NOTES
The
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification is the exclusive
reference of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the
FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and
Exchange Commission (“SEC”) under authority of federal laws are also sources of authoritative GAAP
for SEC registrants. The fund’s financial statements are prepared in accordance with GAAP, which may
require the use of management estimates and assumptions. Actual results could differ from those estimates.
The
fair value of a financial instrument is the amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date (i.e.,
the exit price). GAAP establishes a fair value hierarchy that prioritizes the inputs of valuation techniques
used to measure fair value. This hierarchy gives the highest priority to unadjusted quoted prices in
active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to
unobservable inputs (Level 3 measurements).
Additionally, GAAP provides guidance on determining whether the
volume and activity in a market has decreased significantly and whether such a decrease in activity results
in transactions that are not orderly. GAAP requires enhanced disclosures around valuation inputs and
techniques used during annual and interim periods.
Various inputs are used in determining the
value of the fund’s investments relating to fair value measurements. These inputs are summarized in
the three broad levels listed below:
Level 1—unadjusted quoted prices in active markets for identical investments.
Level 2—other
significant observable inputs (including quoted prices for similar investments, interest rates, prepayment
speeds, credit risk, etc.).
Level
3—significant unobservable inputs (including the fund’s own assumptions in determining the
fair value of investments).
The inputs or methodology used for valuing securities are not necessarily an indication
of the risk associated with investing in those securities.
Changes in valuation techniques may result
in transfers in or out of an assigned level within the disclosure hierarchy. Valuation techniques used
to value the fund’s investments are as follows:
Investments in securities are valued each business day by an
independent pricing service (the “Service”) approved by the fund's Board Members (the “Board”).
Investments for which quoted bid prices are readily available and are representative of the bid side
of the market in the judgment of the Service are valued at the mean between the quoted bid prices (as
obtained by the Service from dealers in such securities) and asked prices (as calculated by the Service
based upon its evaluation of the market for such securities). Other investments (which constitute a majority
of the portfolio securities) are carried at
NOTES
fair
value as determined by the Service, based on methods which include consideration of the following: yields
or prices of municipal securities of comparable quality, coupon, maturity and type; indications as to
values from dealers; and general market conditions. All of the preceding securities are generally categorized
within Level 2 of the fair value hierarchy.
The Service is engaged under the general oversight of the Board.
When
market quotations or official closing prices are not readily available, or are determined not to accurately
reflect fair value, such as when the value of a security has been significantly affected by events after
the close of the exchange or market on which the security is principally traded, but before the fund
calculates its net asset value, the fund may value these investments at fair value as determined in accordance
with the procedures approved by the Board. Certain factors may be considered when fair valuing investments
such as: fundamental analytical data, the nature and duration of restrictions on disposition, an evaluation
of the forces that influence the market in which the securities are purchased and sold, and public trading
in similar securities of the issuer or comparable issuers. These securities are either categorized within
Level 2 or 3 of the fair value hierarchy depending on the relevant inputs used.
For restricted securities
where observable inputs are limited, assumptions about market activity and risk are used and such securities
are generally categorized within Level 3 of the fair value hierarchy.
Inverse Floater Securities: The fund participates in secondary
inverse floater structures in which fixed-rate, tax-exempt municipal bonds are transferred to a trust
(the “Inverse Floater Trust”). The Inverse Floater Trust typically issues two variable rate securities
that are collateralized by the cash flows of the fixed-rate, tax-exempt municipal bonds. One of these
variable rate securities pays interest based on a short-term floating rate set by a remarketing agent
at predetermined intervals (“Trust Certificates”). A residual interest tax-exempt security is also
created by the Inverse Floater Trust, which is transferred to the fund, and is paid interest based on
the remaining cash flows of the Inverse Floater Trust, after payment of interest on the other securities
and various expenses of the Inverse Floater Trust. An Inverse Floater Trust may be collapsed without
the consent of the fund due to certain termination events such as bankruptcy, default or other credit
event.
The
fund accounts for the transfer of bonds to the Inverse Floater Trust as secured borrowings, with the
securities transferred remaining in the fund’s investments, and the Trust Certificates reflected as
fund liabilities in the Statement of Assets and Liabilities.
The fund may invest in inverse floater securities
on either a non-recourse or recourse basis. These securities are typically supported by a liquidity facility
provided by a bank or other financial institution (the “Liquidity Provider”) that allows the holders
of the Trust Certificates to tender their certificates in exchange for payment from the Liquidity Provider
of par plus accrued interest on any business day prior to a termination event. When the fund invests
in inverse floater securities on a non-recourse basis, the Liquidity
NOTES
Provider
is required to make a payment under the liquidity facility due to a termination event to the holders
of the Trust Certificates. When this occurs, the Liquidity Provider typically liquidates all or a portion
of the municipal securities held in the Inverse Floater Trust. A liquidation shortfall occurs if the
Trust Certificates exceed the proceeds of the sale of the bonds in the Inverse Floater Trust (“Liquidation
Shortfall”). When a fund invests in inverse floater securities on a recourse basis, the fund typically
enters into a reimbursement agreement with the Liquidity Provider where the fund is required to repay
the Liquidity Provider the amount of any Liquidation Shortfall. As a result, a fund investing in a recourse
inverse floater security bears the risk of loss with respect to any Liquidation Shortfall.
At May 31, 2019, accumulated
net unrealized appreciation on investments was $32,246,078, consisting of $32,525,757 gross unrealized
appreciation and $279,679 gross unrealized depreciation.
At May 31, 2019, the cost of investments for
federal income tax purposes was substantially the same as the cost for financial reporting purposes (see
the Statement of Investments).
Additional investment related disclosures are hereby incorporated by reference to
the annual and semi-annual reports previously filed with the SEC on Form N-CSR.
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