Putnam
Investment
Grade
Municipal
Trust III
SEMIANNUAL REPORT
April 30, 1996
[LOGO: BOSTON * LONDON * TOKYO]
Fund Highlights
* "As the municipal environment changed during the last six months, we
focused on maximizing the fund's income potential by taking advantage of
opportunities within flourishing state economies and maintaining fund
holdings that have proved to be valuable."
-- Michael F. Bouscaren, manager
Putnam Investment Grade Municipal Trust III
* "[G]iven that 1996 is an election year, the popularity of tax
deductions and complexity of implementing any substantial changes to the
tax codes help make the outlook for the muni market optimistic."
-- The Value Line Mutual Fund Survey, March 19, 1996
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
11 Portfolio holdings
15 Financial statements
[GRAPHIC OMITTED: photo of George Putnam]
(copyright) Karsh, Ottawa
From the Chairman
Dear Shareholder:
The tax-exempt bond market provided quite a ride for shareholders of
Putnam Investment Grade Municipal Trust III during the six months ended
April 30, 1996. While the rest of the bond market was well into one of
the strongest advances in recent memory, tax-exempt investors were
haunted by prospects of a flat tax they feared would end the tax
advantage enjoyed by tax-exempt securities.
Once raised, flat-tax worries provided a negative undercurrent
throughout much of the semiannual period. It subsided just in time to
temper the decline in tax-exempt securities when the bond market
suddenly plunged in March.
As Fund Manager Michael Bouscaren explains in the report that follows,
he believes the continuing demand for tax-free investments, coupled with
a relatively subdued pace in new issuance, bodes well for your fund in
the fiscal year's second half.
Respectfully yours,
/S/George Putnam George Putnam
George Putnam
Chairman of the Trustees
June 19, 1996
Report from the Fund Manager
Michael F. Bouscaren
As Putnam Investment Grade Municipal Trust III began fiscal 1996,
slowing economic growth, low interest rates, and low inflation had
created an appealing environment for fixed-income investments. However,
by the fiscal year's midpoint on April 30, 1996, the bond market was
dancing to a different beat. Stronger-than-expected employment growth
had fueled fears of inflation, signaling a possible end to the Federal
Reserve Board's program of lowering short-term interest rates and
bringing the 10-month bond market rally to an abrupt halt.
Your fund was poised to adapt to this changing economic environment.
Although sector weightings and core holdings remained essentially
unchanged throughout the period, we maximized the fund's potential by
exploring opportunities nationwide, purchasing bonds in states where
economic activity was accelerating and maintaining those holdings that
continued to provide combinations of attractive income and possible
appreciation.
* DURATION ADJUSTMENTS HELP FUND RESPOND TO CHANGING CONDITIONS
Adjusting duration in response to interest rate trends is an important
component of the fund's strategy. Duration is a measure of the
portfolio's maturity structure and reflects the price sensitivity of
portfolio holdings to changes in interest rates. Typically bonds with
longer maturities are more sensitive to these changes and as a result,
may offer greater potential for appreciation when rates are declining.
Since the direction of interest rates was uncertain, we reviewed the
portfolio duration in expectations of a rising rate environment.
At the beginning of the semiannual period, the portfolio's duration was
a relatively long 10 years. It seemed prudent to us to reduce this to 7
1 / 2 years, and we were able to accomplish the shift by the end of the
period. The move proved timely; it softened the impact of the market
decline as bond prices readjusted to the prospect of a stronger economy.
More recently we've seen indications that this may not, in fact, be the
case; the employment and inflation data that sparked the market downturn
appear to be short-term anomalies rather than true forecasts of a change
in direction. However, whether or not the Fed makes a change in its rate
policy, our decision to acquire additional short- to intermediate-term
municipal bonds will bolster the fund's level of call protection --
another important consideration in a volatile rate environment.
We are considering selling additional New York, New Jersey, and
Pennsylvania bonds and securing a greater position within Texas and
California. The California and Texas economies are currently growing
faster than the national average, the result of flourishing new
businesses, rising employment rates, and accelerating residential
construction. When a state economy is strengthening, investor
perceptions of its bonds improve, the risk of any interruption in
interest payments lessens, and demand for the bonds may well increase.
This sequence of events, in turn, can lead to higher prices for the
bonds.
Bonds issued to support the new Denver International Airport remain the
largest portfolio position because of their favorable income and credit
features. Although many municipal issuers are prohibited by current tax
law from refunding outstanding bonds with lower-cost debt, issuers do
have the ability to make tender offers, giving bondholders the
opportunity to sell securities back to them at an agreed-upon price.
Issuers generally must pay bondholders above market prices to persuade
them to tender their higher-coupon securities. Although there was an
opportunity to tender higher-coupon Denver airport bonds in March, we
did not offer the bonds for sale, since we perceived the tender prices
to be unattractive.
[GRAPHIC OF PIE CHART OMITTED: PORTFOLIO QUALITY OVERVIEW*]
information in chart reads:
A - 13.1%
AA - 4.8%
AAA - 42.5%
BBB - 22.1%
VMIGI/A-1+ - 17.5%
*As a percentage of portfolio market value as of 4/30/96. A bond rated
BBB or higher is considered investment grade. All ratings reflect
Standard & Poor's(registered trademark) and Moody's Investor Services
descriptions, unless noted otherwise. Holdings will vary over time.
Some of your fund's income is generated by the selective use of
leveraging strategies. With this approach, the fund issues preferred
shares that pay dividends at prevailing short-term rates. These shares
are sold to corporate and institutional investors; the resulting assets
are then invested in longer-term bonds with higher yields. The
difference between the rates paid to holders of preferred shares and the
rates earned by the fund augments the flow of income to holders of
common shares. Since the yield curve steepened during the year,
resulting in a profitable spread between short- and long-term yields,
the fund's leveraging strategies proved to be beneficial.
* FADING FLAT-TAX FEARS HELP IMPROVE INVESTOR PERSPECTIVES
During the past several months, investors had been sensitive to the
potential effects of the flat-tax proposal being considered by Congress.
In its purest form, the flat tax would deprive municipal bonds of their
advantage as tax-exempt investments. Although such discussions have
influenced the municipal market for more than a year now, investor
concerns and fears have recently subsided, since the flat tax did not
appear to be a near-term event after all.
Although we expect discussions of broader tax reform to reappear this
fall as the presidential election nears, our current assessment is that
any radical changes to the tax code now appear less likely than they did
a few months ago. As a result, investors may begin to rediscover the
tax-advantaged opportunities they have overlooked for months. Any
increase in investor demand is likely to have a beneficial effect on
municipal bond valuations.
* OUTLOOK REMAINS CAUTIOUS BUT CONSTRUCTIVE
We believe the remainder of calendar 1996 will include steady and
manageable economic growth as well as exposure to some inflationary
risk. Such an environment, in contrast with last year's slowing economy,
is unlikely to lead to falling interest rates and price appreciation for
the bond market.
[GRAPHIC OF HORIZONTAL BAR CHART OMITTED: TOP INDUSTRY SECTORS*]
Information in chart reads:
Airport/transportation - 17.8%
Health/hospitals - 17.7%
Municipal utilities - 15.2%
Water and sewerage - 13.4%
Pollution control - 8.3%
*Based on net assets as of 4/30/96. Holdings will vary over time.
A climate of steadier economic growth clearly requires a more cautious
approach to fixed-income investing. Greater emphasis will be placed on
coupon income, stressing the importance of astute credit analysis. These
developments, along with the recent market correction, may offer
investors who have been skeptical of municipals an attractive
opportunity to retest the waters. Furthermore, municipal yields remain
generous on a taxable equivalent basis, providing an attractive
alternative to Treasuries and investment-grade corporate bonds.
The views expressed here are exclusively those of Putnam Management.
They are not meant as investment advice. Although the described
holdings were viewed favorably as of 4/30/96, there is no guarantee the
fund will continue to hold these securities in the future.
Performance summary
Performance should always be considered in light of a fund's investment
strategy. Putnam Investment Grade Municipal Trust III is designed for
investors seeking high current income free from federal income tax,
consistent with preservation of capital.
This section provides, at a glance, information about your fund's
performance. Total return shows how the value of the fund's shares
changed over time, assuming you held the shares through the entire
period and reinvested all distributions in the fund.
TOTAL RETURN FOR PERIODS ENDED 4/30/96
(common shares)
Market
NAV price
- ----------------------------------------------------------------------
6 months 0.89% 1.22%
- ----------------------------------------------------------------------
1 year 6.83 13.07
- ----------------------------------------------------------------------
Life (11/29/93) 7.91 -9.11
Annual average 3.19 -3.87
- ----------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 4/30/96
Lehman Bros.
Municipal Consumer
Bond Index Price Index
- ----------------------------------------------------------------------
6 months 1.11% 1.30%
- ----------------------------------------------------------------------
1 year 7.95 2.50
- ----------------------------------------------------------------------
Life (11/29/93) 9.95 6.79
Annual average 4.01 2.75
- ----------------------------------------------------------------------
TOTAL RETURN FOR PERIODS ENDED 3/31/96
(most recent calendar quarter)
Market
NAV price
- ----------------------------------------------------------------------
6 months 2.90% 3.38%
- ----------------------------------------------------------------------
1 year 7.43 9.35
- ----------------------------------------------------------------------
Life (11/29/93) 8.29 -8.66
Annual average 3.46 -3.80
- ----------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance. They do not take into account any adjustment for taxes
payable on reinvested distributions. Investment returns and net asset
value will fluctuate so that an investor's shares, when sold, may be
worth more or less than their original cost.
PRICE AND DISTRIBUTION INFORMATION
6 months ended 4/30/96
Distributions (common shares)
- -----------------------------------------------------------------------
Number 6
- -----------------------------------------------------------------------
Income $0.4002
- -----------------------------------------------------------------------
Total $0.4002
- -----------------------------------------------------------------------
Preferred shares Series A (200 shares)
- -----------------------------------------------------------------------
Income $865.88
- -----------------------------------------------------------------------
Total $865.88
- -----------------------------------------------------------------------
Share value (common shares) NAV Market price
- -----------------------------------------------------------------------
10/31/95 $13.22 $11.875
- -----------------------------------------------------------------------
4/30/96 12.90 11.625
- -----------------------------------------------------------------------
Current return NAV Market price
- -----------------------------------------------------------------------
End of period
Current dividend rate1 6.20% 6.89%
- -----------------------------------------------------------------------
Taxable equivalent2 10.27 11.40
- -----------------------------------------------------------------------
1Income portion of most recent distribution, annualized and divided by
NAV or market price at end of period. 2Assumes maximum 39.6% federal tax
rate. Results for investors subject to lower tax rates would not be as
advantageous.
TERMS AND DEFINITIONS
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, the liquidation preference and cumulative undeclared
dividends accrued on the remarketed preferred shares, divided by the
number of outstanding common shares.
Market price is the current trading price of one share of the fund.
Market prices are set by transactions between buyers and sellers on the
American Stock Exchange.
COMPARATIVE BENCHMARKS
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
Lehman Brothers Municipal Bond Index is an unmanaged list of long-term
fixed-rate investment-grade tax-exempt bonds representative of the
municipal bond market. The index does not take into account brokerage
commissions or other costs, may include bonds different from those in
the fund, and may pose different risks than the fund. The index assumes
reinvestment of all distributions and interest payments and does not
take into account brokerage fees or taxes. Securities in the fund do not
match those in the index and performance of the fund will differ. It is
not possible to invest directly in an index.
<TABLE>
<CAPTION>
Portfolio of investments owned
April 30, 1996 (Unaudited)
Key to Abbreviations
AMBAC AMBAC Indemnity Corporation
FGIC Financial Guaranty Insurance Company
FSA Financial Security Assurance
G.O. Bond General Obligation Bonds
IF COP Inverse Floater Certificate of Participation
IFB Inverse Floating Rate Bonds
LOC Letter of Credit
MBIA Municipal Bond Investors Assurance Corporation
VRDN Variable Rate Demand Notes
Municipal Bonds and Notes (103.8%) *
PRINCIPAL AMOUNT RATING** VALUE
<S> <C> <C> <C> <C>
California (20.9%)
- -----------------------------------------------------------------------------------------------------------
$2,500,000 Beverly Hills Pub. Fin. Auth. Lease Rev. Bonds,
Ser. A, MBIA, 5.65s, 6/1/15 AAA $2,415,625
1,600,000 CA Poll. Control Fin. Auth. VRDN (Shell Oil Co.
Project B), 3.5s, 10/1/11 VMIG1 1,600,000
CA State G.O. Bonds
1,000,000 6 1/4s, 9/1/2008 A 1,078,750
2,140,000 5.1s, 10/1/08 A 2,070,450
1,250,000 CA State U. IFB, AMBAC, 9.86s, 11/1/21
(acquired 6/6/95, cost $1,339,094) ++ AAA 1,437,500
1,500,000 Foothill/Eastern Trans. Corridor Agcy. Rev. Bonds,
Ser. A, zero %, 1/1/08 BBB 886,875
1,590,000 Los Angeles Cnty., Metro. Trans. Auth.
Sales Tax Rev. Bonds, Ser. A, FGIC, 5s, 7/1/21 AAA 1,377,338
1,000,000 Los Angeles Regl. Arpt. Impt. Corp. VRDN,
4.05s, 12/1/25 (Societe Generale (LOC)) A-1+ 1,000,000
1,000,000 San Diego Cnty., Wtr. Auth. IF COP, FGIC,
7.33179s, 4/23/08 AAA 1,043,750
--------------
12,910,288
Colorado (10.4%)
- -----------------------------------------------------------------------------------------------------------
Denver, City & Cnty. Arpt. Rev. Bonds
3,000,000 Ser. A, 8 3/4s, 11/15/23 BBB 3,543,750
1,500,000 Ser. A, 8 1/2s, 11/15/23 BBB 1,723,125
1,000,000 Ser. D, 7 3/4s, 11/15/13 BBB 1,158,750
--------------
6,425,625
Delaware (0.7%)
- -----------------------------------------------------------------------------------------------------------
400,000 Wilmington Hosp. VRDN (Franciscan Hlth. Syst.),
Ser. A, 4.05s, 7/1/11 (Societe Generale (LOC)) VMIG1 400,000
Florida (1.8%)
- -----------------------------------------------------------------------------------------------------------
1,000,000 Broward Cnty. Res. Recvy. Rev. Bonds (SES Broward
Cnty. LP South Project), 7.95s, 12/1/08 A 1,102,500
Illinois (3.5%)
- -----------------------------------------------------------------------------------------------------------
$1,895,000 IL Hlth. Facs. Auth. Rev. Bonds (Glenoaks Med. Ctr.),
Ser. D, 9 1/2s, 11/15/15 BBB $2,172,144
Indiana (3.5%)
- -----------------------------------------------------------------------------------------------------------
2,000,000 Marion Cnty., Ind. Convention & Recreational Facs.
Auth. Rev. Bonds (Excise Tax Rev. Lease Rental),
Ser. A, AMBAC, 7s, 6/1/21 AAA 2,165,000
Kansas (4.2%)
- -----------------------------------------------------------------------------------------------------------
2,400,000 Burlington Poll. Control Rev. Bonds (Kansas Gas &
Electric Co. Project), MBIA, 7s, 6/1/31 AAA 2,616,000
Louisiana (4.1%)
- -----------------------------------------------------------------------------------------------------------
1,420,000 Beauregard Parish Rev. Bonds (Boise Cascade
Corp. Project), 7 3/4s, 6/1/21 Baa 1,519,400
1,000,000 LA State Recvy. Dist. Sales Tax, VRDN, 4.05s,
7/1/98 VMIG1 1,000,000
--------------
2,519,400
Massachusetts (5.8%)
- -----------------------------------------------------------------------------------------------------------
1,400,000 MA State VRDN, Ser. B, 3.9s, 12/1/97
(National Westminster PLC (LOC)) VMIG1 1,400,000
750,000 MA State Hlth. & Edl. Fac. Auth. IFB (Med. Ctr.
of Central MA), Ser. B, AMBAC, 8.82s, 6/23/22 AAA 827,813
830,000 MA State Port Auth. Rev. Bonds, 13s, 7/1/13 AAA 1,338,374
--------------
3,566,187
Michigan (1.9%)
- -----------------------------------------------------------------------------------------------------------
1,200,000 Grand Rapids Wtr. Supply Syst, VRDN,
FGIC, 4.1s, 1/1/20 VMIG1 1,200,000
Minnesota (6.7%)
- -----------------------------------------------------------------------------------------------------------
925,000 SCA Multi-Fam. Mtge. Rev. Bonds (Nicollet Ridge
Project), Ser. A-9, FSA, 7.1s, 1/1/30 AAA 996,687
1,000,000 St. Paul, Hsg. & Redev. Auth. Hosp. Rev. Bonds
(Healtheast Project), Ser. B, 9 3/4s, 11/1/17 BBB 1,071,250
2,000,000 Western MN Muni. Pwr. Agcy. Supply Rev. Bonds,
Ser. A, 7s, 1/1/13 A 2,065,940
--------------
4,133,877
New York (12.7%)
- -----------------------------------------------------------------------------------------------------------
$2,000,000 NY City, G.O. Bonds, Ser. E, 6 1/2s, 2/15/05 BBB $2,087,500
2,000,000 NY City, Muni. Wtr. Fin. Auth. Wtr. & Swr. Syst.
Rev. Bonds, Ser. C, 7 3/4s, 6/15/20 AAA 2,307,500
1,000,000 NY State Energy Research & Dev. Auth. Elec.
Facs. Rev. Bonds (Cons. Edison Co. Project),
Ser. A, 7 3/4s, 1/1/24 A 1,055,000
2,400,000 NY State Energy Research &
Dev. Auth. Poll. Control VRDN (NY State
Elec. & Gas Co.), Ser. C, 3.8s, 6/1/29
(Morgan Guaranty Trust (LOC)) VMIG1 2,400,000
--------------
7,850,000
North Carolina (1.6%)
- -----------------------------------------------------------------------------------------------------------
1,000,000 NC Muni. Pwr. Agcy. Rev. Bonds, MBIA, 5 1/4s, 1/1/07 AAA 1,005,000
Oklahoma (3.4%)
- -----------------------------------------------------------------------------------------------------------
Grand River Dam Oklahoma Auth. Rev. Bonds
515,000 AMBAC, 6 1/4s, 6/1/11 # AAA 555,556
500,000 AMBAC, 5 1/2s, 6/1/13 AAA 493,750
1,000,000 Muskogee Indl. Tr. Poll. Control Rev. Bonds
(Oklahoma Gas & Elec. Co. Project),
Ser. A, 7s, 3/1/17 AA 1,033,050
--------------
2,082,356
Pennsylvania (3.6%)
- -----------------------------------------------------------------------------------------------------------
2,200,000 Delaware Cnty., Indl. Dev. Auth. Arpt. Fac. VRDN
(UTD Parcel Svc. Project), 3.95s, 12/1/15 VMIG1 2,200,000
Puerto Rico (0.8%)
- -----------------------------------------------------------------------------------------------------------
500,000 Puerto Rico Elec. Pwr. Auth. Pwr. IFB,
FSA, 8.3476s, 7/1/23 AAA 503,750
Tennessee (4.4%)
- -----------------------------------------------------------------------------------------------------------
2,700,000 Metro. Govt Nashville & Davidson Cnty. Tenn. Wtr.
& Swr. IFB, AMBAC, 8.371s, 1/1/22 AAA 2,733,750
Texas (13.8%)
- -----------------------------------------------------------------------------------------------------------
2,400,000 Bexar Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds
(St. Luke's Lutheran Hosp. Project), 7.9s, 5/1/18 AAA/P 2,814,000
2,430,000 Dallas Waterworks & Swr. Rev. Bonds,
4 1/2s, 4/1/15 AA 2,032,088
2,500,000 North Central TX Hlth. Fac. Dev. Corp.
Rev. Bonds (Presbyterian Hlth. Sys.),
MBIA, 6.685s, 6/22/21 AAA 2,618,750
1,000,000 Texarkana Hlth. Fac. Rev. Bonds
(Wadley Med. Ctr. Project) 8 1/2s, 10/1/12 A 1,043,750
--------------
8,508,588
--------------
Total Investments (cost $63,644,696)*** $64,094,465
- -----------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $61,719,986. Net assets available to common shareholders are
$51,697,932.
** The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available at April 30,
1996 for the securities listed. Ratings are generally ascribed to securities at the time of issuance. While the
agencies may from time to time revise such ratings, they undertake no obligation to do so, and the ratings do not
necessarily represent what the agencies would ascribe to these securities at April 30, 1996. Securities rated by
Putnam are indicated by "/P" and are not publicly rated. The table below shows the percentage of the fund's
investments on April 30, 1996 in securities assigned to various rating categories by Moody's or Standard & Poor's
and in unrated securities determined by Putnam Management to be of comparable quality.
Unrated securities
Rated securities of comparable quality,
as a percentage of as a percentage of
Rating fund's net assets fund's net assets
- ---------------------------------------------------------------
AAA/Aaa 39.6% 4.6%
AA/Aa 5.0 --
A/A 13.6 --
BBB/Baa 22.9 --
BB/Ba -- --
VMIG1/A-1+ 18.1 --
- ---------------------------------------------------------------
99.2% 4.6%
- ---------------------------------------------------------------
*** The aggregate identified cost on a tax basis is $63,644,696, resulting in gross unrealized
appreciation and depreciation of $1,059,997 and $610,228, respectively, or net unrealized
appreciation of $449,769.
++ Restricted, excluding 144A securities, as to public resale. The total market value of restricted
securities held at April 30, 1996 was $1,437,500 or 2.3% of net assets.
# A portion of this security was pledged to cover margin requirements for futures contracts at
April 30, 1996. The market value of segregated securities with the custodian for transactions
in futures contracts outstanding is $53,938 or less than 0.1% of net assets.
The rates shown on IFBs and IF COP, which are securities paying interest rates that vary inversely
to changes in the market interest rates, and VRDNs are the current interest rates at April 30, 1996.
The fund had the following insurance group concentrations greater than 10% on April 30, 1996 (as a
percentage of net assets):
MBIA 14.0%
AMBAC 13.3
The fund had the following industry group concentrations greater than 10% on April 30, 1996 (as a
percentage of net assets):
Airport- Transportation 17.8%
Hospitals/Health Care 17.7
Utilities 15.2
Water & Sewerage 13.4
- -------------------------------------------------------------------------------
Futures Contracts Outstanding at April 30, 1996
(aggregate face value $3,299,063)
Aggregate
Total Face Expiration Unrealized
Value Value Date Appreciation
- -------------------------------------------------------------------------------
U.S. Treasury
Bond Futures
(Sell) $3,274,688 $3,299,063 Jun 96 $24,375
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
April 30, 1996 (Unaudited)
<S> <C>
Assets
- ----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $63,644,696) (Note 1) $64,094,465
- ----------------------------------------------------------------------------------------------
Cash 20,643
- ----------------------------------------------------------------------------------------------
Interest receivable 1,217,091
- ----------------------------------------------------------------------------------------------
Receivable for variation margin 20,625
- ----------------------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 13,795
- ----------------------------------------------------------------------------------------------
Total assets 65,366,619
Liabilities
- ----------------------------------------------------------------------------------------------
Distributions payable to shareholders 296,564
- ----------------------------------------------------------------------------------------------
Payable for securities purchased 3,245,096
- ----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 104,295
- ----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 82
- ----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 419
- ----------------------------------------------------------------------------------------------
Other accrued expenses 177
- ----------------------------------------------------------------------------------------------
Total liabilities 3,646,633
- ----------------------------------------------------------------------------------------------
Net assets $61,719,986
Represented by
- ----------------------------------------------------------------------------------------------
Remarketed preferred shares (200 shares issued and
outstanding at $50,000 per share liquidation preference) (Note 4) $10,000,000
- ----------------------------------------------------------------------------------------------
Paid in capital-common shares (Note 1) 55,817,217
- ----------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 387,646
- ----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (4,959,021)
- ----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 474,144
- ----------------------------------------------------------------------------------------------
Net assets $61,719,986
Net assets available to:
- ----------------------------------------------------------------------------------------------
Remarketed preferred shares at liquidation preference $10,000,000
- ----------------------------------------------------------------------------------------------
Cumulative undeclared dividends on remarketed preferred shares 22,054
- ----------------------------------------------------------------------------------------------
Net assets allocated to remarketed preferred shares $10,022,054
- ----------------------------------------------------------------------------------------------
Net assets available to common shares $51,697,932
- ----------------------------------------------------------------------------------------------
Net asset value per common share ($51,697,932 divided 4,007,092 shares) $12.90
- ----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Six months ended April 30, 1996 (Unaudited)
<S> <C>
Tax exempt interest income $1,926,870
- ----------------------------------------------------------------------------------------------
Expenses:
- ----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 218,691
- ----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 33,670
- ----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 3,810
- ----------------------------------------------------------------------------------------------
Administrative services (Note 2) 2,307
- ----------------------------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 2,499
- ----------------------------------------------------------------------------------------------
Reports to shareholders 10,847
- ----------------------------------------------------------------------------------------------
Auditing 28,820
- ----------------------------------------------------------------------------------------------
Legal 1,298
- ----------------------------------------------------------------------------------------------
Postage 4,232
- ----------------------------------------------------------------------------------------------
Exchange listing fees 1,430
- ----------------------------------------------------------------------------------------------
Preferred stock auction fees 9,634
- ----------------------------------------------------------------------------------------------
Other 1,889
- ----------------------------------------------------------------------------------------------
Total expenses 319,127
- ----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (21,311)
- ----------------------------------------------------------------------------------------------
Net expenses 297,816
- ----------------------------------------------------------------------------------------------
Net investment income 1,629,054
- ----------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (295,995)
- ----------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Notes 1 and 3) 9,708
- ----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and futures contracts during the (830,806)
- ----------------------------------------------------------------------------------------------
Net loss on investments (1,117,093)
- ----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $511,961
- ----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Six months ended Year ended
April 30 November 30
1996* 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- ------------------------------------------------------------------------------------------------
Operations:
- ------------------------------------------------------------------------------------------------
Net investment income $1,629,054 $3,606,020
- ------------------------------------------------------------------------------------------------
Net realized loss on investment transactions (286,287) (2,666,613)
- ------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of
investment transactions (830,806) 6,087,229
- ------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 511,961 7,026,636
- ------------------------------------------------------------------------------------------------
Distributions to remarketed preferred shareholders:
- ------------------------------------------------------------------------------------------------
From net investment income (173,176) (362,203)
- ------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations
applicable to common shareholders (excluding
cumulative undeclared dividends on remarketed
preferred shares of $22,054 and $12,493, respectively) 338,785 6,664,433
- ------------------------------------------------------------------------------------------------
Distributions to common shareholders:
- ------------------------------------------------------------------------------------------------
From net investment income (1,603,542) (3,197,815)
- ------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (1,264,757) 3,466,618
- ------------------------------------------------------------------------------------------------
Net assets
- ------------------------------------------------------------------------------------------------
Beginning of period 62,984,743 59,518,125
- ------------------------------------------------------------------------------------------------
End of period (including undistributed net investment
income of $387,646 and $535,310, respectively) $61,719,986 $62,984,743
- ------------------------------------------------------------------------------------------------
Number of fund shares
- ------------------------------------------------------------------------------------------------
Common shares outstanding at beginning and
end of period 4,007,092 4,007,092
- ------------------------------------------------------------------------------------------------
Remarketed preferred shares outstanding at beginning
and end of period 200 200
- ------------------------------------------------------------------------------------------------
* Unaudited
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
For the period
November 29, 1993
Six months (commencement
ended Year ended of operations)
April 30 October 31 to October 31
- ------------------------------------------------------------------------------------------------
1996+ 1995 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period
(common shares) $13.22 $12.36 $14.02*
- ------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------
Net investment income .41 .90 .85(a)
- ------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments (.28) .85 (1.69)
- ------------------------------------------------------------------------------------------------
Total from investment operations .13 1.75 (.84)
- ------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------
From net investment income
- ------------------------------------------------------------------------------------------------
To preferred shareholders (.05) (.09) (.06)**
- ------------------------------------------------------------------------------------------------
To common shareholders (.40) (.80) (.67)
- ------------------------------------------------------------------------------------------------
Total distributions (.45) (.89) (.73)
- ------------------------------------------------------------------------------------------------
Preferred share offering costs -- -- (.09)
- ------------------------------------------------------------------------------------------------
Net asset value, end of period
(common shares) $12.90 $13.22 $12.36
- ------------------------------------------------------------------------------------------------
Market value, end of period
(common shares) $11.625 $11.875 $10.125
- ------------------------------------------------------------------------------------------------
Total investment return at market value
(common shares) (%)(b) 1.22(c) 25.77 (28.60)(c)
- ------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $61,720 $62,985 $59,518
- ------------------------------------------------------------------------------------------------
Ratio of expenses to average
net assets (%)(d)(e) .60(c) 1.23 .85(a)(c)
- ------------------------------------------------------------------------------------------------
Ratio of net investment income to
average net assets (%) 2.71(c) 6.30 5.89(a)(c)
- ------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 87.90(c) 165.21 148.90(c)
- ------------------------------------------------------------------------------------------------
+ Unaudited
* Represents initial net asset value of $14.10 less offering expenses of $0.08. $0.02 of these
expenses are due to a revision of offering expenses on 8/31/94.
** Preferred shares were issued on February 10, 1994. (See Note 4)
(a) Reflects an expense limitation in effect during the period. As a result of such
limitation, expenses of the fund
for the period reflect a reduction of $0.02 per share.
(b) Total investment return assumes dividend reinvestment.
(c) Not annualized.
(d) Ratios reflect net assets available to common shares only; net investment income
ratio also reflects reduction for dividend payments to preferred shareholders.
(e) The ratio of expenses to average net assets for the year ended October 31, 1995
and thereafter includes amounts paid through expense offset arrangements. Prior period
ratios exclude these amounts. (See Note 2)
</TABLE>
Notes to financial statements
April 30, 1996 (Unaudited)
Note 1
Significant accounting policies
The fund is registered under the Investment Company Act of 1940, as
amended, as a diversified, closed-end management investment company. The
fund's investment objective is to provide as high a level of current
income exempt from federal income tax as is believed to be consistent
with preservation of capital. The fund intends to achieve its objective
by investing in a diversified portfolio of investment grade municipal
securities that Putnam Investment Management, Inc. ("Putnam
Management"), the fund's Manager, a wholly-owned subsidiary of Putnam
Investments, Inc., believes does not involve undue risk to income or
principal.
The following is a summary of significant accounting policies
consistently followed by the fund in the preparation of its financial
statements. The preparation of financial statements is in conformity
with generally accepted accounting principles and requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities. Actual results could differ from those
estimates.
A) Security valuation Tax-exempt bonds and notes are stated on the basis
of valuations provided by a pricing service, approved by the Trustees,
which uses information with respect to transactions in bonds, quotations
from bond dealers, market transactions in comparable securities and
various relationships between securities in determining value. The fair
market value of restricted securities is determined by the Putnam
Management following procedures approved by the Trustees, and such
valuations and procedures are reviewed periodically by the Trustees.
B) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy
or sell is executed). Interest income is recorded on the accrual basis.
C) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund
owns or expects to purchase. The fund may also write options on
securities it owns or which it invests to increase its current returns.
The potential risk to the fund is that the change in value of futures
and options contracts may not correspond to the change in value of the
hedged instruments. In addition, losses may arise from changes in the
value of the underlying instruments, if there is an illiquid secondary
market for the contracts, or if the counterparty to the contract is
unable to perform.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. Exchange traded options
are valued at the last sale price, or if no sales are reported, the last
bid price for purchased options and the last ask price for written
options. Options traded over-the-counter are valued using prices
supplied by dealers.
D) Federal taxes It is the policy of the fund to distribute all of its
income within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code applicable to regulated
investment companies. It is also the intention of the fund to distribute
an amount sufficient to avoid imposition of any excise tax under Section
4982 of the Internal Revenue Code of 1986. Therefore, no provision has
been made for federal taxes on income, capital gains or unrealized
appreciation on securities held and for excise tax on income and capital
gains.
At October 31, 1995 the fund had a capital loss carryover of
approximately $3,775,000 which may be available to offset realized
gains, if any.
The amount of the carryover and expiration dates are:
Loss Carryover Expiration
- --------------------------------------------
$1,994,000 10/31/2002
$1,781,000 10/31/2003
E) Distribution to shareholders Distributions to common and preferred
shareholders are recorded by the fund on the ex-dividend date. Dividends
on remarketed preferred shares become payable when, as and if declared
by the Trustees. Each dividend period for the remarketed preferred
shares is generally a 28 day period. The applicable dividend rate for
the remarketed preferred shares on April 30, 1996 was 3.50%. The amount
and character of income and gains to be distributed are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. Reclassifications are made to the fund's
capital accounts to reflect income and gains available for distribution
(or available capital loss carryovers) under income tax regulations.
F) Determination of net asset value Net asset value of the common shares
is determined by dividing the value of all assets of the fund (including
accrued interest and dividends), less all liabilities (including accrued
expenses and undeclared dividends on remarketed preferred shares) and
the liquidation value of any outstanding remarketed preferred shares, by
the total number of common shares outstanding.
G) Amortization of bond premium and discount Any premium resulting from
the purchase of securities in excess of maturity value is amortized on a
yield-to-maturity basis.
H) Unamortized organization expenses Expenses incurred by the fund in
connection with its organization, its registration with the Securities
and Exchange Commission and with various states and the initial public
offering of its shares were $27,157. These expenses are being amortized
on a straight line basis over a five-year period. The fund will
reimburse Putnam Management for the payment of these expenses.
Note 2
Management fee, administrative services, and other transactions
Compensation of Putnam Management, for management and investment
advisory services and administrative services is paid quarterly based on
the average net assets of the fund. Such fee is based on the following
annual rates: 0.70% of the first $500 million of average net assets,
0.60% of the next $500 million, 0.55% of the next $500 million, 0.50% of
the next $1.5 billion of such average net asset value subject, under
current law, to reduction in any year to the extent that expenses
(exclusive of brokerage, interest and taxes) of the fund exceed 2.5% of
the first $30 million of average net assets, 2.0% of the next $70
million and 1.5% of any excess over $100 million and by the amount of
certain brokerage commissions and fees (less expenses) received by
affiliates of Putnam Management on the fund's portfolio transactions.
If dividends payable on remarketed preferred shares during any dividend
payment period plus any expenses attributable to remarketed preferred
shares for the period exceed the fund's net income attributable to the
proceeds of the remarketed preferred shares during that period, then the
fee payable to Putnam Management for that period will be reduced by an
agreed upon formula. See "Administration Services Contact."
The fund reimburses Putnam Management for the compensation and related
expenses of certain officers of the fund and their staff who provide
administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam
Fiduciary Trust Company (PFTC), a wholly-owned subsidiary of Putnam
Investments, Inc. Investor servicing agent functions are provided by
Putnam Investor Services, a division of PFTC. For the six months ended
April 30, 1996, fund expenses were reduced by $21,311 under expense
offset arrangements with PFTC. Investor servicing and custodian fees
reported in the Statement of operations exclude these credits. The fund
could have invested a portion of these assets utilized in connection
with the expense offset arrangements in an income producing asset if it
had not entered into such arrangements.
Trustees of the fund receive an annual Trustees fee of $510 and an
additional fee for each Trustee's meeting attended. Trustees who are not
interested persons of Putnam Management and who serve on committees of
the Trustees receive additional fees for attendance at certain committee
meetings.
The fund adopted a Trustee Fee Deferral Plan (the "Plan") which allows
the Trustees to defer the receipt of all or a portion of Trustees Fees
payable on or after July 1, 1995. The deferred fees remain in the fund
and are invested in the fund or in other Putnam funds until distribution
in accordance with the Plan.
Note 3
Purchase and sales of securities
During the six months ended April 30, 1996, purchases and sales of
investment securities other than
short-term investments aggregated $51,639,077 and $54,636,419,
respectively. There were no purchases and sales of U.S. government
obligations. In determining the net gain or loss on securities sold, the
cost of securities has been determined on the identified cost basis.
Note 4
Remarketed preferred shares
The Series A shares are redeemable at the option of the fund on any
dividend payment date at a redemption price of $50,000 per share, plus
an amount equal to any dividends accumulated on a daily basis but unpaid
through the redemption date (whether or not such dividends have been
declared) and, in certain circumstances, a call premium.
It is anticipated that approximately 100% of total distributions and
dividends paid during the six month period ending April 30, 1996 to
holders of remarketed preferred shares will be considered tax-exempt
dividends under the Internal Revenue Code of 1986. To the extent that
the fund earns taxable income and capital gains by the conclusion of a
fiscal year, it will be required to apportion to the holders of the
remarketed preferred shares throughout that year additional dividends as
necessary to result in an after-tax equivalent to the applicable
dividend rate for the period.
Under the Investment Company Act of 1940, the fund is required to
maintain asset coverage of at least 200% with respect to the remarketed
preferred shares as of the last business day of each month in which any
such shares are outstanding. Additionally, the fund is required to meet
more stringent asset coverage requirements under terms of the remarketed
preferred shares and the shares' rating agencies. Should these
requirements not be met, or should dividends accrued on the remarketed
preferred shares not be paid, the fund may be restricted in its ability
to declare dividends to common shareholders or may be required to redeem
certain of the remarketed preferred shares. At April 30, 1996, no such
restrictions have been placed on the fund.
On February 10, 1994, the fund issued 200 remarketed preferred shares.
Proceeds to the fund, before underwriting expenses of $150,000 and
offering expenses of $214,607, amounted to $10,000,000. Such offering
expenses and the fund underwriting expenditures were paid initially by
Putnam Management, and the fund reimbursed Putnam Management for such
costs. Theses expenses were charged against net assets of the fund
available to common shareholders.
<TABLE>
<CAPTION>
Selected Quarterly Data
(Unaudited)
Net realized and Net increase (decrease)
Investment Net investment unrealized gain in net assets
income income* (loss) on investments* from operations
Per Per Per Per
Quarter Common Common Common Common
Ended Total Share Total Share Total Share Total Share
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1/31/94 $594,620 $.15 $573,545 $.14 $1,466,201 $.37 $2,039,746 $.51
4/30/94 1,032,439 .26 853,691 .22 (5,869,325) (1.47) (5,015,634) (1.25)
7/31/94 1,102,391 .27 871,255 .22 534,393 .13 1,405,648 .35
10/31/94 1,104,044 .28 851,511 .21 (2,907,540) (.72) (2,056,029) (.51)
1/31/95 1,067,814 .27 845,139 .21 825,521 .21 1,670,660 .42
4/30/95 1,030,234 .25 780,180 .20 1,379,201 .34 2,159,381 .54
7/31/95 1,116,982 .28 878,078 .22 245,134 .06 1,123,212 .28
10/31/95 956,387 .24 727,927 .18 970,760 .24 1,698,687 .42
1/31/96 970,123 .24 715,155 .18 1,406,862 .35 2,122,017 .53
4/30/96 956,747 .24 731,162 .18 (2,523,955) (.63) (1,792,793) (.45)
* Available to common shareholders.
</TABLE>
Fund Information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
Eli Shapiro
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. Coburn
Vice President
James E. Erickson
Vice President
Blake E. Anderson
Vice President
Michael F. Bouscaren
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Investment
Grade Municipal Trust III. It may also be used as sales literature when
preceded or accompanied by the current prospectus, which gives details
of sales charges, investment objectives, and operating policies of the
fund, and the most recent copy of Putnam's Quarterly Performance
Summary. For more information, or to request a prospectus, call toll
free: 1-800-225-1581.
Shares of mutual funds are not deposits or obligations of, or guaranteed
or endorsed by, any financial institution, are not insured by the
Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board,
or any other agency, and involve risk, including the possible loss of
principal amount invested.
Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time for up-
to-date information about the fund's net asset value.
- -------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- -------------------
Putnam Investments
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
25126-215 6/96
