominee, then the Preferred Shares to be redeemed
shall be selected by the Paying Agent by lot.
(e) Any Notice of Redemption with respect to Preferred Shares
shall be given (A) in the case of a redemption pursuant to

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<PAGE> 61
paragraph 4(a) of this Part I, by the Trust to the Paying Agent, the Securities
Depository (and any other Holder) and the Remarketing Agent, by telephone, not
later than 1:00 p.m. New York City time (and later confirmed in writing) not
less than 20 nor more than 30 days prior to the earliest date upon which any
such redemption may occur and (B) in the case of a mandatory redemption
pursuant to paragraph 4(b) of this Part I, by the Trust to the Paying Agent,
the Securities Depository (and any other Holder) and the Remarketing Agent, by
telephone, not later than 1:00 p.m., New York City time (and later confirmed in
writing) not less than 20 nor more than 30 days prior to the redemption date
established by the Trustees and specified in such notice. In the case of a
partial redemption of the Preferred Shares, the Paying Agent shall use its
reasonable efforts to provide telephonic notice to each Beneficial Owner of
Preferred Shares called for redemption not later than the close of business on
the Business Day on which the Paying Agent determines the shares to be
redeemed, as described in paragraphs 4(c) and 4(d) of this Part I (or, during a
Non-Payment Period with respect to such shares, not later than the close of
business on the Business Day immediately following the day on which the Paying
Agent receives a Notice of Redemption from the Trust). Such telephonic notice
shall be confirmed promptly in writing to the Remarketing Agent, the Securities
Depository and each Beneficial Owner of Preferred Shares called for redemption
not later than the close of business on the Business Day immediately following
the day on

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<PAGE> 62
which the Paying Agent determines the shares to be redeemed. In the case of a
redemption in whole of the Preferred Shares, the Paying Agent shall use its
reasonable efforts to provide telephonic notice to each Beneficial Owner of
Preferred Shares called for redemption not later than the close of business on
the Business Day immediately following the day on which it receives a Notice of
Redemption from the Trust. Such telephonic notice shall be confirmed promptly
in writing to each Beneficial Owner of Preferred Shares called for redemption,
the Remarketing Agent and the Securities Depository not later than the close of
business on the second Business Day following the day on which the Paying Agent
receives a Notice of Redemption.
(f) Every Notice of Redemption and other redemption notice shall
state: (i) the redemption date; (ii) the number of Preferred Shares to be
redeemed; (iii) the redemption price; (iv) that dividends on the Preferred
Shares to be redeemed shall cease to accumulate as of such redemption date; and
(v) the provision of the Declaration of Trust or the By-laws pursuant to which
such shares are being redeemed. In addition, notice of redemption given to a
Beneficial Owner by the Paying Agent shall state the CUSIP number, if any, of
the Preferred Shares to be redeemed and the manner in which the Beneficial
Owners of such shares may obtain payment of the redemption price. No defect in
the Notice of Redemption or other redemption notice or in the transmittal or
the mailing thereof shall affect the validity of the redemption proceedings,
except as required by applicable law. The Paying

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Agent shall use its reasonable efforts to cause the publication of a Notice of
Redemption in an Authorized Newspaper within two Business Days of the date of
the Notice of Redemption, but failure so to publish such notification shall not
affect the validity or effectiveness of any such redemption proceedings.
(g) On any redemption date, the Trust shall deposit, irrevocably in
trust, in same-day funds, with the Paying Agent, by 12:00 noon, New York City
time, the Optional Redemption Price or Mandatory Redemption Price, as the case
may be, for each Preferred Share called for redemption.
(h) In connection with any redemption, upon the giving of a Notice of
Redemption and the deposit of the funds necessary for such redemption with the
Paying Agent in accordance with this paragraph 4, Preferred Shares so called
for redemption shall no longer be deemed outstanding for any purpose and all
rights of the Holders of Preferred Shares so called for redemption shall cease
and terminate, except the right of the Holders thereof to receive the Optional
Redemption Price or the Mandatory Redemption Price, as the case may be, but
without any interest or other additional amount (except as provided in
paragraph 3(k) of this Part I). The Trust shall be entitled to receive from
the Paying Agent, promptly after the date fixed for redemption, any cash
deposited with the Paying Agent as aforesaid in excess of the sum of (i) the
aggregate redemption price of the Preferred Shares called for redemption on
such date and (ii) all other amounts to which Holders of Preferred Shares
called for redemption may be

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entitled. The Trust shall be entitled to receive, from time to time after the
date fixed for redemption, any interest on any funds deposited in respect of
such redemption. Any funds so deposited with the Paying Agent which are
unclaimed at the end of ninety days from such redemption date shall, to the
extent permitted by law, be repaid to the Trust, after which time the Holders
of Preferred Shares so called for redemption shall look only to the Trust for
payment of the redemption price and all other amounts to which they may be
entitled. For so long as S&P rates the Preferred Shares, if any such unclaimed
funds are repaid to the Trust, the Trust shall invest such unclaimed funds in
Deposit Securities with a maturity of no more than one Business Day until such
time as there are no unclaimed funds.
(i) To the extent that any redemption for which Notice of Redemption
has been given is not made by reason of the absence of legally available funds
therefor, such redemption shall be made as soon as practicable to the extent
such funds become available. Failure to redeem Preferred Shares shall be
deemed to exist at any time after the date specified for redemption in a Notice
of Redemption when the Trust shall have failed, for any reason whatsoever, to
deposit funds with the Paying Agent pursuant to paragraph 4(g) of this Part I
with respect to any shares for which such Notice of Redemption has been given.
(j) Notwithstanding any of the foregoing provisions of this paragraph
4, the Remarketing Agent may, in its sole discretion, modify the procedures set
forth above with respect to

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notification of redemption, provided that any such modification does not
adversely affect any Holder of Preferred Shares or materially alter the
obligations of the Paying Agent; and further provided that the Trust receives
written confirmation from S&P that any such modification would not impair the
ratings then assigned by S&P to Preferred Shares.
(k) In effecting any redemption pursuant to this paragraph 4, the
Trust shall use all reasonable efforts to satisfy all applicable procedural
conditions precedent to effecting such redemption under the 1940 Act and
Massachusetts law.
(l) Notwithstanding the foregoing, (i) no Preferred Share may be
redeemed pursuant to paragraph 4(a) of this Part I unless the full amount of
accumulated but unpaid dividends to the date fixed for redemption for each such
Preferred Share called for redemption shall have been declared, and (ii) no
Preferred Share may be redeemed unless all outstanding Preferred Shares are
simultaneously redeemed, nor may any Preferred Shares be purchased or otherwise
acquired by the Trust except in accordance with a purchase offer made on
substantially equivalent terms by the Trust for all outstanding Preferred
Shares, unless, in each such instance, dividends (other than dividends, if any,
to be paid pursuant to paragraph 3(k) or 3(l) of this Part I which have not yet
become due and payable) on all outstanding Preferred Shares through the most
recent Dividend Payment Date shall have been paid or declared and sufficient
funds for the payment thereof deposited with the Paying Agent.

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(m) Except as set forth in this paragraph 4 with respect to
redemptions and subject to paragraph 4(l) hereof, nothing contained herein
shall limit any legal right of the Trust or any affiliate to purchase or
otherwise acquire any Preferred Share at any price. Any Preferred Shares which
have been redeemed, purchased or otherwise acquired by the Trust or any
affiliate thereof may be resold if, after the resale, the Trust has Moody's
Eligible Assets with an aggregate Discounted Value equal to or greater than the
Preferred Shares Basic Maintenance Amount as provided in Paragraph 8(a) of this
Part I. In lieu of redeeming shares called for redemption, the Trust shall
have the right to arrange for other purchasers to purchase from Holders all
Preferred Shares to be redeemed pursuant to this paragraph 4, except those
Preferred Shares to be redeemed pursuant to paragraph 4(b) hereof, by their
paying to such Holders on or before the close of business on the redemption
date an amount equal to not less than the redemption price payable by the Trust
on the redemption of such shares, and the obligation of the Trust to pay such
redemption price shall be satisfied and discharged to the extent such payment
is so made by such purchasers. Prior to the purchase of such shares by such
purchasers, the Trust shall notify each purchaser that such shares have been
called for redemption.
5. Liquidation. (a) Upon a liquidation, dissolution or winding
up of the affairs of the Trust, whether voluntary or involuntary, the Holders
shall be entitled, whether from capital

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or surplus, before any assets of the Trust shall be distributed among or paid
over to holders of Common Shares or any other class or series of shares of the
Trust ranking junior to the Preferred Shares as to liquidation payments, to be
paid the amount of $50,000 per Preferred Share, plus an amount equal to all
accumulated but unpaid dividends thereon (whether or not earned or declared) to
but excluding the date of final distribution, in same-day funds. After any
such payment, the Holders shall not be entitled to any further participation in
any distribution of assets of the Trust, except as provided in paragraph 3(k)
of this Part I.
(b) If, upon any such liquidation, dissolution or winding up of the
Trust, the assets of the Trust shall be insufficient to make such full payments
to the Holders and the holders of any Preferred Shares ranking as to
liquidation, dissolution or winding up on a parity with the Preferred Shares
(including the Other Preferred Shares), then such assets shall be distributed
among the Holders and such parity holders ratably in accordance with the
respective amounts which would be payable on such Preferred Shares and any
other such Preferred Shares if all amounts thereof were paid in full.
(c) Neither the consolidation nor the merger of the Trust with or
into any other entity or entities nor a reorganization of the Trust alone nor
the sale, lease or transfer by the Trust of all or substantially all of its
assets shall be deemed to be a dissolution or liquidation of the Trust.

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6. Voting Rights. (a) General. Except as otherwise provided in
the Declaration of Trust or By-laws, each Holder of Preferred Shares and each
record holder of Common Shares shall be entitled to one vote for each share
held on each matter submitted to a vote of shareholders of the Trust, and the
holders of outstanding preferred shares, including Preferred Shares, and of
Common Shares shall vote together as a single class; provided that, at any
meeting of the shareholders of the Trust held for the election of Trustees, the
holders of preferred shares, including Preferred Shares, present in person or
represented by proxy at said meeting, shall be entitled, as a class, to the
exclusion of the holders of all other securities and classes of capital shares
of the Trust, to elect two Trustees of the Trust, each preferred share,
including Preferred Shares, entitling the holder thereof to one vote. Subject
to paragraph 6(b) hereof, the holders of outstanding Common Shares and
preferred shares, including Preferred Shares, voting as a single class, shall
elect the balance of the Trustees.
(b) Right to Elect Majority of Trustees. During any period in which
any one or more of the conditions described below shall exist (such period
being referred to herein as a "Voting Period"), the number of Trustees shall be
automatically increased by the smallest number that, when added to the two
Trustees elected exclusively by the holders of preferred shares, would
constitute a majority of the Trustees as so increased by such smallest number;
and the holders of preferred shares shall be

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entitled, voting as a class on a one-vote-per-share basis (to the exclusion of
the holders of all other securities and classes of capital shares of the
Trust), to elect such smallest number of additional Trustees, together with the
two Trustees that such holders are in any event entitled to elect. A Voting
Period shall commence:
(i) if at any time accumulated dividends (whether or not
earned or declared, and whether or not funds are then legally
available in an amount sufficient therefor) on the outstanding
Preferred Shares equal to at least two full years' dividends shall be
due and unpaid and sufficient cash or securities shall not have been
deposited with the Paying Agent for the payment of such accumulated
dividends; or
(ii) if at any time holders of any preferred shares other
than the Preferred Shares are entitled to elect a majority of the
Trustees of the Trust.
Upon the termination of a Voting Period, the voting rights described in this
paragraph 6(b) shall cease, subject always, however, to the revesting of such
voting rights in the Holders upon the further occurrence of any of the events
described in this paragraph 6(b). A Voting Period shall terminate when all
dividends in arrears shall have been paid or otherwise provided for.
(c) Other Actions. Except as otherwise provided herein, so long as
any Preferred Shares are outstanding, the Trust shall not, without the
affirmative vote or consent of the Holders of at

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least a majority of the Preferred Shares outstanding at the time, in person or
by proxy, either in writing or at a meeting (voting separately as one class):
(i) authorize, create or issue, or increase or decrease the authorized or
issued amount of, any class or series of shares of beneficial interest ranking
prior to or on a parity with the Preferred Shares with respect to payment of
dividends or the distribution of assets on liquidation, or increase or decrease
the number of authorized Preferred Shares (although the Trust may, to the
extent of the amount of Preferred Shares authorized from time to time, issue
additional Preferred Shares without such vote or consent); (ii) amend, alter or
repeal the provisions of the Declaration of Trust and the By-laws, including
this Section 12.1, whether by merger, consolidation or otherwise, so as to
affect materially and adversely any preference, right or power of such
Preferred Shares or the Holders thereof; or (iii) take any other action
(including without limitation bankruptcy proceedings) which pursuant to Section
18(a)(2)(D) of the 1940 Act requires such approval by the Holders; provided
that (i) the issuance of not more than the 6,000 Preferred Shares presently
authorized and (ii) the creation and issuance of series of Preferred Shares
ranking junior to the Preferred Shares with respect to payment of dividends and
the distribution of assets on liquidation, will not be deemed to affect such
preferences, rights or powers unless such issuance would, at the time thereof,
cause the Trust not to satisfy the

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1940 Act Preferred Shares Asset Coverage or the Preferred Shares Basic
Maintenance Amount.
The foregoing voting provisions shall not apply with respect to
Preferred Shares if, at or prior to the time when a vote is required, such
Preferred Shares shall have been (i) redeemed or (ii) called for redemption and
sufficient funds (in the form of cash or Municipal Bonds rated at least P-1,
MIG-1 or VMIG-1 by Moody's and which mature prior to the redemption date) shall
have been deposited in trust to effect such redemption.
Notwithstanding the foregoing, the Trustees may, without the vote or
consent of the Holders of Preferred Shares, from time to time amend, alter or
repeal any or all of the provisions of paragraphs 12(a), 12(b), 12(c), 13(a)
and 13(b) of this Part I, as well as any or all of the definitions of the terms
listed below, and any such amendment, alteration or repeal will be deemed not
to affect the preferences, rights or powers of Preferred Shares or the Holders
thereof, provided the Trustees receive written confirmation from Moody's, in
the case of any such action with respect to paragraphs 12(b), 12(c), 13(a) and
13(b), or from S&P, in the case of any such action with respect to paragraphs
12(a), 13(a) and 13(b), or from both Moody's and S&P, in the case of any such
action with respect to the definitions of the terms listed below, that any such
amendment, alteration or repeal would not impair the ratings then assigned to
Preferred Shares by the rating agency providing such confirmation:

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<TABLE>
<S> <C>
Accountant's Confirmation 1940 Act Preferred Shares
Anticipation Notes Asset Coverage
Certificate of Minimum Municipal Bonds
Liquidity Municipal Index
Closing Transactions Quarterly Valuation Date
Deposit Securities Receivables for Municipal
Discounted Value Bonds Sold
Dividend Coverage Amount Preferred Shares Basic
Dividend Coverage Assets Maintenance Amount
Forward Commitments Preferred Shares Basic
Independent Accountant Maintenance Cure Date
Initial Margin Preferred Shares Basic
Market Value Maintenance Report
Maximum Potential Additional S&P Discount Factor
Dividend Liability S&P Eligible Asset
Minimum Liquidity Level S&P Hedging Transaction
Moody's Discount Factor S&P Exposure Period
Moody's Eligible Asset S&P Volatility Factor
Moody's Hedging Transaction Treasury Bonds
Moody's Exposure Period Valuation Date
Moody's Volatility Factor Variation Margin
1940 Act Cure Date
</TABLE>

(d) Voting Procedures. (i) As soon as practicable after the
accrual of any right of the holders of shares of preferred shares to elect
additional Trustees as described in paragraph 6(b) above, the Trust shall
notify the Paying Agent and the Paying Agent shall call a special meeting of
such holders, by mailing a notice of such special meeting to such holders, such
meeting to be held not less than 10 nor more than 20 days after the date of
mailing of such notice. If the Trust fails to send such notice to the Paying
Agent or if the Paying Agent does not call such a special meeting, it may be
called by any such holder on like notice. The record date for determining the
holders entitled to notice of and to vote at such special meeting shall

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be the close of business on the fifth Business Day preceding the day on which
such notice is mailed. At any such special meeting and at each meeting held
during a Voting Period, such holders, voting together as a class (to the
exclusion of the holders of all other securities and classes of capital shares
of the Trust), shall be entitled to elect the number of Trustees prescribed in
paragraph 6(b) above on a one-vote-per-share basis. At any such meeting or
adjournment thereof in the absence of a quorum, a majority of such holders
present in person or by proxy shall have the power to adjourn the meeting
without notice, other than an announcement at the meeting, until a quorum is
present.
(ii) For purposes of determining any rights of the Holders to vote on
any matter, whether such right is created by this Section 12.1, by the other
provisions of the Declaration of Trust or the By-laws, by statute or otherwise,
no Holder shall be entitled to vote and no Preferred Share shall be deemed to
be "outstanding" for the purpose of voting or determining the number of shares
required to constitute a quorum if, prior to or concurrently with the time of
determination of shares entitled to vote or shares deemed outstanding for
quorum purposes, as the case may be, sufficient funds (in the form of cash or
Municipal Bonds rated at least P-1, MIG-1 or VMIG-1 by Moody's and which mature
prior to the redemption date) for the redemption of such shares have been
deposited in trust with the Paying Agent for that purpose and the requisite
Notice of Redemption with respect to such shares shall have been given as
provided in paragraph 4

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of this Part I. No Preferred Share held by the Trust or any affiliate of the
Trust shall have any voting rights or be deemed to be outstanding for voting
purposes.
(iii) The terms of office of all persons who are Trustees of the
Trust at the time of a special meeting of Holders and holders of other
preferred shares to elect Trustees shall continue, notwithstanding the election
at such meeting by the Holders and such other holders of the number of Trustees
that they are entitled to elect, and the persons so elected by the Holders and
such other holders, together with the two incumbent Trustees elected by the
Holders and such other holders of preferred shares and the remaining incumbent
Trustees elected by the holders of the Common Shares and preferred shares,
shall constitute the duly elected Trustees of the Trust.
(iv) Simultaneously with the expiration of a Voting Period, the terms
of office of the additional Trustees elected by the Holders and holders of
other preferred shares pursuant to paragraph 6(b) above shall terminate, the
remaining Trustees shall constitute the Trustees of the Trust and the voting
rights of the Holders and such other holders to elect additional Trustees
pursuant to paragraph 6(b) above shall cease, subject to the provisions of the
penultimate sentence of paragraph 6(b).
(e) Exclusive Remedy. Unless otherwise required by law, the Holders
of Preferred Shares shall not have any relative rights or preferences or other
special rights other than those specifically set forth herein. The Holders of
Preferred Shares

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shall have no preemptive rights or rights to cumulative voting. In the event
that the Trust fails to pay any dividends on the Preferred Shares, the
exclusive remedy of the Holders shall be the right to vote for Trustees
pursuant to the provisions of this paragraph 6. In no event shall the Holders
of Preferred Shares have any right to sue for, or bring a proceeding with
respect to, such dividends or redemptions or damages for the failure to receive
any dividends or the proceeds of a redemption.
(f) Notification to Moody's and S&P. In the event a vote of Holders
of Preferred Shares is required pursuant to the provisions of Section 13(a) of
the 1940 Act, the Trust shall, not later than ten Business Days prior to the
date on which such vote is to be taken, notify Moody's and S&P that such vote
is to be taken, the nature of the action with respect to which such vote is to
be taken and, not later than 10 Business Days following the vote, the results
of the vote.
7. 1940 Act Preferred Shares Asset Coverage. The Trust shall
maintain, as of the last Business Day of each month in which any Preferred
Share is outstanding, the 1940 Act Preferred Shares Asset Coverage.
8. Preferred Shares Basic Maintenance Amount. (a) The Trust
shall maintain, on each Valuation Date, and shall verify to its satisfaction
that it is maintaining on such Valuation Date, (i) S&P Eligible Assets having
an aggregate Discounted Value equal to or greater than the Preferred Shares
Basic Maintenance Amount and (ii) Moody's Eligible Assets having an aggregate

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Discounted Value equal to or greater than the Preferred Shares Basic
Maintenance Amount. Upon any failure to maintain the required Discounted
Value, the Trust will use its best efforts to alter the composition of its
portfolio to reattain the Preferred Shares Basic Maintenance Amount on or prior
to the Preferred Shares Basic Maintenance Cure Date. If, on any Valuation
Date, the Trust shall have Moody's Eligible Assets with a Discounted Value
which exceeds the Preferred Shares Basic Maintenance Amount by not more than
5%, the Adviser shall not alter the composition of the Trust's portfolio unless
it determines that such action will not cause the Trust to have Moody's
Eligible Assets with a Discounted Value less than the Preferred Shares Basic
Maintenance Amount.
(b) The Trust will deliver a Preferred Shares Basic Maintenance
Report to the Remarketing Agent, the Paying Agent, Moody's and S&P as of (i)
each Quarterly Valuation Date, (ii) the first day of a Special Dividend Period,
and (iii) any other time when specifically requested by either Moody's or S&P,
in each case at or before 5:00 p.m., New York City time, on the third Business
Day after such day.
(c) At or before 5:00 p.m., New York City time, on the third Business
Day after a Valuation Date on which the Trust fails to maintain Moody's
Eligible Assets or S&P Eligible Assets, as the case may be, with an aggregate
Discounted Value which exceeds the Preferred Shares Basic Maintenance Amount by
5% or more or to satisfy the Preferred Shares Basic Maintenance Amount,

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the Trust shall complete and deliver to the Remarketing Agent, the Paying
Agent, Moody's and S&P an Preferred Shares Basic Maintenance Report as of the
date of such failure.
(d) At or before 5:00 p.m., New York City time, on the third Business
Day after a Valuation Date on which the Trust cures any failure to satisfy the
Preferred Shares Basic Maintenance Amount, the Trust shall complete and deliver
to the Remarketing Agent, the Paying Agent, Moody's and S&P an Preferred Shares
Basic Maintenance Report as of the date of such cure.
(e) A Preferred Shares Basic Maintenance Report or Accountant's
Confirmation will be deemed to have been delivered to the Remarketing Agent,
the Paying Agent, Moody's and S&P if the Remarketing Agent, the Paying Agent,
Moody's and S&P receive a copy or telecopy, telex or other electronic
transcription thereof and on the same day the Trust mails to the Remarketing
Agent, the Paying Agent, Moody's and S&P for delivery on the next Business Day
the full Preferred Shares Basic Maintenance Report. A failure by the Trust to
deliver an Preferred Shares Basic Maintenance Report under subparagraph (b),
(c) or (d) of this paragraph 8 shall be deemed to be delivery of a Preferred
Shares Basic Maintenance Report indicating that the Discounted Value for all
assets of the Trust is less than the Preferred Shares Basic Maintenance Amount,
as of the relevant Valuation Date.
(f) Whenever the Trust delivers a Preferred Shares Basic Maintenance
Report to S&P pursuant to subparagraph (b) of this

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paragraph 8, it shall also deliver a Certificate of Minimum Liquidity to the
Remarketing Agent and the Paying Agent.

(g) Within ten Business Days after the date of delivery to the
Remarketing Agent, the Paying Agent, S&P and Moody's of a Preferred Shares
Basic Maintenance Report in accordance with paragraph 8(b) above relating to a
Quarterly Valuation Date, the Independent Accountant will confirm in writing to
the Remarketing Agent, the Paying Agent, S&P and Moody's (i) the mathematical
accuracy of the calculations reflected in such Report (and in any other
Preferred Shares Basic Maintenance Report, randomly selected by the Independent
Accountant, that was delivered by the Trust during the quarter ending on such
Quarterly Valuation Date); (ii) that, in such Report (and in such randomly
selected Report), (a) the Trust determined in accordance with this Section 12.1
whether the Trust had, at such Quarterly Valuation Date (and at the Valuation
Date addressed in such randomly selected Report), S&P Eligible Assets of an
aggregate Discounted Value at least equal to the Preferred Shares Basic
Maintenance Amount and Moody's Eligible Assets of an aggregate Discounted Value
at least equal to the Preferred Shares Basic Maintenance Amount, (b) the
aggregate amount of Dividend Coverage Assets equals or exceeds the Dividend
Coverage Amount, and (c) it has obtained confirmation from the Pricing Service
that the Market Value of portfolio securities as determined by the Pricing
Service equals the mean between the quoted bid and asked prices or the yield
equivalent (when quotations are readily available); (iii) that

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the Trust has excluded from the Preferred Shares Basic Maintenance Report
assets not qualifying as Eligible Assets; and (iv) with respect to such
confirmation to Moody's, that the Trust has satisfied the requirements of
paragraph 12(b) of this Part I as of the Quarterly Valuation Date (and at the
Valuation Date addressed in such randomly selected Report) (such confirmation
is herein called the "Accountant's Confirmation"). In preparing the
Accountant's Confirmation, the Independent Accountant shall be entitled to
rely, without further investigation, on such interpretations of law by the
Trust as may have been necessary for the Trust to perform the computations
contained in the Preferred Shares Basic Maintenance Report.
(h) Within ten Business Days after the date of delivery to the
Remarketing Agent, the Paying Agent, S&P and Moody's of an Preferred Shares
Basic Maintenance Report in accordance with paragraph 8(c) above relating to
any Valuation Date on which the Trust failed to satisfy the Preferred Shares
Basic Maintenance Amount, the Independent Accountant will provide to the
Remarketing Agent, the Paying Agent, S&P and Moody's an Accountant's
Confirmation as to such Preferred Shares Basic Maintenance Report.
(i) Within ten Business Days after the date of delivery to the
Remarketing Agent, the Paying Agent, S&P and Moody's of a Preferred Shares
Basic Maintenance Report in accordance with paragraph 8(d) above relating to
any Valuation Date on which the Trust cured any failure to satisfy the
Preferred Shares Basic

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Maintenance Amount, the Independent Accountant will provide to the Remarketing
Agent, the Paying Agent, S&P and Moody's an Accountant's Confirmation as to
such Preferred Shares Basic Maintenance Report.
(j) If any Accountant's Confirmation delivered pursuant to
subparagraph (g), (h) or (i) of this paragraph 8 shows that an error was made
in the Preferred Shares Basic Maintenance Report for a particular Valuation
Date for which such Accountant's Confirmation was required to be delivered, or
shows that a lower aggregate Discounted Value for the aggregate of all S&P
Eligible Assets or Moody's Eligible Assets, as the case may be, of the Trust
was determined by the Independent Accountant, the calculation or determination
made by such Independent Accountant shall be final and conclusive and shall be
binding on the Trust, and the Trust shall accordingly amend and deliver the
Preferred Shares Basic Maintenance Report to the Remarketing Agent, the Paying
Agent, S&P and Moody's promptly following receipt by the Trust of such
Accountant's Confirmation.
(k) At or before 5:00 p.m., New York City time, on the first Business
Day after the Date of Original Issue of the Preferred Shares, the Trust will
complete and deliver to Moody's and S&P a Preferred Shares Basic Maintenance
Report as of the close of business on such Date of Original Issue. Within five
Business Days of such Date of Original Issue, the Independent Accountant will
provide to Moody's and S&P an Accountant's

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Confirmation as to such Preferred Shares Basic Maintenance Report.
(l) At or before 5:00 p.m., New York City time, on the first Business
Day following any date on which the Trust repurchases any outstanding Common
Shares, the Trust will complete and deliver to Moody's and S&P a Preferred
Shares Basic Maintenance Report as of the close of business on the date of the
repurchase.
9. Minimum Liquidity Level. (a) For so long as any Preferred
Shares are rated by S&P, the Trust shall be required to maintain the Minimum
Liquidity Level.
(b) As of each Valuation Date, as long as any Preferred Shares are
rated by S&P, the Trust shall determine (i) the Market Value of the Dividend
Coverage Assets owned by the Trust as of that Valuation Date, (ii) the Dividend
Coverage Amount on that Valuation Date, and (iii) whether the Minimum Liquidity
Level is met as of that Valuation Date. The calculations of the Dividend
Coverage Assets, the Dividend Coverage Amount and whether the Minimum Liquidity
Level is met shall be set forth in a certificate (a "Certificate of Minimum
Liquidity") dated as of the Valuation Date and deliverable to S&P as provided
herein. The Preferred Shares Basic Maintenance Report and the Certificate of
Minimum Liquidity may be combined in one certificate. The Trust shall cause a
Certificate of Minimum Liquidity to be delivered to S&P not later than the
close of business on the third Business Day after a Valuation Date with respect
to which a

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Preferred Shares Basic Maintenance Report must be delivered as required by
paragraph 8(b). The Minimum Liquidity Level shall be deemed to be met as of
any Valuation Date if the Trust has timely delivered a Certificate of Minimum
Liquidity relating to such date which states that the same has been met and
which is not manifestly inaccurate. In the event that a Certificate of Minimum
Liquidity is not delivered to S&P when required, the Minimum Liquidity Level
shall be deemed not to have been met as of the applicable date.
(c) If the Minimum Liquidity Level is not met as of any Valuation
Date, then the Trust shall purchase or otherwise acquire Dividend Coverage
Assets to the extent necessary so that the Minimum Liquidity Level is met as of
the fifth Business Day following such Valuation Date. The Trust shall, by such
fifth Business Day, provide to S&P a Certificate of Minimum Liquidity setting
forth the calculations of the Dividend Coverage Assets and the Dividend
Coverage Amount and showing that the Minimum Liquidity Level is met as of such
fifth Business Day together with a report of the custodian of the Trust's
assets confirming the amount of the Trust's Dividend Coverage Assets as of such
fifth Business Day.
10. Restrictions on Certain Distributions. For so long as any
Preferred Share is outstanding, the Trust shall not declare, pay or set apart
for payment any dividend or other distribution (other than a dividend or
distribution paid in shares of, or options, warrants or rights to subscribe for
or purchase, Common

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Shares or other shares, if any, ranking junior to the Preferred Shares as to
dividends and upon liquidation) in respect of Common Shares or any other shares
of the Trust ranking junior to or on a parity with the Preferred Shares as to
dividends or upon liquidation, or call for redemption, redeem, purchase or
otherwise acquire for consideration any Common Shares or any other such junior
shares or parity shares (except by conversion into or exchange for shares of
the Trust ranking junior to the Preferred Shares as to dividends and upon
liquidation), unless (i) full cumulative dividends on Preferred Shares and
Other Preferred Shares through the most recent Dividend Payment Date shall have
been paid or shall have been declared and sufficient funds for the payment
thereof deposited with the Paying Agent, (ii) the Trust has redeemed the full
number of Preferred Shares and Other Preferred Shares required to be redeemed
by any provision for mandatory redemption pertaining thereto, (iii) immediately
after such transaction the aggregate Discounted Value of Moody's Eligible
Assets and S&P Eligible Assets would at least equal the Preferred Shares Basic
Maintenance Amount and (iv) the Trust meets the applicable requirements of
Section 18(a)(2)(B) of the 1940 Act.
11. Notice. All notices or communications, unless otherwise
specified in these By-laws, shall be sufficiently given if in writing and
delivered in person or mailed by first-class mail, postage prepaid. Notice
shall be deemed given on the

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earlier of the date received or the date seven days after which such notice is
mailed.
12. Futures and Options Transactions; Forward Commitments.
(a) For so long as any Preferred Shares are rated by S&P, the Trust will not
purchase or sell futures contracts, write, purchase or sell options on futures
contracts or write put options (except covered put options) or call options
(except covered call options) on portfolio securities unless it receives
written confirmation from S&P that engaging in such transactions will not
impair the rating then assigned to the Preferred Shares by S&P, except that the
Trust may purchase or sell futures contracts based on the Bond Buyer Municipal
Bond Index (the "Municipal Index") or United States Treasury Bonds with
remaining maturities of ten years or more ("Treasury Bonds") and write,
purchase or sell put and call options on such contracts (collectively "S&P
Hedging Transactions"), subject to the following limitations:
(A) the Trust will not engage in any S&P Hedging Transaction
based on the Municipal Index (other than transactions which terminate
a futures contract or option held by the Trust by the Trust's taking
an opposite position thereto ("Closing Transactions")), which would
cause the Trust at the time of such transaction to own or have sold
(1) 1,001 or more outstanding futures contracts based on the Municipal
Index, (2) outstanding futures contracts based on the Municipal Index
and on Treasury Bonds exceeding in

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number 25% of the quotient of the Market Value of the Trust's total
assets divided by $100,000 or (3) outstanding futures contracts based
on the Municipal Index exceeding in number 10% of the average number
of daily traded futures contracts based on the Municipal Index in the
thirty days preceding the time of effecting such transaction as
reported by The Wall Street Journal;
(B) the Trust will not engage in any S&P Hedging Transaction
based on Treasury Bonds (other than Closing Transactions) which would
cause the Trust at the time of such transaction to own or have sold
(1) outstanding futures contracts based on Treasury Bonds and on the
Municipal Index exceeding in number 25% of the quotient of the Market
Value of the Trust's total assets divided by $100,000 or (2)
outstanding futures contracts based on Treasury Bonds exceeding in
number 10% of the average number of daily traded futures contracts
based on Treasury Bonds in the thirty days preceding the time of
effecting such transaction as reported by The Wall Street Journal;
(C) the Trust will engage in Closing Transactions to close
out any outstanding futures contract which the Trust owns or has sold
or any outstanding option thereon owned by the Trust in the event (i)
the Trust does not have S&P Eligible Assets with an aggregate
Discounted Value equal to or greater than the Preferred Shares Basic
Maintenance Amount on two consecutive Valuation Dates and (ii) the
Trust

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is required to pay Variation Margin on the second such Valuation Date;
(D) the Trust will engage in a Closing Transaction to close
out any outstanding futures contract or option thereon in the month
prior to the delivery month under the terms of such futures contract
or option thereon unless the Trust holds the securities deliverable
under such terms; and
(E) when the Trust writes a futures contract or option
thereon (including a futures contract or option thereon which requires
delivery of an underlying security), it will either maintain an amount
of cash, cash equivalents or short- term, fixed-income securities in a
segregated account with the Trust's custodian, so that the amount so
segregated plus the amount of Initial Margin and Variation Margin held
in the account of or on behalf of the Trust's broker with respect to
such futures contract or option equals the Market Value of the futures
contract or option, or, in the event the Trust writes a futures
contract or option thereon which requires delivery of an underlying
security, it shall hold such underlying security in its portfolio.
For purposes of determining whether the Trust has S&P Eligible Assets
with a Discounted Value that equals or exceeds the Preferred Shares Basic
Maintenance Amount, such Discounted Value shall, unless the Trust receives
written confirmation from S&P to the contrary, be reduced by an amount equal to
(i) 30% of the aggregate settlement value, as marked to market, of any

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outstanding futures contracts based on the Municipal Index which are owned by
the Trust plus (ii) 25% of the aggregate settlement value, as marked to market,
of any outstanding futures contracts based on Treasury Bonds which contracts
are owned by the Trust.
(b) For so long as any Preferred Shares are rated by Moody's, the
Trust will not buy or sell futures contracts, write, purchase or sell put or
call options on futures contracts or write put or call options (except covered
call or put options) on portfolio securities unless it receives written
confirmation from Moody's that engaging in such transactions would not impair
the rating then assigned to the Preferred Shares by Moody's, except that the
Trust may purchase or sell exchange-traded futures contracts based on the
Municipal Index or Treasury Bonds and purchase, write or sell exchange-traded
put options on such futures contracts and purchase, write or sell
exchange-traded call options on such futures contracts (collectively "Moody's
Hedging Transactions"), subject to the following limitations:
(A) the Trust will not engage in any Moody's Hedging
Transaction based on the Municipal Index (other than Closing
Transactions) which would cause the Trust at the time of such
transaction to own or have sold (1) outstanding futures contracts
based on the Municipal Index exceeding in number 10% of the average
number of daily traded futures contracts based on the Municipal Index
in the thirty days preceding the time of effecting such transaction as
reported by The Wall Street Journal or (2) outstanding futures
contracts

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based on the Municipal Index having a Market Value exceeding the
Market Value of Municipal Bonds constituting Moody's Eligible Assets
owned by the Trust;
(B) the Trust will not engage in any Moody's Hedging
Transaction based on Treasury Bonds (other than Closing Transactions)
which would cause the Trust at the time of such transaction to own or
have sold in the aggregate (1) outstanding futures contracts based on
Treasury Bonds having an aggregate Market Value exceeding 10% of the
aggregate Market Value of all Moody's Eligible Assets owned by the
Trust and rated Aaa by Moody's, (2) outstanding futures contracts
based on Treasury Bonds having an aggregate Market Value exceeding 50%
of the aggregate Market Value of all Moody's Eligible Assets owned by
the Trust and rated Aa by Moody's (or, if not rated by Moody's but
rated by S&P, rated AAA by S&P) or (3) outstanding futures contracts
based on Treasury Bonds having an aggregate Market Value exceeding 90%
of the aggregate Market Value of Moody's Eligible Assets owned by the
Trust and rated Baa or A by Moody's (or, if not rated by Moody's but
rated by S&P, rated A or AA by S&P) (for purposes of the foregoing
clauses (A) and (B), the Trust shall be deemed to own the number of
futures contracts that underlie any outstanding options written by the
Trust);
(C) the Trust will engage in Closing Transactions to close
out any outstanding futures contract based on the Municipal Index if
the amount of open interest in the

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Municipal Index as reported by The Wall Street Journal is less than
5,000;
(D) the Trust will engage in a Closing Transaction to close
out any outstanding futures contract by no later than the fifth
Business Day of the month in which such contract expires and will
engage in a Closing Transaction to close out any outstanding option on
a futures contract by no later than the first Business Day of the
month in which such option expires;
(E) the Trust will engage in Moody's Hedging Transactions
only with respect to futures contracts or options thereon having the
next settlement date for such type of futures contract or option, or
the settlement date immediately thereafter;
(F) the Trust will not engage in options and futures
transactions for leveraging or speculative purposes unless Moody's
shall advise the Trust that to do so would not adversely affect
Moody's' then current rating of the Preferred Shares; provided,
however, that the Trust will not be deemed to have engaged in a
futures or options transaction for leveraging or speculative purposes
so long as it has done so otherwise in accordance with this paragraph
12; and
(G) the Trust will not enter into an option or futures
transaction unless, after giving effect thereto, the Trust would
continue to have Moody's Eligible Assets with an

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aggregate Discounted Value equal to or greater than the Preferred
Shares Basic Maintenance Amount.

For purposes of determining whether the Trust has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the Preferred
Shares Basic Maintenance Amount, the Discounted Value of Moody's Eligible
Assets which the Trust is obligated to deliver or receive pursuant to an
outstanding futures contract or option shall be as follows (unless the Trust
receives written confirmation to the contrary from Moody's): (i) assets
subject to call options written by the Trust which are either exchange- traded
and "readily reversible" or which expire within 48 days after the date as of
which such valuation is made shall be valued at the lesser of (a) Discounted
Value and (b) the exercise price of the call option written by the Trust; (ii)
assets subject to call options written by the Trust not meeting the
requirements of clause (i) of this sentence shall have no value; (iii) assets
subject to put options written by the Trust shall be valued at the lesser of
(a) the exercise price and (b) the Discounted Value of such security; and (iv)
futures contracts shall be valued at the lesser of (a) settlement price and (b)
the Discounted Value of the subject security, provided that, if a contract
matures within 48 days after the date as of which such valuation is made, where
the Trust is the seller the contract may be valued at the settlement price and
where the Trust is the buyer the contract may be valued at the Discounted Value
of the subject securities.

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For purposes of determining whether the Trust has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the Preferred
Shares Basic Maintenance Amount, the following amounts shall be added to the
Preferred Shares Basic Maintenance Amount required to be maintained by the
Trust under paragraph 8(a) of this Part I (unless the Trust receives written
confirmation to the contrary from Moody's): (i) 10% of the exercise price of a
written call option; (ii) the exercise price of any written put option; (iii)
where the Trust is the seller under a futures contract, 10% of the settlement
price of the futures contract; (iv) where the Trust is the purchaser under a
futures contract, the settlement price of assets to be purchased under such
futures contract; (v) the settlement price of the underlying futures contract
if the Trust writes put options on a futures contract; and (vi) 105% of the
Market Value of the underlying futures contracts if the Trust writes call
options on futures contracts and does not own the underlying contract.
(c) For so long as any Preferred Shares are rated by Moody's, the
Trust will not enter into any contract to purchase securities for a fixed price
at a future date beyond customary settlement time (other than such contracts
that constitute Moody's Hedging Transactions that are permitted under paragraph
12(b) of this Part I) unless it receives written confirmation from Moody's that
engaging in such transactions would not impair the rating then assigned to the
Preferred Shares by Moody's except that the Trust may enter into such contracts
to purchase

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newly-issued securities on the date such securities are issued ("Forward
Commitments"), subject to the following limitations:
(A) the Trust will maintain in a segregated account with its
custodian cash, cash equivalents or short-term, fixed income
securities rated P-1, MIG-1 or VMIG-1 by Moody's and maturing prior to
the date of the Forward Commitment with a face value that equals or
exceeds the amount of the Trust's obligations under any Forward
Commitments to which it is from time to time a party or long-term
fixed income securities with a Discounted Value that equals or exceeds
the amount of the Trust's obligations under any Forward Commitments to
which it is from time to time a party; and
(B) the Trust will not enter into a Forward Commitment
unless, after giving effect thereto, the Trust would continue to have
Moody's Eligible Assets with an aggregate Discounted Value equal to or
greater than the Preferred Shares Basic Maintenance Amount.
For purposes of determining whether the Trust has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the Preferred
Shares Basic Maintenance Amount, the Discounted Value of all Forward
Commitments to which the Trust is a party and of all securities deliverable to
the Trust pursuant to such Forward Commitments shall be zero.
13. Certain Other Restrictions. (a) For so long as any Preferred
Shares are outstanding, the Trust will not, unless it

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has received written confirmation from Moody's and S&P that any such action
would not impair the ratings then assigned by Moody's and S&P to Preferred
Shares, engage in any one or more of the following transactions:
(i) borrow any money except as may be necessary for the clearance of
purchases and sales of portfolio securities and which borrowings shall be
repaid within 60 days and not be extended or renewed (provided that no such
borrowing will be permitted unless the Trust, after giving effect to such
borrowing, maintains Moody's Eligible Assets and S&P Eligible Assets at least
equal to the Preferred Shares Basic Maintenance Amount);
(ii) lend portfolio securities;
(iii) designate a new Pricing Service;
(iv) engage in short sales;
(v) merge or consolidate with any other entity;
(vi) engage in reverse repurchase agreements; or
(vii) issue a class or series of shares of beneficial interest ranking prior
to or on a parity with the Preferred Shares with respect to payment of
dividends or the distribution of assets on liquidation.
(b) For so long as Preferred Shares are rated by Moody's or S&P, the
Trust shall give to Moody's or S&P, as the case may be, prompt written notice
of the following circumstances:
(i) any change to the Declaration of Trust or Article 12 of the By-laws;

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(ii) any failure to declare or pay any dividend on the Preferred Shares;
(iii) any mandatory or optional redemption of the Preferred Shares;
(iv) any assumption of control of the Trustees by the Holders of Preferred
Shares pursuant to Section 6(b) of this Part I;
(v) in the event the Trust shall not be a party to a pricing services
agreement and dealer quotes on assets are not available;
(vi) in the event that the Applicable Dividend Rate equals or exceeds 95% of
the applicable Reference Rate;
(vii) any person owning of record more than 5% of the Trust's Common Shares;
(viii) a change in Internal Revenue Service rules on Additional Dividends
relating to the operation of the Trust; and
(ix) Putnam Investment Management, Inc. is no longer the Trust's investment
manager.
14. Legally Available Funds. For purposes of this Section 12.1,
funds shall not be "legally available" for the payment of dividends or the
redemption price with respect to any Preferred Share if the Trust is insolvent
at the time such payment would be made or to the extent that such payment
cannot be made without rendering the Trust insolvent.

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PART II
REMARKETING PROCEDURES

The provisions of this Part II and other provisions of these By-laws
describe the procedures pursuant to which the Applicable Dividend Rate shall,
except as otherwise provided in these By-laws, be determined for any Dividend
Period. In the event that any of the Remarketing Agent, Paying Agent,
Securities Depository, Agent Members and Beneficial Owners fail for any reason
to perform any of the acts or obligations to be performed by him or it as
described herein, then no Holder or Beneficial Owner of any Preferred Shares
shall have any right in respect thereof against the Trust or any Trustee or
officer of the Trust, and the sole obligation of the Trust in respect of the
determination of the amount and the payment of any dividend shall be to pay to
the Holders of the Preferred Shares as shown on the share transfer books of the
Trust from time to time dividends as determined in accordance with the terms of
this Part II and any other applicable provisions of these By-laws.
Notwithstanding any provision of these By- laws, the Trust shall have no
obligation at any time to provide notice (other than to the Remarketing Agent,
the Paying Agent, the Securities Depository, S&P and Moody's), or to make any
payment (in respect of any dividend or otherwise), to any person other than the
Holders of the Preferred Shares shown on the share transfer books of the Trust
from time to time, and the providing of any notice or the

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payment of any amount to such Holders (or to such other entities) shall
discharge in full for all purposes (including without limitation as against all
Beneficial Owners of any Preferred Shares) the Trust's obligation to provide
any notice or to make any payment.
1. Remarketing Schedule. Each Remarketing shall take place over
a two-Business Day period consisting of the Remarketing Date and the Settlement
Date. Such dates or the method of establishing such dates shall be determined
by the Trustees from time to time and until further action by the Trustees, a
Remarketing Date shall occur on the last Business Day of a Dividend Period
(except for the last Dividend Period for the Preferred Shares) and the related
Settlement Date shall occur on the first Business Day of the succeeding
Dividend Period.
2. Procedure for Tendering. (a) Each Preferred Share is subject
to Tender and Dividend Reset at the end of each Dividend Period for the
Preferred Shares and may be tendered in the Remarketing which commences on the
Remarketing Date immediately prior to the end of the current Dividend Period.
By 9:00 a.m., New York City time, on each such Remarketing Date, the
Remarketing Agent shall, after canvassing the market and considering prevailing
market conditions at the time for Preferred Shares and similar securities,
provide Beneficial Owners non-binding indications of the Applicable Dividend
Rate for the next succeeding 28-day Dividend Period or, if applicable, a
Special Dividend Period; provided that, if the Trust has

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designated the next Dividend Period as a Special Dividend Period, the
Remarketing Agent will provide to Beneficial Owners a non-binding indication
only of the Applicable Dividend Rate for such Special Dividend Period. The
actual Applicable Dividend Rate for such Dividend Period may be greater than or
less than the rate per annum indicated in such non-binding indications (but not
greater than the applicable Maximum Dividend Rate). By 12:00 noon, New York
City time, on such Remarketing Date, each Beneficial Owner of a Preferred Share
must notify a Remarketing Agent of its desire, on a share-by-share basis,
either to tender such Preferred Share at a price of $50,000 per share or to
continue to hold such share for the next 28-day Dividend Period or, if
applicable, the next Special Dividend Period. Beneficial Owners who do not
provide such notice shall be deemed to have elected (i) to hold all their
Preferred Shares if each of the current Dividend Period and succeeding Dividend
Period is a 28-day Dividend Period or a Special Dividend Period of 90 days or
less, and (ii) to tender all their Preferred Shares if the current Dividend
Period or succeeding Dividend Period is a Special Dividend Period of more than
90 days. Any notice given to a Remarketing Agent to tender or hold shares for
a particular Dividend Period shall be irrevocable and shall not be conditioned
upon the level at which the Applicable Dividend Rate is established. A
Remarketing Agent may, in its sole discretion, (i) at the request of a
Beneficial Owner that has tendered one or more shares to such Remarketing
Agent, waive such Beneficial

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Owner's tender, and thereby enable such Beneficial Owner to continue to hold
the share or shares for the next 28-day Dividend Period or, if applicable, a
designated Special Dividend Period, as agreed to by such Beneficial Owner and
such Remarketing Agent at such time, so long as such tendering Beneficial Owner
has indicated to such Remarketing Agent that it would accept the new Applicable
Dividend Rate for such Dividend Period, such waiver to be contingent upon the
Remarketing Agent's ability to remarket all Preferred Shares tendered in such
Remarketing, and (ii) at the request of a Beneficial Owner that has elected to
hold one or more of its Preferred Shares, waive such Beneficial Owner's
election with respect thereto, such waiver to be contingent upon the
Remarketing Agent's ability to remarket all Preferred Shares tendered in such
Remarketing.
(b) The ability of each Beneficial Owner to tender Preferred
Shares in a Remarketing shall be limited to the extent that (i) the Remarketing
Agent conducts a Remarketing pursuant to the terms of the Remarketing
Agreement, (ii) shares tendered have not been called for redemption and (iii)
the Remarketing Agent is able to find a purchaser or purchasers for tendered
Preferred Shares at an Applicable Dividend Rate for the next applicable
Dividend Period that is not in excess of the Maximum Dividend Rate for such
Dividend Period.
3. Determination of Applicable Dividend Rates. (a) By 3:00 p.m.,
New York City time, on each Remarketing Date, the Remarketing Agent shall
determine the Applicable Dividend Rate to

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the nearest one-thousandth (0.001) of one percent per annum for the next 28-day
Dividend Period, or, if designated, Special Dividend Period. The Applicable
Dividend Rate for each such Dividend Period, except as otherwise required
herein, shall be the dividend rate per annum which the Remarketing Agent
determines, in its sole judgment, to be the lowest rate that will enable it to
remarket on behalf of the Beneficial Owners thereof all Preferred Shares
subject to Tender and Dividend Reset in such Remarketing and tendered to it on
such Remarketing Date at a price of $50,000 per share.
(b) If no Applicable Dividend Rate shall have been established on
a Remarketing Date in a Remarketing for the next 28- day Dividend Period, or
Special Dividend Period, if any, for any reason (other than because there is no
Remarketing Agent, the Remarketing Agent is not required to conduct a
Remarketing pursuant to the terms of the Remarketing Agreement or the
Remarketing Agent is unable to remarket on the Remarketing Date all Preferred
Shares tendered (or deemed tendered) to it at a price of $50,000 per share),
then the Remarketing Agent, in its sole discretion, shall, if necessary and
except during a Non-Payment Period, after taking into account market conditions
as reflected in the prevailing yields on fixed and variable rate taxable and
tax exempt debt securities and the prevailing dividend yields of fixed and
variable rate preferred stock, determine the Applicable Dividend Rate that
would be the rate per annum that would be the initial dividend rate fixed in an

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offering on such Remarketing Date, assuming in each case a comparable dividend
period, issuer and security. If there is no Remarketing because there is no
Remarketing Agent or the Remarketing Agent is not required to conduct a
Remarketing pursuant to the Remarketing Agreement or if the Remarketing Agent
is unable to remarket on the Remarketing Date all Preferred Shares tendered (or
deemed tendered) to it at a price of $50,000 per share, then, except during a
Non-Payment Period, the Applicable Dividend Rate for the subsequent Dividend
Period for Preferred Shares and for each subsequent Dividend Period for
Preferred Shares for which no Remarketing takes place because of the foregoing
shall be the applicable Maximum Dividend Rate for a 28-day Dividend Period and
the next Dividend Period for Preferred Shares and each such subsequent Dividend
Period shall be a 28-day Dividend Period.
(c) In determining such Applicable Dividend Rate, the Remarketing
Agent shall, after taking into account market conditions as reflected in the
prevailing yields on fixed and variable rate taxable and tax exempt debt
securities and the prevailing dividend yields of fixed and variable rate
preferred stock determined for the purpose of providing non-binding indications
of the Applicable Dividend Rate to Beneficial Owners and potential purchasers
of Preferred Shares, (i) consider the number of Preferred Shares tendered and
the number of Preferred Shares potential purchasers are willing to purchase and
(ii) contact by telephone or otherwise current and potential

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Beneficial Owners of Preferred Shares subject to Tender and Dividend Reset to
ascertain the dividend rates at which they would be willing to hold Preferred
Shares.
(d) The Applicable Dividend Rate shall be determined as aforesaid
by the Remarketing Agent in its sole discretion (except as otherwise provided
in this Section 12.1 with respect to an Applicable Dividend Rate that shall be
the Non-Payment Period Rate or the Maximum Dividend Rate) and shall be
conclusive and binding on Holders and Beneficial Owners.
(e) Except during a Non-Payment Period, the Applicable Dividend
Rate for any Dividend Period shall not be more than the applicable Maximum
Dividend Rate.
4. Allocation of Shares; Failure to Remarket at $50,000 Per
Share. (a) If the Remarketing Agent is unable to remarket by 3:00 p.m., New
York City time, on a Remarketing Date all Preferred Shares tendered (or deemed
tendered) to it in the related Remarketing at a price of $50,000 per share, (i)
each Beneficial Owner that tendered or was deemed to have tendered Preferred
Shares for sale shall sell a number of Preferred Shares on a pro rata basis, to
the extent practicable, or by lot, as determined by the Remarketing Agent in
its sole discretion, based on the number of orders to purchase Preferred Shares
in such Remarketing, and (ii) the Applicable Dividend Rate for the next
Dividend Period for Preferred Shares, which shall be a 28-day Dividend Period,
shall be the Maximum Dividend Rate for such 28-day Dividend Period.

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(b) If the allocation procedures described above would result in
the sale of a fraction of a Preferred Share, the Remarketing Agent shall, in
its sole discretion, round up or down the number of Preferred Shares sold by
each Beneficial Owner on the applicable Remarketing Date so that each share
sold by a Beneficial Owner shall be a whole Preferred Share, and the total
number of shares sold equals the total number of shares purchased on such
Remarketing Date.
5. Notification of Results; Settlement. (a) By telephone at
approximately 3:30 p.m., New York City time, on each Remarketing Date, the
Remarketing Agent shall advise each Beneficial Owner of tendered shares and
each purchaser thereof (or the Agent Member thereof) (i) of the number of
shares such Beneficial Owner or purchaser is to sell or purchase and (ii) to
give instructions to its Agent Member to deliver such shares against payment
therefor or to pay the purchase price against delivery as appropriate. The
Remarketing Agent will also advise each Beneficial Owner or purchaser that is
to continue to hold, or to purchase, shares with a Dividend Period beginning on
the Business Day following such Remarketing Date of the Applicable Dividend
Rate for such shares.
(b) In accordance with the Securities Depository's normal procedures,
on the Settlement Date, the transactions described above with respect to each
Preferred Share shall be executed through the Securities Depository, if the
Securities Depository or its nominee holds or is to hold the certificate
relating to

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the shares to be purchased, and the accounts of the respective Agent Members of
the Securities Depository shall be debited and credited and shares delivered by
book entry as necessary to effect the purchases and sales of Preferred Shares
in the related Remarketing. Purchasers of Preferred Shares shall make payment
to the Paying Agent in same-day funds against delivery to such purchasers or
their nominees of one or more certificates representing Preferred Shares, or,
if the Securities Depository or its nominee holds or is to hold the certificate
relating to the shares to be purchased, through their Agent Members in same-day
funds to the Securities Depository against delivery by book entry of Preferred
Shares through their Agent Members. The Securities Depository shall make
payment in accordance with its normal procedures.
(c) If any Beneficial Owner selling Preferred Shares in a Remarketing
fails to deliver such shares, the Agent Member of such selling Beneficial Owner
and of any other person that was to have purchased Preferred Shares in such
Remarketing may deliver to any such other person a number of whole Preferred
Shares that is less than the number of shares that otherwise was to be
purchased by such person. In such event, the number of Preferred Shares to be
so delivered shall be determined by such Agent Member. Delivery of such lesser
number of Preferred Shares shall constitute good delivery.
(d) The Remarketing Agent, the Paying Agent and the Securities
Depository each will use its reasonable commercial

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efforts to meet the timing requirements set forth in paragraphs (a) and (b)
above; provided that, in the event that there is a delay in the occurrence of
any delivery or other event connected with a Remarketing, the Remarketing
Agent, the Paying Agent and the Securities Depository each will use its
reasonable commercial efforts to accommodate such delivery in furtherance of
the Remarketing.
(e) Notwithstanding any of the foregoing provisions of this paragraph
5, the Remarketing Agent may, in its sole discretion, modify the settlement
procedures set forth above with respect to any Remarketing, provided any such
modification does not adversely affect the Beneficial Owners or the Holders of
Preferred Shares or the Trust.
(f) Neither the Trust, the Paying Agent nor the Remarketing Agent
shall be obligated in any case to provide funds to make payment to a Beneficial
Owner upon such Beneficial Owner's tender of its Preferred Shares in a
Remarketing, unless, in each case, such Preferred Shares were acquired for the
account of the Trust, the Paying Agent or the Remarketing Agent, as the case
may be.
6. Purchase of Preferred Shares by Remarketing Agent. The
Remarketing Agent may purchase for its own account Preferred Shares in a
Remarketing, provided that it purchases all tendered (or deemed tendered)
Preferred Shares not sold in such Remarketing to other purchasers. If the
Remarketing Agent holds Preferred Shares for its own account upon completion of
a Remarketing, it must establish an Applicable Dividend Rate with

-102-
<PAGE> 105
respect to such shares in such Remarketing that is not higher than the
Applicable Dividend Rate that would have been established if the Remarketing
Agent did not hold or had not purchased such shares. Except as provided in the
first sentence of this paragraph 6, the Remarketing Agent shall not be
obligated to purchase any Preferred Shares that would otherwise remain unsold
in a Remarketing. If the Remarketing Agent holds for its own account any
Preferred Shares subject to a Remarketing immediately prior to such Remarketing
and if all other shares subject to such Remarketing and tendered for sale by
other Beneficial Owners of Preferred Shares (including circumstances where the
Remarketing Agent holds such shares as nominee) have been sold in such
Remarketing, then the Remarketing Agent may sell such number of its shares in
such Remarketing as there are outstanding orders to purchase that have not been
filled by shares tendered for sale by other Beneficial Owners.
7. Applicable Dividend Rate During a Non-Payment Period. So long
as a Non-Payment Period shall continue, paragraphs 1, 2, 3, 4, 5 and 6 of this
Part II shall not be applicable to any of the Preferred Shares and the
Preferred Shares shall not be subject to Tender and Dividend Reset.
8. Transfers. Unless the Trust has elected, during a Non-Payment
Period, to waive this requirement, ownership of Preferred Shares will be
maintained in book entry form by the Securities Depository, for the account of
a designated Agent Member which,

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<PAGE> 106
in turn, shall maintain records of such purchaser's beneficial ownership.
9. Miscellaneous. (a) To the extent permitted by applicable law,
the Trustees may interpret or adjust the provisions hereof to resolve any
inconsistency or ambiguity, or to remedy any formal defect.
(b) Notwithstanding any provision of these By-laws, (i) no Remarketing
Agent, Paying Agent, Securities Depository or Agent Member shall have any
obligation in respect of any person having any interest in any Preferred Share
other than the Beneficial Owner thereof, and the Paying Agent shall have no
obligation to record any transfer of beneficial ownership in any share unless
and until it shall have received proper notice and evidence of such transfer
and the right of the transferee in accordance with its procedures in effect
from time to time, and (ii) the record books of the Trust as kept by the Paying
Agent shall be conclusive as to who is the Holder of any Preferred Share and as
to the number of Preferred Shares held from time to time by any Holder, and the
Trust shall have no obligation in respect of any Preferred Share to any person
other than such Holder.
10. Securities Depository; Shares Certificates. (a) If there is a
Securities Depository, one certificate for all of the Preferred Shares shall be
issued to the Securities Depository and registered in the name of the
Securities Depository or its nominee. Any such certificate shall bear a legend
to the effect that such certificate is issued subject to the provisions

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<PAGE> 107
contained in this Section 12.1. Unless the Trust shall have elected, during a
Non-Payment Period, to waive this requirement, the Trust will also issue
stop-transfer instructions to this effect to the Paying Agent for the Preferred
Shares. Except as provided in paragraph (b) below, the Securities Depository
or its nominee will be the Holder, and no Beneficial Owner shall receive
certificates representing its ownership interest in such shares.
(b) If the Applicable Dividend Rate applicable to all Preferred
Shares shall be the Non-Payment Period Rate or there is no Securities
Depository, the Trust may at its option issue one or more new certificates with
respect to such shares (without the legend referred to in paragraph 10(a) of
this Part II) registered in the names of the Beneficial Owners or their
nominees and rescind the stop-transfer instructions referred to in paragraph
10(a) of this Part II with respect to such shares.

-105-

<PAGE> 1
Exhibit 99(d)(3)

Portions of Amendment No. 1 to By-laws
Relating to Shareholders' Rights

6. Voting Rights. (a) General. Except as otherwise provided in
the Declaration of Trust or By-laws, each Holder of Preferred Shares and each
record holder of Common Shares shall be entitled to one vote for each share
held on each matter submitted to a vote of shareholders of the Trust, and the
holders of outstanding preferred shares, including Preferred Shares, and of
Common Shares shall vote together as a single class; provided that, at any
meeting of the shareholders of the Trust held for the election of Trustees, the
holders of preferred shares, including Preferred Shares, present in person or
represented by proxy at said meeting, shall be entitled, as a class, to the
exclusion of the holders of all other securities and classes of capital shares
of the Trust, to elect two Trustees of the Trust, each preferred share,
including Preferred Shares, entitling the holder thereof to one vote. Subject
to paragraph 6(b) hereof, the holders of outstanding Common Shares and
preferred shares, including Preferred Shares, voting as a single class, shall
elect the balance of the Trustees.
(b) Right to Elect Majority of Trustees. During any period in which
any one or more of the conditions described below shall exist (such period
being referred to herein as a "Voting Period"), the number of Trustees shall be
automatically increased

<PAGE> 2
by the smallest number that, when added to the two Trustees elected exclusively
by the holders of preferred shares, would constitute a majority of the Trustees
as so increased by such smallest number; and the holders of preferred shares
shall be entitled, voting as a class on a one-vote-per-share basis (to the
exclusion of the holders of all other securities and classes of capital shares
of the Trust), to elect such smallest number of additional Trustees, together
with the two Trustees that such holders are in any event entitled to elect. A
Voting Period shall commence:
(i) if at any time accumulated dividends (whether or not
earned or declared, and whether or not funds are then legally
available in an amount sufficient therefor) on the outstanding
Preferred Shares equal to at least two full years' dividends shall be
due and unpaid and sufficient cash or securities shall not have been
deposited with the Paying Agent for the payment of such accumulated
dividends; or
(ii) if at any time holders of any preferred shares other
than the Preferred Shares are entitled to elect a majority of the
Trustees of the Trust.
Upon the termination of a Voting Period, the voting rights described in this
paragraph 6(b) shall cease, subject always, however, to the revesting of such
voting rights in the Holders upon the further occurrence of any of the events
described in this paragraph 6(b). A Voting Period shall terminate when all

CLBBYEXC.PF -2-
<PAGE> 3
dividends in arrears shall have been paid or otherwise provided for.
(c) Other Actions. Except as otherwise provided herein, so long as
any Preferred Shares are outstanding, the Trust shall not, without the
affirmative vote or consent of the Holders of at least a majority of the
Preferred Shares outstanding at the time, in person or by proxy, either in
writing or at a meeting (voting separately as one class): (i) authorize, create
or issue, or increase or decrease the authorized or issued amount of, any class
or series of shares of beneficial interest ranking prior to or on a parity with
the Preferred Shares with respect to payment of dividends or the distribution
of assets on liquidation, or increase or decrease the number of authorized
Preferred Shares (although the Trust may, to the extent of the amount of
Preferred Shares authorized from time to time, issue additional Preferred
Shares without such vote or consent); (ii) amend, alter or repeal the
provisions of the Declaration of Trust and the By-laws, including this Section
12.1, whether by merger, consolidation or otherwise, so as to affect materially
and adversely any preference, right or power of such Preferred Shares or the
Holders thereof; or (iii) take any other action (including without limitation
bankruptcy proceedings) which pursuant to Section 18(a)(2)(D) of the 1940 Act
requires such approval by the Holders; provided that (i) the issuance of not
more than the 6,000 Preferred Shares presently authorized and (ii) the creation
and issuance of series of Preferred Shares ranking junior to the

CLBBYEXC.PF -3-
<PAGE> 4
Preferred Shares with respect to payment of dividends and the distribution of
assets on liquidation, will not be deemed to affect such preferences, rights or
powers unless such issuance would, at the time thereof, cause the Trust not to
satisfy the 1940 Act Preferred Shares Asset Coverage or the Preferred Shares
Basic Maintenance Amount.
The foregoing voting provisions shall not apply with respect to
Preferred Shares if, at or prior to the time when a vote is required, such
Preferred Shares shall have been (i) redeemed or (ii) called for redemption and
sufficient funds (in the form of cash or Municipal Bonds rated at least P-1,
MIG-1 or VMIG-1 by Moody's and which mature prior to the redemption date) shall
have been deposited in trust to effect such redemption.
Notwithstanding the foregoing, the Trustees may, without the vote or
consent of the Holders of Preferred Shares, from time to time amend, alter or
repeal any or all of the provisions of paragraphs 12(a), 12(b), 12(c), 13(a)
and 13(b) of this Part I, as well as any or all of the definitions of the terms
listed below, and any such amendment, alteration or repeal will be deemed not
to affect the preferences, rights or powers of Preferred Shares or the Holders
thereof, provided the Trustees receive written confirmation from Moody's, in
the case of any such action with respect to paragraphs 12(b), 12(c), 13(a) and
13(b), or from S&P, in the case of any such action with respect to paragraphs
12(a), 13(a) and 13(b), or from both Moody's and S&P, in the case of any such
action with respect to the

CLBBYEXC.PF -4-
<PAGE> 5
definitions of the terms listed below, that any such amendment, alteration or
repeal would not impair the ratings then assigned to Preferred Shares by the
rating agency providing such confirmation:

CLBBYEXC.PF -5-
<PAGE> 6
such notice to the Paying Agent or if the Paying Agent does not call such a
special meeting, it may be called by any such holder on like notice. The
record date for determining the holders entitled to notice of and to vote at
such special meeting shall be the close of business on the fifth Business Day
preceding the day on which such notice is mailed. At any such special meeting
and at each meeting held during a Voting Period, such holders, voting together
as a class (to the exclusion of the holders of all other securities and classes
of capital shares of the Trust), shall be entitled to elect the number of
Trustees prescribed in paragraph 6(b) above on a one-vote-per-share basis. At
any such meeting or adjournment thereof in the absence of a quorum, a majority
of such holders present in person or by proxy shall have the power to adjourn
the meeting without notice, other than an announcement at the meeting, until a
quorum is present.
(ii) For purposes of determining any rights of the Holders to vote on
any matter, whether such right is created by this Section 12.1, by the other
provisions of the Declaration of Trust or the By-laws, by statute or otherwise,
no Holder shall be entitled to vote and no Preferred Share shall be deemed to
be "outstanding" for the purpose of voting or determining the number of shares
required to constitute a quorum if, prior to or concurrently with the time of
determination of shares entitled to vote or shares deemed outstanding for
quorum purposes, as the case may be, sufficient funds (in the form of cash or
Municipal Bonds rated at least P-1, MIG-1 or VMIG-1 by Moody's and which

CLBBYEXC.PF -6-
<PAGE> 7
mature prior to the redemption date) for the redemption of such shares have
been deposited in trust with the Paying Agent for that purpose and the
requisite Notice of Redemption with respect to such shares shall have been
given as provided in paragraph 4 of this Part I. No Preferred Share held by
the Trust or any affiliate of the Trust shall have any voting rights or be
deemed to be outstanding for voting purposes.
(iii) The terms of office of all persons who are Trustees of the
Trust at the time of a special meeting of Holders and holders of other
preferred shares to elect Trustees shall continue, notwithstanding the election
at such meeting by the Holders and such other holders of the number of Trustees
that they are entitled to elect, and the persons so elected by the Holders and
such other holders, together with the two incumbent Trustees elected by the
Holders and such other holders of preferred shares and the remaining incumbent
Trustees elected by the holders of the Common Shares and preferred shares,
shall constitute the duly elected Trustees of the Trust.
(iv) Simultaneously with the expiration of a Voting Period, the terms
of office of the additional Trustees elected by the Holders and holders of
other preferred shares pursuant to paragraph 6(b) above shall terminate, the
remaining Trustees shall constitute the Trustees of the Trust and the voting
rights of the Holders and such other holders to elect additional Trustees
pursuant to paragraph 6(b) above shall cease, subject to the provisions of the
penultimate sentence of paragraph 6(b).

CLBBYEXC.PF -7-
<PAGE> 8
(e) Exclusive Remedy. Unless otherwise required by law, the Holders
of Preferred Shares shall not have any relative rights or preferences or other
special rights other than those specifically set forth herein. The Holders of
Preferred Shares shall have no preemptive rights or rights to cumulative
voting. In the event that the Trust fails to pay any dividends on the
Preferred Shares, the exclusive remedy of the Holders shall be the right to
vote for Trustees pursuant to the provisions of this paragraph 6. In no event
shall the Holders of Preferred Shares have any right to sue for, or bring a
proceeding with respect to, such dividends or redemptions or damages for the
failure to receive any dividends or the proceeds of a redemption.
(f) Notification to Moody's and S&P. In the event a vote of Holders
of Preferred Shares is required pursuant to the provisions of Section 13(a) of
the 1940 Act, the Trust shall, not later than ten Business Days prior to the
date on which such vote is to be taken, notify Moody's and S&P that such vote
is to be taken, the nature of the action with respect to which such vote is to
be taken and, not later than 10 Business Days following the vote, the results
of the vote.

CLBBYEXC.PF -8-

<PAGE> 1
EXHIBIT (H)(1)

PUTNAM INVESTMENT GRADE
MUNICIPAL TRUST III

MUNICIPAL INCOME PREFERRED SHARES
200 PREFERRED SHARES SERIES TH

UNDERWRITING AGREEMENT
----------------------

January __, 1994

Smith Barney Shearson Inc.
1345 Avenue of the Americas
New York, New York 10105

Dear Sirs:

The undersigned, Putnam Investment Grade Municipal Trust III, a
voluntary association with transferable shares organized and existing under and
by virtue of the laws of The Commonwealth of Massachusetts (commonly referred
to as a "Massachusetts business trust") (the "Fund"), Putnam Investment
Management, Inc., a Delaware corporation (the "Manager") [and Putnam Mutual
Funds Corp., a Massachusetts corporation ("PMF"),] address you as underwriter
(the "Underwriter"). The Fund proposes to issue and sell to the Underwriter an
aggregate of 200 Municipal Income Preferred Shares, Series Th, par value $.01
per share, liquidation preference $50,000 per share (the "Preferred Shares").

The Fund, the Manager [and PMF] wish to confirm as follows their
respective agreements with you for the purchase of the Preferred Shares.

The Fund has entered into a management agreement with the Manager
dated November 10, 1993, an administration contract with the Manager dated
November 10, 1993, a custodian agreement with Putnam Fiduciary Trust Company
dated May 31, 1991, as amended July 13, 1992 and an investor servicing
agreement with Putnam Fiduciary Trust Company dated July 1, 1991, and such
agreements are herein referred to as the "Management Agreement," the
"Administration Agreement," the "Custodian Agreement" and the "Transfer Agency
Agreement" respectively. This Underwriting Agreement is herein referred to as
the "Agreement." Collectively, the Management Agreement, the Administration
Agreement, the Custodian Agreement, and the Transfer Agency Agreement are
referred to herein as the "Fund

<PAGE> 2

Agreements." The Fund is entering into a remarketing agreement with Smith
Barney Shearson Inc. dated January __, 1994 (the "Remarketing Agreement"), a
letter agreement with the Depository Trust Company dated January __, 1994 (the
"DTC Letter") and a paying agent agreement with ___________ (the "Paying
Agent") dated January __, 1994 (the "Paying Agent Agreement," together with the
Remarketing Agreement, DTC Letter and Paying Agent Agreement are the
"Preferred Shares Agreements"). The Manager has entered into a Consulting
Services Agreement with Smith Barney Shearson Inc. ("SBS"), dated as of
November 26, 1993 (the "Services Agreement"), pursuant to which SBS will
provide certain services to the Manager.

1. REGISTRATION STATEMENT AND PROSPECTUS. The Fund has prepared and
filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended (the
"1933 Act") and the Investment Company Act of 1940, as amended (the "1940
Act"), and the rules and regulations of the Commission under the 1933 Act (the
"1933 Act Rules and Regulations") and the 1940 Act (the "1940 Act Rules and
Regulations" and together with the 1933 Act Rules and Regulations, the "Rules
and Regulations") a registration statement on Form N-2 (File Nos. 33-_______
and 811-7099) under the 1933 Act, the 1940 Act and the Rules and Regulations
(the "registration statement"), including a prospectus subject to completion
relating to the Preferred Shares, and a notification of registration of the
Fund as an investment company under the 1940 Act on Form N-8A (the "1940 Act
Notification"). The term "Registration Statement" as used in this Agreement
means the registration statement (including all financial schedules and
exhibits), as amended at the time it becomes effective, or, if the registration
statement became effective prior to the execution of this Agreement, as
supplemented or amended prior to the execution of this Agreement. If it is
contemplated, at the time this Agreement is executed, that a post-effective
amendment to the registration statement will be filed and must be declared
effective before the offering of the Preferred Shares may commence, the term
"Registration Statement" as used in this Agreement means the registration
statement as amended by said post-effective amendment. The term "Prospectus"
as used in this Agreement means the prospectus in the form included in the
Registration Statement, or, if the prospectus included in the Registration
Statement omits information in reliance on Rule 430A under the 1933 Act Rules
and Regulations and such information is included in a prospectus filed with the
Commission pursuant to Rule

<PAGE> 3

497(h) under the 1933 Act Rules and Regulations, the term "Prospectus" as used
in this Agreement means the prospectus in the form included in the Registration
Statement as supplemented by the addition of the information contained in the
prospectus filed with the Commission pursuant to Rule 497(h). The term
"Prepricing Prospectus" as used in this Agreement refers to the prospectus
subject to completion in the form included in the registration statement at the
time of the initial filing of the registration statement with the Commission,
and as such prospectus shall have been amended from time to time prior to the
date of the Prospectus, together with any other prospectus relating to the Fund
used prior to the effective date of the Registration Statement.

The Fund has furnished the Underwriter with copies of such
registration statement, each amendment to such registration statement filed by
the Fund with the Commission and any Prepricing Prospectus filed by the Fund
with the Commission or used by the Fund or the Manager.

2. AGREEMENTS TO SELL AND PURCHASE. The Fund hereby agrees to issue
and to sell to the Underwriter and the Underwriter, upon the basis of the
representations, warranties and agreements of the Fund, the Manager [and PMF]
herein contained and subject to all the terms and conditions set forth herein,
agrees to purchase from the Fund at a purchase price per share of $______ (the
"purchase price per Share"), the number of Preferred Shares set forth opposite
the name of the Underwriter in Schedule I hereto.

3. TERMS OF PUBLIC OFFERING. The Fund has been advised by
you that you propose to make a public offering of their respective portions of
the Preferred Shares as soon after the Registration Statement and this
Agreement become effective as in your judgment is advisable and initially to
offer the Preferred Shares upon the terms set forth in the Prospectus.

4. DELIVERY OF PREFERRED SHARES AND PAYMENTS WITH RESPECT THERETO.
Certificates in definitive form representing the Preferred Shares to be
purchased by you hereunder registered in the name of Cede & Co. ("Cede"), as
nominee for The Depository Trust Company ("DTC"), shall be delivered by or on
behalf of the Fund to DTC for the account of the Underwriter, against payment
by the Underwriter of the purchase price therefor by Federal Funds check or
checks or similar same day funds including a wire transfer, payable to the
order of the

<PAGE> 4

Fund, all at the office of Skadden, Arps, Slate, Meagher & Flom, 919 Third
Avenue, New York, New York. The time and date of such delivery and payment
shall be 10:00 a.m., New York time, on January __, 1994, or at such other time
and date as you and the Fund may agree upon in writing (the "Closing Date").
Such certificate will be made available for checking by the Underwriter at
least 24 hours prior to the Closing Date.

5. AGREEMENTS OF THE FUND AND THE MANAGER. The Fund and the
Manager covenant and agree with the Underwriter as follows:

(a) If, at the time this Agreement is executed and delivered,
it is necessary for the registration statement or a post-effective
amendment thereto to be declared effective before the offering of the
Preferred Shares may commence, the Fund will use its best efforts,
which may include filing a further amendment or amendments
(collectively, the "Final Amendment"), to cause the registration
statement or such post-effective amendment to become effective as soon
as possible and the Fund or the Manager will advise you promptly and,
if requested by you, will confirm such advice in writing (i) when the
Registration Statement and any such post-effective amendment becomes
effective, (ii) when the Prospectus has been timely filed pursuant to
Rule 497(c) or Rule 497(h) of the 1933 Act Rules and Regulations or
the certification permitted pursuant to Rule 497(j) of the 1933 Act
Rules and Regulations has been timely filed, whichever is applicable,
(iii) of any request made to the Fund, the Manager or any affiliate
thereof by the Commission for amendments or supplements to the
Registration Statement, any Prepricing Prospectus or the Prospectus
(or any amendments or supplements thereto) or for additional
information with respect to any of the foregoing or any of the matters
contemplated thereby, by this Agreement, any of the Fund Agreements,
Preferred Shares Agreements or by the Services Agreement, (iv) of the
receipt by the Fund or the Manager of notice of the issuance by the
Commission of any order suspending the effectiveness of the
Registration Statement or prohibiting or suspending the use of the
Prospectus, any Prepricing Prospectus (or any amendments or
supplements thereto) or any sales material (as hereinafter defined) or
of any notice pursuant to Section 8(e) of the 1940 Act or the
initiation or contemplated initiation of any proceedings for such
purposes, (v) of

<PAGE> 5
receipt by the Fund, the Manager, any affiliate thereof or any
representative or attorney of the Fund, the Manager or any such
affiliate of any other communication from the Commission, the National
Association of Securities Dealers, Inc. ("NASD"), any state
securities commission, any national securities exchange or any other
regulatory body or agency relating to the Fund, the Registration
Statement, the Notification, any Prepricing Prospectus, the Prospectus
(or any amendments or supplements thereto), any sales material (as
hereinafter defined) or any of the matters contemplated thereby, by
this Agreement, any of the Fund Agreements or by the Services
Agreement except for routine or non-material communications occurring
more than one year from the date of this Agreement and communications
not relating to the Underwriter occurring more than three years from
the date of this Agreement and (vi) within the period of time referred
to in (e) below, of the happening of any event which makes any
statement made in the Registration Statement, the Prospectus or any
Prepricing Prospectus (as then amended or supplemented) untrue, in any
material respect, or which requires the making of any additions to or
changes in the Registration Statement, the Prospectus or any
Prepricing Prospectus (or any amendments or supplements thereto) in
order to make the statements therein not misleading. If at any time
the Commission shall issue any stop order suspending the effectiveness
of the Registration Statement (or any amendment or supplement
thereto), the Fund will make every reasonable effort to obtain the
withdrawal of such order at the earliest possible moment.

(b) The Fund will furnish to you, without charge, signed
copies of the Registration Statement and the 1940 Act Notification as
originally filed with the Commission and of each amendment thereto,
including all exhibits thereto, (except any post-effective amendment
required by Rule 8b-16 of the 1940 Act Rules and Regulations which is
filed with the Commission after the later of (x) one year from the
date of this Agreement and (y) the date on which the distribution of
the Preferred Shares is completed) and will also furnish to you,
without charge, for transmittal to the Underwriter and for other uses,
such number of conformed copies of the Registration Statement as
originally filed and of each amendment thereto, (except any
post-effective amendment required by Rule 8b-16 of the 1940 Act Rules
and Regulations which is filed with the Commission after the later of
(x) one year from the

<PAGE> 6
date of this Agreement and (y) the date on which the distribution of
the Preferred Shares is completed) without exhibits, as you shall
reasonably request.

(c) The Fund will not (i) file any amendment to the
Registration Statement (including any post-effective amendment) or
make any amendment or supplement to the Prospectus (except any
post-effective amendment required by Rule 8b-16 of the 1940 Act Rules
and Regulations which is filed with the Commission after the later of
(x) one year from the date of this Agreement and (y) the date on which
the distribution of the Preferred Shares is completed) unless a copy
thereof shall first have been submitted to you a reasonable time
before its filing and you shall not have reasonably objected to its
filing within a reasonable time of your receipt of such copy or (ii)
so long as, in the reasonable opinion of counsel for the Underwriter,
a Prospectus (or any amendment or supplement thereto) is required to
be delivered in connection with sales of Preferred Shares by the
Underwriter or dealer, file any information, documents or reports
pursuant to the Securities Exchange Act of 1934, as amended (the "1934
Act"), without delivering a copy of such information, documents or
reports to you, as Underwriter, prior to or concurrently with such
filing.

(d) Prior to the execution and delivery of this Agreement,
the Fund has delivered or will deliver to the Underwriter, without
charge, in such quantities as it has requested or may hereafter
request, copies of each form of the Prepricing Prospectus. The Fund
and the Manager consent to the use, in accordance with the provisions
of the 1933 Act and with the securities or Blue Sky laws of the
jurisdictions in which the Preferred Shares are offered by the
Underwriter and by dealers, prior to the date of the Prospectus, of
each Prepricing Prospectus so furnished by the Fund.

(e) As soon after the execution and delivery of this
Agreement as is practicable and thereafter from time to time, for such
period as in the opinion of counsel for the Underwriter the Prospectus
(or any amendment or supplement thereto) is required by law to be
delivered in connection with sales of any of the Preferred Shares by
the Underwriter or any dealer, the Fund will deliver to the
Underwriter, without charge, as many copies of the Prospectus (and of
any amendments or supplements thereto)

<PAGE> 7
as it may request. The Fund consents to the use of the Prospectus
(and of any supplements or amendments thereto) in accordance with the
provisions of the 1933 Act and with the securities or Blue Sky laws of
the jurisdictions in which the Preferred Shares are offered by the
Underwriter and by all dealers to whom Preferred Shares may be sold,
both in connection with the offering or sale of the Preferred Shares
and for such period of time thereafter as the Prospectus (or any
amendment or supplement thereto) is required by law to be delivered in
connection with sales by the Underwriter or any dealer. If during
such period of time any event shall occur which in the judgment of the
Fund or in the reasonable opinion of counsel for the Underwriter is
required to be set forth in the Prospectus (as then amended or
supplemented) or should be set forth therein in order to make the
statements therein, in light of the circumstances under which they
were made, not misleading, or if it is necessary to supplement or
amend the Prospectus (or any amendment or supplement thereto) to
comply with the 1933 Act, the 1940 Act, the Rules and Regulations or
any other law, rule or regulation, the Fund will forthwith prepare
and, subject to the provisions of paragraph (c) above, file with the
Commission an appropriate supplement or amendment thereto and will
expeditiously furnish to the Underwriter and dealers, without charge,
such number of copies thereof as the Underwriter and dealers shall
request; provided that, if the supplement or amendment is required
exclusively as a result of a misstatement in or omission from the
information provided to the Fund in writing by the Underwriter
expressly for use in the Prospectus, the Fund may deliver such
supplement or amendment to the Underwriter at a reasonable charge not
to exceed the actual cost thereof to the Fund. In the event that the
Fund and you agree that the Prospectus (or any amendment or supplement
thereto) should be amended or supplemented, the Fund, if requested by
you, will promptly issue a press release announcing or disclosing the
matters to be covered by the proposed amendment or supplement.

(f) The Fund will take such actions as you may reasonably
request or as may be necessary in connection with the registration or
qualification of the Preferred Shares for offering and sale by the
Underwriter and dealers under the securities or Blue Sky laws of such
jurisdictions as you may request and will file such consents to
service of process or other documents as may

<PAGE> 8
be necessary in order to effect such registration or qualification;
provided that the Fund shall not be required in connection therewith
or as a condition thereto to qualify as a foreign corporation in any
jurisdiction in which it is not otherwise required to so qualify or to
execute a general consent to service of process.

(g) The Fund will make generally available to its security
holders an earnings statement covering a twelve-month period beginning
not later than the first day of the Fund's fiscal quarter next
following the effective date of the Registration Statement, as soon as
practicable, but not later than the last day of the 18th full calendar
month following the calendar quarter in which the Registration
Statement becomes effective, which earnings statement shall satisfy
the provisions of Section 11(a) of the 1933 Act and Rule 158 of the
1933 Act Rules and Regulations.

(h) During the period of five years hereafter, the Fund will
furnish to you (i) as soon as publicly available, a copy of each
report of the Fund mailed to shareholders or filed with the Commission
and (ii) from time to time such other information concerning the Fund
as you may reasonably request.

(i) The Fund will not sell, contract to sell or otherwise
dispose of, prior to the expiration of 180 days after the effective
date of the Registration Statement, without your prior written
consent, any shares of beneficial interest other than the Preferred
Shares being sold to the Underwriter hereunder and any preferred
shares of beneficial interest of the Fund as contemplated by the
Prospectus.

(j) The Fund will file the requisite copies of the Prospectus
with the Commission in a timely fashion pursuant to Rule 497(c) or
Rule 497(h) of the 1933 Act Rules and Regulations, whichever is
applicable, or, if applicable, will file in a timely fashion the
certification permitted by Rule 497(j) of the 1933 Act Rules and
Regulations.

(k) The Fund will direct the investment of the proceeds of
the offering of the Preferred Shares in such a manner as to comply
with the investment objective,

<PAGE> 9
policies and restrictions of the Fund as described in the Prospectus.

6. REPRESENTATIONS AND WARRANTIES OF THE FUND AND THE MANAGER. The
Fund and the Manager jointly and severally represent and warrant to the
Underwriter on the date hereof, and shall be deemed to represent and warrant to
the Underwriter on the Closing Date that:

(a) Each Prepricing Prospectus included as part of the
registration statement as originally filed or as part of any amendment
or supplement thereto, or filed pursuant to Rule 497 of the 1933 Act
Rules and Regulations, complied when so filed in all material respects
with the provisions of the 1933 Act, the 1940 Act and the Rules and
Regulations; the Commission has not issued any order preventing or
suspending the use of any Prepricing Prospectus. The Registration
Statement, in the form in which it became or becomes effective and
also in such form as it may be when any post-effective amendment
thereto shall become effective and on the Closing Date, the
Prospectus, and any supplement or amendment thereto when filed with
the Commission under Rule 497 of the 1933 Act Rules and Regulations
and on the Closing Date and the 1940 Act Notification when originally
filed with the Commission, when any amendment or supplement thereto
was or is filed with the Commission and on the Closing Date complied
or will comply, as the case may be, in all material respects with the
requirements of the 1933 Act and the 1940 Act and the Rules and
Regulations and on the date the Registration Statement and any
post-effective amendment thereto became or becomes effective and on
the Closing Date, the Registration Statement did not or will not
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to
make the statements therein not misleading; and on each such effective
date and on the Closing Date, the Prospectus (and any amendment or
supplement thereto) did not or will not, and on the date of any filing
of the Prospectus pursuant to Rule 497(c) or 497(h) or, if applicable,
any filing of the certification contemplated by Rule 497(j), as the
case may be, and on the date of any filing pursuant to Rule 497(d) of
the 1933 Act Rules and Regulations, the Prospectus (and any amendment
or supplement thereto) will not, include any untrue statement of a
material fact or omit to state a material fact required to be stated

<PAGE> 10
therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
except that this representation and warranty does not apply to (a)
statements in or omissions from the Registration Statement or the
Prospectus made in reliance upon and in conformity with information
relating to any Underwriter furnished to the Fund in writing by or on
behalf of any Underwriter expressly for use therein or (b) with
respect to the representations of the Fund, the description of the
Manager contained in the Prospectus under the heading "Investment
Manager and Administrator."

(b) The Fund is not in violation of its Agreement and
Declaration of Trust or the by-laws of the Fund (as such by-laws have
been amended to include the terms of the Preferred Shares (the
"By-Laws")) or in breach of or default under any contract, indenture,
mortgage, loan agreement, note, lease or other instrument to which it
is a party or by which it or any of its property may be bound or
affected; and the execution and delivery of this Agreement, the
Management Agreement, the Administration Agreement, the Custodian
Agreement, the Transfer Agency Agreement and the Preferred Shares
Agreements and the consummation of the transactions contemplated
herein and therein have been duly authorized by all necessary action
by the Fund and do not or will not conflict with or constitute a
breach of, or default under, or result in the creation or imposition
of any material lien, charge or encumbrance upon any property or
assets of the Fund pursuant to any contract, indenture, mortgage,
loan, agreement, note, lease or other instrument to which the Fund is
a party or by which it may be bound or to which any of the property or
assets of the Fund is subject, nor will such action result in any
violation of the provisions of the Declaration of Trust or By-Laws of
the Fund or any law, rule, regulation, decree or order of any court,
governmental instrumentality, securities exchange or association or
arbitrator applicable to the Fund which violation would have a
material adverse effect on the Fund, on the ability of the Fund to
conduct its business or operations as contemplated by the Prospectus
(and any amendment or supplement thereto) or on the ability of the
Fund to perform its obligations under any such agreement; and no
consent, approval, authorization or order of any court or governmental
authority or agency or body or securities exchange or securities
association is required

<PAGE> 11
for the consummation by the Fund of the transactions contemplated by
this Agreement, the Management Agreement, the Administration
Agreement, the Custody Agreement, the Transfer Agency Agreement or the
Preferred Shares Agreements, except such as has been obtained under
the 1933 Act, the 1934 Act, the 1940 Act, the by-laws and rules of the
National Association of Securities Dealers or the American Stock
Exchange or as may be required under state securities or Blue Sky laws
in connection with the purchase and distribution of the Preferred
Shares by the Underwriter.

(c) Since the date as of which information is given in the
Registration Statement and the Prospectus (and any amendments or
supplements thereto), except as otherwise stated therein, (A) there
has been no material adverse change in the condition, financial or
otherwise, of the Fund, or in the earnings, business affairs or
business prospects of the Fund, whether or not arising in the ordinary
course of business; (B) there have been no transactions entered into
by the Fund which are material to the Fund other than those in the
ordinary course of its business or as described in the Prospectus (and
any amendment or supplement thereto); and (C) there has been no
dividend or distribution of any kind declared, paid or made by the
Fund on any class of its shares of beneficial interest except,
[___________________].

(d) There is not now pending nor, to the knowledge of the
Fund, threatened, any action, suit or proceeding to which the Fund is
a party before or by any court or governmental agency or body which
reasonably might result in any material adverse change in the
condition (financial or otherwise), business or prospects of the Fund,
might materially and adversely affect the properties or assets thereof
or are of a nature required to be described in the Registration
Statement or the Prospectus; and there are no contracts or documents
of the Fund which would be required to be described in or filed as
exhibits to the Registration Statement by the 1933 Act, the 1940 Act
or by the Rules and Regulations which have not been described or filed
as required.

(e) The Fund has a duly and validly authorized capitalization
as described in the Prospectus (and any amendment or supplement
thereto); the outstanding Common Preferred Shares of the Fund and the
Preferred Shares

<PAGE> 12
conform to the description thereof in the Registration Statement and
the Prospectus (and any amendments or supplements thereto) and the
Preferred Shares if issued are, or, when issued by the Fund to the
Underwriter pursuant to this Agreement against payment of the
consideration set forth in this Agreement will be, validly issued,
fully paid and, except as set forth in the Prospectus (and any
amendment or supplement thereto), non-assessable; and, except as set
forth in the Prospectus (and any amendment or supplement thereto), the
issuance of the Preferred Shares to be purchased by the Underwriter
from the Fund hereunder is not subject to preemptive or similar
rights.

(f) The Fund has been duly organized and is validly existing
as a Massachusetts business trust in good standing under the laws of
The Commonwealth of Massachusetts, with full power and authority to
conduct all activities conducted by it, to own or lease all assets
owned or leased by it and to conduct its business as described in the
Registration Statement and the Prospectus (and any amendments or
supplements thereto); the Fund is duly licensed or qualified to
transact business and is in good standing in each jurisdiction in
which the conduct of its business or ownership of its property
necessitates such qualification and in which the failure to be so
licensed or qualified would have a material adverse effect on the
Fund, on its ability to conduct its business or operations as
contemplated by the Prospectus (and any amendment or supplement
thereto) or on the ability of the Fund to perform its obligations
under this Agreement or any of the Fund Agreements; and the Fund has
no subsidiaries.

(g) Coopers & Lybrand, which has audited the Statement of
Assets and Liabilities filed with the Commission as a part of the
Registration Statement, and which is included in the Prospectus, is an
independent public accounting firm with respect to the Fund within the
meaning of the 1933 Act, the 1940 Act and the Rules and Regulations.

(h) The financial statements, together with related schedules
and notes, included in the Registration Statement and the Prospectus
(and any amendments or supplements thereto) present fairly the
financial position of the Fund on the basis stated in the Registration
State-

<PAGE> 13
ment (and any amendment or supplement thereto) at the date to
which they apply and have been prepared in conformity with generally
accepted accounting principles in the United States applied on a
consistent basis and the other financial and statistical information
and data included in the Registration Statement and the Prospectus
(and any amendments or supplements thereto) are accurately presented
and prepared on a basis consistent with such Statement of Assets and
Liabilities and the books and records of the Fund.

(i) The Fund, subject to the filing of any Final Amendment,
the Registration Statement having been declared effective and the
filing of the Prospectus under Rule 497 under the Rules and
Regulations, has taken all required action under the 1933 Act, the
1940 Act and the Rules and Regulations to make the public offering and
consummate the sale of the Preferred Shares as contemplated by this
Agreement.

(j) The Fund is in compliance with all, and is not in
violation of any, laws, ordinances or governmental rules or
regulations to which it is subject except as to any non-compliance or
violations which, alone or in the aggregate, would not have a material
adverse effect on the Fund, on the ability of the Fund to conduct its
business or operations as contemplated by the Prospectus (and any
amendment or supplement thereto) or on the ability of the Fund to
perform its obligations under this Agreement or any of the Fund
Agreements, and the Fund owns, possesses or has obtained and currently
maintains all licenses, permits, franchises, consents, orders or other
governmental authorizations or approvals necessary to the ownership,
leasing or operation of its property or to the conduct of its business
(as described in the Prospectus) except as to those which the failure
by the Fund to own, possess, obtain or maintain, alone or in the
aggregate, would not have a material adverse effect on the Fund, on
the ability of the Fund to conduct its business or operations as
contemplated by the Prospectus (and any amendment or supplement
thereto) or on the ability of the Fund to perform its obligations
under this Agreement or any of the Fund Agreements.

(k) The conduct by the Fund of its business as described in
the Prospectus (and any amendment or supplement thereto) does not
require it to be the owner,

13
<PAGE> 14

possessor or licensee of any patents, patent licenses, trademarks,
service marks or trade names.

(l) Except (i) with respect to stabilization activities
conducted by the Underwriter and (ii) share repurchases, tender offers
or purchases of Preferred Shares in the open market pursuant to the
Fund's dividend reinvestment plan effected following the date on which
the distribution of the Preferred Shares is completed, in accordance
with the policies of the Fund as set forth in the Prospectus, the Fund
has not taken and will not take, directly or indirectly, any action
designed to or which might reasonably be expected to cause or result
in, or which will constitute, stabilization or manipulation of the
price of the Common Preferred Shares, and the Fund is not aware of any
such action taken or to be taken by any affiliates of the Fund.

(m) The Fund is duly registered under the 1940 Act as a
closed-end, diversified management investment company. The Fund has
not received any notice from the Commission pursuant to Section 8(e)
of the 1940 Act with respect to the 1940 Act Notification or the
Registration Statement.

(n) All advertising and other sales literature (including
"prospecting letters" and "prospectus wrappers") prepared or
authorized by or on behalf of the Fund or the Manager for use in
connection with the public offering and sale of the Preferred Shares
(collectively, "sales material") complied and comply in all material
respects, as the case may be, with the requirements of the 1933 Act,
the 1933 Act Rules and Regulations and the rules and interpretations
of the National Association of Securities Dealers and no such sales
material contained or contains an untrue statement of a material fact
or omitted or omits to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The Fund
and the Manager confirm that the only such sales material is the
prospectus wrapper initially filed with the National Association of
Securities Dealers on October 11, 1993 and the prospecting letter
initially filed with the National Association of Securities Dealers on
October 29, 1993, as the same may have been revised for use pursuant
to the comments of the NARD.

<PAGE> 15
(o) Each of the Management Agreement, the Administration
Agreement, the Custody Agreement, the Transfer Agency Agreement and
the Preferred Shares Agreements has been duly and validly authorized,
executed and delivered by the Fund, and, assuming due authorization,
execution and delivery by the other parties thereto, is a legal, valid
and binding obligation of the Fund enforceable in accordance with its
terms and complies in all material respects with all applicable
provisions of the 1940 Act, the 1940 Act Rules and Regulations, the
Investment Advisers Act of 1940 (the "Advisers Act") and the rules and
regulations adopted by the Commission under the Advisers Act (the
"Advisers Act Rules and Regulations"), subject as to enforcement to
applicable bankruptcy, reorganization, insolvency or other similar
laws relating to or affecting creditors rights generally and to
equitable principles and principles of public policy that may restrict
the availability of remedies. This Agreement has been duly and
validly authorized, executed and delivered by the Fund, and, assuming
due authorization, execution and delivery by the other parties
thereto, is a legal and valid obligation of the Fund and complies in
all material respects with all applicable provisions of the 1940 Act,
the 1940 Act Rules and Regulations, the Advisers Act and the Advisers
Act Rules and Regulations, subject as to enforcement to applicable
bankruptcy, reorganization, insolvency or other similar laws relating
to or affecting creditors rights generally and to equitable principles
and principles of public policy that may restrict the availability of
remedies.

(p) No person has rights to the registration of any
securities of the Fund as a result of the filing of the registration
statement.

(q) The Common Shares are listed on the American Stock
Exchange.

(r) The Preferred Shares have been, or prior to the Time of
Delivery (as defined in Section 4 hereof) will be, assigned ratings of
"AAA" by Standard & Poor's Ratings Group ("Standard & Poor's") and
"aaa" by Moody's Investors Service, Inc. ("Moody's"), respectively.

7. REPRESENTATIONS AND WARRANTIES OF THE MANAGER. The Manager
represents and warrants to the Underwriter as follows:

<PAGE> 16
(i) The Manager has been duly incorporated as a
corporation and is in good standing under the laws of the
State of Delaware with full corporate power and authority to
conduct its business as described in the Prospectus (and any
amendment or supplement thereto); the Manager is duly
qualified to transact business and is in good standing in each
jurisdiction in which such qualification is required except
where the failure to so qualify would not have a material
adverse effect on the condition, financial or otherwise, of
the Manager or on the ability of the Manager to perform its
obligations hereunder, under the Management Agreement, under
the Administration Agreement or under the Services Agreement.

(ii) The Manager is duly registered as an investment
adviser under the Advisers Act and is not prohibited by the
Advisers Act, the 1940 Act, the Advisers Act Rules and
Regulations or the 1940 Act Rules and Regulations from acting
under the Management Agreement or the Administration Agreement
for the Fund as contemplated by the Prospectus (and any
amendment or supplement thereto).

(iii) The Management Agreement, the Administration
Agreement and the Services Agreement have been duly and
validly authorized, executed and delivered by the Manager and,
assuming due authorization, execution and delivery by the
other parties thereto, each constitutes a legal, valid and
binding obligation of the Manager enforceable in accordance
with its terms, subject as to enforcement to applicable
bankruptcy, reorganization, insolvency or other similar laws
relating to or affecting creditors rights generally and to
equitable principles and principles of public policy that may
restrict the availability of remedies; this Agreement has been
duly and validly authorized, executed and delivered by the
Manager and, assuming due authorization, execution and
delivery by the other parties thereto, is a legal and valid
obligation of the Manager, subject as to enforcement to
applicable bankruptcy, reor-

<PAGE> 17

ganization, insolvency or other similar laws relating to or
affecting creditors rights generally and to equitable
principles and principles of public policy that may restrict
the availability of remedies; and neither the execution and
delivery of this Agreement, the Management Agreement, the
Administration Agreement or the Services Agreement nor
the performance by the Manager of its obligations hereunder or
thereunder conflicts with or will conflict with, or results or
will result in a breach of, or a default under the Certificate
of Incorporation or By-Laws of the Manager or any agreement or
instrument to which the Manager is a party or by which it is
bound, or any law, order, rule or regulation applicable to it
of any jurisdiction, court, federal or state regulatory body,
administrative agency or other governmental body, stock
exchange or securities association or arbitrator which
conflict, breach or default, alone or in the aggregate, would
have a material adverse effect on the Manager or on the
ability of the Manager to perform its obligations under
any such agreement.

(iv) The Manager has the financial resources
available to it necessary for the performance of its services
and obligations as contemplated in the Prospectus (and any
amendment or supplement thereto) and under the Management
Agreement, the Administration Agreement and the Services
Agreement.

(v) The description of the Manager in the
Registration Statement and the Prospectus (and any amendments
or supplements thereto) complies in all material respects with
all requirements of the 1933 Act, the 1940 Act, the Advisers
Act, the Rules and Regulations and the Advisers Act Rules and
Regulations and does not contain any untrue statement of a
material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein
(with respect to the Prospectus, in the light of the
circumstances under which they were made) not misleading.

<PAGE> 18
(vi) Except as described in the Registration
Statement (and any amendment or supplement thereto), there is
no litigation or proceeding pending or, to the knowledge of
the Manager, threatened against the Manager which,
individually or in the aggregate, reasonably might result in
any material adverse change in the condition, financial or
otherwise, business affairs or business prospects of the
Manager, reasonably might have a material adverse effect on
the ability of the Manager to fulfill its obligations
hereunder or under the Management Agreement or is or are of a
nature required to be disclosed in the Registration Statement
or Prospectus (or any amendments or supplements thereto).

(vii) Since the respective dates as of which
information is given in the Registration Statement and the
Prospectus (and any amendments or supplements thereto), there
has not been a material adverse change in or affecting the
general affairs, management or financial position of the
Manager.

(viii) The Manager owns, possesses or has obtained
and currently maintains all governmental licenses, permits,
consents, orders, approvals and other authorizations required
to carry on its business as contemplated in the Prospectus
(and any amendment or supplement thereto) except as to those
the failure of the Manager to own, possess, obtain or
maintain, alone or in the aggregate, would not have a material
adverse effect on the Manager or on the ability of the Manager
to perform its obligations under this Agreement, the
Management Agreement, the Administration Agreement or the
Services Agreement.

(ix) Each of this Agreement, the Management
Agreement, the Administration Agreement and the Services
Agreement complies, as to the obligations of the Manager, with
all applicable provisions of the 1940 Act, the Advisers Act,
the 1940 Rules and Regulations and the Advisers Act Rules and
Regulations.

<PAGE> 19
(x) No consent, approval, authorization or order of
any court, governmental agency or body or securities exchange
or securities association is required for the consummation by
the Manager of the transactions contemplated in this
Agreement, the Management Agreement, the Administration
Agreement or the Services Agreement, except such as have been
obtained.

(xi) Except (i) with respect to stabilization
activities conducted by the Underwriter and (ii) share
repurchases, tender offers or purchases of Common Shares in
the open market pursuant to the Fund's dividend reinvestment
plan effected following the date on which the distribution of
the Preferred Shares is completed, in accordance with the
policies of the Fund as set forth in the Prospectus, the
Manager has not taken and will not take, directly or
indirectly, any action designed, or which might be expected to
cause or result in, or which will constitute, stabilization or
manipulation of the price of the Common Preferred Shares.

(xii) The material prepared or approved by the Fund
or the Manager for distribution to and use internally by
brokers and dealers participating in the offering of the
Preferred Shares (i.e., "broker kits") accurately and fairly
presents the information contained therein in all material
respects for purposes of such internal use.

8. INDEMNIFICATION AND CONTRIBUTION.

(a) The Fund and the Manager, jointly and severally, agree to
indemnify and hold harmless the Underwriter, and each person, if any,
who controls the Underwriter within the meaning of Section 15 of the
1933 Act or Section 20(a) of the 1934 Act, from and against any and
all losses, claims, damages, liabilities and expenses, joint or
several (including investigation, legal or other expenses reasonably
incurred and any amount paid in settlement of any action, suit or
proceeding or any claim asserted), arising out of or based upon any
untrue statement or alleged untrue statement of a material fact

<PAGE> 20
contained in the registration statement or the Registration Statement,
the Prepricing Prospectus or the Prospectus, in any amendments or
supplements thereto, or in the sales material or arising out of or
based upon any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading (in the case of the Prepricing
Prospectus and the Prospectus, in light of the circumstances under
which such statements were made), except insofar as such losses,
claims, damages, liabilities or expenses arise out of or are based
upon any untrue statement or omission or allegation thereof which has
been made therein or omitted therefrom in reliance upon and in
conformity with information furnished in writing to the Fund by or on
behalf of the Underwriter through you expressly for use in connection
therewith; provided, however, that the indemnity agreement contained
in this paragraph with respect to the Prepricing Prospectus shall not
inure to the benefit of the Underwriter (or to the benefit of any
person controlling the Underwriter) on account of any such loss,
claim, damage, liability or expense arising from the sale of the
Preferred Shares by the Underwriter to any person if a copy of the
Prospectus shall not have been delivered or sent to such person within
the time required by the 1933 Act and the 1933 Act Rules and
Regulations, and the untrue statement or alleged untrue statement or
omission or alleged omission of a material fact contained in such
Prepricing Prospectus was corrected in the Prospectus, provided that
the Fund has delivered the Prospectus to the Underwriter in requisite
quantity on a timely basis to permit such delivery or sending. The
foregoing indemnity agreement shall be in addition to any liability
which the Fund may otherwise have.

(b) If any action, suit or proceeding shall be brought or
asserted against the Underwriter or any person controlling the
Underwriter, in respect of which indemnity may be sought from the Fund
or the Manager, the Underwriter or such controlling person shall
promptly notify the Fund and the Manager, and the Fund and the Manager
shall assume the defense thereof, including the employment of counsel
and the payment of all expenses. The Underwriter or any such
controlling person shall have the right to employ separate counsel in
any such action, suit or proceeding and to participate in the defense
thereof, but the fees and expenses of such counsel shall be at the

<PAGE> 21
expense of the Underwriter or controlling person unless (a) the
employment thereof has been specifically authorized by the Fund or the
Manager in writing, (b) the Fund and the Manager have failed to assume
the defense and employ counsel within a reasonable time after
receiving notice of commencement of the action or (c) the named
parties to any such action, suit or proceeding (including any
impleaded parties) include both the Underwriter or such controlling
person and the Fund and/or the Manager, and the Underwriter or such
controlling person shall have been advised by its counsel that
representation of such indemnified party and the Fund and/or the
Manager by the same counsel would be inappropriate under applicable
standards of professional conduct (whether or not such representation
by the same counsel has been proposed) due to actual or potential
differing interests between them (in which case the Fund and the
Manager shall not have the right to assume the defense of such action
on behalf of the Underwriter or such controlling person). It is
understood, however, that the Fund and the Manager shall, in
connection with any one such action, suit or proceeding or separate
but substantially similar or related actions, suits or proceedings in
the same jurisdiction arising out of the same general allegations or
circumstances be liable for the fees and expenses of only one separate
firm of attorneys (in addition to any local counsel) at any time for
all the Underwriter and controlling persons not having actual or
potential differing interests with the Fund or the Manager, which firm
shall be designated in writing by SBS and that all such fees and
expenses shall be reimbursed as they are incurred. The Fund and the
Manager shall not be liable for any settlement or any such action,
suit or proceeding effected without the written consent of the Fund or
the Manager, but if settled with such written consent, or if there be
a final judgment for the plaintiff in any such action, suit or
proceeding, the Fund and the Manager agree to indemnify and hold
harmless the Underwriter, to the extent provided in the preceding
paragraph, and each such controlling person from and against any loss,
claim, liability, damage or expense by reason of such settlement or
judgment.

(c) The Underwriter agrees to indemnify and hold harmless the
Fund and the Manager, each of their directors, each of the officers of
the Fund who sign the Registration Statement, and each person, if any,
who con-

21
<PAGE> 22

trols the Fund or the Manager within the meaning of Section 15
of the 1933 Act or Section 20(a) of the 1934 Act, to the same extent
as the foregoing indemnity from the Fund and the Manager to the
Underwriter, but only with respect to information relating to the
Underwriter furnished in writing to the Fund by it or on its behalf
through you expressly for use in the Registration Statement, the
Prospectus or the Prepricing Prospectus (or any amendments or
supplements thereto). If any action, suit or proceeding shall be
brought or asserted against the Fund or the Manager (or their
directors, such officers or any such controlling person), based on the
Registration Statement, the Prospectus or the Prepricing Prospectus,
or any amendment or supplement thereto, and in respect of which
indemnity may be sought against the Underwriter pursuant to this
paragraph (c), the Underwriter shall have the rights and duties given
to the Fund by paragraph (b) above (except that if the Fund or the
Manager shall have assumed the defense thereof the Underwriter shall
not be required to do so, but may employ separate counsel therein and
participate in the defense thereof, but the fees and expenses of such
counsel shall be at the Underwriter's expense), and the Fund and the
Manager (and their directors, such officers, and any such controlling
person) shall have the rights and duties given to the Underwriter by
paragraph (b). The foregoing indemnity agreement shall be in addition
to any liability which the Underwriter may otherwise have.

(d) If the indemnification provided for in this Section 8 is
unavailable to an indemnified party under paragraphs (a) or (c) hereof
in respect of any losses, claims, damages, liabilities or expenses
referred to therein, then an indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses,
claims, damages, liabilities or expenses (i) in such proportion as is
appropriate to reflect the relative benefits received by the Fund and
the Manager on the one hand (treated jointly for this purpose as one
person) and the Underwriter on the other hand from the offering of the
Preferred Shares or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in
clause (i) above but also the relative fault of the Fund and the
Manager on the one hand (treated jointly for

<PAGE> 23
this purpose as one person) and of the Underwriter on the other in
connection with the statements or omissions that resulted in such
losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative benefits received by
the Fund and the Manager on the one hand (treated jointly for this
purpose as one person) and the Underwriter on the other shall be
deemed to be in the same proportion as the total net proceeds from the
offering (before deducting expenses) received by the Fund bear to the
total underwriting discounts and commissions received by the
Underwriter, in each case as set forth in the table on the cover page
of the Prospectus. The relative fault of the Fund and the Manager on
the one hand (treated jointly for this purpose as one person) and of
the Underwriter on the other hand shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of
a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Fund and the
Manager on the one hand (treated jointly for this purpose as one
person) or by the Underwriter on the other hand and the parties'
relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.

(e) The Fund, the Manager and the Underwriter agree that it
would not be just and equitable if contribution pursuant to this
Section 8 were determined by pro rata allocation (even if the
Underwriter were treated as one entity for such purpose) or by any
other method of allocation which does not take account of the
equitable considerations referred to in paragraph (d) above. The
amount paid or payable by an indemnified party as a result of the
losses, claims, damages, liabilities and expenses referred to in
paragraph (d) above shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating
any claim or defending any such action, suit or proceeding.
Notwithstanding the provisions of this Section 8, the Underwriter
shall not be required to contribute any amount in excess of the amount
by which the total price of the Preferred Shares underwritten by it
and distributed to the public exceeds the amount of any damages which
the Underwriter has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission.
No person guilty of fraud-

23
<PAGE> 24

ulent misrepresentation (within the meaning of Section 11(f) of the
1933 Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. The Underwriter's
obligations to contribute pursuant to this Section 8 are several in
proportion to the respective numbers of Preferred Shares set forth
opposite their names in Schedule I hereto (or such number of
Preferred Shares in creased as set forth in Section 10 hereof) and not
joint.

(f) No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement of any pending
or threatened action, suit or proceeding in respect of which any
indemnified party is or could have been a party and indemnity could
have been sought hereunder by such indemnified party, unless such
settlement includes an unconditional release of such indemnified party
from all liability on claims that are the subject matter of such
settlement.

(g) Any losses, claims, damages, liabilities or expenses for
which an indemnified party is entitled to indemnification or
contribution under this Section 8 shall be paid by the indemnifying
party to the indemnified party as such losses, claims, damages,
liabilities or expenses are incurred. The indemnity and contribution
agreements contained in this Section 8 and the representations and
warranties of the Fund and the Manager set forth in this Agreement
shall remain operative and in full force and effect, regardless of (1)
any investigation made by or on behalf of the Underwriter or any
person controlling the Underwriter, the Fund, the Manager or their
directors or offices or any person controlling the Fund or the
Manager, (ii) acceptance of any Preferred Shares and payment therefor
hereunder and (iii) any termination of this Agreement, provided that
the Underwriter shall not be entitled pursuant to this Section 8 to
seek or enforce any claim for damages measured by their own lost
profits as a result of any termination of this Agreement. A successor
to the Underwriter, the Fund, the Manager or their directors or
officers or any person controlling the Underwriter or the Fund or the
Manager shall be entitled to the benefits of the indemnity,
contribution and reimbursement agreements contained in this Section 8.

<PAGE> 25
9. CONDITIONS OF UNDERWRITER'S OBLIGATIONS. The obligations of the
Underwriter to purchase Preferred Shares hereunder are subject to, in the
reasonable judgment of the Underwriter, the accuracy of and compliance with the
representations, warranties and agreements of and by the Fund and the Manager
contained herein on and as of the date hereof, the date on which the
Registration Statement becomes or became effective, the date of the Prospectus
(and any amendments or supplements thereto) and the Closing Date, to the
accuracy and completeness of all statements made by the Fund, the Manager or
any of their officers in any certificate delivered to the Underwriter or its
counsel pursuant to this Agreement and to the following further conditions:

(a) That the Registration Statement shall have become
effective by 5:30 p.m., New York City time, on the date of this
Agreement or at such later time as the Underwriter consents to in
writing and any post-effective amendment thereto shall be effective by
such time as the Underwriter shall designate in writing and all
filings required by Rules 497 and 430A under the 1933 Act shall have
been timely made.

(b) That you shall have received on the Closing Date an
opinion or opinions, dated the Closing Date, in form and scope
satisfactory to you and your counsel, of Ropes & Gray, counsel for the
Fund, to the following effect:

(i) The Fund has been duly organized and is validly
existing as an unincorporated voluntary association under and
by virtue of the laws of The Commonwealth of Massachusetts.

(ii) The Fund has full power and authority to own,
lease and operate its properties and conduct its business as
contemplated in the Registration Statement and Prospectus and,
to the extent required, is duly qualified as a foreign entity
and in good standing in each jurisdiction in which the Fund
has informed us that it owns or leases property or conducts
business (as described in the Prospectus) and in which the
failure to qualify would have a material adverse effect on its
business or operations, except that we express no opinion

<PAGE> 26
as to any qualification required under state securities or "blue sky"
laws as a result of the sale and delivery of the Preferred Shares
pursuant to the Underwriting Agreement.

(iii) The capitalization of the Fund is as set forth in the
Registration Statement and Prospectus and all outstanding shares of
beneficial interest of the Fund, including the Preferred Shares (when
issued and delivered to and paid for by the Underwriter in accordance
with this Agreement), have been duly authorized; the Preferred Shares
conform in all material respects to the description thereof in the
Prospectus. All outstanding shares of beneficial interest of the Fund
have been, and the Preferred Shares, when delivered to and paid for by
the Underwriter pursuant to the Underwriting Agreement, will be
validly issued, fully paid and nonassessable; and the issuance of the
Preferred Shares is not subject to preemptive or other similar rights.

(iv) Under Massachusetts law, shareholders could, under
certain circumstances, be held personally liable for the obligations
of the Fund. However, the Declaration of Trust disclaims shareholder
liability for acts or obligations of the Fund and requires that notice
of such disclaimer be given in each agreement, obligation, or
instrument entered into or executed by the Fund or the Trustees. The
Declaration of Trust provides for indemnification out of the Fund's
property for all loss and expense of any shareholder held personally
liable solely by reason of his being or having been a shareholder.
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circum stances in which the Fund
itself would be unable to meet its obligations.

(v) The Fund has all necessary power and authority to enter
into each of this Agreement and the Management Agreement and such
agreements (A) have been duly and validly authorized, signed and
delivered by the Fund and (B)

<PAGE> 27
comply with all applicable provisions of the 1933 Act, the 1933 Act
Rules and Regulations, the 1940 Act, the 1940 Act Rules and
Regulations, the Advisers Act and the Advisers Act Rules and
Regulations.

(vi) The Fund has all necessary power and authority to enter
into each of the Administrative Services Contract, the Custodian
Agreement, the Transfer Agency Agreement and the Preferred Shares
Agreements, and each such agreement (A) has been duly and validly
authorized, signed and delivered by the Fund, (B) complies with all
applicable provisions of the 1940 Act and the 1940 Act Rules and
Regulations and (C) assuming the due authorization, execution and
delivery by the other party thereto, constitutes the legal, valid and
binding obligation of the Fund enforceable in accordance with its
terms, subject, as to enforcement, to applicable bankruptcy,
reorganization, insolvency or other similar laws relating to or
affecting creditor's rights generally and to general principles of
equity.

(vii) No consent, approval, authorization, or order of any
court, governmental authority or agency or body or securities exchange
is required by or of the Fund for the performance by the Fund of, or
for the consummation by the Fund of the transactions contemplated by
this Agreement, the Management Agreement, the Administration
Agreement, the Transfer Agency Agreement, the Custody Agreement or the
Preferred Shares Agreements, except such as have been obtained under
the 1933 Act, the 1940 Act, the Rules and Regulations or the by-laws
and rules of the American Stock Exchange and such as may be required
by the NASD or under state securities laws in connection with the
purchase and distribution of the Preferred Shares by the Underwriter
pursuant to the Underwriting Agreement.

(viii) The execution and delivery of this Agreement, the
Management Agreement, the Administration Agreement, the Transfer
Agency Agree-

<PAGE> 28
ment, the Custody Agreement and the Preferred Shares Agreements by the
Fund, performance by the Fund of its obligations therein and
consummation of the transactions contemplated therein do not and will
not conflict with or constitute a breach of the Declaration of Trust
or the By-laws of the Fund or a default under any contract, indenture,
mortgage, loan, agreement, note, lease or other agreement or
instrument known to us after due inquiry to which the Fund is a party
or by which it may be bound or any of the property or assets of the
Fund is subject as of the date hereof, or violates any law,
administrative regulation, known to us after due inquiry,
administrative, court or arbitrator order or decree in effect as of
the date hereof.

(ix) The Registration Statement is effective under the 1933
Act and, to the best of our knowledge and information after due
inquiry, no stop order suspending the effectiveness of the
Registration Statement or suspending or preventing the use of the
Prospectus has been issued and no proceeding for that purpose, to the
best of our knowledge and information after due inquiry, has been
instituted or is threatened or pending; any required filing by the
Fund of the Prospectus or any supplements thereto required under Rule
497 of the 1933 Act Rules and Regulations have been made in the manner
and within the time required by such rule.

(x) The Fund is duly registered with the Commission under
the 1940 Act as a closed-end diversified management investment
company, and all required action has been taken by the Fund under the
1933 Act, the 1940 Act and the Rules and Regulations in connection
with the issuance and sale of the Preferred Shares to make the public
offering and consummate the sale of the Preferred Shares pursuant to
this Agreement.

(xi) The information in the Prospectus under the caption
"Taxation," to the extent that it constitutes matters of law or legal

<PAGE> 29

conclusions provides a fair and accurate summary of such laws or
conclusions.

(xii) As of the Closing Date and, with respect to the
Registration Statement, at the time the Registration Statement became
effective, and, with respect to the Prospectus, at the date of the
Prospectus, the Registration Statement and the Prospectus (other than
the statement of assets and liabilities and other financial and
statistical data included therein, as to which such counsel need not
express an opinion) comply and complied as to form in all material
respects with the requirements of the 1933 Act, the 1940 Act and the
Rules and Regulations. The authorized common shares of beneficial
interest of the Fund conform in all material respects to the
description thereof contained in the Registration Statement and
Prospectus insofar as such statements relate to legal matters, and the
form of certificate used to evidence the Preferred Shares is in proper
form and complies with all applicable statutory requirements.

(xiii) To the best of such counsel's knowledge and information
after due inquiry, there are no contracts, indentures, mortgages, loan
agreements, notes, leases or other documents or instruments to which
the Fund is a party or by which the Fund or its property is bound or
affected required to be described or referred to in the Registration
Statement or the Prospectus or to be filed as exhibits to the
Registration Statement other than those described or referred to
therein or filed as exhibits thereto, and the descriptions thereof or
references thereto are correct.

(xiv) The Fund's registration statement on Form 8-A under
the 1934 Act has become effective.

(xv) To the best of such counsel's knowledge and information
after due inquiry, there are no legal or governmental actions, suits
or proceedings pending or threatened against the

<PAGE> 30

Fund which are required to be disclosed in the Registration Statement
or Prospectus other than those disclosed therein.

(xvi) All descriptions in the Prospectus of statutes,
regulations or legal or governmental proceedings under the laws of the
United States or The Commonwealth of Massachusetts are accurate and
fairly present the information shown in all material respects.

Such counsel shall also state that nothing has come to their
attention that has led them to believe that the Registration
Statement, at the time it became effective or at the Closing Date,
contained or contains any untrue statement of a material fact or
omitted or omits to state any material fact required to be stated in
it or necessary in order to make the statements in it not misleading
or that the Prospectus as of its date or at the Closing Date,
contained or contains any untrue statement of any material fact or
omitted or omits to state any material fact required to be stated
therein or necessary in order to make the statements in it, in light
of the circumstances under which they were made, not misleading. Such
counsel need express no opinion or belief as to the financial
statements, including the notes thereto, or any financial or
statistical data set forth or referred to in the Registration
Statement or the Prospectus or as to any statements in or omissions
from the Prospectus or the Registration Statement made in reliance
upon and in conformity with written information furnished to the Fund
by you specifically for use therein.

In rendering any such opinions, such counsel may rely, as to matters
of fact, to the extent such counsel deems proper, on certificates of
responsible officers of the Fund, the Manager and public officials.

(c) That you shall have received on the Closing Date an opinion dated
the Closing Date, in form and scope satisfactory to you and your counsel, of
William H.

<PAGE> 31

Woolverton, Esq., counsel to the Manager to the effect that:

(i) The Manager has been duly organized and is validly
existing as a corporation in good standing under the laws of the State
of Delaware with full corporate power and authority to own its
properties and conduct its business as described in the Prospectus;

(ii) The Manager is duly qualified to transact business as a
foreign corporation and is in good standing in each jurisdiction where
such qualification is required except where the failure to so qualify
would not have a material adverse effect on the condition, financial
or otherwise, of the Manager, or on the ability of the Manager to
perform its obligations hereunder or under the Management Agreement,
the Administration Agreement and the Services Agreement;

(iii) The Manager is duly registered as an investment adviser
under the Advisers Act and is not prohibited by the Advisers Act, the
1940 Act, or the Rules and Regulations under such acts, from acting as
investment adviser for the Fund under the Management Agreement or to
perform its obligations under the Administration Agreement as
contemplated by the Prospectus;

(iv) Each of the Management Agreement, the Administration
Agreement and the Services Agreement has been duly and validly
authorized, executed and delivered by the Manager, complies in all
material respects with all provisions of the Advisers Act, the 1940
Act and the Rules and Regulations thereunder applicable to the Manager
and constitutes a legal, valid, binding and enforceable agreement of
the Manager in accordance with its terms, subject to applicable
bankruptcy, insolvency, reorganization and moratorium laws and other
laws affecting enforcement of creditors' rights generally and to
equitable principles and principles of public policy that may restrict
the availability of

31
<PAGE> 32

remedies; this Agreement has been duly and validly authorized,
executed and delivered by the Manager; and neither the execution and
delivery by the Manager of this Agreement, the Management Agreement,
the Administration Agreement or the Services Agreement nor the
consummation by the Manager of the transactions contemplated
thereunder or hereunder does or will, to the best of such counsel's
knowledge and information after due inquiry, result in a breach or
violation of the terms and provisions of, or constitute a default
under, any agreement or instrument to which the Manager is a party or
of which it or its property is subject nor will such action result in
any violation of the provisions of the Certificate of Incorporation or
By-Laws of the Manager or of any law, rule, regulation or order of any
court, governmental instrumentality, securities exchange or
association or arbitrator, which breach, violation or default, alone
or in the aggregate, would have a material adverse effect on the
Manager or on the ability of the Manager to perform its obligations
under any such agreement;

(v) The description of the Manager and its business in the
Prospectus complies with all requirements of the 1933 Act, the 1940
Act and the Rules and Regulations;

(vi) To the best of such counsel's knowledge and information
after due inquiry, there are no actions, proceedings or suits before
or by any court, commission, regulatory body, administrative agency or
other governmental body now pending or threatened to which the Manager
is a party or to which the Manager or any property of the Manager is
subject, other than as set forth in the Prospectus, that are required
to be disclosed in the Prospectus or that might individually or in the
aggregate have a material adverse effect on the condition, business
affairs or business prospects of the Manager or the ability of the
Manager to perform its obligations as contemplated by this

32
<PAGE> 33

Agreement, the Management Agreement, the Administration Agreement or
the Services Agreement;

(vii) The Manager owns, possesses or has obtained and
currently maintains all governmental licenses, permits, consents,
orders, approvals and other authorizations as is necessary for the
Manager to perform its obligations under this Agreement, the
Management Agreement, the Administration Agreement and the Services
Agreement;

(viii) No consent, approval, authorization or order of any
court, governmental agency or body or securities exchange or
association is required for the consummation by the Manager of the
transactions contemplated in this Agreement, the Management Agreement,
the Administration Agreement or the Services Agreement except such as
have been obtained.

Such counsel shall also state that nothing has come to their
attention that has led them to believe that the Registration
Statement, at the time it became effective or at the Closing Date,
contained or contains any untrue statement of a material fact or
omitted or omits to state any material fact required to be stated in
it or necessary to make the statements in it not misleading or that
the Prospectus, as of its date or at the Closing Date, contained or
contains any untrue statement of a material fact or omitted or omits
to state any material fact required to be stated therein or necessary
in order to make the statements in it, in light of the circumstances
under which they were made, not misleading. Such counsel need express
no opinion or belief as to the financial statements, including the
notes thereto, or any financial or statistical data set forth or
referred to in the Registration Statement or the Prospectus or as to
any statements in or omissions from the Prospectus or the Registration
Statement made in reliance upon and in conformity with written
information furnished to the Fund by you specifically for use therein.

<PAGE> 34
In rendering any such opinion, such counsel may rely, as to
matters of fact, to the extent such counsel deems proper, on
certificates of responsible officers of the Fund, the Manager
and public officials.

(d) That you shall have received on the Closing Date, an
opinion, dated the Closing Date, of Skadden, Arps, Slate, Meagher &
Flom, counsel for the Underwriter, with respect to such matters as the
Underwriter may require, and the Fund, the Manager and their
respective counsels shall have furnished to such counsel such
documents as they may request for the purpose of enabling them to pass
upon such matters.

In rendering any such opinion, such counsel may rely,
as to matters of fact, to the extent such counsel deems proper, on
certificates of responsible officers of the Fund, the Manager and
public officials.

(e) That you shall have received by 1:00 p.m., New York City
time, on the date this Agreement is signed and delivered by the
Underwriter a signed letter, dated such date, substantially in the
form of Annex A to this Agreement from the firm of accountants
designated in such Annex. You also shall have received on the Closing
Date a signed letter from such accountants, dated such Closing Date,
confirming on the basis of a review in accordance with the procedures
set forth in their earlier letter that nothing has come to their
attention during the period from a date not more than five business
days before the date of this Agreement, specified in the letter, to a
date not more than five business days before such Closing Date, that
would require any change in their letter referred to in the foregoing
sentence.

(f) That no order suspending the effectiveness of the
registration statement or the Registration Statement or prohibiting or
suspending the use of the Prospectus or any Prepricing Prospectus (or
any amendments or supplements thereto) or any sales material shall
have been issued and no proceedings for such purpose or for the
purpose of commencing an enforcement action against the Fund or, with
respect to the transactions contemplated by the Prospectus and this
Agreement, the Manager or the Underwriter may be pending before or, to
the knowledge of the Fund, the Manager or the Underwriter or in the
rea-

34
<PAGE> 35

sonable view of counsel to the Underwriter expressed in writing,
shall be threatened or contemplated by the Commission, that any
request for additional information (to be included in the registration
statement, the Prospectus or otherwise) on the part of the Commission
be complied with to the satisfaction of the Underwriter.

(g) (i) there shall not have been any change in the shares of
beneficial interest of the Fund nor any material increase in debt of
the Fund from that set forth in the Prospectus (and any amendment or
supplement thereto) and the Fund shall not have sustained any material
liabilities or obligations, direct or contingent, other than those
reflected in the Prospectus (and any amendment or supplement thereto);
(ii) since the date of the Prospectus (and any amendment or supplement
thereto) there shall not have been any material adverse change in the
general affairs, management, business, financial condition or results
of operation of the Fund or the Manager; (iii) the Fund and the
Manager must not have sustained any material loss or interference with
its business from any court or from legislative or other governmental
action, order or decree or from any other occurrence not described in
the Registration Statement and the Prospectus; and (iv) all of the
representations and warranties of the Fund and the Manager contained
in this Agreement shall be true and correct on and as of the date
hereof and as of the Closing Date as if made on and as of the Closing
Date.

(h) Subsequent to the effective date of this Agreement, there
shall not have occurred (i) any change, or any development involving a
prospective change, in or affecting the general affairs, management,
business, financial condition or results of operations of the Fund or
the Manager not contemplated by the Prospectus, which in your opinion,
as Underwriter, would materially, adversely affect the market for the
Preferred Shares, or (ii) any event or development relating to or
involving the Fund, the Manager or any officer or director of the Fund
or the Manager which makes any statement made in the Prospectus (or
any amendment or supplement thereto) untrue or which, in the opinion
of the Fund and its counsel or the Underwriter and their counsel,
requires the making of any addition to or change in the Prospectus (or
any amendment or supplement thereto) in order to state a material fact
required by the Act, the 1940 Act,

<PAGE> 36
the Rules and Regulations or any other law to be stated therein or
necessary in order to make the statements therein not misleading, if
amending or supplementing the Prospectus to reflect such event or
development would, in your opinion, as Underwriter, materially
adversely affect the market for the Preferred Shares.

(i) That neither the Fund nor the Manager shall have failed at
or prior to the Closing Date to have performed or complied with any of
the agreements herein contained and required to be performed or
complied with by them at or prior to the Closing Date.

(j) That you shall have received on the Closing Date a
certificate, dated such date, of two executive officers of each of the
Fund and the Manager reasonably acceptable to the Underwriter
certifying that the signers have carefully examined the Registration
Statement, the Prospectus (and any amendments or supplements thereto)
and this Agreement, and that, to the best of their knowledge and
information after due inquiry (i) the representations and warranties
of the Fund (with respect to the certificates from such Fund officers)
and the representations and warranties of the Manager (with respect to
the certificates from such officers of the Manager) in this Agreement
are true and correct on and as of the date of the certificate as if
made on such date, (ii) since the date of the Prospectus (and any
amendment or supplement thereto) there has not been any material
adverse change in the general affairs, prospects, management,
business, financial condition or results of operations of the Fund
(with respect to the certificates from such Fund officers) or the
Manager (with respect to the certificates from such officers of the
Manager), (iii) after reasonable investigation of any proceedings by
the Commission, no order under the 1933 Act or the 1940 Act suspending
the effectiveness of the Registration Statement or prohibiting the
sale of any of the Preferred Shares, or having a material adverse
effect on the Fund (with respect to the certificates from such Fund
officers) or the Manager (with respect to the certificates from such
officers of the Manager) has been issued and no proceedings for any
such purpose are pending before or threatened by the Commission or any
court or other regulatory body, (iv) each of the Fund (with respect to
certificates from such Fund officers) and the Manager (with respect to
certificates from such officers of the Manager) has performed and
com-

<PAGE> 37

plied with all agreements that this Agreement require it to perform
by such Closing Date, (v) neither the Fund (with respect to the
certificate from such officers of the Fund) nor the Manager (with
respect to the certificate from such officers of the Manager) has
sustained any material loss or interference with its business from any
court or from legislative or other governmental action, order or
decree or from any other occurrence not described in the Registration
Statement and the Prospectus and (vi) with respect to the certificate
from such officers of the Fund, there has not been any change in the
shares of beneficial interest of the Fund nor any material increase in
the debt of the Fund from that set forth in the Prospectus (and any
amendment or supplement thereto) and the Fund has not sustained any
material liabilities or obligations, direct or contingent, other than
those reflected in the Prospectus (and any amendment or supplement
thereto), and that the Fund and the Manager shall have furnished to
you such further certificates, documents and opinions of counsel as
you shall reasonably request (including certificates of officers of
the Fund and the Manager).

(k) The Preferred Shares to be sold by the Fund at the
Closing Date shall have been accorded the ratings of Moody's and
Standard & Poor's as set forth in Section 1(a)(vi) hereof and letters
to the effect, dated the Time of Delivery, shall have been received
from Moody's and Standard & Poor's.

(l) At the Closing Date and assuming the receipt of the net
proceeds from the sale of the Preferred Shares, the 1940 Act Asset
Coverage, the Preferred Share Basic Maintenance Amount and the Minimum
Liquidity Level (each as defined in the Prospectus) each will be met.

Any certificate or document signed by an officer of the Fund
or the Manager and delivered to you, as Underwriter, or to
Underwriter's counsel, shall be deemed a representation and warranty
by the Fund or the Manager to the Underwriter as to the statements
made therein.

10. EFFECTIVE DATE OF AGREEMENT. This Agreement shall become
effective: (i) upon the execution and delivery hereof by the parties hereto; or
(ii) if, at the time this Agreement is executed and delivered, it is necessary
for the registration statement or a post-effective amendment thereto to be

37
<PAGE> 38

declared effective before the offering of the Preferred Shares may commence,
when notification of the effectiveness of the Registration Statement or such
post-effective amendment has been released by the Commission. Until such time
as this Agreement shall have become effective, it may be terminated by the Fund
by notifying you, or by you by notifying the Fund.

If there is more than one Underwriter of the Preferred Shares named in
Schedule I and if any one or more of the Underwriter shall fail or refuse to
purchase Preferred Shares which it or they have agreed to purchase hereunder,
and the aggregate number of Preferred Shares which such defaulting Underwriter
or Underwriters agreed but failed or refused to purchase is not more than one-
tenth of the aggregate number of the Preferred Shares, each non-defaulting
Underwriter shall be obligated, severally, in the proportion which the number
of Preferred Shares set forth opposite its name in Schedule 1 bears to the
aggregate number of Preferred Shares set forth opposite the names of all
non-defaulting Underwriters, or in such other proportions as you may specify in
accordance with Section 20 of the SBS Master Agreement Among Underwriters, to
purchase Preferred Shares which such defaulting Underwriter or Underwriters
agreed but failed or refused to purchase. If any Underwriter or Underwriters
shall fail or refuse to purchase Preferred Shares and the aggregate number of
Preferred Shares with respect to which such default occurs is more than one-
tenth of the aggregate number of Preferred Shares and arrangements satisfactory
to you and the Fund for purchase of such Preferred Shares by one or more
non-defaulting Underwriter or other party or parties approved by you and the
Fund are not made within 36 hours after such default, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter or
the Fund (provided, however, that the Fund shall be responsible for the fees,
costs and expenses specified in the first paragraph of Section 12 of this
Agreement). In any such case which does not result in termination of this
Agreement, either you or the Fund shall have the right to postpone the Closing
Date, but in no event for longer than seven days, in order that the required
changes, if any, in the Registration Statement and the Prospectus or any other
documents or arrangements may be effected. Any action taken under this
paragraph shall not relieve any defaulting Underwriter from liability in
respect of any such default of any such Underwriter under this Agreement. The
term "Underwriter" as used in this Agreement includes, for all purposes of this
Agreement, any party not listed in Schedule I hereto who, with your approval
and the approval of the Fund, purchases Pre-

<PAGE> 39

ferred Shares which a defaulting Underwriter agreed, but failed or refused,
to purchase.

Any notice under this Section 10 may be made by telegraph or telephone
but shall be subsequently confirmed by letter.

11. TERMINATION OF AGREEMENT. This Agreement shall be subject to
termination in your absolute discretion, without liability on the part of the
Underwriter to the Fund, the Manager or PMF by notice given to the Fund if on
or prior to the Closing Date, as the case may be, (i) trading in securities
generally on any national securities exchange or the NASDAQ shall have been
suspended or materially limited or trading in securities of the Fund shall have
been suspended or materially limited, (ii) additional material governmental
restrictions not in force on the date of this Agreement have been imposed upon
trading in securities generally or a general moratorium on commercial banking
activities in New York or The Commonwealth of Massachusetts shall have been
declared by either Federal or state authorities or (iii) there shall have
occurred any outbreak or escalation of hostilities or other international or
domestic calamity, crisis or change in political, financial or economic
conditions the effect of which on the financial markets of the United States is
such as to make it, in your judgment, impracticable or inadvisable to commence
or continue the offering of the Preferred Shares at the offering price to the
public set forth on the cover page of the Prospectus or to enforce contracts
for the resale of the Preferred Shares by the Underwriter. Notice of such
termination shall be given to the Fund and the Manager by telegraph or
telephone but shall be subsequently confirmed by letter.

12. CERTAIN AGREEMENTS RELATING TO EXPENSES. The Fund agrees to pay
all fees, costs and expenses incident to the performance by the Fund of its
obligations hereunder, including (a) the preparation, printing or reproduction,
and filing (including, without limitation, the filing fees prescribed by the
1933 Act, the 1940 Act and the Rules and Regulations) and distribution of the
Registration Statement (including exhibits thereto), each Prepricing
Prospectus, the Prospectus and the 1940 Act Notification, and all amendments or
supplements thereto, (b) the preparation, printing authentication, issuance and
delivery of certificates for the Preferred Shares, including any stamp taxes
and transfer agent and registrar fees payable in connection with the original
issuance and sale of such Preferred Shares, (c) the registrations or
qualifica-

39
<PAGE> 40

tions referred to in Section 5(f), including the reasonable fees and
disbursements of counsel for the Underwriter relating to the preparation,
printing or reproduction, and delivery of the preliminary and supplemental Blue
Sky Memoranda and such registrations or qualifications, (d) the fees and
expenses of the Fund's independent accountants, counsel for the Fund and of the
transfer agent, (e) the expenses of printing or reproduction and delivery
(including postage, air freight and the cost of counting and packaging) of
copies of the registration statement, Registration Statement, the Prospectus,
each Prepricing Prospectus, all amendments or supplements thereto and any sales
material as may be requested for use in connection with the offering and sale
of the Preferred Shares, (f) printing or otherwise reproducing this Agreement,
any dealer agreements, the preliminary and supplemental Blue Sky Memoranda and
all other agreements, memoranda, correspondence and other documents printed or
reproduced and delivered in connection with the offering of the Preferred
Shares, (g) the fees and expenses incurred with respect to the review of the
offering of the Preferred Shares by the National Association of Securities
Dealers, Inc., including filing fees and reasonable fees and expenses of
counsel and (h) the fees and expenses incurred with respect to the listing of
the Common Shares on the American Stock Exchange and the registration of the
Preferred Shares under the 1934 Act.

If this Agreement shall be terminated pursuant to any of the
provisions hereof (otherwise than by notice given by you pursuant to Section 10
(except as otherwise provided in Section 10) or pursuant to Section 11 hereof),
or if this Agreement shall be terminated by the Underwriter because of any
failure or refusal on the part of the Fund or the Manager to comply with the
terms or fulfill any of the conditions of this Agreement, the Fund and Manager
agree to reimburse the Underwriter for all out-of-pocket expenses (including
reasonable fees and expenses of counsel for the Underwriter) incurred by them
in connection herewith but without any further obligation on the part of the
Fund and the Manager for loss of profits or otherwise. In the event that this
Agreement shall be terminated pursuant to Section 10 (otherwise than by notice
given by the Fund pursuant to Section 10) or Section 11 hereof, the Fund shall
be responsible only for the costs and expenses identified in the preceding
paragraph.

Notwithstanding the foregoing, the Manager will pay the costs and
expenses of the Fund set forth above in this Section

<PAGE> 41

12 unless the sale of the Preferred Shares is consummated pursuant to Section 2
hereof.

13. INFORMATION FURNISHED BY THE UNDERWRITER. The statements in the
first and second paragraph under the caption "Underwriting" in the Prospectus
constitute the only information furnished by or on behalf of the Underwriter to
you expressly for use in the Prospectus as such information is referred to in
this Agreement.

14. MISCELLANEOUS. Except as otherwise provided in Sections 5, 10
and 11 hereof, notice given pursuant to any provision of this Agreement shall
be in writing and shall be delivered (a) to the Fund and the Manager at Putnam
Investment Management, Inc., One Post Office Square, Boston, MA 02109,
Attention: John R. Verani or (b) to you, as Underwriter, at the office of SBS
at 1345 Avenue of the Americas, New York, NY 10105, Attention: Manager,
Corporate Finance Division.

This Agreement has been and is made solely for the benefit of the
Underwriter, the Fund, the Manager, the controlling persons, directors and
officers referred to in Section 8 and their respective successors and assigns,
to the extent provided herein, and no other person shall acquire or have any
right under or by virtue of this Agreement. Neither the term "successor" nor
the term "successors and assigns" as used in this Agreement shall include a
purchaser from the Underwriter of any of the Preferred Shares in his status as
such purchaser. The terms "director," "directors" or "board of directors" when
used with respect to the Fund shall be deemed to include any trustee, trustees
or board of trustees of the Fund.

15. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all such
counterparts shall together constitute one and the same instrument.

16. APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed with the State of New York.

17. LIMITATION OF LIABILITY. A copy of the Agreement and Declaration
of Trust of the Fund is on file with the Secretary of State of The Commonwealth
of Massachusetts, and, pursuant thereto, notice is hereby given that this
Agreement has been executed on behalf of the Fund by an officer of the Fund as
an officer and not individually and the obligations of

<PAGE> 42

the Fund arising out of this Agreement are not binding upon any of the
trustees, officers or shareholders of the Fund individually but are binding
only upon the assets and property of the Fund.

42
<PAGE> 43

Please confirm that the foregoing correctly sets forth the agreement
among the Fund, the Manager, PMF and the Underwriter.

Very truly yours,

PUTNAM INVESTMENT GRADE
MUNICIPAL TRUST III

By:________________________
Name:
Title:

PUTNAM INVESTMENT
MANAGEMENT, INC.

By:________________________
Name:
Title:

PUTNAM MUTUAL FUNDS CORP.

By:________________________
Name:
Title:

<PAGE> 44

Confirmed as of the date
first above written.

By: SMITH BARNEY SHEARSON INC.

By: __________________________________
Name: William B. Ogden IV
Title: Managing Director

44
<PAGE> 45

<TABLE>
Schedule I

<CAPTION>
Underwriter Preferred Shares
----------- ----------------
<S> <C> <C>
Smith Barney Shearson Inc. . . . . .

_______

Total:
</TABLE>

<PAGE> 46
ANNEX A

Pursuant to Section (__) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:

(i) They are independent public accountants as required by
the Securities Act, the Investment Company Act and the Rules and
Regulations;

(ii) It is their opinion that the statement of assets and
liabilities audited by them and included in the Registration Statement
complies in form in all material respects with the applicable
accounting requirements of the Securities Act, the Investment Company
Act and the related published Rules and Regulations;

(iii) They have not audited any financial statements of the
Fund as of any date or for any period subsequent to _________, 19__,
although they have conducted an audit of _________, 19__. The purpose
of the audit was to enable them to express their opinion on the
statement of assets and liabilities as of _________, 19__. Therefore,
they are unable to and need not express any opinion on the unaudited
statement of assets and liabilities as of _________, 19__ and the
unaudited statements of operations, changes in net assets and the
unaudited condensed financial information for the period from
_________, 19__ (commencement of operations) to _________, 19__,
included in the Registration Statement or on any other financial
statements or condensed financial information for any period subsequent
to _________, 19__;

(iv) For purposes of such letter, they have read all minutes
of meetings of the Board of Directors of the Fund as set forth in the
minute books at _________, 19__, officials of the Fund having advised
them that the minutes of all such meetings through _________, 19__ were
set forth therein; and they have carried out other procedures to
_________, 19__ (their work did not extend to the period from

A-1

<PAGE> 47
_________, 19__ to _________, 19__, inclusive) as follows:

(a) With respect to the period from _________, 19__
(commencement of operations) to _________, 19__, they have:

(i) Read the unaudited statement of assets and liabilities as
of _________, 19__, and the unaudited statements of operations, changes
in net assets and the unaudited condensed financial information for the
period from _________, 19__ to _________, 19__, included in the
Registration Statement; and

(ii) Made inquiries of certain officials of the Fund who have
responsibility for financial and accounting matters regarding (1)
whether the unaudited financial statements and unaudited condensed
financial information referred to in (iv)(__)(i) comply in form in all
material respects with the applicable accounting requirements of the
Securities Act and the Investment Company Act and the related published
Rules and Regulations and (2) whether those unaudited financial
statements and unaudited condensed financial information are in
conformity with generally accepted accounting principles.

The foregoing procedures do not constitute an audit conducted in accordance
with generally accepted auditing standards. Also, they would not necessarily
reveal matters of significance with respect to the comments in the following
paragraph. Accordingly, they need not make any representations regarding the
sufficiency of the foregoing procedures for purposes of the Underwriters;

(iii) Nothing came to their attention as a result of the
foregoing procedures, however, that caused them to believe that (i) the
unaudited financial statements and unaudited condensed financial
information described in (iv)(a)(i), included in the Registration
Statement, do not comply in form in all material respects with the
applicable accounting requirements of the Securities Act and the
Investment Company Act and the related published Rules and Regulations
and (ii) the financial

A-2

<PAGE> 48
statements and unaudited condensed financial information are not in
conformity with generally accepted accounting principles;

(iv) They have made inquiries of certain officials of the
Fund who have responsibility for financial and accounting matters
regarding whether there was any change at _________, 19__ in the net
assets, capital stock or liabilities of the Fund as compared with
amounts shown in the unaudited financial statements as of _________,
19__ included in the Registration Statement. On the basis of these
procedures and their reading of the minutes as described in item (iv),
nothing came to their attention that would cause them to believe that
there were any such changes, increases or decreases, except in all
instances for changes, increases or deceases that the Registration
Statement discloses have occurred or may occur; and

(v) In addition to the limited procedures referred to in
clause (iv) above, they have carried out certain specified procedures,
not constituting an audit, with respect to certain amounts, percentages
and financial information which are derived from the general accounting
records of the Fund, which are included in the Registration Statement
and which are specified by the Underwriters, and have compared such
amounts, percentages and financial information with the accounting
records of the Fund and have found them to be in agreement.

A-3

<PAGE> 1

Coopers certified public accountants
& Lybrand

CONSENT OF INDEPENDENT ACCOUNTANTS

To the Trustees of
Putnam Investment Grade Municipal Trust III:

We consent to the inclusion in this Pre-Effective Amendment No. 1 to
the Registration Statement on Form N-2 under the Securities Act of 1933 (File
No. 33-51667) of our report dated November 11, 1993 on our audit of the
statement of assets and liabilities contained in the Prospectus included as
part of this Pre-Effective Amendment. We also consent to the reference to our
firm under the heading "Experts" in the Prospectus included as part of this
Pre-Effective Amendment.

Boston, Massachusetts COOPERS & LYBRAND
January 26, 1994

<PAGE> 1
EXHIBIT (2)(k)(3)

____________________________________________________________

PAYING AGENT AGREEMENT

between

PUTNAM INVESTMENT GRADE MUNICIPAL TRUST III

and

IBJ SCHROEDER BANK AND TRUST COMPANY

Dated as of ___________, 1994

Relating to

Municipal Income Preferred Shares

PUTNAM INVESTMENT GRADE MUNICIPAL TRUST III

____________________________________________________________

<PAGE> 2

<TABLE>

TABLE OF CONTENTS

<CAPTION>
Page
----
<S> <C> <C>
Section 1.01. PURPOSE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Section 1.02. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Section 1.03. RULES OF CONSTRUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Section 2.01. NOTICE OF REDEMPTION; OTHER REDEMPTION PROCEDURES. . . . . . . . . . . . . . . . 3

Section 3.01. RESULTS OF REMARKETINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Section 3.02. DISBURSING DIVIDENDS AND REDEMPTION PRICE. . . . . . . . . . . . . . . . . . . . 6

Section 3.03. CHANGE IN DIVIDEND PERIOD. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Section 3.04. NOTICE TO THE FUND AND REMARKETING AGENT . . . . . . . . . . . . . . . . . . . . 7

Section 3.05. SETTLEMENT PROCEDURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Section 4.01. ISSUE OF SHARE CERTIFICATE. . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Section 4.02. SHARE REGISTER; ALLOCATION OF SHARES . . . . . . . . . . . . . . . . . . . . . . 8

Section 4.03. REGISTRATION OF SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Section 4.04. LOST CERTIFICATES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Section 4.05. DISPOSITION OF CANCELLED CERTIFICATES; RECORD RETENTION. . . . . . . . . . . . . 10

Section 4.06. SHARE TRANSFER BOOKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Section 4.07. RETURN OF FUNDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Section 5.01. REPRESENTATIONS AND WARRANTIES OF THE FUND. . . . . . . . . . . . . . . . . . . 11

Section 5.02. REPRESENTATIONS AND WARRANTIES OF THE PAYING AGENT. . . . . . . . . . . . . . . 12

Section 6.01. DUTIES AND RESPONSIBILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Section 6.02. RIGHTS OF THE PAYING AGENT. . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Section 6.03. PAYING AGENT'S DISCLAIMER. . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Section 6.04. COMPENSATION, EXPENSES AND INDEMNIFICATION. . . . . . . . . . . . . . . . . . . 13

Section 7.01. TERM OF AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Section 7.02. COMMUNICATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>

<PAGE> 3

<TABLE>
<S> <C> <C>
Section 7.03. ENTIRE AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Section 7.04. BENEFITS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Section 7.05. AMENDMENT; WAIVER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Section 7.06. SUCCESSORS AND ASSIGNS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Section 7.07. SEVERABILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Section 7.08. ARTICLE AND SECTION HEADINGS. . . . . . . . . . . . . . . . . . . . . . . . . 16

Section 7.09. COUNTERPARTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Section 7.10. GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Section 7.11. TRUST ONLY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

</TABLE>

-ii-
<PAGE> 4
PAYING AGENT AGREEMENT

PAYING AGENT AGREEMENT dated as of ___________, 1994, between PUTNAM
INVESTMENT GRADE MUNICIPAL TRUST III, a Massachusetts business trust (the
"Fund"), and IBJ SCHROEDER BANK AND TRUST COMPANY, a New York banking
corporation (the "Paying Agent").

The Fund proposes to issue 200 Municipal Income Preferred Shares (the
"Preferred Shares") pursuant to its By-Laws (as defined below). The Fund
desires that the Paying Agent perform certain duties in connection with the
Preferred Shares upon the terms and conditions of this Agreement and hereby
appoints the Paying Agent to act in the capacities set forth in this Agreement.

NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, the Fund and the Paying Agent agree as follows:

ARTICLE ONE

PURPOSE; DEFINITIONS AND RULES OF CONSTRUCTION

Section 1.01. PURPOSE. The Trustees of the Fund have adopted one or
more resolutions appointing the Paying Agent as transfer agent, registrar,
dividend and redemption price disbursing agent, settlement agent and agent for
certain notifications for the Fund in connection with the Preferred Shares.
The Paying Agent accepts such appointment and agrees to act in accordance with
(a) its standard procedures as Paying Agent with respect to the Preferred
Shares, (b) the By-Laws and (c) this Agreement.

Section 1.02. DEFINITIONS. For all purposes of this Agreement,
except as otherwise expressly provided or unless the context otherwise
requires, capitalized terms used herein that are not otherwise defined shall
have the meanings ascribed thereto in the By-Laws.

"AGENT MEMBER" of any person shall mean such person's agent member of
the Securities Depository.

"AUTHORIZED NEWSPAPER" shall mean a newspaper of general circulation
in the English language generally published on Business Days in The City of New
York, New York.

"AUTHORIZED OFFICER" shall mean each Senior Vice President, Vice
President, Assistant Vice President, Assistant Secretary and Assistant
Treasurer of the Paying Agent assigned to its Corporate Trust Department and
every other officer or employee of the Paying Agent designated as an
"Authorized Officer" for purposes hereof in a notice from the Paying Agent to
the Fund.

<PAGE> 5

"BENEFICIAL OWNER" shall mean a person that is listed as the
beneficial owner of one or more Preferred Shares in the records of the Paying
Agent or, with respect to any share not registered in the name of the
Securities Depository on the share transfer books of the Fund, the person in
whose name such share is so registered.

"BUSINESS DAY" means a day on which the New York Stock Exchange, Inc.
is open for trading, and which is not a day on which banks in The City of New
York are authorized or obligated by law to close.

"BY-LAWS" shall mean the By-Laws, as amended, of the Fund (including
the Statements).

"COMMISSION" shall mean the Securities and Exchange Commission.

"HOLDER" shall mean, with respect to any Preferred Share, the person
whose name appears on the share transfer books of the Fund as the registered
holder of such share.

"NOTICE OF REDEMPTION" shall mean a notice of redemption of some or
all Preferred Shares given by the Fund by telephone or facsimile and in writing
substantially in the form attached hereto as Exhibit A.

"UNDERWRITING AGREEMENT" shall mean the Underwriting Agreement, dated
________ __, 1994 by and among the Fund, Putnam Investment Management, Inc.,
and Smith Barney Shearson Inc. (the "Underwriter") providing for the sale of
the Preferred Shares by the Fund to the Underwriter.

"SIGNING OFFICER" shall mean the Chairman, the President, a Vice
President or the Treasurer of the Fund and every other officer or employee of
the Fund designated by the Chairman, the President or a Vice President as a
"Signing Officer" for purposes hereof in a notice to the Paying Agent.

"STATEMENTS" shall mean the statements establishing the rights and
preferences of the shares of one or more series of Preferred Shares contained
in the By-Laws.

"TRUSTEES" means the Trustees of the Fund.

"VICE PRESIDENT" when used with respect to the Fund shall mean any
Vice President of the Fund whether or not designated by a number or a word or
words added before or after the title "Vice President."

-2-
<PAGE> 6
Section 1.03. RULES OF CONSTRUCTION. Unless the context or use
indicates another or different meaning or intent, the following rules shall
apply to the construction of this Agreement: (i) words importing the singular
number shall include the plural number and vice versa; (ii) the captions and
headings herein are solely for convenience of reference and shall not
constitute a part of this Agreement nor shall they affect its meaning,
construction or effect; (iii) the words "hereof", "herein", "hereto" and other
words of similar import refer to this Agreement as a whole; and (iv) all
references herein to times of day shall be to New York City time.

ARTICLE TWO

REDEMPTION OF PREFERRED SHARES

Section 2.01. NOTICE OF REDEMPTION; OTHER REDEMPTION PROCEDURES.

(a) Notice of redemption, in whole or in part, of Preferred Shares
pursuant to Part I, paragraph 4 of the applicable Statement shall be given by
the Fund to the Paying Agent, the Remarketing Agent and the Securities
Depository, if any (and any other Holder) by telephone, in the form of a Notice
of Redemption, not later than 1:00 p.m. (and later confirmed in writing), (i)
in the case of optional redemption, not less than 20 nor more than 30 days
prior to the earliest date upon which any such redemption may occur and (ii) in
the case of mandatory redemption, not less than 20 nor more than 30 days prior
to the redemption date established by the Trustees and specified in such
notice.

(b) In the case of any partial redemption of Preferred Shares
pursuant to paragraph 4 of Part I of the applicable Statement, the Paying Agent
will use its reasonable efforts to provide telephonic notice to each Beneficial
Owner of Preferred Shares selected for redemption not later than the close of
business on the Business Day on which the Paying Agent determines the shares to
be redeemed, as described in clause (e) below (or, during a Non-Payment Period
with respect to such shares, not later than the close of business on the
Business Day immediately following the day on which the Paying Agent receives a
Notice of Redemption from the Fund). Such telephonic notice shall be confirmed
promptly in writing by a notice of redemption substantially in the form of
Exhibit B hereto to the Remarketing Agent and the Securities Depository, if
any, and substantially in the form of Exhibit C hereto to each Beneficial Owner
of the shares called for redemption, in each case not later than the close of
business on the Business Day immediately following the day on which the Paying
Agent determines the shares to be redeemed.

-3-
<PAGE> 7

Statement, the Paying Agent will use reasonable efforts to provide telephonic
notice to each Beneficial Owner of Preferred Shares called for redemption not
later than the close of business on the Business Day immediately following the
day on which the Paying Agent receives a Notice of Redemption pursuant to
clause (a) above. Such telephonic notice shall be confirmed in writing by a
notice of redemption substantially in the form of Exhibit B hereto to the
Securities Depository, if any, and the Remarketing Agent and substantially in
the form of Exhibit C hereto to each Beneficial Owner of the shares called for
redemption, in each case not later than the close of business on the second
Business Day following the day on which the Paying Agent receives a Notice of
Redemption.

(d) Every Notice of Redemption and every other notice of redemption
sent to Beneficial Owners of shares subject to redemption shall state: (i) the
redemption date; (ii) the number of Preferred Shares to be redeemed; (iii) the
redemption price; (iv) that dividends on the Preferred Shares to be redeemed
will cease to accumulate as of such redemption date; and (v) the provisions of
the Declaration of Trust, the By-laws and the applicable Statement pursuant to
which such shares are being redeemed. In addition, notice of redemption given
to Beneficial Owners shall state the CUSIP numbers, if any, of the Preferred
Shares to be redeemed and the manner in which the Beneficial Owners of such
shares may obtain payment of the redemption price. No defect in the Notice of
Redemption or other redemption notice or in the transmittal or mailing thereof
shall affect the validity of the redemption proceedings, except as required by
applicable law. The Paying Agent will use its reasonable efforts to cause any
Notice of Redemption to be published in an Authorized Newspaper within two
Business Days of the date of such Notice of Redemption pursuant to clause (a)
above, but failure so to publish such Notice of Redemption shall not affect the
validity or effectiveness of any such redemption proceedings.

(e) (i) Subject to clause (e)(ii) below, if fewer than all the
outstanding Preferred Shares are to be redeemed, the number of Preferred Shares
to be redeemed shall be a whole number of Preferred Shares and shall be
determined by the Trustees, and the Fund shall give a Notice of Redemption;
provided that (a) no Preferred Share will be subject to optional redemption on
any Dividend Payment Date during a Non-Call Period to which it is subject and
(b) Preferred Shares subject to a Non-Call Period will be subject to mandatory
redemption only on the basis described in clause (f) below. Unless
certificates representing shares are held by Holders other than the Securities
Depository or its nominee, the Securities Depository, upon receipt of such
notice, will determine by lot (or otherwise in accordance with procedures in
effect at the time) the number of Preferred Shares to be redeemed from the
account of each Agent Member (which may include an Agent Member, including a
Remarketing Agent, holding shares for its own account) and notify the Paying
Agent of such determination. The Paying Agent, upon receipt of such notice,
will in turn determine by lot the number of Preferred Shares to

-4-
<PAGE> 8
be redeemed from the accounts of the Beneficial Owners of the Preferred Shares
whose Agent Members have been selected by the Securities Depository and give
notice of such determination to the Remarketing Agent. In doing so, shares may
be redeemed from the accounts of some Beneficial Owners, which may include the
Remarketing Agent, without shares being redeemed from the accounts of other
Beneficial Owners.

(ii) Notwithstanding clause (e)(i) above, if certificates
representing Preferred Shares are held by Holders other than the Securities
Depository, then the shares to be redeemed shall be selected by the Paying
Agent by lot.

(f) Any Preferred Share will be subject to mandatory redemption
regardless of whether such share is subject to a Non-Call Period provided that
Preferred Shares subject to a Non-Call Period will only be subject to
redemption to the extent that the other Preferred Shares are not available to
satisfy the number of shares required to be redeemed. In such event, such
shares subject to a Non-Call Period shall be selected for redemption in order
of outstanding Non-Call Period (with shares with the lowest number of days
remaining in the Period to be called first) and by lot in the event of equal
outstanding Non-Call Periods.

(g) Notwithstanding the foregoing provisions of this Section 2.01,
the Remarketing Agent may, in its sole discretion, modify the procedures set
forth above with respect to notification of redemption, provided that any such
modification does not adversely affect any Holder of Preferred Shares or
materially alter the obligations of the Paying Agent; and further provided that
the Trust receives written confirmation from S&P that any such modification
would not impair the ratings then assigned by S&P to Preferred Shares.

ARTICLE THREE

PAYING AGENT AS DIVIDEND AND REDEMPTION PRICE
DISBURSING AGENT, SETTLEMENT AGENT AND AGENT FOR
CERTAIN NOTIFICATIONS

Section 3.01. RESULTS OF REMARKETINGS.

(a) On each Remarketing Date, the Fund will cause the Remarketing
Agent to advise the Paying Agent by electronic data transfer or telecopy by
3:30 p.m. of (i) the Applicable Dividend Rate determined in the related
Remarketing; (ii) the identities of (and the number of shares held by) the
Beneficial Owners who purchased such Preferred Shares as a result of the
Remarketing; and (iii) the identities of (and number of shares sold by) persons
who sold Preferred Shares in the Remarketing. By approximately 4:30 p.m. on
such Remarketing Date, the Paying Agent will confirm by telephone, telecopy or
electronic data transfer such information with the Remarketing Agent.

-5-
<PAGE> 9
(b) This Section shall not be applicable to any Preferred Share
during a Non-Payment Period.

Section 3.02. DISBURSING DIVIDENDS AND REDEMPTION PRICE.

(a) The Fund shall deposit in same-day funds with the Paying Agent by
12:00 noon (i) on each Dividend Payment Date, the full amount of any dividend
declared and payable on such Dividend Payment Date on any Preferred Share, and
(ii) on any redemption date, the Optional Redemption Price or Mandatory
Redemption Price, as the case may be, for each Preferred Share called for
redemption. With respect to any such deposit which is not made by the Fund by
12:00 noon on a Dividend Payment Date for any Preferred Shares (if, prior to
12:00 noon on such Dividend Payment Date, the Fund has declared such dividend
payable on or within three Business Days after such Dividend Payment Date to
the Holders who held such Preferred Shares as of 12:00 noon on the Business Day
preceding such Dividend Payment Date) or redemption date for any Preferred
Shares subject to redemption, as the case may be, but made within three
Business Days after such due date, the Fund shall also deposit with the Paying
Agent a late charge in such an amount as shall be calculated by the Fund for
such period of non-payment at the Non-Payment Period Rate applied to the amount
of such non-payment based on the actual number of days comprising such period
divided by 365 all as more fully described in the By- laws. The Paying Agent
agrees to hold all moneys so deposited with the Paying Agent by the Fund in
trust for the payment of dividends, the redemption price or any applicable late
charge on Preferred Shares for the benefit of the Holders entitled thereto and
to apply such moneys as set forth in clause (b) below.

(b) The Paying Agent will pay to the applicable Holder, as determined
pursuant to the By-Laws, on the Business Day following the Fund's deposit of
funds in accordance with the provisions of paragraph (a) above (provided,
however, that such payment shall be made on the Business Day following such
Business Day following the Fund's deposit of funds if such deposit is made
after 12:00 noon) (or, in the case of dividends in arrears on any Preferred
Share, at any time as may be fixed by the Fund), (i) dividends, including any
late charge, on the applicable Preferred Shares, and (ii) the Optional
Redemption Price or Mandatory Redemption Price, as the case may be, plus any
late charge, on any Preferred Shares called for redemption, in either case
after receipt of the necessary funds from the Fund with which to make such
payments. The amount of dividends for any Dividend Period to be paid by the
Paying Agent to the Holder entitled thereto will be determined by the Fund as
set forth in Part I, paragraph 3 of the applicable Statement. The redemption
price to be paid by the Paying Agent to the Holder entitled thereto will be
determined by the Fund as set forth in Part I, paragraph 4 of the applicable
Statement. The Paying Agent shall have no duty to determine the redemption
price or the Non-Payment Period Rate and may rely on the amount thereof set
forth in the Notice of Redemption. Upon the request of the Fund, the Paying
Agent shall promptly transmit to the Fund

-6-
<PAGE> 10

after the date of any redemption as described above any cash held by the Paying
Agent in excess of the aggregate redemption price of Preferred Shares called
for redemption on such date.

Section 3.03. CHANGE IN DIVIDEND PERIOD. Upon any change in the
period of time between Dividend Payment Dates for Preferred Shares as a result
of a change in law or otherwise, the Fund will give notice of such change to
the Paying Agent and the Remarketing Agent and the Paying Agent shall use
reasonable efforts to notify the Holders thereof by telephone, confirmed in
writing of such change; provided that if the Dividend Period whose length is
being adjusted is a Dividend Period for which the Applicable Dividend Rate is
the Non-Payment Period Rate, the Fund will notify the Holders of Preferred
Shares directly.

Section 3.04. NOTICE TO THE FUND AND REMARKETING AGENT. If one or
more of the following events occurs with respect to Preferred Shares, the
Paying Agent shall promptly notify the Fund and, so long as the Applicable
Dividend Rate applicable to all shares shall not be the Non-Payment Period
Rate, the Remarketing Agent, of such occurrence by telephone, promptly
confirmed in writing:

(i) at the close of business on any Dividend Payment Date for
such shares, dividends on all outstanding shares accumulated to any Dividend
Payment Date for such shares, including such first mentioned Dividend Payment
Date, have not been paid in full or sufficient funds have not been deposited
with the Paying Agent for the payment of such accumulated dividends;

(ii) the Fund has failed to redeem on any redemption date
any shares for which Notice of Redemption has been received by the Paying
Agent; or

(iii) by 12:00 Noon on the third Business Day following the
occurrence of either of the events described in (i) or (ii) above, the Fund has
not deposited with the Paying Agent the full amount of funds described in
subparagraph (a) of Section 3.02.

Section 3.05. SETTLEMENT PROCEDURES.

(a) In the event that any person other than the Paying Agent fails to
perform any act necessary to enable the Paying Agent to act as contemplated by
this Section, the Paying Agent shall take such steps as are reasonably
requested by the Fund or the Remarketing Agent (and approved by the Fund) to
facilitate the transfers contemplated by this Section even if such transfers
cannot take place within the time periods set forth in this Section.

(b) On the first day of any Dividend Period on which the Applicable
Dividend Rate applicable to any Preferred Share shall

-7-
<PAGE> 11

be the Non-Payment Period Rate, this Section 3.05 shall no longer be applicable
to such Preferred Shares.

(c) Notwithstanding the foregoing provisions of this Section 3.05,
the Remarketing Agent may, in its sole discretion, modify the procedures set
forth above with respect to the Preferred Shares, provided any modification
does not adversely affect the Holders or the Beneficial Owners of the shares or
the Paying Agent.

ARTICLE FOUR

PAYING AGENT AS TRANSFER AGENT AND REGISTRAR

Section 4.01. ISSUE OF SHARE CERTIFICATE. On the Date of Original
Issue of the Preferred Shares, one certificate for the Preferred Shares shall
be issued by the Fund. At the request of the Fund, such certificate shall be
registered as instructed by the Fund and countersigned by the Paying Agent in
its capacity as registrar, which, except in the event a Securities Depository
is used, shall deliver the certificates as instructed by the Fund in writing.
If a Securities Depository is used, the Paying Agent shall hold the certificate
as custodian for the Securities Depository. At no time shall the aggregate
number of Preferred Shares represented by such countersigned certificates
exceed the number of then outstanding shares.

Section 4.02. SHARE REGISTER; ALLOCATION OF SHARES.

(a) So long as the Applicable Dividend Rate applicable to Preferred
Shares shall not be the Non-Payment Period Rate, the Paying Agent shall
maintain a registry of the Beneficial Owners of the shares which shall specify
with respect to each Beneficial Owner the Remarketing Agent through which such
Beneficial Owner purchased and holds its shares. By 9:00 a.m. on each
Remarketing Date, the Paying Agent shall inform the Remarketing Agent of the
name of each Beneficial Owner of Preferred Shares subject to Tender and
Dividend Reset and the number of such shares. On or prior to their original
issuance, the Fund shall cause the underwriter of the Preferred Shares to
provide the Paying Agent with a list of the initial Beneficial Owners of the
Preferred Shares who purchased Preferred Shares through such underwriter of the
Preferred Shares and, as to each such Beneficial Owner, (i) its address and
telephone number, including the name of an individual or department authorized
to receive notices pursuant to this agreement, (ii) the name and Securities
Depository account number of its Agent Member and (iii) such other information
as the Paying Agent may reasonably require (collectively, "Beneficial Owner
Information"). The Paying Agent may rely exclusively upon, as conclusive
evidence of the identities of the Beneficial Owners, (i) such lists, (ii) the
results of Remarketings reported to the Paying Agent by the Remarketing Agent,
and (iii) notice from a Remarketing Agent with

-8-
<PAGE> 12

respect to the transfer of Preferred Shares outside of a Remarketing by a
Beneficial Owner to another person.

(b) The Paying Agent shall only register a transfer of Preferred
Shares from a Beneficial Owner to a new Beneficial Owner if the Paying Agent
has been notified of such transfer by a Remarketing Agent who provides the
Beneficial Owner Information for the new Beneficial Owner. The Paying Agent
shall not be required to accept any notice delivered pursuant to the foregoing
sentence unless received by the Paying Agent by 3:00 p.m. on the Business Day
preceding the immediately succeeding Remarketing Date for such shares for such
Remarketing.

(c) Except as otherwise provided in this Section, the foregoing
provisions of this Section shall no longer be applicable to Preferred Shares if
the Applicable Dividend Rate applicable to all shares shall be the Non-Payment
Period Rate.

Section 4.03. REGISTRATION OF SHARES.

(a) If a Securities Depository is used and except as set forth in
this Section, Preferred Shares shall be registered solely in the name of the
Securities Depository or its nominee. If, with respect to Preferred Shares,
the Securities Depository shall give notice of its intention to resign as such,
and if the Fund shall not have selected a substitute Securities Depository with
respect to Preferred Shares reasonably acceptable to the Paying Agent prior to
such resignation, then upon such resignation, such Preferred Shares shall be
registered for transfer or exchange, and new certificates shall be issued in
the name of the designated transferee or transferees of the Securities
Depository, upon surrender of the old certificates in a form deemed by the
Paying Agent in its capacity as registrar properly endorsed for transfer with
(i) all necessary endorsers' signatures guaranteed in such manner and form as
the Paying Agent in its capacity as registrar may require by a guarantor
reasonably believed by the Paying Agent in its capacity as registrar to be
responsible; (ii) such assurances as the Paying Agent in its capacity as
registrar shall deem necessary or appropriate to evidence the genuineness and
effectiveness of each necessary endorsement; and (iii) satisfactory evidence of
compliance with all applicable laws relating to the collection of taxes or
funds necessary for the payment of such taxes.

(b) If certificates representing Preferred Shares are, at the
direction of the Fund, to be held by Holders other than the Securities
Depository, such shares shall be registered for transfer or exchange, and the
Fund shall issue one or more new certificates with respect to such shares
registered in the names of such Holder or their nominees, upon surrender of the
old certificates in a form deemed by the Paying Agent properly endorsed for
transfer, with (i) all necessary endorsers' signatures guaranteed in such
manner and form as the Paying Agent may require by a guarantor reasonably
believed by the Paying

-9-
<PAGE> 13

Agent to be responsible; (ii) such assurances as the Paying Agent shall deem
necessary or appropriate to evidence the genuineness and effectiveness of each
necessary endorsement; and (iii) satisfactory evidence of compliance with all
applicable laws relating to the collection of taxes or funds necessary for the
payment of such taxes.

Section 4.04. LOST CERTIFICATES. The Paying Agent shall issue and
register replacement certificates for certificates represented to have been
lost, stolen or destroyed, upon the fulfillment of such requirements as shall
be deemed appropriate by the Fund and the Paying Agent, subject at all times to
provisions of law, the By-Laws and resolutions adopted by the Fund with respect
to lost securities. The Paying Agent may issue new certificates in exchange
for and upon the cancellation of mutilated certificates. Any request by the
Fund to the Paying Agent to issue a replacement or new certificate pursuant to
this Section shall be deemed to be a representation and warranty by the Fund to
the Paying Agent that such issuance will comply with applicable provisions of
law and the By-laws and resolutions of the Fund.

Section 4.05. DISPOSITION OF CANCELLED CERTIFICATES; RECORD
RETENTION. The Paying Agent shall retain share certificates which have been
cancelled in transfer or in exchange and accompanying documentation for two
calendar years from the date of such cancellation. The Paying Agent shall
afford access to the Fund, its agents and counsel upon written request at
reasonable times during normal business hours to review and make extracts or
copies of such certificates and accompanying documentation. Upon the
expiration of such two-year period and at the Fund's request, the Paying Agent
shall deliver to the Fund the cancelled certificates and accompanying
documentation. The Fund shall, at its sole cost and expense, retain such
records for a minimum additional period of ten calendar years from the date of
delivery of the records to the Fund and shall make such records available
during normal business hours upon written request during this period at any
time, or from time to time, for reasonable periodic, special or other
examinations by representatives of the Commission. The Fund shall also
undertake to furnish to the Commission, upon demand, at either its principal
office or at any regional office, complete, correct and current hard copies of
any and all such records.

Section 4.06. SHARE TRANSFER BOOKS. The Paying Agent shall maintain
the share transfer books listing the Holders of the Preferred Shares. In case
of any request or demand for the inspection of the share transfer books of the
Fund or any other books in the possession of the Paying Agent, the Paying Agent
will notify the Fund and secure written instructions as to permitting or
refusing such inspection. Notwithstanding the foregoing, the Paying Agent
reserves the right to exhibit the share transfer books or other books to any
Person in case it is advised by its counsel that its failure to do so would be:
(i)

-10-
<PAGE> 14

unlawful; or (ii) expose it to liability unless the Paying Agent shall have
received sufficient indemnification.

Section 4.07. RETURN OF FUNDS. The Paying Agent shall notify the
Fund in writing of the amount of any funds deposited with the Paying Agent by
the Fund for any reason under this Agreement, including for the payment of
dividends or the redemption of Preferred Shares, that remain with the Paying
Agent after 90 days from the date of such deposit and such amount shall, to the
extent permitted by law, be repaid to the Fund by the Paying Agent upon the
written request of the Fund. The Paying Agent shall have no duty to invest any
funds deposited with it at any time pursuant to this Agreement. The Fund shall
be entitled, however, to receive, from time to time after the date fixed for
redemption, investment earnings, if any, on the funds so deposited.

ARTICLE FIVE

REPRESENTATIONS AND WARRANTIES

Section 5.01. REPRESENTATIONS AND WARRANTIES OF THE FUND. The Fund
represents and warrants to the Paying Agent that:

(a) the Fund is duly established and is validly existing as a
voluntary association in good standing under the laws of The Commonwealth of
Massachusetts and has full power to execute and deliver this Agreement and to
authorize, create and issue the Preferred Shares;

(b) this Agreement has been duly and validly authorized, executed and
delivered by the Fund, is enforceable in accordance with its terms and
constitutes the legal, valid and binding obligation of the Fund;

(c) the form of the certificate evidencing the Preferred Shares
complies with all applicable laws of The Commonwealth of Massachusetts;

(d) the Preferred Shares have been duly authorized and are validly
issued, fully paid and nonassessable (except as set forth in the Prospectus);

(e) no action by or before any governmental body or authority of the
United States or of any state thereof is required in connection with the
execution and delivery of this Agreement or the issuance of the Preferred
Shares except as required by the Securities Act of 1933, the Investment Company
Act of 1940, the rules and regulations promulgated thereunder, and applicable
state securities laws, in each case as in effect at the date hereof, all of
which have been taken, obtained or made and are in full force and effect on the
date hereof;

-11-
<PAGE> 15

(f) the execution and delivery of this Agreement and the issuance and
delivery of the Preferred Shares do not and will not conflict with, violate or
result in a breach of, in any material respects, the terms, conditions or
provisions of, or constitute a default under, the Agreement and Declaration of
Trust or the By-Laws of the Fund, any law or regulation, any order or decree of
any court or public authority having jurisdiction, or any mortgage, indenture,
contract, agreement or undertaking to which the Fund is a party or by which it
is bound; and

(g) no taxes are payable upon or in respect of the execution of this
Agreement or the issuance of the Preferred Shares.

Section 5.02. REPRESENTATIONS AND WARRANTIES OF THE PAYING AGENT.
The Paying Agent represents and warrants to the Fund that the Paying Agent is
duly organized and is validly existing as a banking corporation under the laws
of the State of New York and has the power to enter into and perform its
obligations under this Agreement.

ARTICLE SIX

THE PAYING AGENT

Section 6.01. DUTIES AND RESPONSIBILITIES.

(a) The Paying Agent is not a trustee and is acting solely as agent
for the Fund hereunder and owes no fiduciary duties to any other person by
reason of this Agreement.

(b) The Paying Agent undertakes to perform such duties and only such
duties as are specifically set forth in or incorporated by reference into this
Agreement, and no implied covenants or obligations shall be read into this
Agreement against the Paying Agent.

(c) In the absence of negligence or willful misconduct on its part,
the Paying Agent shall not be liable for any action taken, suffered or omitted
or for any error of judgment made by it in the performance of its duties under
this Agreement. The Paying Agent shall not be liable for any error of judgment
made in good faith unless the Paying Agent shall have been negligent in
ascertaining or failing to ascertain the pertinent facts.

-12-
<PAGE> 16

Section 6.02. RIGHTS OF THE PAYING AGENT.

(a) The Paying Agent may rely and shall be protected in acting or
refraining from acting upon any communication authorized hereby and upon any
written instruction, notice, request, direction, consent, report, certificate,
share certificate or other instrument, paper or document, in each case
reasonably believed by it to be genuine. The Paying Agent shall not be liable
for acting upon any telephone communication authorized hereby which the Paying
Agent believes in good faith to have been given by the Fund, a Holder, a
Beneficial Owner, an Agent Member or a Remarketing Agent. The Paying Agent may
record telephone communications with the Fund and any Remarketing Agent in
connection with its duties hereunder.

(b) The Paying Agent may consult with counsel as to matters of law
and the advice of such counsel shall be full and complete authorization and
protection in respect of any action (other than willful misconduct) taken,
suffered or omitted by it hereunder in good faith and in reasonable reliance
thereon.

(c) The Paying Agent shall not be required to advance, expend or risk
its own funds or otherwise incur or become exposed to financial liability in
the performance of its duties hereunder.

(d) The Paying Agent may exercise its rights hereunder and, with the
prior written consent of the Fund, may perform its duties hereunder either
directly or by or through agents or attorneys.

Section 6.03. PAYING AGENT'S DISCLAIMER. The Paying Agent makes no
representation as to the validity of any Preferred Share.

Section 6.04. COMPENSATION, EXPENSES AND INDEMNIFICATION.

(a) The Fund shall pay the Paying Agent, from time to time,
reasonable compensation for all services rendered by it under this Agreement as
shall be agreed upon by the Fund and the Paying Agent.

(b) The Fund shall reimburse the Paying Agent, upon the Paying
Agent's request, for all reasonable out-of-pocket expenses, disbursements and
advances which shall have been agreed upon by the Fund and the Paying Agent and
shall have been incurred or made by the Paying Agent in accordance with the
provisions of this Agreement (including the reasonable compensation, expenses
and disbursements of any agent or counsel for the Paying Agent) except any
expense or disbursement attributable to its negligence or willful misconduct.

(c) The Fund shall indemnify the Paying Agent for and hold it
harmless against any loss, liability or reasonable expense incurred without
negligence or willful misconduct on the Paying

-13-
<PAGE> 17

Agent's part, arising out of or in connection with its agency under this
Agreement, including the reasonable costs and expenses of defending itself
against any claim or liability (including reasonable attorneys' fees) in
connection with its exercise or performance of any of its duties hereunder.

ARTICLE SEVEN

MISCELLANEOUS

Section 7.01. TERM OF AGREEMENT.

(a) The term of this Agreement is unlimited unless it shall be
terminated as provided in this Section. The Fund may terminate this Agreement
at any time by so notifying the Paying Agent, provided that, so long as any
Preferred Shares are outstanding, the Fund has entered into an agreement with a
successor Paying Agent in substantially the form of this Agreement. The Paying
Agent may terminate this Agreement, subject to the acceptance of the Fund, upon
notice to the Fund on the date specified in such notice, which shall be no
earlier than 90 days after the date of delivery of such notice. If an
instrument of acceptance shall not have been delivered to the resigning Paying
Agent within 30 days after the giving of such notice of resignation, the
resigning Paying Agent may, at the expense of the Fund, petition any court of
competent jurisdiction for the appointment of a successor Paying Agent.

(b) Except as otherwise provided in this clause (b), the respective
rights and duties of the Fund and the Paying Agent under this Agreement shall
cease upon termination of this Agreement. The Fund's representations,
warranties, covenants and obligations to the Paying Agent under Sections 5.01
and 6.04 hereof shall survive the termination hereof. Upon termination of this
Agreement, the Paying Agent shall (i) at the request of the Fund, promptly
deliver to the Fund copies of all books and records maintained by it in
connection with its duties hereunder, and (ii) at the request of the Fund,
promptly transfer to the Fund or any successor Paying Agent any funds held for
the Fund which have not previously been distributed by the Paying Agent in
accordance with this Agreement.

Section 7.02. COMMUNICATIONS. Except for communications authorized
to be by telephone pursuant to this Agreement, all notices, requests and other
communications to any party hereunder shall be in writing (including telecopy
or similar writing) given to such person at its address or telecopy number set
forth below:

-14-
<PAGE> 18

If to the Fund: Putnam Investment Grade
Municipal Trust III
One Post Office Square
Boston, Massachusetts 02109
Attention: Chief Compliance Officer
Telephone: (617) 292-1103
Telecopier: (617) 292-1659

If to the Paying
Agent: IBJ Schroeder Bank and Trust Company
One State Street
New York, New York 10014
Attention: ________________________
________________________
Telephone: (212) ________
Telecopier: (212) ________

If to the
Remarketing Agent: Smith Barney Shearson Inc.
1345 Avenue of the Americas
New York, New York 10105
Attention: _______________
_______________
Telephone: (212) ________
Telecopier: (212) ________

If to the
Securities
Depository: The Depository Trust Company
7 Hanover Square
24th Floor
New York, New York 10004
Attention: Manager, Cash Receipts
Section Dividend
Department
Telephone: (212) 709-1646
Telecopier: (212) 709-1623

or to such other address as the party to whom the communication is addressed
shall have previously communicated to the other party. Any notice to a
Beneficial Owner shall be given at the address or phone number, as the case may
be, as the Remarketing Agent or the Agent Member for such Beneficial Owner
shall have previously communicated to the Paying Agent. Communications shall
be given on behalf of the Fund by a Signing Officer and on behalf of the Paying
Agent by an Authorized Officer. Communications shall be effective when
received at the proper address.

Section 7.03. ENTIRE AGREEMENT. This Agreement contains the entire
agreement between the parties relating to the subject matter hereof, and there
are no other representations, endorsements, promises, agreements or
understandings, oral, written or inferred, between the parties.

-15-
<PAGE> 19

Section 7.04. BENEFITS. Nothing herein, express or implied, shall
give to any person, other than the Fund, the Paying Agent and their respective
successors and assigns, any benefit of any legal or equitable right, remedy or
claim hereunder. In particular, and without limiting the generality of the
foregoing, no Holder or Beneficial Owner of any Preferred Shares shall have or
be deemed to have any right in respect of, or shall in any event be entitled to
enforce or to seek recourse against any person in respect of any provision of
this Agreement, and any and all rights of holders of Preferred Shares or
obligations of the Fund in respect thereof arise only under and are governed
solely by the Agreement and Declaration of Trust and By-laws of the Fund as
they are in effect from time to time.

Section 7.05. AMENDMENT; WAIVER.

(a) This Agreement shall not be deemed or construed to be modified,
amended, rescinded, cancelled or waived, in whole or in part, except by a
written instrument signed by a duly authorized representative of each party.

(b) Failure of either party hereto to exercise any right or remedy
hereunder in the event of a breach hereof by the other party shall not
constitute a waiver of any such right or remedy with respect to any subsequent
breach.

Section 7.06. SUCCESSORS AND ASSIGNS. This Agreement shall be
binding upon, inure to the benefit of, and be enforceable by, the respective
successors and assigns of each of the Fund and the Paying Agent. Without the
prior written consent of the Fund, the Paying Agent may not assign this
Agreement except by operation of law or to a person who acquires substantially
all of the assets and assumes all of the liabilities of the Paying Agent,
either directly or by operation of law.

Section 7.07. SEVERABILITY. If any clause, provision or section
hereof shall be ruled invalid or unenforceable by any court of competent
jurisdiction, the invalidity or unenforceability of such clause, provision or
section shall not affect any of the remaining clauses, provisions of sections
hereof.

Section 7.08. ARTICLE AND SECTION HEADINGS. The Article and
Section headings herein are for convenience of reference only, and shall not
limit or otherwise affect the meaning hereof.

Section 7.09. COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which so executed and delivered shall be deemed
to be an original, but all of which counterparts shall together constitute but
one and the same instrument.

Section 7.10. GOVERNING LAW. This Agreement shall be governed by
and construed in accordance with the laws of the

-16-
<PAGE> 20

State of New York applicable to agreements made and performed in said State.

Section 7.11. TRUST ONLY. A copy of the Agreement and Declaration
of Trust of the Fund is on file with the Secretary of State of The Commonwealth
of Massachusetts and notice is hereby given that this Agreement has been
executed on behalf of the Fund by an officer of the Fund as an officer and not
individually and the obligations of the Fund arising out of this Agreement are
not binding upon any of the trustees, officers or shareholders of the Fund
individually but are binding only upon the assets and property of the Fund.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered by their proper and duly authorized officers as
of the date first above written.

PUTNAM INVESTMENT GRADE
MUNICIPAL TRUST III

By:_______________________________________
Title:

IBJ SCHROEDER BANK AND TRUST COMPANY

By:_______________________________________
Title:

-17-
<PAGE> 21

EXHIBIT A
---------

[Fund to Paying Agent]

PUTNAM INVESTMENT GRADE MUNICIPAL TRUST III

NOTICE OF REDEMPTION OF

MUNICIPAL INCOME PREFERRED SHARES
("PREFERRED SHARES")

NOTICE IS HEREBY given that, pursuant to the provisions in Section
_____ of the By-Laws of Putnam Investment Grade Municipal Trust III (the
"Fund"), the Fund will redeem on ______________________, ______, (the
"Redemption Date"), _______ shares (the "Redemption Shares") of its then
outstanding Preferred Shares at the redemption price of $50,000 per share plus
accumulated but unpaid dividends to the Redemption Date plus premium, if any.
[Of such shares, _________ shares are to be redeemed from CUSIP #_____ ____]
[and ______ shares are to be redeemed from CUSIP #__________.] (1)

Payment of an amount equal to the redemption price, plus accumulated
but unpaid dividends to the Redemption Date, will be deposited, in same-day
funds, with the Paying Agent by 12:00 p.m., New York time, on the Redemption
Date or at such other time as is permitted under the By-laws of the Fund.

As of _________________, ___________ dividends on the Redemption
Shares will cease to accumulate.

[Date] PUTNAM INVESTMENT GRADE
MUNICIPAL TRUST III

By:___________________________
Title:

___________________

(1) Expand to include additional CUSIP numbers, as appropriate.

<PAGE> 22

EXHIBIT B
---------
[Paying Agent to Remarketing Agent and Securities Depository]

PUTNAM INVESTMENT GRADE MUNICIPAL TRUST III

NOTICE OF REDEMPTION

MUNICIPAL INCOME PREFERRED SHARES ("PREFERRED SHARES")

Payment of an amount equal to the redemption price, including
accumulated but unpaid dividends to the Redemption Date, will be made pursuant
to the Paying Agent Agreement.

As of ______________, ______________ dividends on the Redemption
Shares will cease to accumulate.

[Date] IBJ SCHROEDER BANK AND TRUST
COMPANY

By:___________________________
Title:

____________________

(1) Expand to include additional CUSIP numbers, as appropriate.

<PAGE> 23
EXHIBIT C
---------
[Paying Agent to Beneficial Owner]

PUTNAM INVESTMENT GRADE MUNICIPAL TRUST III

NOTICE OF REDEMPTION OF

MUNICIPAL INCOME PREFERRED SHARES ("PREFERRED SHARES")

NOTICE IS HEREBY given that, pursuant to the provisions in Section
_______ of the By-Laws of Putnam Investment Grade Municipal Trust III (the
"Fund"), the Fund will redeem on ______________, ______ (the "Redemption
Date"), ______________ shares (the "Redemption Shares") of its then outstanding
Preferred Shares at the redemption price of $50,000 per share plus accumulated
but unpaid dividends to the Redemption Date plus premium, if any. Of such
shares, it has been determined that ____are your shares. [You shall instruct
your Agent Member to deliver by ______.m. on the Redemption Date, by book
entry, shares selected for redemption as provided in the Paying Agent Agreement
against receipt of payment therefor.](1) [You shall present and surrender at
the office of the Paying Agent by ______.m. on the Redemption Date the
certificate or certificates evidencing shares selected for redemption as
provided in the Paying Agent Agreement against receipt of payment therefor.](1)

Payment of the redemption price, including accumulated but unpaid
dividends to the Redemption Date, will be made pursuant to the Paying Agent
Agreement.

As of _____________, ________ dividends on the Redemption Shares will
cease to accumulate.

[Date] IBJ SCHROEDER BANK AND TRUST
COMPANY

By:___________________________
Title:

____________________

(1) Delete if not applicable.

<PAGE> 24

EXHIBIT D
---------

[Remarketing Agent to Paying Agent -
To be used only for transfers made
other than pursuant to a Remarketing]

PUTNAM INVESTMENT GRADE MUNICIPAL TRUST III

MUNICIPAL INCOME PREFERRED SHARES
("PREFERRED SHARES")

TRANSFER FORM

The undersigned hereby notifies you that:

_____________________________________________
(Print name of existing beneficial owner)

has sold ___________ Preferred Shares (CUSIP No. _________) to

________________________________________________
(Print name of new Beneficial Owner)

________________________________________________
(Print address of new Beneficial Owner)

________________________________________________
(Print telephone number of new Beneficial Owner)

________________________________________________
(Print name and Securities Depository account
number of new Agent Member)

[NAME OF REMARKETING AGENT]

By:________________________
Name:
Title:

<PAGE> 1
EXHIBIT (4)
-----------

______________________________________________________________

PUTNAM INVESTMENT GRADE MUNICIPAL TRUST III

AND

PUTNAM INVESTMENT MANAGEMENT, INC.

AND

SMITH BARNEY SHEARSON INC.

REMARKETING AGREEMENT

DATED JANUARY __, 1994
______________________________________________________________

<PAGE> 2
REMARKETING AGREEMENT

THIS REMARKETING AGREEMENT, dated January __, 1994 (the
"Remarketing Agreement"), by and among Putnam Investment Grade Municipal Trust
III, a voluntary association with transferable shares organized and existing
under and by virtue of the laws of The Commonwealth of Massachusetts (commonly
referred to as a "Massachusetts business trust") (the "Fund"), Putnam
Investment Management, Inc., a Delaware corporation (the "Adviser"), and Smith
Barney Shearson Inc., a Delaware corporation ("Smith Barney");

WITNESSETH:

WHEREAS, the Fund expects to issue 200 Municipal Income
Preferred Shares Series Th, with no par value, liquidation preference $50,000
per share plus accumulated but unpaid dividends (the "Shares"), pursuant to and
with the powers, preferences and rights assigned to them in the Fund's
Declaration of Trust, as amended to the date hereof and including the
Certificate of Vote establishing and fixing the rights and preferences of the
Shares (the "Certificate"), on file with the Secretary of State of The
Commonwealth of Massachusetts (together, the Fund's Declaration of Trust and
the Certificate are referred to herein as the "Declaration");

WHEREAS, the Shares will initially be sold to and purchased by
Smith Barney [and ________] pursuant to the terms of an Underwriting Agreement
(the "Underwriting Agreement") dated January __, 1994 among the Fund, the
Adviser, and Smith Barney [and ________];

WHEREAS, the Fund has requested Smith Barney to act as the
Remarketing Agent under this Agreement in accordance with the provisions of the
Declaration (and the Board of Trustees of the Fund has adopted a resolution
appointing Smith Barney as Remarketing Agent) (a) to set the Applicable
Dividend Rate on the Shares from time to time on behalf of the Fund and (b) to
remarket the Shares tendered to it in a Remarketing on behalf of the Beneficial
Owners of such Shares from time to time who wish to sell their Shares in a
Remarketing (Smith Barney

2
<PAGE> 3
being referred to hereinafter when acting in any of such capacities as the
"Remarketing Agent"); and

WHEREAS, Smith Barney is willing to assume such duties on the
terms and conditions expressly set forth herein.

NOW, THEREFORE, in consideration of the premises and mutual
covenants herein contained, the parties hereto agree as follows:

Section 1. DEFINITIONS. Capitalized terms used herein that
are not otherwise defined shall have the meanings assigned to them in the
Declaration.

Section 2. APPOINTMENT AND OBLIGATIONS OF REMARKETING AGENT.

(a) The Fund hereby appoints Smith Barney, and Smith Barney
hereby accepts such appointment, as the exclusive Remarketing Agent of the
Shares for the purpose of (i) setting the Applicable Dividend Rate on such
Shares from time to time, (ii) remarketing such Shares from time to time on
behalf of the Beneficial Owners thereof, and (iii) performing such other duties
as are assigned to the Remarketing Agent in the Declaration; all pursuant to
the procedures set forth in the Declaration and the Prospectus dated January
__, 1994 relating to the offering of the Shares (the "Prospectus"). The Fund
shall have the right, on seven Business Days' notice to the Remarketing Agent,
to appoint one or more additional Remarketing Agents with respect to the Shares
under an agreement substantially in the form of this Agreement. Upon any such
appointment, including any appointment of a successor Remarketing Agent
pursuant to Section 4 hereof, all references in this Agreement to "Remarketing
Agent" shall be deemed to refer also to each such additional or successor
Remarketing Agent. Any such additional or successor Remarketing Agent shall
accept its appointment by executing an agreement substantially in the form of
this Agreement.

(b) The Remarketing Agent agrees with respect to the Shares
(i) to calculate the Maximum Dividend Rate applicable to each Dividend Period
with respect to such Shares; (ii) to use its best efforts to set in
Remarketings the Applicable Dividend Rate on such Shares;

<PAGE> 4
(iii) to notify the Fund promptly of the Applicable Dividend Rate; (iv) to use
its best efforts to remarket such Shares tendered to the Remarketing Agent in
Remarketings held from time to time as provided in the Declaration; (v) to
assist the Fund in establishing the Specific Redemption Provisions, if any,
relating to such Shares; and (vi) to carry out such other duties as are
assigned to the Remarketing Agent in the Declaration, all in accordance with
the provisions of the Declaration.

(c) The Remarketing Agent agrees that if, at any time,
either Moody's or S&P shall not make available a rating for the Shares required
for the Remarketing Agent to calculate any Maximum Dividend Rate, or if both
Moody's and S&P shall not make available such a rating, the Fund shall select
one or more Substitute Rating Agencies for such purpose.

(d) It is expressly understood and agreed by the parties
hereto that the obligations of the Remarketing Agent hereunder are conditioned
upon the issuance and delivery of the Shares pursuant to the terms and
conditions of the Underwriting Agreement. It is further understood and agreed
by and between the parties that the Remarketing Agent shall not be obligated to
set the Applicable Dividend Rate on the Shares or to remarket the Shares during
a Non-Payment Period, or at any time that any of the conditions set forth in
clauses (a) and (b) of Section 7 hereof shall not have been fully and
completely met to the satisfaction of the Remarketing Agent or at any time any
of the events set forth in clause (c) of said Section 7 shall have occurred.

(e) Subject to a failure to remarket, as described in Part II
Section 5 of the Statement, by 3:30 p.m., New York City time, on each
Remarketing Date, the Remarketing Agent will advise ________ (the "Paying
Agent") of (i) the Applicable Dividend Rate determined in the related
Remarketing; (ii) the identities of (and the number of Shares held by) the
Beneficial Owners who purchased such Shares as a result of the Remarketing, to
the extent known to the Remarketing Agent; (iii) the identities of (and number
of Shares sold by) persons who sold Shares in the Remarketing; and (iv) the
Specific Redemption Provisions, if any, relating to the Shares. By 3:30 p.m.,
New York City time, on each Remarketing Date, the Remarketing Agent shall also
advise the Fund of

4
<PAGE> 5
the information set forth in clauses (i) and (ii) of this Section 2(e), to the
extent such information is known to the Remarketing Agent.

(f) As soon as practicable after the Date of Original Issue
for the Shares, but not later than the fifth Business Day preceding the date of
the first Remarketing for such Shares, the Remarketing Agent will provide the
Fund and the Paying Agent with a list of the persons to whom it has sold
Shares, the number of Shares sold to each such person and the number of Shares
it is holding as of the date of such notice.

(g) The Remarketing Agent shall promptly notify the Paying
Agent by a notice substantially in the form of Exhibit A hereto of any
transfers of Shares outside of a Remarketing of which it is aware.

(h) Whenever the Fund intends to include any net capital
gains or other income taxable for federal income tax purposes in any dividend
on the Shares, the Fund intends to notify the Remarketing Agent and the Paying
Agent of the amount to be so included seven days prior to the Remarketing on
which the Applicable Dividend Rate for such dividend is to be established. The
Remarketing Agent agrees that, whenever it receives such notice from the Fund,
it will in turn notify the holders of the Shares and prospective purchasers
believed by it to be interested in purchasing such Shares in such Remarketing.
If the Fund retroactively allocates net capital gains or other income taxable
for federal income tax purposes without having provided such notice, the Fund
shall notify the Remarketing Agent of such retroactive allocation as provided
in the Declaration.

(i) The Remarketing Agent may, in its sole discretion,
modify the settlement procedures set forth in the Declaration so long
as any such modification does not adversely affect the Beneficial
Owners or the Holders of the Shares of the Fund, does not adversely affect the
rating of the Shares and does not cause the Fund to violate any law, rule or
regulation, including the 1940 Act and the laws of The Commonwealth of
Massachusetts.

(j) The Remarketing Agent may, in its sole discretion,
modify the procedures concerning notification of redemption set forth in the
Declaration, provided that

<PAGE> 6
any such modification does not adversely affect the Holder or any Beneficial
Owner of the Shares, does not adversely affect the rating of the Shares and
does not cause the Fund to violate any law, rule or regulation, including the
1940 Act and the laws of The Commonwealth of Massachusetts.

Section 3. FEES, EXPENSES AND COMMISSIONS.

(a) For the performance of its services as Remarketing
Agent hereunder, the Fund shall pay to the Remarketing Agent on ________
and each ________ and ________ thereafter (or the next Business Day if
such payment date is not a Business Day) with respect to each Share outstanding
on such day a fee which shall be calculated by multiplying (i) the product of
0.25% times $50,000 by (ii) the actual number of days from and including such
day to but excluding the next day for payment of such fee (or prior redemption
or liquidation date for the Shares, as the case may be) divided by 360,
rounding the product of (i) and (ii) upwards to the nearest dollar; provided
that should the Dividend Period be a Special Dividend Period of [90] days or
more, then during such Dividend Period the fee for the Shares will not be
calculated in the aforesaid manner and, with respect to the Shares, the Fund
will instead pay to the Remarketing Agent a fee, to be determined by mutual
consent of the Fund and the Remarketing Agent, based upon the selling
concessions that would be applicable to an underwriting of a fixed or variable
rate preferred stock issue with a similar dividend period at the commencement
of such Dividend Period. In addition to its obligations under Section 8
hereof, the Fund shall reimburse the Remarketing Agent for extraordinary
out-of-pocket expenses, such as legal fees, incurred in connection with the
performance of its duties hereunder. The obligation of the Fund to make the
payments required by this Section 3 shall survive the termination of this
Agreement and remain in full force and effect until all such payments shall
have been made in full.

(b) The Remarketing Agent may pay to Broker-dealers which
obtain purchasers of the Shares a commission based upon the number of shares
sold, which will not be in excess of the amount of the remarketing fee to be
paid to the Remarketing Agent. The Remarketing Agent may also pay to
Broker-dealers a commission on the same basis

<PAGE> 7
with respect to each consecutive additional Dividend Period for which Shares
are held by owners obtained by them.

Section 4. RESIGNATION AND REMOVAL OF REMARKETING AGENT.

(a) The Remarketing Agent may resign and be discharged from
its duties and obligations hereunder with respect to the Shares by giving 60
days' prior written notice to the Fund, the Securities Depository and the
Paying Agent; provided, however, that no such prior resignation or any such
removal shall be effective until the Fund shall have appointed a nationally
recognized broker-dealer as successor Remarketing Agent pursuant to the
Declaration and such successor Remarketing Agent shall have entered into a
remarketing agreement with the Fund in which it shall have agreed to conduct
Remarketings in accordance with the terms and conditions of the Declaration.
In such case, the Fund will use its best efforts to appoint a successor
Remarketing Agent and enter into such remarketing agreement with such person
as soon as reasonably practicable.

(b) The Fund may remove the Remarketing Agent for any
reason by giving at least 60 days' prior written notice to the Remarketing
Agent, the Securities Depository and the Paying Agent; provided, however,
that no such removal shall become effective until the Fund shall have
appointed at least one nationally recognized broker-dealer as successor
Remarketing Agent and such successor Remarketing Agent shall have entered into
a remarketing agreement with the Fund in which it shall have agreed to conduct
Remarketings in accordance with the terms and conditions of the Declaration.
In such case, the Fund will use its best efforts to appoint a successor
Remarketing Agent and enter into such a remarketing agreement with such person
as soon as reasonably practicable.

Section 5. DEALING IN SHARES; REDEMPTION OF REMARKETING
AGENT'S SHARES. The Remarketing Agent, when acting as Remarketing Agent or
in its individual or any other capacity, may, to the extent permitted by law,
buy, sell, hold and deal in the Shares; provided, however, that the Remarketing
Agent may hold for its own account the Shares upon completion of a Remarketing
only if (a)

<PAGE> 8
Applicable Dividend Rate established with respect to the Shares in the
Remarketing is no higher than the Applicable Dividend Rate that would have been
set if the Remarketing Agent did not hold or had not purchased the Shares, and
(b) the Remarketing Agent purchases all tendered Shares not sold in the
Remarketing to other purchasers. Except as provided in clause (b) of the
preceding sentence, the Remarketing Agent is not obligated to purchase any
Shares that would otherwise remain unsold in a Remarketing. If the Remarketing
Agent owns any Shares immediately prior to a Remarketing and if all other
Shares tendered for sale by other Beneficial Owners have been sold in such
Remarketing, then the Remarketing Agent may sell such number of its Shares in
such Remarketing as there are outstanding orders to purchase that have not been
filled by Shares tendered for sale by Beneficial Owners other than any
Remarketing Agent. Smith Barney may exercise any vote or join in any action
which any Holder of Shares may be entitled to exercise or take pursuant to the
Declaration with like effect as if it did not act in any capacity hereunder.
Smith Barney, in its individual capacity, either as principal or agent, may
also engage in or have an interest in any financial or other transaction with
the Fund as freely as if it did not act in any capacity hereunder.

Section 6. INFORMATION.

(a) The Fund agrees to furnish to the Remarketing
Agent: (i) copies of the Declaration and the Bylaws and any amendment
thereto and each report or other document mailed or made available to
holders of the Shares (including annual reports to shareholders) or filed by
the Fund with the Commission (including any documents incorporated therein by
reference); (ii) notice of the creation of any subsidiary by the Fund;
(iii) notice of the purchase of the Shares, either in a Remarketing or
otherwise, by a subsidiary or affiliate of the Fund as soon as the Fund shall
become aware of such purchase; (iv) notice of the occurrence of any of the
events set forth in clause (c) of Section 7 hereof; and (v) in connection with
the Remarketing of the Shares, such other remarketing information as the
Remarketing Agent may reasonably request from time to time, including but not
limited to the financial condition of the Fund. The Fund agrees to provide the
Remarketing Agent with as many copies of the foregoing materials and
information as

<PAGE> 9
the Remarketing Agent may reasonably request for use in connection with the
Remarketing of the Shares and consents to the use thereof for such purpose.
If, in connection with the Fund's obligation to provide certain information to
the Remarketing Agent for its use as a Remarketing Agent, such information is
reasonably determined by the Fund and the Remarketing Agent to be confidential
to the Fund, the Fund and the Remarketing Agent shall enter into a mutually
acceptable confidentiality agreement.

(b) If at any time during the term of this Agreement
any event or condition known to the Fund relating to or affecting the
Fund or any Shares shall occur which might affect the accuracy or
completeness of any statement of a material fact contained in any of the
reports, documents, materials and information referred to in clause (a) above
or any document incorporated therein by reference (collectively, the
"Remarketing Materials") or any other materials or information made publicly
available by the Fund, the Fund shall promptly notify the Remarketing Agent in
writing of the circumstances and details of such event or condition.

(c) None of the information contained in any of
the Remarketing Materials shall contain an untrue or misleading statement
of a fact or omit to state a fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading with respect to which
there shall be a substantial possibility that such fact, statement or omission
would be material to an existing Holder or prospective purchaser of Shares.

Section 7. CONDITIONS TO OBLIGATIONS OF REMARKETING
AGENT. The obligations of the Remarketing Agent with respect to the
Shares under this Agreement have been undertaken in reliance upon,
and shall be subject to: (a) the due performance in all material
respects by the Fund of its obligations and agreements as set forth in this
Agreement (including Section 6(c) hereof) and the Underwriting Agreement; (b)
the accuracy in all material respects as of the dates specified therein of the
representations and warranties contained in the Underwriting Agreement; and (c)
the nonoccurrence of any of the following events: (i) the rating of the
Shares shall have been downgraded or withdrawn by a national

<PAGE> 10
rating service after the date hereof, the effect of which, in the opinion of
the Remarketing Agent, is to affect materially and adversely the market price
of the Shares or the Remarketing Agent's ability to remarket the Shares; (ii)
all of the Shares shall have been called for redemption; (iii) a pending or
proposed change in applicable tax laws; (iv) a material adverse change in the
financial condition of the Fund; (v) a banking moratorium; (vi) domestic or
international hostilities; (vii) an imposition of material restrictions on the
Shares; or (viii) without the prior written consent of the Remarketing Agent,
the Declaration, the Bylaws of the Fund or the Paying Agent Agreement dated as
of the date hereof between the Fund and ________ (the "Paying Agent Agreement")
shall have been amended in any manner that, in the opinion of the Remarketing
Agent, materially changes the nature of the Shares or the remarketing
procedures (a "Material Change"). In the event of the failure of any such
conditions with respect to the Shares, the Remarketing Agent may terminate its
obligations under this Agreement as provided in Section 9(b) hereof.

Section 8. INDEMNIFICATION.

(a) The Fund and the Adviser, jointly and severally,
agree to indemnify and hold harmless the Remarketing Agent and its officers,
directors and employees and each person, if any, who controls the Remarketing
Agent within the meaning of Section 15 of the Securities Act of 1933, as
amended (the "Securities Act") (collectively, the "Indemnified Persons"
and, individually, an "Indemnified Person") from and against any
losses, claims, damages or liabilities to which any Indemnified Person may
become subject insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of, or are based upon, any untrue
statement or alleged untrue statement of a material fact contained in any of
the Remarketing Materials, or arise out of, or are based upon, the omission or
alleged omission to state a material fact required to be stated in the
Remarketing Materials or any revision thereof or supplement thereto or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, or arise out of, or are based upon, any
violation by the Fund or the Adviser of, or any failure by the Fund or the
Adviser to perform any of its obligations

<PAGE> 11
under, this Agreement. The Fund or the Adviser agrees to reimburse promptly
each Indemnified Person for any legal or other expenses reasonably incurred by
such Indemnified Person in investigating, defending or preparing to defend any
such action or claim; provided, however, that neither the Fund nor the Adviser
shall be liable in any such case to the extent any such loss, claim, damage or
liability arises out of the use by the Remarketing Agent of any information
that is not contained in the Remarketing Materials. The indemnity agreement in
this paragraph shall be in addition to any liability or obligation which the
Fund or the Adviser may otherwise have to any Indemnified Person and shall
extend upon the same terms and conditions to each person, if any, who controls
any Indemnified Person within the meaning of the Securities Exchange Act of
1934, as amended (the "Exchange Act").

(b) Each Indemnified Person shall give notice as promptly as
reasonably practicable to the Fund and the Adviser of any action commenced
against it in respect of which indemnity may be sought hereunder, but failure
to so notify the Fund and the Adviser shall not relieve either the Fund or the
Adviser from any liability which it may have otherwise than on account of this
indemnity agreement. No settlement or compromise of any such action shall be
made without the consent of the Fund and the Adviser, which consent shall not
be unreasonably withheld. The Fund and the Adviser may participate at their
own expense in the defense of such action. In no event shall the Fund and the
Adviser be liable for fees and expenses of more than one counsel separate from
its own respective counsel for all Indemnified Persons in connection with any
one action or separate but similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances.

(c) The indemnity agreement contained in clauses (a) and (b)
of this Section 8 shall remain operative and in full force and effect,
regardless of any investigation made by or on behalf of the Remarketing Agent,
and shall survive the termination or cancellation of this Agreement and the
remarketing of any Shares hereunder.

<PAGE> 12
Section 9. TERMINATION OF REMARKETING AGREEMENT.

(a) This Agreement shall terminate as to the
Remarketing Agent and its obligations hereunder with respect to the
Shares on the effective date of the resignation or removal of the Remarketing
Agent pursuant to Section 4 hereof. The obligations of the parties under this
Agreement with respect to the Shares (other than those provided in Sections
2(b)(i), 2(g), 2(h), 8 and 10) will be suspended during a Non-Payment Period.

(b) In addition, the Remarketing Agent may terminate
this Agreement and all of its obligations hereunder, by notifying
the Fund of its election to do so, if any of the conditions referred to or set
forth in Section 7 hereof have not been met or satisfied in full and such
failure shall have continued for a period of 30 days after such Remarketing
Agent has given notice thereof to the Fund specifying the condition which has
not been met and requiring it to be met.

Section 10. REMARKETING AGENT'S PERFORMANCE; DUTY OF CARE.
The duties and obligations of the Remarketing Agent shall be determined
solely by the express provisions of this Remarketing Agreement and the
Declaration. No implied covenants or obligations shall be read into this
Remarketing Agreement or the Declaration. In the absence of bad faith on the
part of the Remarketing Agent, the Remarketing Agent may conclusively rely upon
any document furnished to it, which purports to conform to the requirements of
this Remarketing Agreement or the Declaration, as to the truth of the
statements expressed in any of such documents. The Remarketing Agent shall be
protected in acting upon any document or communication reasonably believed by
it to have been signed, presented or made by the proper party or parties. The
Remarketing Agent shall incur no liability to the Fund or to any Beneficial
Owner or Holder of the Shares in its individual capacity or as Remarketing
Agent for any action or failure to act in connection with a Remarketing or
otherwise, except as a result of its gross negligence or willful misconduct.

Section 11. BOOKS AND RECORDS. The Remarketing Agent
shall keep such books and records with

<PAGE> 13
respect to the performance of its duties hereunder as shall be consistent with
prudent industry practice and shall make such books and records available for
inspection by the Fund on reasonable notice during normal business hours.

Section 12. GOVERNING LAW AND TIME. The Remarketing
Agreement shall be governed by and construed in accordance with the laws of
the State of New York applicable to contracts made and to be performed in
said State. Except where otherwise provided, specified times of day refer to
New York City time.

Section 13. TERM OF AGREEMENT. Unless otherwise
terminated in accordance with the provisions hereof, this Agreement
shall remain in full force and effect from the date hereof with respect
to the Shares until the first day thereafter on which no such Shares
are outstanding. Regardless of any termination of this Agreement pursuant to
any of the provisions hereof, the obligations of the Fund pursuant to Section
3(a) hereof and the Fund and the Adviser pursuant to Section 8 hereof shall
remain operative and in full force and effect until fully satisfied.

Section 14. SUCCESSORS AND ASSIGNS. The rights and
obligations of the Fund and the Adviser hereunder may not be assigned or
delegated to any other person without the prior written consent of the
Remarketing Agent. The rights and obligations of the Remarketing Agent
hereunder may not be assigned or delegated to any other person without the
prior written consent of the Fund. This Agreement shall inure to the benefit
of and be binding upon the Fund, the Adviser and the Remarketing Agent and
their respective successors and assigns, and will not confer any benefit upon
any other person, partnership, association or corporation other than persons,
if any, controlling the Remarketing Agent within the meaning of Section 15 of
the Securities Act or Section 20 of the Exchange Act, or any Indemnified Person
to the extent provided in Section 8 hereof. The terms "successors" and
"assigns" shall not include any purchaser of the Shares merely because of such
purchase.

Section 15. HEADINGS. The section headings herein are for
convenience of reference only, and it is agreed that such section headings
are not a part of this

<PAGE> 14
Agreement and will not be used in the interpretation of any provisions of this
Agreement.

Section 16. SEVERABILITY. If any provision of
this Agreement shall be held or deemed to be or shall, in fact, be
invalid, inoperative or unenforceable as applied in any particular case in any
or all jurisdictions because it conflicts with any provision of any
constitution, statute, rule of public policy or for any other reason, such
circumstances shall not have the effect of rendering the provision in question
invalid, inoperative or unenforceable in any other case, circumstance or
jurisdiction, or of rendering any other provision or provisions of this
Agreement invalid, inoperative or unenforceable to any extent whatsoever.

Section 17. COUNTERPARTS. This Agreement may be
executed in several counterparts, each of which shall be regarded as an
original and all of which shall constitute one and the same document.

Section 18. REMARKETING AGENT NOT ACTING AS UNDERWRITER.
It is understood and agreed by the parties hereto that the only
obligations of the Remarketing Agent hereunder are as set forth in Sections 2
and 11 hereof. When engaged in remarketing any tendered Shares, the
Remarketing Agent shall act only as agent for and on behalf of each owner of
the Shares so tendered. The Remarketing Agent shall not act as an underwriter
for such tendered Shares and shall not be obligated in any case to provide
funds to make payments to any Beneficial Owner upon such Beneficial Owner's
tender of its Shares in any Remarketing (except in its individual capacity as
purchaser of those Shares it may elect, in accordance with Section 5 hereof, to
purchase, in its sole discretion) or to otherwise expend or risk its own funds
or incur or become exposed to financial liability in the performance of its
duties hereunder.

Section 19. AMENDMENT. This Agreement may be
amended by any instrument in writing signed by all of the parties hereto
so long as this Agreement as amended is not inconsistent with the Declaration
in effect as of the date of any such amendment.

Section 20. NOTICES. Unless otherwise specified, any
notices, requests, consents or other communica-

<PAGE> 15

tions given or made hereunder or pursuant hereto shall be made in writing and
shall be deemed to have been validly given or made when delivered or mailed, by
registered or certified mail, postage prepaid and return receipt requested, or
by prepaid courier service, addressed as follows: if to the Fund or the
Adviser, to either of them at One Post Office Square, Boston, Massachusetts
02109, Attention: John R. Verani; and if to the Remarketing Agent, to Smith
Barney Shearson Inc., 1345 Avenue of the Americas, New York, New York 10105,
Attention: Short-Term Preferred Sales and Trading--23rd Floor.

<PAGE> 16

IN WITNESS WHEREOF, each of the parties hereto has caused this Remarketing
Agreement to be executed in its name and on its behalf by one of its duly
authorized officers as of the date first above written.

PUTNAM INVESTMENT GRADE MUNICIPAL
TRUST III

By:__________________________________
Name:
Title:

PUTNAM INVESTMENT MANAGEMENT, INC.

By:__________________________________
Name:
Title:

SMITH BARNEY SHEARSON INC.

By:__________________________________
Name:
Title:

<PAGE> 17
EXHIBIT A
---------

[Remarketing Agent to Paying Agent--
to be used only for transfers made other than
pursuant to a Remarketing]

PUTNAM INVESTMENT GRADE MUNICIPAL TRUST III

MUNICIPAL INCOME PREFERRED SHARES SERIES Th
("PREFERRED SHARES")

TRANSFER FORM

The undersigned hereby notifies you that:

_________________________________________
(Print name of existing beneficial owner)

has sold _______ Preferred Shares to

_________________________________________
(Print name of new beneficial owner)

SMITH BARNEY SHEARSON INC.

By:______________________________________
Name:
Title: