A description of the valuation techniques applied to the Funds’
major classifications of assets and liabilities measured at fair value follows:
Prices of fixed-income securities are generally provided by an independent
pricing service (“pricing service”) approved by the Board. The pricing service establishes a security’s fair value using
methods that may include consideration of the following: yields or prices of investments of comparable quality, type of issue, coupon,
maturity and rating, market quotes or indications of value from security dealers, evaluations of anticipated cash flows or collateral,
general market conditions and other information and analysis, including the obligor’s credit characteristics considered relevant.
In pricing certain securities, particularly less liquid and lower quality securities, the pricing service may consider information about
a security, its issuer or market activity provided by the Adviser. These securities are generally classified as Level 2.
Equity securities and exchange-traded fund listed or traded on a
national market or exchange are valued based on their sale price at the official close of business of such market or exchange on the valuation
date. Foreign equity securities and registered investment companies that trade on a foreign exchange are valued at the last sale price
or official closing price reported on the exchange where traded and converted to U.S. dollars at the prevailing rates of exchange on the
date of valuation. To the extent these securities are actively traded and that valuation adjustments are not applied, they are generally
classified as Level 1. If there is no official close of business, then the latest available sale price is utilized. If no sales are reported,
then the mean of the latest available bid and ask prices is utilized and these securities are generally classified as Level 2.
Futures contracts are valued using the closing settlement price
or, in the absence of such a price, the last traded price and are generally classified as Level 1.
Any portfolio security or derivative for which market quotations
are not readily available or for which the above valuation procedures are deemed not to reflect fair value are valued at fair value, as
determined in good faith using procedures approved by the Board. As a general principle, the fair value of a security would appear to
be the amount that the owner might reasonably expect to receive for it in a current sale. A variety of factors may be considered in determining
the fair value of such securities, which may include consideration of the following: yields or prices of investments of comparable quality,
type of issue, coupon, maturity and rating, market quotes or indications of value from security dealers, evaluations of anticipated cash
flows or collateral, general market conditions and other information and analysis, including the obligor’s credit characteristics
considered relevant. To the extent the inputs are observable and timely, the values would be classified as Level 2 of the fair value hierarchy;
otherwise they would be classified as Level 3.
The following table summarizes the market value of the Funds’
investments as of the end of the reporting period, based on the inputs used to value them:
The Funds hold liabilities in floating rate obligations and preferred
shares, where applicable, which are not reflected in the tables above. The fair values of the Funds’ liabilities for floating rate
obligations approximate their liquidation values. Floating rate obligations are generally classified as Level 2 and further described
in Note 4 – Portfolio Securities and Investments in Derivatives. The fair values of the Funds’ liabilities for preferred shares
approximate their liquidation preference. Preferred shares are generally classified as Level 2 and further described in Note 5 –
Fund Shares.
Each Fund is authorized to invest in inverse floating rate securities.
An inverse floating rate security is created by depositing a municipal bond (referred to as an “Underlying Bond”), typically
with a fixed interest rate, into a special purpose tender option bond (“TOB”) trust (referred to as the “TOB Trust”)
created by or at the direction of one or more Funds. In turn, the TOB Trust issues (a) floating rate certificates (referred to as “Floaters”),
in face amounts equal to some fraction of the Underlying Bond’s par amount or market value, and (b) an inverse floating rate certificate
(referred to as an “Inverse Floater”) that represents all remaining or residual interest in the TOB Trust. Floaters typically
pay short-term tax-exempt interest rates to third parties who are also provided a right to tender their certificate and receive its par
value, which may be paid from the proceeds of a remarketing of the Floaters, by a loan to the TOB Trust from a third party liquidity provider
(“Liquidity Provider”), or by the sale of assets from the TOB Trust. The Inverse Floater is issued to a long term investor,
such as one or more of the Funds. The income received by the Inverse Floater holder varies inversely with the short-term rate paid to
holders of the Floaters, and in most circumstances the Inverse Floater holder bears substantially all of the Underlying Bond’s downside
investment risk and also benefits disproportionately from any potential appreciation of the Underlying Bond’s value. The value of
an Inverse Floater will be more volatile than that of the Underlying Bond because the interest rate is dependent on not only the fixed
coupon rate of the Underlying Bond but also on the short-term interest paid on the Floaters, and because the Inverse Floater essentially
bears the risk of loss (and possible gain) of the greater face value of the Underlying Bond.
The Inverse Floater held by a Fund gives the Fund the right to (a)
cause the holders of the Floaters to tender their certificates at par (or slightly more than par in certain circumstances), and (b) have
the trustee of the TOB Trust (the “Trustee”) transfer the Underlying Bond held by the TOB Trust to the Fund, thereby collapsing
the TOB Trust.
A Fund may acquire an Inverse Floater in a transaction where it
(a) transfers an Underlying Bond that it owns to a TOB Trust created by a third party or (b) transfers an Underlying Bond that it owns,
or that it has purchased in a secondary market transaction for the purpose of creating an Inverse Floater, to a TOB Trust created at its
direction, and in return receives the Inverse Floater of the TOB Trust (referred to as a “self-deposited Inverse Floater”).
A
Fund may also purchase an Inverse Floater in a secondary market
transaction from a third party creator of the TOB Trust without first owning the Underlying Bond (referred to as an “externally-deposited
Inverse Floater”).
An investment in a self-deposited Inverse Floater is accounted for
as a “financing” transaction (i.e., a secured borrowing). For a self-deposited Inverse Floater, the Underlying Bond deposited
into the TOB Trust is identified in the Fund’s Portfolio of Investments as “(UB) – Underlying bond of an inverse floating
rate trust reflected as a financing transaction,” with the Fund recognizing as liabilities, labeled “Floating rate obligations”
on the Statement of Assets and Liabilities, (a) the liquidation value of Floaters issued by the TOB Trust, and (b) the amount of any borrowings
by the TOB Trust from a Liquidity Provider to enable the TOB Trust to purchase outstanding Floaters in lieu of a remarketing. In addition,
the Fund recognizes in “Investment Income” the entire earnings of the Underlying Bond, and recognizes (a) the interest paid
to the holders of the Floaters or on the TOB Trust’s borrowings, and (b) other expenses related to remarketing, administration,
trustee, liquidity and other services to a TOB Trust, as a component of “Interest expense and amortization of offering costs”
on the Statement of Operations. Earnings due from the Underlying Bond and interest due to the holders of the Floaters as of the end of
the reporting period are recognized as components of “Receivable for interest” and “Payable for interest” on the
Statement of Assets and Liabilities, respectively.
In contrast, an investment in an externally-deposited Inverse Floater
is accounted for as a purchase of the Inverse Floater and is identified in the Fund’s Portfolio of Investments as “(IF) –
Inverse floating rate investment.” For an externally-deposited Inverse Floater, a Fund’s Statement of Assets and Liabilities
recognizes the Inverse Floater and not the Underlying Bond as an asset, and the Fund does not recognize the Floaters, or any related borrowings
from a Liquidity Provider, as a liability. Additionally, the Fund reflects in “Investment Income” only the net amount of earnings
on the Inverse Floater (net of the interest paid to the holders of the Floaters or the Liquidity Provider as lender, and the expenses
of the Trust), and does not show the amount of that interest paid or the expenses of the TOB Trust as described above as interest expense
on the Statement of Operations.
Fees paid upon the creation of a TOB Trust for self-deposited Inverse
Floaters and externally-deposited Inverse Floaters are recognized as part of the cost basis of the Inverse Floater and are capitalized
over the term of the TOB Trust.
As of the end of the reporting period, the aggregate value of Floaters
issued by each Fund’s TOB Trust for self-deposited Inverse Floaters and externally-deposited Inverse Floaters was as follows:
During the current fiscal period, the average amount of Floaters
(including any borrowings from a Liquidity Provider) outstanding, and the average annual interest rate and fees related to self-deposited
Inverse Floaters, were as follows:
TOB Trusts are supported by a liquidity facility provided by a Liquidity
Provider pursuant to which the Liquidity Provider agrees, in the event that Floaters are (a) tendered to the Trustee for remarketing and
the remarketing does not occur, or (b) subject to mandatory tender pursuant to the terms of the TOB Trust agreement, to either purchase
Floaters or to provide the Trustee with an advance from a loan facility to fund the purchase of Floaters by the TOB Trust. In certain
circumstances, the Liquidity Provider may otherwise elect to have the Trustee sell the Underlying Bond to retire the Floaters that were
tendered and not remarketed prior to providing such a loan. In these circumstances, the Liquidity Provider remains obligated to provide
a loan to the extent that the proceeds of the sale of the Underlying Bond is not sufficient to pay the purchase price of the Floaters.
The size of the commitment under the loan facility for a given TOB
Trust is at least equal to the balance of that TOB Trust’s outstanding Floaters plus any accrued interest. In consideration of the
loan facility, fee schedules are in place and are charged by the Liquidity Provider(s). Any loans made by the Liquidity Provider will
be secured by the purchased Floaters held by the TOB Trust. Interest paid on any outstanding loan balances will be effectively borne by
the Fund that owns the Inverse Floaters of the TOB Trust that has incurred the borrowing and may be at a rate that is greater than the
rate that would have been paid had the Floaters been successfully remarketed.
As described above, any amounts outstanding under a liquidity facility
are recognized as a component of “Floating rate obligations” on the Statement of Assets and Liabilities by the Fund holding
the corresponding Inverse Floaters issued by the borrowing TOB Trust. As of the end of the reporting period there were no loans outstanding
under any such facility.
Each Fund may also enter into shortfall and forbearance agreements
(sometimes referred to as a “recourse arrangement”) (TOB Trusts involving such agreements are referred to herein as “Recourse
Trusts”), under which a Fund agrees to reimburse the Liquidity Provider for the Trust’s Floaters, in certain circumstances,
for the amount (if any) by which the liquidation value of the Underlying Bond held by the TOB Trust may fall short of the sum of the liquidation
value of the Floaters issued by the TOB Trust plus any amounts borrowed by the TOB Trust from the Liquidity Provider, plus any shortfalls
in interest cash flows. Under these agreements, a Fund’s potential exposure to losses related to or on an Inverse Floater may increase
beyond the value of the
Inverse Floater as a Fund may potentially be liable to fulfill all
amounts owed to holders of the Floaters or the Liquidity Provider. Any such shortfall amount in the aggregate is recognized as “Unrealized
depreciation on Recourse Trusts” on the Statement of Assets and Liabilities.
As of the end of the reporting period, each Fund’s maximum
exposure to the Floaters issued by Recourse Trusts for self-deposited Inverse Floaters and externally-deposited Inverse Floaters was as
follows:
A zero coupon security does not pay a regular interest coupon to
its holders during the life of the security. Income to the holder of the security comes from accretion of the difference between the original
purchase price of the security at issuance and the par value of the security at maturity and is effectively paid at maturity. The market
prices of zero coupon securities generally are more volatile than the market prices of securities that pay interest periodically.
The Funds may purchase securities on a when-issued or delayed-delivery
basis. Securities purchased on a when-issued or delayed-delivery basis may have extended settlement periods; interest income is not accrued
until settlement date. Any securities so purchased are subject to market fluctuation during this period. The Funds have earmarked securities
in their portfolios with a current value at least equal to the amount of the when issued/ delayed-delivery purchase commitments. If the
Funds have outstanding when-issued/delayed-delivery purchases commitments as of the end of the reporting period, such amounts are recognized
on the Statement of Assets and Liabilities.
In addition to the inverse floating rate securities in which each
Fund may invest, which are considered portfolio securities for financial reporting purposes, each Fund is authorized to invest in certain
other derivative instruments such as futures, options and swap contracts. Each Fund limits its investments in futures, options on futures
and swap contracts to the extent necessary for the Adviser to claim the exclusion from registration by the Commodity Futures Trading Commission
as a commodity pool operator with respect to the Fund. The Funds record derivative instruments at fair value, with changes in fair value
recognized on the Statement of Operations, when applicable. Even though the Funds’ investments in derivatives may represent economic
hedges, they are not considered to be hedge transactions for financial reporting purposes.
Upon execution of a futures contract, a Fund is obligated to deposit
cash or eligible securities, also known as “initial margin,” into an account at its clearing broker equal to a specified percentage
of the contract amount. Cash held by the broker to cover initial margin requirements on open futures contracts, if any, is recognized
as “Cash collateral at brokers for investments in futures contracts” on the Statement of Assets and Liabilities. Investments
in futures contracts obligate a Fund and the clearing broker to settle monies on a daily basis representing changes in the prior days
“mark-to-market” of the open contracts. If a Fund has unrealized appreciation the clearing broker would credit the Fund’s
account with an amount equal to appreciation and conversely if a Fund has unrealized depreciation the clearing broker would debit the
Fund’s account with an amount equal to depreciation. These daily cash settlements are also known as “variation margin.”
Variation margin is recognized as a receivable and/or payable for “Variation margin on futures contracts” on the Statement
of Assets and Liabilities.
During the period the futures contract is open, changes in the value
of the contract are recognized as an unrealized gain or loss by “marking-to-market” on a daily basis to reflect the changes
in market value of the contract, which is recognized as a component of “Change in net unrealized appreciation (depreciation) of
futures contracts” on the Statement of Operations. When the contract is closed or expired, a Fund records a realized gain or loss
equal to the difference between the value of the contract on the closing date and value of the contract when originally entered into,
which is recognized as a component of “Net realized gain (loss) from futures contracts” on the Statement of Operations.
Risks of investments in futures contracts include the possible adverse
movement in the price of the securities or indices underlying the contracts, the possibility that there may not be a liquid secondary
market for the contracts and/or that a change in the value of the contract may not correlate with a change in the value of the underlying
securities or indices.
During the current fiscal period, NID used U.S. Treasury futures
as part of an overall portfolio construction strategy to manage portfolio duration and yield curve exposure.
The average notional amount of futures contracts outstanding during
the current fiscal period was as follows:
The following table presents the fair value of all futures contracts
held by the Fund as of the end of the reporting period, the location of these instruments on the Statement of Assets and Liabilities and
the primary underlying risk exposure.
| |
|
|
Location on the Statement of Assets and Liabilities |
|
| |
|
Asset Derivatives |
|
(Liability) Derivatives |
| Underlying |
Derivative |
|
|
|
|
|
|
| Risk Exposure |
Instrument |
Location |
Value |
|
Location |
|
Value |
| NID |
|
|
|
|
|
|
|
| Interest rate |
Futures contracts |
Receivable for |
$46,334 |
|
— |
|
$ — |
| |
|
variation margin on |
|
|
|
|
|
| |
|
futures contracts* |
|
|
|
|
|
* Value represents the cumulative unrealized appreciation (depreciation)
of futures contracts as reported in the Fund’s Portfolio of Investments and not the daily asset and/or liability derivatives location
as described in the table above.
The following table presents the amount of net realized gain (loss)
and change in net unrealized appreciation (depreciation) recognized on futures contracts on the Statement of Operations during the current
fiscal period, and the primary underlying risk exposure.
| |
|
|
|
| |
|
|
Change in Net |
| |
|
Net Realized |
Unrealized Appreciation |
| Underlying |
Derivative |
Gain (Loss) from |
(Depreciation) of |
| Risk Exposure |
Instrument |
Futures Contracts |
Futures Contracts |
| Interest rate |
Futures contracts |
$396,672 |
$54,205 |
Market and Counterparty Credit Risk
In the normal course of business each Fund may invest in financial
instruments and enter into financial transactions where risk of potential loss exists due to changes in the market (market risk) or failure
of the other party to the transaction to perform (counterparty credit risk). The potential loss could exceed the value of the financial
assets recorded on the financial statements. Financial assets, which potentially expose each Fund to counterparty credit risk, consist
principally of cash due from counterparties on forward, option and swap transactions, when applicable. The extent of each Fund’s
exposure to counterparty credit risk in respect to these financial assets approximates their carrying value as recorded on the Statement
of Assets and Liabilities.
Each Fund helps manage counterparty credit risk by entering into
agreements only with counterparties the Adviser believes have the financial resources to honor their obligations and by having the Adviser
monitor the financial stability of the counterparties. Additionally, counterparties may be required to pledge collateral daily (based
on the daily valuation of the financial asset) on behalf of each Fund with a value approximately equal to the amount of any unrealized
gain above a pre-determined threshold. Reciprocally, when each Fund has an unrealized loss, the Funds have instructed the custodian to
pledge assets of the Funds as collateral with a value approximately equal to the amount of the unrealized loss above a pre-determined
threshold. Collateral pledges are monitored and subsequently adjusted if and when the valuations fluctuate, either up or down, by at least
the pre-determined threshold amount.
5. Fund Shares
Common Share Transactions
Transactions in common shares for the Funds during the Funds’
current and prior fiscal period, where applicable, were as follows:
| |
|
NID |
|
|
|
NIQ |
|
| |
| |
Year |
|
Year |
|
Year |
|
Year |
| |
Ended |
|
Ended |
|
Ended |
|
Ended |
| |
5/31/22 |
|
5/31/21 |
|
5/31/22 |
|
5/31/21 |
| Common shares: |
|
|
|
|
|
|
|
| Issued to shareholders due to reinvestments of distributions |
14,409 |
|
— |
|
1,724 |
|
— |
59
Notes to Financial Statements (continued)
Preferred Shares
Adjustable Rate MuniFund Term Preferred Shares
The Funds have issued and have outstanding Adjustable Rate MuniFund
Term Preferred (“AMTP”) Shares, with a $100,000 liquidation preference per share. AMTP Shares are issued via private placement
and are not publicly available.
As of the end of the reporting period, details of each Fund’s
AMTP Shares outstanding were as follows:
| |
|
|
|
Liquidation |
| |
|
|
|
Preference, |
| |
|
Shares |
Liquidation |
net of deferred |
| Fund |
Series |
Outstanding |
Preference |
offering cost |
| NID |
2023 |
1,750 |
$175,000,000 |
$174,968,336 |
| NIQ |
2023 |
550 |
$55,000,000 |
$54,970,954 |
Each Fund is obligated to redeem its AMTP Shares by the date as
specified in its offering document (“Term Redemption Date”), unless earlier redeemed by the Fund. AMTP Shares are subject
to optional and mandatory redemption in certain circumstances. The AMTP Shares may be redeemed at the option of each Fund, subject to
payment of premium for approximately six months following the date of issuance (“Premium Expiration Date”), and at the redemption
price per share thereafter. The redemption price per share is equal to the sum of the liquidation preference per share plus any accumulated
but unpaid dividends.
AMTP Shares are short-term or short/intermediate-term instruments
that pay a variable dividend rate tied to a short-term index, plus an additional fixed “spread” amount which is initially
established at the time of issuance and may be adjusted in the future based upon a mutual agreement between the majority owner and each
Fund. From time-to-time the majority owner may propose to each Fund an adjustment to the dividend rate. Should the majority owner and
the Funds fail to agree upon an adjusted dividend rate, and such proposed dividend rate adjustment is not withdrawn, the Funds will be
required to redeem all outstanding shares upon the end of a notice period.
In addition, the Funds may be obligated to redeem a certain amount
of the AMTP Shares if the Funds fail to maintain certain asset coverage and leverage ratio requirements and such failures are not cured
by the applicable cure date. The Term Redemption Date and Premium Expiration Date for each Fund’s AMTP Shares are as follows:
| |
|
|
|
|
| |
Notice |
|
Term |
Premium |
| Fund |
Period |
Series |
Redemption Date |
Expiration Date |
| NID |
360-day |
2023 |
March 31, 2023* |
August 31, 2018 |
| NIQ |
360-day |
2023 |
June 30, 2023* |
August 31, 2018 |
*
Subject to early termination by either the Fund or the holder.
The average liquidation preference of AMTP Shares outstanding and
annualized dividend rate for the Funds during the current fiscal period were as follows:
| |
|
|
| |
NID |
NIQ |
| Average liquidation preference of AMTP Shares outstanding |
$175,000,000 |
$55,000,000 |
| Annualized dividend rate |
1.06% |
1.06% |
AMTP Shares are subject to restrictions on transfer, generally do
not trade, and market quotations are generally not available. The fair value of AMTP Shares is expected to be approximately their liquidation
preference so long as the fixed “spread” on the AMTP Shares remains roughly in line with the “spread” being demanded
by investors on instruments having similar terms in the current market environment. In present market conditions, the Funds’ Adviser
has determined that the fair value of AMTP Shares is approximately their liquidation preference, but their fair value could vary if market
conditions change materially. For financial reporting purposes, the liquidation preference of AMTP Shares is a liability and is recognized
as a component of “Adjustable Rate MuniFund Term Preferred (“AMTP”) Shares, net of deferred offering costs” on
the Statement of Assets and Liabilities.
AMTP Share dividends are treated as interest payments for financial
reporting purposes. Unpaid dividends on AMTP Shares are recognized as a component of “Interest payable” on the Statement of
Assets and Liabilities. Dividends accrued on AMTP Shares are recognized as a component of “Interest expense and amortization of
offering costs” on the Statement of Operations.
Costs incurred in connection each Fund’s offering of AMTP
Shares were recorded as deferred charges, which are amortized over the life of the shares and are recognized as components of “Adjustable
Rate MuniFund Term Preferred (“AMTP”) Shares, net of deferred offering costs” on the Statement of Assets and Liabilities
and “Interest expense and amortization of offering costs” on the Statement of Operations.
Preferred Share Transactions
The Funds did not have any transactions in preferred shares during
the current or prior fiscal period.
60
6. Income Tax Information
Each Fund is a separate taxpayer for federal income tax purposes.
Each Fund intends to distribute substantially all of its net investment income and net capital gains to shareholders and otherwise comply
with the requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies. Therefore, no federal
income tax provision is required.
Each Fund intends to satisfy conditions that will enable interest
from municipal securities, which is exempt from regular federal income tax, to retain such tax-exempt status when distributed to shareholders
of the Funds. Net realized capital gains and ordinary income distributions paid by the Funds are subject to federal taxation.
Each Fund files income tax returns in U.S. federal and applicable
state and local jurisdictions. A Fund's federal income tax returns are generally subject to examination for a period of three fiscal years
after being filed. State and local tax returns may be subject to examination for an additional period of time depending on the jurisdiction.
Management has analyzed each Fund's tax positions taken for all open tax years and has concluded that no provision for income tax is required
in the Fund's financial statements.
Differences between amounts for financial statement and federal
income tax purposes are primarily due to timing differences in recognizing gains and losses on investment transactions. Temporary differences
do not require reclassification. As of year end, permanent differences that resulted in reclassifications among the components of net
assets relate primarily to distressed PIK bond adjustments, nondeductible offering costs, paydowns, taxable market discount and taxes
paid. Temporary and permanent differences have no impact on a Fund's net assets.
As of year end, the aggregate cost and net unrealized appreciation/(depreciation)
of all investments for federal income tax purposes was as follows:
| |
|
|
|
|
| |
|
Gross |
Gross |
Net Unrealized |
| |
|
Unrealized |
Unrealized |
Appreciation |
| Fund |
Tax Cost |
Appreciation |
(Depreciation) |
(Depreciation) |
| NID |
$770,552,911 |
$50,832,807 |
$(30,098,878) |
$20,733,929 |
| NIQ |
222,679,397 |
6,311,380 |
(5,197,534) |
1,113,846 |
For purposes of this disclosure, tax cost generally includes the
cost of portfolio investments as well as up-front fees or premiums exchanged on derivatives and any amounts unrealized for income statement
reporting but realized income and/or capital gains for tax reporting, if applicable.
As of year end, the components of accumulated earnings on a tax
basis were as follows:
| |
|
|
|
|
|
|
|
|
| |
Undistributed |
Undistributed |
Undistributed |
Unrealized |
|
|
Other |
|
| |
Tax-Exempt |
Ordinary |
Long-Term |
Appreciation |
Capital Loss |
Late-Year Loss |
Book-to-Tax |
|
| Fund |
Income1 |
Income |
Capital Gains |
(Depreciation) |
Carryforwards |
Deferrals |
Differences |
Total |
| NID |
$6,212,585 |
$114,871 |
$ — |
$20,733,929 |
$(47,265,856) |
$ — |
$(2,181,969) |
$(22,386,440) |
| NIQ |
745,612 |
— |
— |
1,113,846 |
(12,087,315) |
— |
(504,306) |
(10,732,163) |
1 Undistributed tax-exempt income (on a tax basis) has not been
reduced for the dividend declared on May 2, 2022 and paid on June 1, 2022.
The tax character of distributions paid were as follows:
| |
|
|
|
|
|
|
| |
|
5/31/22 |
|
|
5/31/21 |
|
| |
Tax-Exempt |
Ordinary |
Long-Term |
Tax-Exempt |
Ordinary |
Long-Term |
| Fund |
Income1 |
Income |
Capital Gains |
Income |
Income |
Capital Gains |
| NID |
$25,893,077 |
$170,888 |
$ — |
$23,950,726 |
$536,117 |
$ — |
| NIQ |
6,417,932 |
— |
— |
5,977,263 |
99,812 |
— |
1 Each Fund designates these amounts paid during the period as Exempt
Interest Dividends.
As of year end, the Funds had capital loss carryforwards, which
will not expire:
| |
|
|
|
| Fund |
Short-Term |
Long-Term |
Total |
| NID |
$23,282,876 |
$23,982,980 |
$47,265,856 |
| NIQ |
9,022,206 |
3,065,109 |
12,087,315 |
61
Notes to Financial Statements (continued)
7. Management Fees and Other Transactions with Affiliates
Management Fees
Each Fund’s management fee compensates the Adviser for overall
investment advisory and administrative services and general office facilities. The Sub-Adviser is compensated for its services to the
Funds from the management fees paid to the Adviser.
Each Fund’s management fee consists of two components –
a fund-level fee, based only on the amount of assets within each individual Fund, and a complex-level fee, based on the aggregate amount
of all eligible fund assets managed by the Adviser. This pricing structure enables Fund shareholders to benefit from growth in the assets
within their respective Fund as well as from growth in the amount of complex-wide assets managed by the Adviser.
The
annual fund-level fee, payable monthly, for each Fund is calculated according to the following schedule:
| |
NID |
NIQ |
| Average Daily Managed Assets* |
Fund-Level Fee Rate |
Fund-Level Fee Rate |
| For the first $125 million |
0.4000% |
0.3000% |
| For the next $125 million |
0.3875 |
0.2875 |
| For the next $250 million |
0.3750 |
0.2750 |
| For the next $500 million |
0.3625 |
0.2625 |
| For the next $1 billion |
0.3500 |
0.2500 |
| For the next $3 billion |
0.3250 |
0.2250 |
| For managed assets over $5 billion |
0.3125 |
0.2125 |
The annual complex-level fee, payable monthly, for each Fund is
calculated by multiplying the current complex-wide fee rate, determined according to the following schedule by the Fund’s daily
managed assets:
| |
|
| Complex-Level Eligible Asset Breakpoint Level* |
Effective Complex-Level Fee Rate at Breakpoint Level |
| $55 billion |
0.2000% |
| $56 billion |
0.1996 |
| $57 billion |
0.1989 |
| $60 billion |
0.1961 |
| $63 billion |
0.1931 |
| $66 billion |
0.1900 |
| $71 billion |
0.1851 |
| $76 billion |
0.1806 |
| $80 billion |
0.1773 |
| $91 billion |
0.1691 |
| $125 billion |
0.1599 |
| $200 billion |
0.1505 |
| $250 billion |
0.1469 |
| $300 billion |
0.1445 |
* For the complex-level fees, managed assets include closed-end
fund assets managed by the Adviser that are attributable to certain types of leverage. For these purposes, leverage includes the funds’
use of preferred stock and borrowings and certain investments in the residual interest certificates (also called inverse floating rate
securities) in tender option bond (TOB) trusts, including the portion of assets held by a TOB trust that has been effectively financed
by the trust’s issuance of floating rate securities, subject to an agreement by the Adviser as to certain funds to limit the amount
of such assets for determining managed assets in certain circumstances. The complex-level fee is calculated based upon the aggregate daily
managed assets of all Nuveen open-end and closed-end funds that constitute “eligible assets.” Eligible assets do not include
assets attributable to investments in other Nuveen Funds or assets in excess of a determined amount (originally $2 billion) added
to the Nuveen fund complex in connection with the Adviser’s assumption of the management of the former First American Funds effective
January 1, 2011, but do not include certain Nuveen funds that were reorganized into funds advised by an affiliate of the Adviser during
the 2019 calendar year. As of May 31, 2022, the complex-level fee for each Fund was 0.1559%.
Other Transactions with Affiliates
Each Fund is permitted to purchase or sell securities from or to
certain other funds or accounts managed by the Sub-Adviser (“Affiliated Entity”) under specified conditions outlined in procedures
adopted by the Board (“cross-trade”). These procedures have been designed to ensure that any cross-trade of securities by
the Fund from or to an Affiliated Entity by virtue of having a common investment adviser (or affiliated investment adviser), common officer
and/or common trustee complies with Rule 17a-7 under the 1940 Act. These transactions are effected at the current market price (as provided
by an independent pricing service) without incurring broker commissions.
During the current fiscal period, the Funds did not engage in cross-trades
pursuant to these procedures.
62
8. Commitments and Contingencies
In the normal course of business, each Fund enters into a variety
of agreements that may expose the Fund to some risk of loss. These could include recourse arrangements for certain TOB Trusts and certain
agreements related to preferred shares, which are described elsewhere in these Notes to Financial Statements. The risk of future loss
arising from such agreements, while not quantifiable, is expected to be remote. As of the end of the reporting period, the Funds did not
have any unfunded commitments.
From time to time, the Funds may be a party to certain legal proceedings
in the ordinary course of business, including proceedings relating to the enforcement of the Funds’ rights under contracts. As of
the end of the reporting period, management has determined that any legal proceeding(s) the Funds are subject to, including those described
within this report, are unlikely to have a material impact to any of the Funds’ financial statements.
9. Borrowing Arrangements
Committed Line of Credit
The Funds, along with certain other funds managed by the Adviser
(“Participating Funds”), have established a 364-day, $2.635 billion standby credit facility with a group of lenders, under
which the Participating Funds may borrow for temporary purposes (other than on-going leveraging for investment purposes). Each Participating
Fund is allocated a designated proportion of the facility’s capacity (and its associated costs, as described below) based upon a
multifactor assessment of the likelihood and frequency of its need to draw on the facility, the size of the Fund and its anticipated draws,
and the potential importance of such draws to the operations and well-being of the Fund, relative to those of the other Funds. A Fund
may effect draws on the facility in excess of its designated capacity if and to the extent that other Participating Funds have undrawn
capacity. The credit facility expires in June 2022 unless extended or renewed.
The credit facility has the following terms: 0.15% per annum on
unused commitment amounts and a drawn interest rate equal to the higher of (a) OBFR (Overnight Bank Funding Rate) plus 1.20% per annum
or (b) the Fed Funds Effective Rate plus 1.20% per annum on amounts borrowed. Prior to June 23, 2021, the drawn interest rate was
equal to the higher of (a) one-month LIBOR (London Inter-Bank Offered Rate) plus 1.25% per annum or (b) the Fed Funds rate plus 1.25%
per annum on amounts borrowed. The Participating Funds also incurred a 0.05% upfront fee on the increase of the $230 million commitment
amount during the reporting period. Interest expense incurred by the Participating Funds, when applicable, is recognized as a component
of “Interest expense and amortization of offering costs” on the Statement of Operations. Participating Funds paid administration,
legal and arrangement fees, which are recognized as a component of “Interest expense and amortization of offering costs” on
the Statement of Operations, and along with commitment fees, have been allocated among such Participating Funds based upon the relative
proportions of the facility’s aggregate capacity reserved for them and other factors deemed relevant by the Adviser and the Board
of each Participating Fund.
During the current fiscal period, the following Fund utilized this
facility. The Fund’s maximum outstanding balance during the utilization period was as follows:
| |
NID |
| Maximum outstanding balance |
$4,700,000 |
During the Fund’s utilization period(s) during the current
fiscal period, the average daily balance outstanding and average annual interest rate on the Borrowings were as follows:
| |
|
| |
NID |
| Utilization period (days outstanding) |
23 |
| Average daily balance outstanding |
$1,595,652 |
| Average annual interest rate |
1.28% |
Borrowings outstanding as of the end of the reporting period, if
any, are recognized as “Borrowings” on the Statement of Assets and Liabilities, where applicable.
Inter-Fund Borrowing and Lending
The SEC has granted an exemptive order permitting registered open-end
and closed-end Nuveen funds to participate in an inter-fund lending facility whereby the Nuveen funds may directly lend to and borrow
money from each other for temporary purposes (e.g., to satisfy redemption requests or when a sale of securities “fails,” resulting
in an unanticipated cash shortfall) (the “Inter-Fund Program”). The closed-end Nuveen funds, including the Funds covered by
this shareholder report, will participate only as lenders, and not as borrowers, in the Inter-Fund Program because such closed-end funds
rarely, if ever, need to borrow cash to meet redemptions. The Inter-Fund Program is subject to a number of conditions, including,
among other things, the requirements that (1) no fund may borrow or lend money through the Inter-Fund Program unless it receives a more
favorable interest rate than is typically available from a bank or other financial institution for a comparable transaction; (2) no fund
may borrow on an unsecured basis through the Inter-Fund Program unless the fund’s outstanding borrowings from all sources immediately
after the inter-fund borrowing total 10% or less of its
63
Notes to Financial Statements (continued)
total assets; provided that if the borrowing fund has a secured
borrowing outstanding from any other lender, including but not limited to another fund, the inter-fund loan must be secured on at least
an equal priority basis with at least an equivalent percentage of collateral to loan value; (3) if a fund’s total outstanding borrowings
immediately after an inter-fund borrowing would be greater than 10% of its total assets, the fund may borrow through the inter-fund loan
on a secured basis only; (4) no fund may lend money if the loan would cause its aggregate outstanding loans through the Inter-Fund Program
to exceed 15% of its net assets at the time of the loan; (5) a fund’s inter-fund loans to any one fund shall not exceed 5% of the
lending fund’s net assets; (6) the duration of inter-fund loans will be limited to the time required to receive payment for securities
sold, but in no event more than seven days; and (7) each inter-fund loan may be called on one business day’s notice by a lending
fund and may be repaid on any day by a borrowing fund. In addition, a Nuveen fund may participate in the Inter-Fund Program only if and
to the extent that such participation is consistent with the fund’s investment objective and investment policies. The Board is responsible
for overseeing the Inter-Fund Program.
The limitations detailed above and the other conditions of the SEC
exemptive order permitting the Inter-Fund Program are designed to minimize the risks associated with Inter-Fund Program for both the lending
fund and the borrowing fund. However, no borrowing or lending activity is without risk. When a fund borrows money from another fund, there
is a risk that the loan could be called on one day’s notice or not renewed, in which case the fund may have to borrow from a bank
at a higher rate or take other actions to payoff such loan if an inter-fund loan is not available from another fund. Any delay in repayment
to a lending fund could result in a lost investment opportunity or additional borrowing costs.
During the current reporting period, none of the Funds covered by
this shareholder report have entered into any inter-fund loan activity.
10. Subsequent Events
Committed Line of Credit
During June 2022, the Participating Funds renewed the standby credit
facility through June 2023. In conjunction with this renewal the commitment amount increased from $2.635 billion to $2.700 billion. The
Participating Funds also incurred a 0.05% upfront fee on the increased commitments from select lenders. All other terms remain unchanged.
NID and NIQ Announce Shareholder Proposals
On June 14, 2022, the Board approved a proposal that will allow
each Fund's shareholders the opportunity to maintain their investment in the Fund and its exposure to leveraged, intermediate duration
municipal securities. In light of the upcoming scheduled terminations of NID on March 31, 2023 and NIQ on June 30, 2023, the proposal
asks shareholders of each NID and NIQ to vote to amend their respective Fund's declaration of trust to eliminate the term structure at
a special meeting of shareholders on October 12. For each Fund, if the amendment is approved by shareholders, the Fund will conduct a
tender offer for 100% of its outstanding common shares at net asset value. If the Fund's common assets taking into account common shares
properly tendered in the tender offer would be $70 million or greater, the tender offer will be completed and the Fund's term will be
eliminated. If the Fund's common assets after the tender offer would be less than $70 million, the tender offer will be cancelled with
no common shares repurchased, and instead, the Fund will proceed to terminate as scheduled.
As part of the proposal, if a Fund's term is eliminated, the Fund's
name will change to reflect the elimination. NID's name will change to “Nuveen Intermediate Duration Municipal Fund” and NIQ's
name will change to “Nuveen Intermediate Duration Quality Municipal Fund.” In addition, if a Fund's term is eliminated, the
common shares of the Fund will continue to trade on the NYSE under the current ticker symbol, and Nuveen will waive 50% of its net management
fees over the first year following the elimination of the term, which may enhance the net earnings of the Fund.
The changes described above will take effect with respect to a Fund
only if shareholders of such Fund approves the proposal described above and the tender offer condition is satisfied for such Fund.
64
Shareholder Update
(Unaudited)
CURRENT INVESTMENT OBJECTIVES, INVESTMENT
POLICIES AND PRINCIPAL RISKS OF THE FUNDS
NUVEEN INTERMEDIATE DURATION MUNICIPAL TERM
FUND (NID)
Investment Objectives
The Fund’s primary investment objective is to provide a high
level of current income exempt from regular federal income tax. The Fund’s secondary investment objective is to seek additional
total return.
Investment Policies
As a fundamental policy, under normal circumstances, the Fund will
invest at least 80% of its Assets (as defined below) in municipal securities and other related investments, the income from which is exempt
from regular federal income tax.
Under the Fund’s Amended and Restated Declaration of Trust,
dated October 11, 2012, on or before March 31, 2023 (the “Termination Date”), the Fund would cease its investment operations,
liquidate its portfolio, retire or redeem leverage facilities and distribute its net assets to shareholders of record as of the date of
termination. However, on June 14, 2022, the Fund’s Board of Trustees approved a proposal to amend the Fund’s declaration of
trust to eliminate the Termination Date. If the amendment is approved by shareholders, the Fund will conduct a tender offer for 100% of
its outstanding common shares at net asset value (“NAV”). If the Fund’s common assets taking into account common shares
properly tendered in the tender offer would be $70 million or greater, the tender offer will be completed, the Fund’s Termination
Date will be eliminated and the Fund would continue without limitation of time. If the Fund’s common assets after the tender offer
would be less than $70 million, the tender offer will be cancelled with no common shares repurchased, and instead, the Fund will proceed
to terminate as scheduled on the Termination Date.
The Fund invests in municipal securities that are exempt from federal
income taxes, and seeks to maintain a portfolio with a levered effective duration of between 3 and 10 years, which takes into account
the effects of leverage and optional call provisions of the municipal securities in the Fund’s portfolio.
“Assets” mean the net assets of the Fund plus the amount
of any borrowings for investment purposes. “Managed Assets” mean the total assets of the Fund, minus the sum of its accrued
liabilities (other than Fund liabilities incurred for the express purpose of creating leverage). Total assets for this purpose shall include
assets attributable to the Fund’s use of leverage (whether or not those assets are reflected in the Fund’s financial statements
for purposes of generally accepted accounting principles), and derivatives will be valued at their market value.
Under normal circumstances:
| • | | The Fund may invest up to 20% of its Managed Assets in municipal securities that pay interest
that is taxable under the federal alternative minimum tax applicable to individuals (“AMT Bonds”). |
| • | | The Fund will invest at least 50% of its Managed Assets in municipal securities that at the
time of investment are investment grade quality. A security is considered investment grade quality if it is rated within the four highest
letter grades (BBB- or Baa3 or better) by at least one nationally recognized statistical rating organization (“NRSRO”) that
rate such security (even if it is rated lower by another), or if it is unrated by any NRSRO but judged to be of comparable quality by
the Fund’s sub-adviser. |
| • | | The Fund may invest up to 50% of its Managed Assets in municipal securities that at the time
of investment are rated below investment grade or are unrated by any NRSRO but judged to be of comparable quality by the Fund’s
sub-adviser. |
| • | | The Fund will maintain a levered effective duration ranging between three and ten years. |
| • | | No more than 10% of the Fund’s Managed Assets may be invested in municipal securities
rated below B3/B- or that are unrated but judged to be of comparable quality by the Fund’s sub-adviser. |
| • | | The Fund will not invest more than 25% of its Managed Assets in municipal securities in any
one sector and no more than 5% of its Managed Assets in any one issuer. |
| • | | No more than 10% of the Fund’s Managed Assets may be invested in “tobacco settlement
bonds.” |
| • | | The Fund may invest up to 10% of its Managed Assets in securities of other open- or closed-end
investment companies (including exchange-traded funds (“ETFs”)) that invest primarily in municipal securities of the types
in which the Fund may invest directly. |
65
Shareholder Update (Unaudited) (continued)
The foregoing
policies apply only at the time of any new investment.
Approving Changes in Investment Policies
The Board of Trustees of the Fund may change the policies described
above without a shareholder vote. However, the Fund’s (i) investment objectives and (ii) policy of investing at least 80% of its
Assets in municipal securities and other related investments, the income from which is exempt from regular federal income tax, may not
be changed without the approval of the holders of a majority of the outstanding common shares and preferred shares voting together as
a single class, and the approval of the holders of a majority of the outstanding preferred shares, voting separately as a single class.
A “majority of the outstanding” shares means (i) 67% or more of the shares present at a meeting, if the holders of more than
50% of the shares are present or represented by proxy or (ii) more than 50% of the shares, whichever is less.
Portfolio Contents
The Fund generally invests in municipal securities. Municipal securities
include municipal bonds, notes, securities issued to finance and refinance public projects, certificates of participation, variable rate
demand obligations, lease obligations, municipal notes, pre-refunded municipal bonds, private activity bonds, securities issued by tender
option bond trusts (“TOB trusts”), including inverse floating rate securities, and other forms of municipal bonds and securities,
and other related instruments that create exposure to municipal bonds, notes and securities that provide for the payment of interest income
that is exempt from regular U.S. federal income tax.
Municipal securities are debt obligations generally issued by states,
cities and local authorities and certain possessions and territories of the United States (such as Puerto Rico and Guam) to finance or
refinance public purpose projects such as roads, schools, and water supply systems.
The Fund may also invest in AMT Bonds. AMT Bonds may trigger adverse
tax consequences for Fund shareholders who are subject to the federal alternative minimum tax.
The Fund may invest in municipal securities that represent lease
obligations and certificates of participation in such leases. A municipal lease is an obligation in the form of a lease or installment
purchase that is issued by a state or local government to acquire equipment and facilities. Income from such obligations generally is
exempt from state and local taxes in the state of issuance. A certificate of participation represents an undivided interest in an unmanaged
pool of municipal leases, an installment purchase agreement or other instruments. The certificates typically are issued by a municipal
agency, a trust or other entity that has received an assignment of the payments to be made by the state or political subdivision under
such leases or installment purchase agreements. Such certificates provide the Fund with the right to a pro rata undivided interest in
the underlying municipal securities. In addition, such participations generally provide the Fund with the right to demand payment, on
not more than seven days’ notice, of all or any part of the Fund’s participation interest in the underlying municipal securities,
plus accrued interest.
The Fund may invest in municipal notes. Municipal securities in
the form of notes generally are used to provide for short-term capital needs, in anticipation of an issuer’s receipt of other revenues
or financing, and typically have maturities of up to three years. Such instruments may include tax anticipation notes, revenue anticipation
notes, bond anticipation notes, tax and revenue anticipation notes and construction loan notes. Tax anticipation notes are issued to finance
the working capital needs of governments. Generally, they are issued in anticipation of various tax revenues, such as income, sales, property,
use and business taxes, and are payable from these specific future taxes. Revenue anticipation notes are issued in expectation of receipt
of other kinds of revenue, such as federal revenues available under federal revenue sharing programs. Bond anticipation notes are issued
to provide interim financing until long-term bond financing can be arranged. In most cases, the long-term bonds then provide the funds
needed for repayment of the bond anticipation notes. Tax and revenue anticipation notes combine the funding sources of both tax anticipation
notes and revenue anticipation notes. Construction loan notes are sold to provide construction financing. Mortgage notes insured by the
Federal Housing Authority secure these notes; however, the proceeds from the insurance may be less than the economic equivalent of the
payment of principal and interest on the mortgage note if there has been a default. The anticipated revenues from taxes, grants or bond
financing generally secure the obligations of an issuer of municipal notes.
The Fund may invest in “tobacco settlement bonds.” Tobacco
settlement bonds are municipal securities that are secured or payable solely from the collateralization of the proceeds from class action
or other litigation against the tobacco industry.
The Fund may invest in pre-refunded municipal securities. The principal
of and interest on pre-refunded municipal securities are no longer paid from the original revenue source for the securities. Instead,
the source of such payments is typically an escrow fund consisting of U.S. government securities. The assets in the escrow fund are derived
from the proceeds of refunding bonds issued by the same issuer as the pre-refunded municipal securities. Issuers of municipal securities
use this advance refunding technique to obtain more favorable terms with respect to securities that are not yet subject to call or redemption
by the issuer. For example, advance refunding enables an issuer to refinance debt at lower market interest rates, restructure debt to
improve cash flow or eliminate restrictive covenants in the indenture or other governing instrument for the pre-refunded municipal securities.
However, except for a change in the revenue source from which principal and interest payments are made, the pre-refunded municipal securities
remain outstanding on their original terms until they mature or are redeemed by the issuer.
66
The Fund may invest in private activity bonds. Private activity
bonds are issued by or on behalf of public authorities to obtain funds to provide privately operated housing facilities, airport, mass
transit or port facilities, sewage disposal, solid waste disposal or hazardous waste treatment or disposal facilities and certain local
facilities for water supply, gas or electricity. Other types of private activity bonds, the proceeds of which are used for the construction,
equipment, repair or improvement of privately operated industrial or commercial facilities, may constitute municipal securities, although
the current federal tax laws place substantial limitations on the size of such issues.
The Fund may invest in municipal securities issued by special taxing
districts. Special taxing districts are organized to plan and finance infrastructure developments to induce residential, commercial and
industrial growth and redevelopment. The bond financing methods such as tax increment finance, tax assessment, special services district
and Mello-Roos bonds, are generally payable solely from taxes or other revenues attributable to the specific projects financed by the
bonds without recourse to the credit or taxing power of related or overlapping municipalities.
The Fund may invest in zero coupon bonds. A zero coupon bond is
a bond that typically does not pay interest for the entire life of the obligation or for an initial period after the issuance of the obligation.
The Fund may buy and sell securities on a when-issued or delayed
delivery basis, making payment or taking delivery at a later date, normally within 15 to 45 days of the trade date.
The Fund may invest in inverse floating rate securities issued by
a TOB trust, the interest rate on which varies inversely with the Securities Industry Financial Markets Association short-term rate, which
resets weekly, or a similar short-term rate, and is reduced by the expenses related to the TOB trust. Typically, inverse floating rate
securities represent beneficial interests in a special purpose trust (sometimes called a TOB trust) formed by a third party sponsor for
the purpose of holding municipal bonds. Inverse floating rate securities may increase or decrease in value at a greater rate than the
underlying interest rate on the municipal bond held by the TOB trust, which effectively leverages the Fund’s investment.
The Fund may invest in floating rate securities issued by special
purpose trusts. Floating rate securities may take the form of short-term floating rate securities or the option period may be substantially
longer. Generally, the interest rate earned will be based upon the market rates for municipal securities with maturities or remarketing
provisions that are comparable in duration to the periodic interval of the tender option, which may vary from weekly, to monthly, to extended
periods of one year or multiple years. Since the option feature has a shorter term than the final maturity or first call date of the underlying
bond deposited in the trust, the Fund as the holder of the floating rate security relies upon the terms of the agreement with the financial
institution furnishing the option as well as the credit strength of that institution. As further assurance of liquidity, the terms of
the trust provide for a liquidation of the municipal security deposited in the trust and the application of the proceeds to pay off the
floating rate security. The trusts that are organized to issue both short-term floating rate securities and inverse floaters generally
include liquidation triggers to protect the investor in the floating rate security.
The Fund may utilize structured notes and similar instruments for
investment purposes and also for hedging purposes. Structured notes are privately negotiated debt obligations where the principal and/or
interest is determined by reference to the performance of a benchmark asset, market or interest rate (an “embedded index”),
such as selected securities, an index of securities or specified interest rates, or the differential performance of two assets or markets.
The Fund may invest in illiquid securities (i.e., securities
that are not readily marketable), including, but not limited to, restricted securities (securities the disposition of which is restricted
under the federal securities laws), securities that may be resold only pursuant to Rule 144A under the Securities Act of 1933, as amended
(the “1933 Act”), and repurchase agreements with maturities in excess of seven days.
The Fund may enter into certain derivative instruments in pursuit
of its investment objectives, including to seek to enhance return, to hedge certain risks of its investments in municipal securities or
as a substitute for a position in the underlying asset. Such instruments include financial futures contracts, swap contracts (including
interest rate swaps, credit default swaps and municipal market data rate locks (“MMD Rate Locks”)), options on financial futures,
options on swap contracts or other derivative instruments.
The Fund may purchase and sell MMD Rate Locks. An MMD Rate Lock
permits the Fund to lock in a specified municipal interest rate for a portion of its portfolio to preserve a return on a particular investment
or a portion of its portfolio as a duration management technique or to protect against any increase in the price of securities to be purchased
at a later date. By using an MMD Rate Lock, the Fund can create a synthetic long or short position, allowing the Fund to select what the
manager believes is an attractive part of the yield curve. The Fund will ordinarily use these transactions as a hedge or for duration
or risk management although it is permitted to enter into them to enhance income or gain or to increase the Fund’s yield, for example,
during periods of steep interest rate yield curves (i.e., wide differences between short term and long term interest rates).
The Fund may also invest in securities of other open- or closed-end
investment companies (including ETFs) that invest primarily in municipal securities of the types in which the Fund may invest directly,
to the extent permitted by the Investment Company Act of 1940, as amended (the “1940 Act”), the rules and regulations issued
thereunder and applicable exemptive orders issued by the Securities and Exchange Commission (“SEC”).
67
Shareholder Update (Unaudited) (continued)
Use of Leverage
The Fund uses leverage to pursue its investment objectives. The
Fund may use leverage to the extent permitted by the 1940 Act. The Fund may source leverage through a number of methods including the
issuance of preferred shares of beneficial interest (“Preferred Shares”) and investments in inverse floating rate securities.
As a fundamental policy, the Fund may not issue debt securities or Preferred Shares that rank senior to any outstanding Preferred Shares
issued by the Fund. Additionally, as a fundamental policy, the Fund may not borrow money, except from banks for temporary or emergency
purposes, or to repurchase its shares. In addition, the Fund may also use certain derivatives that have the economic effect of leverage
by creating additional investment exposure. The amount and sources of leverage will vary depending on market conditions.
Temporary Defensive Periods
During temporary defensive periods (e.g., times when, in
the Fund’s investment adviser’s and/or the Fund’s sub-adviser’s opinion, temporary imbalances of supply and demand
or other temporary dislocations in the tax-exempt bond market adversely affect the price at which intermediate-term municipal securities
are available), the Fund may invest up to 100% of its net assets in cash or cash equivalents, short-term investments or municipal bonds
and deviate from its investment policies including the Fund’s 80% names rule policy. Also, during these periods, the effective duration
of the Fund’s investment portfolio may fall below the effective duration range of between 3 and 10 years and the Fund may not achieve
its investment objectives.
68
NUVEEN INTERMEDIATE DURATION QUALITY MUNICIPAL
TERM FUND (NIQ)
Investment Objectives
The Fund’s primary investment objective is to provide current
income exempt from regular federal income tax. The Fund’s secondary investment objective is to seek additional total return.
Investment Policies
As a fundamental policy, under normal circumstances, the Fund will
invest at least 80% of its Assets (as defined below) in municipal securities and other related investments, the income from which is exempt
from regular federal income tax.
Under the Fund’s Declaration of Trust, dated December 11,
2012, on or before June 30, 2023 (the “Termination Date”), the Fund would cease its investment operations, liquidate its portfolio,
retire or redeem leverage facilities and distribute its net assets to shareholders of record as of the date of termination. However, on
June 14, 2022, the Fund’s Board of Trustees approved a proposal to amend the Fund’s declaration of trust to eliminate the
Termination Date. If the amendment is approved by shareholders, the Fund will conduct a tender offer for 100% of its outstanding common
shares at net asset value (“NAV”). If the Fund’s common assets taking into account common shares properly tendered in
the tender offer would be $70 million or greater, the tender offer will be completed, the Fund’s Termination Date will be eliminated
and the Fund would continue without limitation of time. If the Fund’s common assets after the tender offer would be less than $70
million, the tender offer will be cancelled with no common shares repurchased, and instead, the Fund will proceed to terminate as scheduled
on the Termination Date.
The Fund invests in municipal securities that are exempt from federal
income taxes, and seeks to maintain a portfolio with a levered effective duration of between 3 and 10 years, which takes into account
the effects of leverage and optional call provisions of the municipal securities in the Fund’s portfolio.
“Assets” mean the net assets of the Fund plus the amount
of any borrowings for investment purposes. “Managed Assets” mean the total assets of the Fund, minus the sum of its accrued
liabilities (other than Fund liabilities incurred for the express purpose of creating leverage). Total assets for this purpose shall include
assets attributable to the Fund’s use of leverage (whether or not those assets are reflected in the Fund’s financial statements
for purposes of generally accepted accounting principles), and derivatives will be valued at their market value.
Under normal circumstances:
| • | | The Fund may invest up to 20% of its Managed Assets in AMT Bonds. |
| • | | The Fund will invest at least 80% of its Managed Assets in municipal securities that at the
time of investment are investment grade quality. A security is considered investment grade quality if it is rated within the four highest
letter grades (BBB- or Baa3 or better) by at least one NRSRO that rates such security (even if it is rated lower by another), or if it
is unrated by any NRSRO but judged to be of comparable quality by the Fund’s sub-adviser. |
| • | | The Fund may invest up to 20% of its Managed Assets in municipal securities that at the time
of investment are rated below investment grade or are unrated by any NRSRO but judged to be of comparable quality by the Fund’s
sub-adviser. |
| • | | The Fund will maintain a levered effective duration ranging between three and ten years. |
| • | | No more than 10% of the Fund’s Managed Assets may be invested in municipal securities
rated below B3/B- or that are unrated but judged to be of comparable quality by the Fund’s sub-adviser. |
| • | | The Fund will not invest more than 25% of its Managed Assets in municipal securities in any
one sector and no more than 5% of its Managed Assets in any one issuer. |
| • | | No more than 10% of the Fund’s Managed Assets may be invested in “tobacco settlement
bonds.” |
| • | | The Fund may invest up to 10% of its Managed Assets in securities of other open- or closed-end
investment companies (including ETFs) that invest primarily in municipal securities of the types in which the Fund may invest directly. |
The foregoing
policies apply only at the time of any new investment.
Approving Changes in Investment Policies
The Board of Trustees of the Fund may change the policies described
above without a shareholder vote. However, the Fund’s (i) investment objectives and (ii) policy of investing at least 80% of its
Assets in municipal securities and other related investments, the income from which is exempt from regular federal income tax, may not
be changed without the approval of the holders of a majority of the outstanding common shares and preferred shares voting together as
a single class, and the approval of the holders of a majority of the outstanding preferred shares, voting separately as a single class.
A
69
Shareholder Update (Unaudited) (continued)
“majority of the outstanding” shares means (i) 67% or
more of the shares present at a meeting, if the holders of more than 50% of the shares are present or represented by proxy or (ii) more
than 50% of the shares, whichever is less.
However, with respect to the Fund’s policy of investing at
least 80% of its Managed Assets in municipal securities that at the time of investment are investment grade quality, such policy may not
be changed without 60 days’ prior written notice to Common Shareholders.
Portfolio Contents
The Fund generally invests in municipal securities. Municipal securities
include municipal bonds, notes, securities issued to finance and refinance public projects, certificates of participation, variable rate
demand obligations, lease obligations, municipal notes, pre-refunded municipal bonds, private activity bonds, securities issued by TOB
trusts, including inverse floating rate securities, and other forms of municipal bonds and securities, and other related instruments that
create exposure to municipal bonds, notes and securities that provide for the payment of interest income that is exempt from regular U.S.
federal income tax.
Municipal securities are debt obligations generally issued by states,
cities and local authorities and certain possessions and territories of the United States (such as Puerto Rico and Guam) to finance or
refinance public purpose projects such as roads, schools, and water supply systems.
The Fund may also invest in AMT Bonds. AMT Bonds may trigger adverse
tax consequences for Fund shareholders who are subject to the federal alternative minimum tax.
The Fund may invest in municipal securities that represent lease
obligations and certificates of participation in such leases. A municipal lease is an obligation in the form of a lease or installment
purchase that is issued by a state or local government to acquire equipment and facilities. Income from such obligations generally is
exempt from state and local taxes in the state of issuance. A certificate of participation represents an undivided interest in an unmanaged
pool of municipal leases, an installment purchase agreement or other instruments. The certificates typically are issued by a municipal
agency, a trust or other entity that has received an assignment of the payments to be made by the state or political subdivision under
such leases or installment purchase agreements. Such certificates provide the Fund with the right to a pro rata undivided interest
in the underlying municipal securities. In addition, such participations generally provide the Fund with the right to demand payment,
on not more than seven days’ notice, of all or any part of the Fund’s participation interest in the underlying municipal securities,
plus accrued interest.
The Fund may invest in municipal notes. Municipal securities in
the form of notes generally are used to provide for short-term capital needs, in anticipation of an issuer’s receipt of other revenues
or financing, and typically have maturities of up to three years. Such instruments may include tax anticipation notes, revenue anticipation
notes, bond anticipation notes, tax and revenue anticipation notes and construction loan notes. Tax anticipation notes are issued to finance
the working capital needs of governments. Generally, they are issued in anticipation of various tax revenues, such as income, sales, property,
use and business taxes, and are payable from these specific future taxes. Revenue anticipation notes are issued in expectation of receipt
of other kinds of revenue, such as federal revenues available under federal revenue sharing programs. Bond anticipation notes are issued
to provide interim financing until long-term bond financing can be arranged. In most cases, the long-term bonds then provide the funds
needed for repayment of the bond anticipation notes. Tax and revenue anticipation notes combine the funding sources of both tax anticipation
notes and revenue anticipation notes. Construction loan notes are sold to provide construction financing. Mortgage notes insured by the
Federal Housing Authority secure these notes; however, the proceeds from the insurance may be less than the economic equivalent of the
payment of principal and interest on the mortgage note if there has been a default. The anticipated revenues from taxes, grants or bond
financing generally secure the obligations of an issuer of municipal notes.
The Fund may invest in “tobacco settlement bonds.” Tobacco
settlement bonds are municipal securities that are secured or payable solely from the collateralization of the proceeds from class action
or other litigation against the tobacco industry.
The Fund may invest in pre-refunded municipal securities. The principal
of and interest on pre-refunded municipal securities are no longer paid from the original revenue source for the securities. Instead,
the source of such payments is typically an escrow fund consisting of U.S. government securities. The assets in the escrow fund are derived
from the proceeds of refunding bonds issued by the same issuer as the pre-refunded municipal securities. Issuers of municipal securities
use this advance refunding technique to obtain more favorable terms with respect to securities that are not yet subject to call or redemption
by the issuer. For example, advance refunding enables an issuer to refinance debt at lower market interest rates, restructure debt to
improve cash flow or eliminate restrictive covenants in the indenture or other governing instrument for the pre-refunded municipal securities.
However, except for a change in the revenue source from which principal and interest payments are made, the pre-refunded municipal securities
remain outstanding on their original terms until they mature or are redeemed by the issuer.
The Fund may invest in private activity bonds. Private activity
bonds are issued by or on behalf of public authorities to obtain funds to provide privately operated housing facilities, airport, mass
transit or port facilities, sewage disposal, solid waste disposal or hazardous waste treatment or disposal facilities and certain local
facilities for water supply, gas or electricity. Other types of private activity bonds, the proceeds of which are used for the construction,
equipment, repair or improvement of privately operated industrial or commercial facilities, may constitute municipal securities, although
the current federal tax laws place substantial limitations on the size of such issues.
70
The Fund may invest in municipal securities issued by special taxing
districts. Special taxing districts are organized to plan and finance infrastructure developments to induce residential, commercial and
industrial growth and redevelopment. The bond financing methods such as tax increment finance, tax assessment, special services district
and Mello-Roos bonds, are generally payable solely from taxes or other revenues attributable to the specific projects financed by the
bonds without recourse to the credit or taxing power of related or overlapping municipalities.
The Fund may invest in zero coupon bonds. A zero coupon bond is
a bond that typically does not pay interest for the entire life of the obligation or for an initial period after the issuance of the obligation.
The Fund may buy and sell securities on a when-issued or delayed
delivery basis, making payment or taking delivery at a later date, normally within 15 to 45 days of the trade date.
The Fund may invest in inverse floating rate securities issued by
a TOB trust, the interest rate on which varies inversely with the Securities Industry Financial Markets Association short-term rate, which
resets weekly, or a similar short-term rate, and is reduced by the expenses related to the TOB trust. Typically, inverse floating rate
securities represent beneficial interests in a special purpose trust (sometimes called a TOB trust) formed by a third party sponsor for
the purpose of holding municipal bonds. Inverse floating rate securities may increase or decrease in value at a greater rate than the
underlying interest rate on the municipal bond held by the TOB trust, which effectively leverages the Fund’s investment.
The Fund may invest in floating rate securities issued by special
purpose trusts. Floating rate securities may take the form of short-term floating rate securities or the option period may be substantially
longer. Generally, the interest rate earned will be based upon the market rates for municipal securities with maturities or remarketing
provisions that are comparable in duration to the periodic interval of the tender option, which may vary from weekly, to monthly, to extended
periods of one year or multiple years. Since the option feature has a shorter term than the final maturity or first call date of the underlying
bond deposited in the trust, the Fund as the holder of the floating rate security relies upon the terms of the agreement with the financial
institution furnishing the option as well as the credit strength of that institution. As further assurance of liquidity, the terms of
the trust provide for a liquidation of the municipal security deposited in the trust and the application of the proceeds to pay off the
floating rate security. The trusts that are organized to issue both short-term floating rate securities and inverse floaters generally
include liquidation triggers to protect the investor in the floating rate security.
The Fund may utilize structured notes and similar instruments for
investment purposes and also for hedging purposes. Structured notes are privately negotiated debt obligations where the principal and/or
interest is determined by reference to the performance of a benchmark asset, market or interest rate (an “embedded index”),
such as selected securities, an index of securities or specified interest rates, or the differential performance of two assets or markets.
The Fund may invest in illiquid securities (i.e., securities
that are not readily marketable), including, but not limited to, restricted securities (securities the disposition of which is restricted
under the federal securities laws), securities that may be resold only pursuant to Rule 144A under the 1933 Act, and repurchase agreements
with maturities in excess of seven days.
The Fund may enter into certain derivative instruments in pursuit
of its investment objectives, including to seek to enhance return, to hedge certain risks of its investments in municipal securities or
as a substitute for a position in the underlying asset. Such instruments include financial futures contracts, swap contracts (including
interest rate swaps, credit default swaps and MMD Rate Locks), options on financial futures, options on swap contracts or other derivative
instruments.
The Fund may purchase and sell MMD Rate Locks. An MMD Rate Lock
permits the Fund to lock in a specified municipal interest rate for a portion of its portfolio to preserve a return on a particular investment
or a portion of its portfolio as a duration management technique or to protect against any increase in the price of securities to be purchased
at a later date. By using an MMD Rate Lock, the Fund can create a synthetic long or short position, allowing the Fund to select what the
manager believes is an attractive part of the yield curve. The Fund will ordinarily use these transactions as a hedge or for duration
or risk management although it is permitted to enter into them to enhance income or gain or to increase the Fund’s yield, for example,
during periods of steep interest rate yield curves (i.e., wide differences between short term and long term interest rates).
The Fund may also invest in securities of other open- or closed-end
investment companies (including ETFs) that invest primarily in municipal securities of the types in which the Fund may invest directly,
to the extent permitted by the 1940 Act, the rules and regulations issued thereunder and applicable exemptive orders issued by the SEC.
Use of Leverage
The Fund uses leverage to pursue its investment objectives. The
Fund may use leverage to the extent permitted by the 1940 Act. The Fund may source leverage through a number of methods including the
issuance of Preferred Shares and investments in inverse floating rate securities. As a fundamental policy, the Fund may not issue debt
securities or Preferred Shares that rank senior to any outstanding Preferred Shares issued by the Fund. Additionally, as a fundamental
policy, the Fund may not borrow money, except from banks for temporary or emergency purposes, or to repurchase its shares. In addition,
the Fund may also use certain derivatives that have the economic effect of leverage by creating additional investment exposure. The amount
and sources of leverage will vary depending on market conditions.
71
Shareholder Update (Unaudited) (continued)
Temporary Defensive Periods
During temporary defensive periods (e.g., times when, in
the Fund’s investment adviser’s and/or the Fund’s sub-adviser’s opinion, temporary imbalances of supply and demand
or other temporary dislocations in the tax-exempt bond market adversely affect the price at which intermediate-term municipal securities
are available), the Fund may invest up to 100% of its net assets in cash or cash equivalents, short-term investments or municipal bonds
and deviate from its investment policies including the Fund’s 80% names rule policy. Also, during these periods, the effective duration
of the Fund’s investment portfolio may fall below the effective duration range of between 3 and 10 years and the Fund may not achieve
its investment objectives.
72
PRINCIPAL RISKS OF THE FUNDS
The factors that are most likely to have a material effect on a
particular Fund’s portfolio as a whole are called “principal risks.” Each Fund is subject to the principal risks indicated
below, whether through direct investment or derivative positions. Each Fund may be subject to additional risks other than those identified
and described below because the types of investments made by a Fund can change over time.
| |
|
|
| |
|
Nuveen |
| |
Nuveen |
Intermediate |
| |
Intermediate |
Duration |
| |
Duration |
Quality |
| |
Municipal |
Municipal |
| |
Term |
Term |
| |
Fund |
Fund |
| Risk |
(NID) |
(NIQ) |
| Portfolio Level Risks |
|
|
| Alternative Minimum Tax Risk |
X |
X |
| Below Investment Grade Risk |
X |
X |
| Call Risk |
X |
X |
| Credit Risk |
X |
X |
| Credit Spread Risk |
X |
X |
| Defaulted and Distressed Securities Risk |
X |
X |
| Deflation Risk |
X |
X |
| Derivatives Risk |
X |
X |
| Duration Risk |
X |
X |
| Economic Sector Risk |
X |
X |
| Financial Futures and Options Risk |
X |
X |
| Hedging Risk |
X |
X |
| Illiquid Investments Risk |
X |
X |
| Income Risk |
X |
X |
| Inflation Risk |
X |
X |
| Insurance Risk |
X |
X |
| Interest Rate Risk |
X |
X |
| Inverse Floating Rate Securities Risk |
X |
X |
| London Interbank Offered Rate (“LIBOR”) Replacement Risk |
X |
X |
| Municipal Securities Market Liquidity Risk |
X |
X |
| Municipal Securities Market Risk |
X |
X |
| Other Investment Companies Risk |
X |
X |
| Puerto Rico Municipal Securities Market Risk |
X |
X |
| Reinvestment Risk |
X |
X |
| Sector and Industry Risk |
X |
X |
| Sector Focus Risk |
X |
X |
| Special Risks Related to Certain Municipal Obligations |
X |
X |
| Swap Transactions Risk |
X |
X |
| Tax Risk |
X |
X |
| Taxability Risk |
X |
X |
| Tobacco Settlement Bond Risk |
X |
X |
| Unrated Securities Risk |
X |
X |
| Valuation Risk |
X |
X |
| Zero Coupon Bonds Risk |
X |
X |
73
Shareholder Update (Unaudited) (continued)
| |
|
|
| |
|
Nuveen |
| |
Nuveen |
Intermediate |
| |
Intermediate |
Duration |
| |
Duration |
Quality |
| |
Municipal |
Municipal |
| |
Term |
Term |
| |
Fund |
Fund |
| Risk |
(NID) |
(NIQ) |
| Fund Level and Other Risks |
|
|
| Anti-Takeover Provisions |
X |
X |
| Counterparty Risk |
X |
X |
| Cybersecurity Risk |
X |
X |
| Economic and Political Events Risk |
X |
X |
| Global Economic Risk |
X |
X |
| Investment and Market Risk |
X |
X |
| Legislation and Regulatory Risk |
X |
X |
| Leverage Risk |
X |
X |
| Limited Term Risk |
X |
X |
| Market Discount from Net Asset Value |
X |
X |
| Recent Market Conditions |
X |
X |
| Reverse Repurchase Agreement Risk |
X |
X |
Portfolio Level Risks:
Alternative Minimum Tax Risk. The Fund may invest in AMT
Bonds. Therefore, a portion of the Fund’s otherwise exempt-interest dividends may be taxable to those shareholders subject to the
federal alternative minimum tax.
Below Investment Grade Risk. Municipal securities of below
investment grade quality are regarded as having speculative characteristics with respect to the issuer’s capacity to pay interest
and repay principal, and may be subject to higher price volatility and default risk than investment grade municipal securities of comparable
terms and duration. Issuers of lower grade municipal securities may be highly leveraged and may not have available to them more traditional
methods of financing. The prices of these lower grade securities are typically more sensitive to negative developments, such as a decline
in the issuer’s revenues or a general economic downturn. The secondary market for lower rated municipal securities may not be as
liquid as the secondary market for more highly rated municipal securities, a factor which may have an adverse effect on the Fund’s
ability to dispose of a particular municipal security. If a below investment grade municipal security goes into default, or its issuer
enters bankruptcy, it might be difficult to sell that security in a timely manner at a reasonable price.
Call Risk. The Fund may invest in municipal securities that
are subject to call risk. Such municipal securities may be redeemed at the option of the issuer, or “called,” before their
stated maturity or redemption date. In general, an issuer will call its instruments if they can be refinanced by issuing new instruments
that bear a lower interest rate. The Fund is subject to the possibility that during periods of falling interest rates, an issuer will
call its high yielding municipal securities. The Fund would then be forced to invest the unanticipated proceeds at lower interest rates,
resulting in a decline in the Fund’s income.
Credit Risk. Issuers of municipal securities in which the
Fund may invest may default on their obligations to pay principal or interest when due. This non-payment would result in a reduction of
income to the Fund, a reduction in the value of a municipal security experiencing non-payment and potentially a decrease in the NAV of
the Fund. To the extent that the credit rating assigned to a municipal security in the Fund’s portfolio is downgraded, the market
price and liquidity of such security may be adversely affected.
Credit Spread Risk. Credit spread risk is the risk that credit
spreads (i.e., the difference in yield between securities that is due to differences in their credit quality) may increase when
the market believes that municipal securities generally have a greater risk of default. Increasing credit spreads may reduce the market
values of the Fund’s securities. Credit spreads often increase more for lower rated and unrated securities than for investment grade
securities. In addition, when credit spreads increase, reductions in market value will generally be greater for longer-maturity securities.
Defaulted and Distressed Securities Risk. The Fund may invest
in securities of an issuer that is in default or that is in bankruptcy or insolvency proceedings at the time of purchase. In addition,
the Fund may hold investments that at the time of purchase are not in default or involved in bankruptcy or insolvency proceedings, but
may later become so. Moreover, the Fund may invest in low-rated securities that, although not in default, may be “distressed,”
meaning that the issuer is experiencing financial difficulties or distress at the time of acquisition. Such securities would present a
substantial risk of future default which may cause the Fund to incur losses, including additional expenses, to the extent it is required
to seek recovery upon a default in the payment of principal or interest on those securities. In any reorganization or liquidation proceeding
relating to a portfolio security,
74
the Fund may lose its entire investment or may be required to accept
cash or securities with a value less than its original investment. Defaulted or distressed securities may be subject to restrictions on
resale.
Deflation Risk. Deflation risk is the risk that prices throughout
the economy decline over time. Deflation may have an adverse effect on the creditworthiness of issuers and may make issuer default more
likely, which may result in a decline in the value of the Fund’s portfolio.
Derivatives Risk. The use of derivatives involves additional
risks and transaction costs which could leave the Fund in a worse position than if it had not used these instruments. Derivative instruments
can be used to acquire or to transfer the risk and returns of a municipal security or other asset without buying or selling the municipal
security or asset. These instruments may entail investment exposures that are greater than their cost would suggest. As a result, a small
investment in derivatives can result in losses that greatly exceed the original investment. Derivatives can be highly volatile, illiquid
and difficult to value. An over-the-counter derivative transaction between the Fund and a counterparty that is not cleared through a central
counterparty also involves the risk that a loss may be sustained as a result of the failure of the counterparty to the contract to make
required payments. The payment obligation for a cleared derivative transaction is guaranteed by a central counterparty, which exposes
the Fund to the creditworthiness of the central counterparty.
It is possible that regulatory or other developments in the derivatives
market, including the SEC’s recently adopted new Rule 18f-4 under the 1940 Act, which imposes limits on the amount of derivatives
a fund can enter into could adversely impact the Fund’s ability to successfully use derivative instruments.
Duration Risk. Duration is the sensitivity, expressed in
years, of the price of a fixed-income security to changes in the general level of interest rates (or yields). Securities with longer durations
tend to be more sensitive to interest rate (or yield) changes, which typically corresponds to increased volatility and risk, than securities
with shorter durations. For example, if a security or portfolio has a duration of three years and interest rates increase by 1%, then
the security or portfolio would decline in value by approximately 3%. Duration differs from maturity in that it considers potential changes
to interest rates, and a security’s coupon payments, yield, price and par value and call features, in addition to the amount of
time until the security matures. The duration of a security will be expected to change over time with changes in market factors and time
to maturity.
Economic Sector Risk. The Fund may invest a significant amount
of its total assets in municipal securities in the same economic sector. This may make the Fund more susceptible to adverse economic,
political or regulatory occurrences affecting an economic sector. As concentration increases, so does the potential for fluctuation in
the value of the Fund’s assets. In addition, the Fund may invest a significant portion of its assets in certain sectors of the municipal
securities market, such as health care facilities, private educational facilities, special taxing districts and start-up utility districts,
and private activity bonds including industrial development bonds on behalf of transportation companies, whose credit quality and performance
may be more susceptible to economic, business, political, regulatory and other developments than other sectors of municipal issuers. If
the Fund invests a significant portion of its assets in the sectors noted above, the Fund’s performance may be subject to additional
risk and variability.
Financial Futures and Options Transactions Risk. The Fund
may use certain transactions for hedging the portfolio’s exposure to credit risk and the risk of increases in interest rates, which
could result in poorer overall performance for the Fund. There may be an imperfect correlation between price movements of the futures
and options and price movements of the portfolio securities being hedged.
If the Fund engages in futures transactions or in the writing of
options on futures, it will be required to maintain initial margin and maintenance margin and may be required to make daily variation
margin payments in accordance with applicable rules of the exchanges and the Commodity Futures Trading Commission (“CFTC”).
If the Fund purchases a financial futures contract or a call option or writes a put option in order to hedge the anticipated purchase
of municipal securities, and if the Fund fails to complete the anticipated purchase transaction, the Fund may have a loss or a gain on
the futures or options transaction that will not be offset by price movements in the municipal securities that were the subject of the
anticipatory hedge. There can be no assurance that a liquid market will exist at a time when the Fund seeks to close out a derivatives
or futures or a futures option position, and the Fund would remain obligated to meet margin requirements until the position is closed.
Hedging Risk. The Fund’s use of derivatives or other
transactions to reduce risk involves costs and will be subject to the investment adviser’s and/or the sub-adviser’s ability
to predict correctly changes in the relationships of such hedge instruments to the Fund’s portfolio holdings or other factors. No
assurance can be given that the investment adviser’s and/or the sub-adviser’s judgment in this respect will be correct, and
no assurance can be given that the Fund will enter into hedging or other transactions at times or under circumstances in which it may
be advisable to do so. Hedging activities may reduce the Fund’s opportunities for gain by offsetting the positive effects of favorable
price movements and may result in net losses.
Illiquid Investments Risk. Illiquid investments are investments
that are not readily marketable. These investments may include restricted investments, including Rule 144A securities, which cannot be
resold to the public without an effective registration statement under the 1933 Act, or, if they are unregistered, may be sold only in
a privately negotiated transaction or pursuant to an exemption from registration. The Fund may not be able to readily dispose of such
investments at prices that approximate those at which the Fund could sell such investments if they were more widely traded and, as a result
of such illiquidity, the Fund may have to sell other investments or engage in borrowing transactions if necessary to raise cash to meet
its obligations. Limited liquidity can also affect the market price of investments, thereby adversely affecting the Fund’s NAV and
ability to make dividend distributions. The financial markets in general have in recent years experienced periods of extreme secondary
market supply and demand imbalance, resulting in a loss of
75
Shareholder Update (Unaudited) (continued)
liquidity during which market prices were suddenly and substantially
below traditional measures of intrinsic value. During such periods, some investments could be sold only at arbitrary prices and with substantial
losses. Periods of such market dislocation may occur again at any time.
Income Risk. The Fund’s income could decline due to
falling market interest rates. This is because, in a falling interest rate environment, the Fund generally will have to invest the proceeds
from maturing portfolio securities in lower-yielding securities.
Inflation Risk. Inflation risk is the risk that the value
of assets or income from investments will be worth less in the future as inflation decreases the value of money. As inflation increases,
the real value of the common shares and distributions can decline. Currently, inflation rates are elevated relative to normal market conditions
and could continue to increase.
Insurance Risk. The Fund may purchase municipal securities
that are secured by insurance, bank credit agreements or escrow accounts. The credit quality of the companies that provide such credit
enhancements will affect the value of those securities. Certain significant providers of insurance for municipal securities have incurred
significant losses as a result of exposure to sub-prime mortgages and other lower credit quality investments. As a result, such losses
reduced the insurers’ capital and called into question their continued ability to perform their obligations under such insurance
if they are called upon to do so in the future. While an insured municipal security will typically be deemed to have the rating of its
insurer, if the insurer of a municipal security suffers a downgrade in its credit rating or the market discounts the value of the insurance
provided by the insurer, the value of the municipal security would more closely, if not entirely, reflect such rating. In such a case,
the value of insurance associated with a municipal security may not add any value. The insurance feature of a municipal security does
not guarantee the full payment of principal and interest through the life of an insured obligation, the market value of the insured obligation
or the NAV of the common shares represented by such insured obligation.
Interest Rate Risk. Interest rate risk is the risk that municipal
securities in the Fund’s portfolio will decline in value because of changes in market interest rates. Generally, when market interest
rates rise, the market value of such securities will fall, and vice versa. As interest rates decline, issuers of municipal securities
may prepay principal earlier than scheduled, forcing the Fund to reinvest in lower-yielding securities and potentially reducing the Fund’s
income. As interest rates increase, slower than expected principal payments may extend the average life of municipal securities, potentially
locking in a below-market interest rate and reducing the Fund’s value. In typical market interest rate environments, the prices
of longer-term municipal securities generally fluctuate more than prices of shorter-term municipal securities as interest rates change.
The risks associated with rising interest rates are greatly heightened in view of the US Federal Reserve Bank’s decision to raise
the federal funds rate from historic lows, and may continue to raise interest rates if considered necessary to reduce the inflation to
acceptable levels.
Inverse Floating Rate Securities Risk. The Fund may invest
in inverse floating rate securities. In general, income on inverse floating rate securities will decrease when short-term interest rates
increase and increase when short-term interest rates decrease. Investments in inverse floating rate securities may subject the Fund to
the risks of reduced or eliminated interest payments and losses of principal. In addition, inverse floating rate securities may increase
or decrease in value at a greater rate than the underlying interest rate, which effectively leverages the Fund’s investment. As
a result, the market value of such securities generally will be more volatile than that of fixed rate securities.
The Fund may invest in inverse floating rate securities issued by
special purpose trusts that have recourse to the Fund (i.e., the Fund typically bears the risk of loss with respect to any liquidity
shortfall). In such instances, the Fund may be at risk of loss that exceeds its investment in the inverse floating rate securities.
The Fund may be required to sell its inverse floating rate securities
at less than favorable prices, or liquidate other Fund portfolio holdings in certain circumstances, including, but not limited to, the
following:
| • | | If the Fund has a need for cash and the securities in a special purpose trust are not actively
traded due to adverse market conditions; |
| • | | If special purpose trust sponsors (as a collective group or individually) experience financial
hardship and consequently seek to terminate their respective outstanding special purpose trusts; and |
| • | | If the value of an underlying security declines significantly and if additional collateral
has not been posted by the Fund. |
London Interbank Offered Rate (“LIBOR”) Replacement
Risk. LIBOR is an index rate that historically has been widely used in lending transactions and remains a common reference rate for
setting the floating interest rate on private loans. The use of the LIBOR will begin to be phased out in the near future, which may adversely
affect the Fund’s investments whose value is tied to LIBOR. While the Secured Overnight Financing Rate (“SOFR”) has
been recommended as the replacement rate for LIBOR, and some product markets have adopted the use of SOFR, LIBOR may still be used as
a reference rate until such time that private markets have fully transitioned to using SOFR or other alternative reference rates recommended
by applicable market regulators. The transition process away from LIBOR may involve, among other things, increased volatility or illiquidity
in markets for instruments that currently rely on LIBOR. The potential effect of a discontinuation of LIBOR on the Fund’s investments
will vary depending on, among other things: (1) existing fallback provisions that provide a replacement reference rate if LIBOR is no
longer available; (2) termination provisions in individual contracts; and (3) how, and when industry participants develop and adopt new
reference rates and fallbacks for both legacy and new products and instruments held by the Fund. Accordingly, it is difficult to predict
the full impact of the transition away from LIBOR until it is clearer how the Fund’s products and instruments will be impacted by
this transition.
76
Municipal Securities Market Liquidity Risk. Inventories of
municipal securities held by brokers and dealers have decreased in recent years, lessening their ability to make a market in these securities.
This reduction in market making capacity has the potential to decrease the Fund’s ability to buy or sell municipal securities at
attractive prices, and increase municipal security price volatility and trading costs, particularly during periods of economic or market
stress. In addition, recent federal banking regulations may cause certain dealers to reduce their inventories of municipal securities,
which may further decrease the Fund’s ability to buy or sell municipal securities. As a result, the Fund may be forced to accept
a lower price to sell a security, to sell other securities to raise cash, or to give up an investment opportunity, any of which could
have a negative effect on performance. If the Fund needed to sell large blocks of municipal securities to raise cash to meet its obligations,
those sales could further reduce the municipal securities’ prices and hurt performance.
Municipal Securities Market Risk. The amount of public information
available about the municipal securities in the Fund’s portfolio is generally less than that for corporate equities or bonds, and
the investment performance of the Fund may therefore be more dependent on the analytical abilities of the sub-adviser than if the Fund
were a stock fund or taxable bond fund. The secondary market for municipal securities, particularly below investment grade municipal securities,
also tends to be less well-developed or liquid than many other securities markets, which may adversely affect the Fund’s ability
to sell its municipal securities at attractive prices.
Other Investment Companies Risk. The Fund may invest in the
securities of other investment companies, including ETFs. Investing in an investment company exposes the Fund to all of the risks of that
investment company’s investments. The Fund, as a holder of the securities of other investment companies, will bear its pro rata
portion of the other investment companies’ expenses, including advisory fees. These expenses are in addition to the direct expenses
of the Fund’s own operations. As a result, the cost of investing in investment company shares may exceed the costs of investing
directly in its underlying investments. In addition, securities of other investment companies may be leveraged. As a result, the Fund
may be indirectly exposed to leverage through an investment in such securities and therefore magnify the Fund’s leverage risk.
With respect to ETF’s, an ETF that is based on a specific
index may not be able to replicate and maintain exactly the composition and relative weighting of securities in the index. The value of
an ETF based on a specific index is subject to change as the values of its respective component assets fluctuate according to market volatility.
ETFs typically rely on a limited pool of authorized participants to create and redeem shares, and an active trading market for ETF shares
may not develop or be maintained. The market value of shares of ETFs and closed-end funds may differ from their NAV.
Puerto Rico Municipal Securities Market Risk. To the extent
that the Fund invests a significant portion of its assets in the securities issued by the Commonwealth of Puerto Rico or its political
subdivisions, agencies, instrumentalities, or public corporations (collectively referred to as “Puerto Rico” or the “Commonwealth”),
it will be disproportionally affected by political, social and economic conditions and developments in the Commonwealth. In addition,
economic, political or regulatory changes in that territory could adversely affect the value of the Fund’s investment portfolio.
Puerto Rico currently is experiencing significant fiscal and economic
challenges, including substantial debt service obligations, high levels of unemployment, underfunded public retirement systems, and persistent
government budget deficits. These challenges may negatively affect the value of the Fund’s investments in Puerto Rican municipal
securities. Several major ratings agencies have downgraded the general obligation debt of Puerto Rico to below investment grade and continue
to maintain a negative outlook for this debt, which increases the likelihood that the rating will be lowered further. Puerto Rico recently
defaulted on its debt by failing to make full payment due on its outstanding bonds, and there can be no assurance that Puerto Rico will
be able to satisfy its future debt obligations. Further downgrades or defaults may place additional strain on the Puerto Rico economy
and may negatively affect the value, liquidity, and volatility of the Fund’s investments in Puerto Rican municipal securities. Additionally,
numerous issuers have entered Title III of the Puerto Rico Oversite, Management and Economic Stability Act (“PROMESA”), which
is similar to bankruptcy protection, through which the Commonwealth of Puerto Rico can restructure its debt. However, Puerto Rico’s
case is the first ever heard under PROMESA and there is no existing case precedent to guide the proceedings. Accordingly, Puerto Rico’s
debt restructuring process could take significantly longer than traditional municipal bankruptcy proceedings. Further, it is not clear
whether a debt restructuring process will ultimately be approved or, if so, the extent to which it will apply to Puerto Rico municipal
securities sold by an issuer other than the territory. A debt restructuring could reduce the principal amount due, the interest rate,
the maturity, and other terms of Puerto Rico municipal securities, which could adversely affect the value of Puerto Rican municipal securities.
Legislation that would allow Puerto Rico to restructure its municipal debt obligations, thus increasing the risk that Puerto Rico may
never pay off municipal indebtedness, or may pay only a small fraction of the amount owed, could also impact the value of the Fund’s
investments in Puerto Rican municipal securities.
These challenges and uncertainties have been exacerbated by multiple
hurricanes and a series of earthquakes and the resulting natural disasters that have stuck Puerto Rico since 2017. The full extent of
the natural disasters’ impact on Puerto Rico’s economy and foreign investment in Puerto Rico is difficult to estimate.
Reinvestment Risk. Reinvestment risk is the risk that income
from the Fund’s portfolio will decline if and when the Fund invests the proceeds from matured, traded or called municipal securities
at market interest rates that are below the portfolio’s current earnings rate. A decline in income could affect the common shares’
market price, NAV and/or a common shareholder’s overall returns.
Sector and Industry Risk. Subject to the concentration limits
of the Fund’s investment policies and guidelines, a Fund may invest a significant portion of its net assets in certain sectors of
the municipal securities market, such as hospitals and other health care facilities, charter schools and other private
77
Shareholder Update (Unaudited) (continued)
educational facilities, special taxing districts and start-up utility
districts, and private activity bonds including industrial development bonds on behalf of transportation companies such as airline companies,
whose credit quality and performance may be more susceptible to economic, business, political, regulatory and other developments than
other sectors of municipal issuers. If the Fund invests a significant portion of its net assets in the sectors noted above, the Fund’s
performance may be subject to additional risk and variability.
Sector Focus Risk. At times, the Fund may focus its investments
(i.e., overweight its investments relative to the overall municipal securities market) in one or more particular sectors, which
may subject the Fund to additional risk and variability. Securities issued in the same sector may be similarly affected by economic or
market events, making the Fund more vulnerable to unfavorable developments in that sector than funds that invest more broadly. As the
percentage of the Fund’s Managed Assets invested in a particular sector increases, so does the potential for fluctuation in the
NAV of the Fund’s common shares.
Special Considerations Related to California Concentration Risk.
Because the Fund primarily invests in municipal securities from a single state, the State of California, the Fund is more susceptible
to political, economic or regulatory factors affecting issuers of California municipal securities. Information regarding the financial
condition of the State of California is ordinarily included in various public documents issued thereby, such as the official statements
prepared in connection with the issuance of general obligation bonds of the State of California.
Additionally, the State of California is a party to numerous legal
proceedings, many of which normally occur in governmental operations. The creditworthiness of obligations issued by local California issuers
may be unrelated to the creditworthiness of obligations issued by the State of California, and that there is no obligation on the part
of the State of California to make payment on such local obligations in the event of default.
Special Risks Related to Certain Municipal Obligations. Municipal
leases and certificates of participation involve special risks not normally associated with general obligations or revenue bonds. Leases
and installment purchase or conditional sale contracts (which normally provide for title to the leased asset to pass eventually to the
governmental issuer) have evolved as a means for governmental issuers to acquire property and equipment without meeting the constitutional
and statutory requirements for the issuance of debt. The debt issuance limitations are deemed to be inapplicable because of the inclusion
in many leases or contracts of “non-appropriation” clauses that relieve the governmental issuer of any obligation to make
future payments under the lease or contract unless money is appropriated for such purpose by the appropriate legislative body. In addition,
such leases or contracts may be subject to the temporary abatement of payments in the event that the governmental issuer is prevented
from maintaining occupancy of the leased premises or utilizing the leased equipment. Although the obligations may be secured by the leased
equipment or facilities, the disposition of the property in the event of non-appropriation or foreclosure might prove difficult, time
consuming and costly, and may result in a delay in recovering or the failure to fully recover the Fund’s original investment. In
the event of non-appropriation, the issuer would be in default and taking ownership of the assets may be a remedy available to the Fund,
although the Fund does not anticipate that such a remedy would normally be pursued.
Certificates of participation involve the same risks as the underlying
municipal leases. In addition, the Fund may be dependent upon the municipal authority issuing the certificates of participation to exercise
remedies with respect to the underlying securities. Certificates of participation also entail a risk of default or bankruptcy, both of
the issuer of the municipal lease and also the municipal agency issuing the certificate of participation.
Swap Transactions Risk. The Fund may enter into debt-related
derivative instruments such as credit default swap contracts and interest rate swaps. Like most derivative instruments, the use of swaps
is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio
securities transactions. In addition, the use of swaps requires an understanding by the adviser and/or the sub-adviser of not only the
referenced asset, rate or index, but also of the swap itself. If the investment adviser and/or the sub-adviser is incorrect in its forecasts
of default risks, market spreads or other applicable factors or events, the investment performance of the Fund would diminish compared
with what it would have been if these techniques were not used.
Tax Risk. The value of the Fund’s investments and its
NAV may be adversely affected by changes in tax rates, rules and policies. Because interest income from municipal securities is normally
not subject to regular federal income taxation, the attractiveness of municipal securities in relation to other investment alternatives
is affected by changes in federal income tax rates or changes in the tax exempt status of interest income from municipal securities. Additionally,
the Fund is not a suitable investment for individual retirement accounts, for other tax exempt or tax-deferred accounts, for investors
who are not sensitive to the federal income tax consequences of their investments.
Taxability Risk. The Fund will invest in municipal securities
in reliance at the time of purchase on an opinion of bond counsel to the issuer that the interest paid on those securities will be excludable
from gross income for regular federal income tax purposes, and the sub-adviser will not independently verify that opinion. Subsequent
to the Fund’s acquisition of such a municipal security, however, the security may be determined to pay, or to have paid, taxable
income. As a result, the treatment of dividends previously paid or to be paid by the Fund as “exempt-interest dividends” could
be adversely affected, subjecting the Fund’s shareholders to increased federal income tax liabilities. Certain other investments
made by the Fund, including derivatives transactions, may result in the receipt of taxable income or gains by the Fund.
Tobacco Settlement Bond Risk. The Fund may invest in tobacco
settlement bonds. Tobacco settlement bonds are municipal securities that are backed solely by expected revenues to be derived from lawsuits
involving tobacco related deaths and illnesses which were settled between certain states and American tobacco companies. Tobacco settlement
bonds are secured by an issuing state’s proportionate share in the Master Settlement Agreement, an agreement between 46 states and
nearly all of the U.S. tobacco manufacturers (the “MSA”). Under the terms of the MSA, the actual amount of future
78
settlement payments by tobacco-manufacturers is dependent on many
factors, including, among other things, reduced cigarette consumption. Payments made by tobacco manufacturers could be negatively impacted
if the decrease in tobacco consumption is significantly greater than the forecasted decline.
Unrated Securities Risk. The Fund may purchase securities
that are not rated by any rating organization. Unrated securities determined by the Fund’s investment adviser to be of comparable
quality to rated investments which the Fund may purchase may pay a higher dividend or interest rate than such rated investments and be
subject to a greater risk of illiquidity or price changes. Less public information is typically available about unrated investments or
issuers than rated investments or issuers. Some unrated securities may not have an active trading market or may be difficult to value,
which means the Fund might have difficulty selling them promptly at an acceptable price. To the extent that the Fund invests in unrated
securities, the Fund’s ability to achieve its investment objectives will be more dependent on the investment adviser’s credit
analysis than would be the case when the Fund invests in rated securities.
Valuation Risk. The municipal securities in which the Fund
invests typically are valued by a pricing service utilizing a range of market-based inputs and assumptions, including readily available
market quotations obtained from broker-dealers making markets in such instruments, cash flows and transactions for comparable instruments.
There is no assurance that the Fund will be able to sell a portfolio security at the price established by the pricing service, which could
result in a loss to the Fund. Pricing services generally price municipal securities assuming orderly transactions of an institutional
“round lot” size, but some trades may occur in smaller, “odd lot” sizes, often at lower prices than institutional
round lot trades. Different pricing services may incorporate different assumptions and inputs into their valuation methodologies, potentially
resulting in different values for the same securities. As a result, if the Fund were to change pricing services, or if the Fund’s
pricing service were to change its valuation methodology, there could be a material impact, either positive or negative, on the Fund’s
NAV.
Zero Coupon Bonds Risk. Because interest on zero coupon bonds
is not paid on a current basis, the values of zero coupon bonds will be more volatile in response to interest rate changes than the values
of bonds that distribute income regularly. Although zero coupon bonds generate income for accounting purposes, they do not produce cash
flow, and thus the Fund could be forced to liquidate securities at an inopportune time in order to generate cash to distribute to shareholders
as required by tax laws.
Fund Level and Other Risks:
Anti-Takeover Provisions. The Fund’s organizational
documents include provisions that could limit the ability of other entities or persons to acquire control of the Fund or convert the Fund
to open-end status. Further, the Fund’s by-laws provide that a shareholder who obtains beneficial ownership of common shares in
a “Control Share Acquisition” will have the same voting rights as other common shares only to the extent authorized by shareholders.
Although the application of the "Control Share Acquisition" provisions has currently been suspended, these provisions could
have the effect of depriving the common shareholders of opportunities to sell their common shares at a premium over the then-current market
price of the common shares.
Counterparty Risk. Changes in the credit quality of the companies
that serve as the Fund’s counterparties with respect to derivatives or other transactions supported by another party’s credit
will affect the value of those instruments. Certain entities that have served as counterparties in the markets for these transactions
have incurred or may incur in the future significant financial hardships including bankruptcy and losses as a result of exposure to sub-prime
mortgages and other lower-quality credit investments. As a result, such hardships have reduced these entities’ capital and called
into question their continued ability to perform their obligations under such transactions. By using such derivatives or other transactions,
the Fund assumes the risk that its counterparties could experience similar financial hardships. In the event of the insolvency of a counterparty,
the Fund may sustain losses or be unable to liquidate a derivatives position.
Cybersecurity Risk. The Fund and its service providers are
susceptible to operational and information security risk resulting from cyber incidents. Cyber incidents refer to both intentional attacks
and unintentional events including: processing errors, human errors, technical errors including computer glitches and system malfunctions,
inadequate or failed internal or external processes, market-wide technical-related disruptions, unauthorized access to digital systems
(through “hacking” or malicious software coding), computer viruses, and cyber-attacks which shut down, disable, slow or otherwise
disrupt operations, business processes or website access or functionality (including denial of service attacks). Cyber incidents could
adversely impact the Fund and cause the Fund to incur financial loss and expense, as well as face exposure to regulatory penalties, reputational
damage, and additional compliance costs associated with corrective measures. In addition, substantial costs may be incurred in order to
prevent any cyber incidents in the future. Furthermore, the Fund cannot control the cybersecurity plans and systems put in place by its
service providers or any other third parties whose operations may affect the Fund.
Economic and Political Events Risk. The Fund may be more
sensitive to adverse economic, business or political developments if it invests a substantial portion of its assets in the municipal securities
of similar projects (such as those relating to the education, health care, housing, transportation, or utilities industries), industrial
development bonds, or in particular types of municipal securities (such as general obligation bonds, private activity bonds or moral obligation
bonds). Such developments may adversely affect a specific industry or local political and economic conditions, and thus may lead to declines
in the creditworthiness and value of such municipal securities.
79
Shareholder Update (Unaudited) (continued)
Global Economic Risk. National and regional economies and
financial markets are becoming increasingly interconnected, which increases the possibilities that conditions in one country, region or
market might adversely impact issuers in a different country, region or market. Changes in legal, political, regulatory, tax and economic
conditions may cause fluctuations in markets and securities prices around the world, which could negatively impact the value of the Fund’s
investments. Major economic or political disruptions, particularly in large economies like China’s, may have global negative economic
and market repercussions. Additionally, instability in various countries, such as Afghanistan and Syria, and natural and environmental
disasters and the spread of infectious illnesses or other public health emergencies, possible terrorist attacks in the United States and
around the world, continued tensions between North Korea and the United States and the international community generally, growing social
and political discord in the United States, the European debt crisis, the response of the international community—through economic
sanctions and otherwise—further downgrade of U.S. government securities, the change in the U.S. president and the new administration
and other similar events may adversely affect the global economy and the markets and issuers in which the Fund invests. Recent examples
of such events include the outbreak of a novel coronavirus known as COVID-19 that was first detected in China in December 2019 and heightened
concerns regarding North Korea’s nuclear weapons and long-range ballistic missile programs. In addition, Russia’s recent invasion
of Ukraine in February 2022 has resulted in sanctions imposed by several nations, such as the United States, United Kingdom, European
Union and Canada. The current sanctions and potential further sanctions may negatively impact certain sectors of Russia’s economy,
but also may negatively impact the value of the Fund’s investments that do not have direct exposure to Russia. These events could
reduce consumer demand or economic output, result in market closure, travel restrictions or quarantines, and generally have a significant
impact on the economy. These events could also impair the information technology and other operational systems upon which the Fund’s
service providers, including the investment adviser and sub-adviser, rely, and could otherwise disrupt the ability of employees of the
Fund’s service providers to perform essential tasks on behalf of the Fund. Governmental and quasigovernmental authorities and regulators
throughout the world have in the past responded to major economic disruptions with a variety of significant fiscal and monetary policy
changes, including but not limited to, direct capital infusions into companies, new monetary programs and dramatically lower interest
rates. An unexpected or quick reversal of these policies, or the ineffectiveness of these policies, could increase volatility in securities
markets, which could adversely affect the Fund’s investments.
Investment and Market Risk. An investment in common shares
is subject to investment risk, including the possible loss of the entire principal amount that you invest. Common shares frequently trade
at a discount to their NAV. An investment in common shares represents an indirect investment in the securities owned by the Fund. Common
shares at any point in time may be worth less than your original investment, even after taking into account the reinvestment of Fund dividends
and distributions.
Legislation and Regulatory Risk. At any time after the date
of this report, legislation or additional regulations may be enacted that could negatively affect the assets of the Fund, securities held
by the Fund or the issuers of such securities. Fund shareholders may incur increased costs resulting from such legislation or additional
regulation. There can be no assurance that future legislation, regulation or deregulation will not have a material adverse effect on the
Fund or will not impair the ability of the Fund to achieve its investment objectives.
The SEC’s recently adopted Rule 18f-4 under the 1940 Act governing
the use of derivatives by registered investment companies, which could affect the nature and extent of derivatives used by the Fund. Rule
18f-4 could limit the Fund’s use of derivatives, which could have an adverse impact on the Fund.
Leverage Risk. The use of leverage creates special risks
for common shareholders, including potential interest rate risks and the likelihood of greater volatility of NAV and market price of,
and distributions on, the common shares. The use of leverage in a declining market will likely cause a greater decline in the Fund’s
NAV, which may result at a greater decline of the common share price, than if the Fund were not to have used leverage.
The Fund will pay (and common shareholders will bear) any costs
and expenses relating to the Fund’s use of leverage, which will result in a reduction in the Fund’s NAV. The investment adviser
may, based on its assessment of market conditions and composition of the Fund’s holdings, increase or decrease the amount of leverage.
Such changes may impact the Fund’s distributions and the price of the common shares in the secondary market.
The Fund may seek to refinance its leverage over time, in the ordinary
course, as current forms of leverage mature or it is otherwise desirable to refinance; however, the form that such leverage will take
cannot be predicted at this time. If the Fund is unable to replace existing leverage on comparable terms, its costs of leverage will increase.
Accordingly, there is no assurance that the use of leverage may result in a higher yield or return to common shareholders.
The amount of fees paid to the investment adviser and the sub-adviser
for investment advisory services will be higher if the Fund uses leverage because the fees will be calculated based on the Fund’s
Managed Assets - this may create an incentive for the investment adviser and the sub-adviser to leverage the Fund or increase the Fund’s
leverage.
Limited Term Risk. Because the assets of the Fund will be
liquidated in connection with its termination, the Fund may be required to sell portfolio securities when it otherwise would not, including
at times when market conditions are not favorable, which may cause the Fund to lose money. The Fund’s investment objectives and
policies are not designed to return to investors who purchase Common Shares in this offering their initial investment on the termination
date. When terminated, the Fund’s distributions will be based upon the Fund’s net asset value at the end of the term and such
initial investors and any investors that purchase Common Shares after the completion of this offering may receive more or less than their
original investment upon termination.
80
Market Discount from Net Asset Value. Shares of closed-end
investment companies like the Fund frequently trade at prices lower than their NAV. This characteristic is a risk separate and distinct
from the risk that the Fund’s NAV could decrease as a result of investment activities. Whether investors will realize gains or losses
upon the sale of the common shares will depend not upon the Fund’s NAV but entirely upon whether the market price of the common
shares at the time of sale is above or below the investor’s purchase price for the common shares. Furthermore, management may have
difficulty meeting the Fund’s investment objectives and managing its portfolio when the underlying securities are redeemed or sold
during periods of market turmoil and as investors’ perceptions regarding closed-end funds or their underlying investments change.
Because the market price of the common shares will be determined by factors such as relative supply of and demand for the common shares
in the market, general market and economic circumstances, and other factors beyond the control of the Fund, the Fund cannot predict whether
the common shares will trade at, below or above NAV. The common shares are designed primarily for long-term investors, and you should
not view the Fund as a vehicle for short-term trading purposes.
Recent Market Conditions. Periods of unusually high financial
market volatility and restrictive credit conditions, at times limited to a particular sector or geographic area, have occurred in the
past and may be expected to recur in the future. Some countries, including the United States, have adopted or have signaled protectionist
trade measures, relaxation of the financial industry regulations that followed the financial crisis, and/or reductions to corporate taxes.
The scope of these policy changes is still developing, but the equity and debt markets may react strongly to expectations of change, which
could increase volatility, particularly if a resulting policy runs counter to the market’s expectations. The outcome of such changes
cannot be foreseen at the present time. In addition, geopolitical and other risks, including environmental and public health risks, may
add to instability in the world economy and markets generally. As a result of increasingly interconnected global economies and financial
markets, the value and liquidity of the Fund’s investments may be negatively affected by events impacting a country or region, regardless
of whether the Fund invests in issuers located in or with significant exposure to such country or region.
The current outbreak of COVID-19 has resulted in instances of market
closures and dislocations, extreme volatility, liquidity constraints and increased trading costs. Efforts to contain the spread of COVID-19
have resulted in travel restrictions, closed international borders, disruptions of healthcare systems, business operations (including
business closures) and supply chains, layoffs, lower consumer demand and employee availability, defaults and credit downgrades, among
other significant economic impacts, all of which have disrupted global economic activity across many industries and may exacerbate other
pre-existing political, social and economic risks, locally or globally and cause general concern and uncertainty. The full economic impact
and ongoing effects of COVID-19 (or other future epidemics or pandemics) at the macro-level and on individual businesses are unpredictable
and may result in significant and prolonged effects on the Fund's performance.
To the extent the impacts of COVID-19 continue, the Fund may experience
negative impacts to its business that could exacerbate other risks to which the Fund is subject, including: (1) operational impacts on
and availability of key personnel of Nuveen Fund Advisors, the Sub-Advisers, and/or any of the Fund’s other service providers, vendors
and counterparties as they face changed circumstances and/or illness related to the pandemic and (2) limitations on the Fund’s ability
to make distributions or dividends, as applicable, to Common Shareholders.
Governmental authorities and regulators throughout the world, such
as the U.S. Federal Reserve, have in the past responded to major economic disruptions with changes to fiscal and monetary policy, including
but not limited to, direct capital infusions, new monetary programs, and dramatically lower interest rates. Certain of those policy changes
are being implemented or considered in response to the COVID-19 outbreak. Such policy changes may adversely affect the value, volatility
and liquidity of instruments in which the Fund invests.
On June 23, 2016, the United Kingdom (“UK”) held a referendum
on whether to remain a member state of the European Union (“EU”), in which voters favored the UK’s withdrawal from the
EU, an event widely referred to as “Brexit.” On January 31, 2020, the UK formally withdrew from the EU. The transition period
concluded on December 31, 2020, and EU law no longer applies in the UK. On December 30, 2020, the UK and EU signed an EU-UK Trade and
Cooperation Agreement (“UK/EU Trade Agreement”), which went into effect on January 1, 2021 and sets out the foundation of
the economic and legal framework for trade between the UK and EU. As the UK/EU Trade Agreement is a new legal framework, the implementation
of the UK/EU Trade Agreement may result in uncertainty in its application and periods of volatility in both the UK and wider European
markets. The longer term economic, legal, political and social framework to be put in place between the UK and the EU are unclear at this
stage, remain subject to negotiation and are likely to lead to ongoing political and economic uncertainty and periods of exacerbated volatility
in both the UK and in wider European markets for some time. The outcomes may cause increased volatility and have a significant adverse
impact on world financial markets, other international trade agreements, and the UK and European economies, as well as the broader global
economy for some time. Additionally, a number of countries in Europe have suffered terror attacks, and additional attacks may occur in
the future. Ukraine has experienced ongoing military conflict, most recently in February 2022 when Russia invaded Ukraine; this conflict
may expand and military attacks could occur elsewhere in Europe. Europe has also been struggling with mass migration from the Middle East
and Africa. The ultimate effects of these events and other socio-political or geographical issues are not known but could profoundly affect
global economies and markets.
The ongoing trade war between China and the United States, including
the imposition of tariffs by each country has recently imposed tariffs on the other country’s products, has created a tense political
environment. These actions may trigger a significant reduction in international trade, the oversupply of certain manufactured goods, substantial
price reductions of goods and possible failure of individual companies and/or large segments of China’s export industry, which could
have a negative impact on the Fund’s performance. U.S. companies that source material and goods from China
81
Shareholder Update (Unaudited) (continued)
and those that make large amounts of sales in China would be particularly
vulnerable to an escalation of trade tensions. Uncertainty regarding the outcome of the trade tensions and the potential for a trade war
could cause the U.S. dollar to decline against safe haven currencies, such as the Japanese yen and the euro. Events such as these and
their consequences are difficult to predict and it is unclear whether further tariffs may be imposed or other escalating actions may be
taken in the future.
The impact of these developments in the near- and long-term is unknown
and could have additional adverse effects on economies, financial markets and asset valuations around the world.
Reverse Repurchase Agreement Risk. A reverse repurchase agreement,
in economic essence, constitutes a securitized borrowing by the Fund from the security purchaser. In a reverse repurchase agreement, the
Fund retains the risk of loss associated with the sold security. The Fund may enter into reverse repurchase agreements for the purpose
of creating a leveraged investment exposure and, as such, their usage involves essentially the same risks associated with a leveraging
strategy generally since the proceeds from these agreements may be invested in additional portfolio securities. Reverse repurchase agreements
tend to be short-term in tenor, and there can be no assurances that the purchaser (lender) will commit to extend or “roll”
a given agreement upon its agreed-upon repurchase date or an alternative purchaser can be identified on similar terms. Reverse repurchase
agreements also involve the risk that the purchaser fails to return the securities as agreed upon, files for bankruptcy or becomes insolvent.
Upon the bankruptcy or insolvency of a counterparty, the Fund is considered to be an unsecured creditor with respect to excess collateral
and as such the return of the excess collateral may be delayed. The Fund also may be restricted from taking normal portfolio actions during
such time, could be subject to loss to the extent that the proceeds of the agreement are less than the value of securities subject to
the agreement and may experience adverse tax consequences.
82
EFFECTS OF LEVERAGE
The following table is furnished in response to requirements of
the SEC. It is designed to illustrate the effects of leverage through the use of senior securities, as that term is defined under Section
18 of the 1940 Act, as well as certain other forms of leverage, such as reverse repurchase agreements and investments in inverse floating
rate securities, on common share total return, assuming investment portfolio total returns (consisting of income and changes in the value
of investments held in the Fund’s portfolio) of -10%, -5%, 0%, 5% and 10%. The table below reflects each Fund’s (i) continued
use of leverage as of May 31, 2022 as a percentage of Managed Assets (including assets attributable to such leverage), (ii) the estimated
annual effective interest expense rate payable by the Funds on such instruments (based on actual leverage costs incurred during the fiscal
year ended May 31, 2022) as set forth in the table, and (iii) the annual return that the Fund’s portfolio must experience (net of
expenses) in order to cover such costs of leverage based on such estimated annual effective interest expense rate. The information below
does not reflect any Fund’s use of certain other forms of economic leverage achieved through the use of certain derivative instruments.
The numbers are merely estimates, used for illustration. The costs
of leverage may vary frequently and may be significantly higher or lower than the estimated rate. The assumed investment portfolio returns
in the table below are hypothetical figures and are not necessarily indicative of the investment portfolio returns experienced or expected
to be experienced by the Funds. Your actual returns may be greater or less than those appearing below.
| |
|
|
| |
|
Nuveen |
| |
Nuveen |
Intermediate |
| |
Intermediate |
Duration |
| |
Duration |
Quality |
| |
Municipal |
Municipal |
| |
Term |
Term |
| |
Fund |
Fund |
| |
(NID) |
(NIQ) |
| Estimated Leverage as a Percentage of Managed Assets (Including Assets |
|
|
| Attributable to Leverage) |
35.63% |
33.69% |
| Estimated Annual Effective Leverage Expense Rate Payable by Fund on Leverage |
1.04% |
1.12% |
| Annual Return Fund Portfolio Must Experience (net of expenses) to Cover |
|
|
| Estimated Annual Effective Interest Expense Rate on Leverage |
0.37% |
0.38% |
| Common Share Total Return for (10.00)% Assumed Portfolio Total Return |
-16.11% |
-15.65% |
| Common Share Total Return for (5.00)% Assumed Portfolio Total Return |
-8.34% |
-8.11% |
| Common Share Total Return for 0.00% Assumed Portfolio Total Return |
-0.58% |
-0.57% |
| Common Share Total Return for 5.00% Assumed Portfolio Total Return |
7.19% |
6.97% |
| Common Share Total Return for 10.00% Assumed Portfolio Total Return |
14.96% |
14.51% |
Common Share total return is composed of two elements — the
distributions paid by the Fund to holders of common shares (the amount of which is largely determined by the net investment income of
the Fund after paying dividend payments on any preferred shares issued by the Fund and expenses on any forms of leverage outstanding)
and gains or losses on the value of the securities and other instruments the Fund owns. As required by SEC rules, the table assumes that
the Funds are more likely to suffer capital losses than to enjoy capital appreciation. For example, to assume a total return of 0%, the
Fund must assume that the income it receives on its investments is entirely offset by losses in the value of those investments. This table
reflects hypothetical performance of the Fund’s portfolio and not the actual performance of the Fund’s common shares, the
value of which is determined by market forces and other factors. Should the Fund elect to add additional leverage to its portfolio, any
benefits of such additional leverage cannot be fully achieved until the proceeds resulting from the use of such leverage have been received
by the Fund and invested in accordance with the Fund’s investment objectives and policies. As noted above, the Fund’s willingness
to use additional leverage, and the extent to which leverage is used at any time, will depend on many factors.
83
Shareholder Update (Unaudited) (continued)
DIVIDEND
REINVESTMENT PLAN
Nuveen Closed-End Funds Automatic Reinvestment Plan
Your Nuveen Closed-End Fund allows you to conveniently reinvest
distributions in additional Fund shares. By choosing to reinvest, you’ll be able to invest money regularly and automatically, and
watch your investment grow through the power of compounding. Just like distributions in cash, there may be times when income or capital
gains taxes may be payable on distributions that are reinvested. It is important to note that an automatic reinvestment plan does not
ensure a profit, nor does it protect you against loss in a declining market.
Easy and convenient
To make recordkeeping easy and convenient, each month you’ll
receive a statement showing your total distributions, the date of investment, the shares acquired and the price per share, and the total
number of shares you own.
How shares are purchased
The shares you acquire by reinvesting will either be purchased on
the open market or newly issued by the Fund. If the shares are trading at or above NAV at the time of valuation, the Fund will issue new
shares at the greater of the NAV or 95% of the then-current market price. If the shares are trading at less than NAV, shares for your
account will be purchased on the open market. If Computershare Trust Company, N.A. (the “Plan Agent”) begins purchasing Fund
shares on the open market while shares are trading below NAV, but the Fund’s shares subsequently trade at or above their NAV before
the Plan Agent is able to complete its purchases, the Plan Agent may cease open-market purchases and may invest the uninvested portion
of the distribution in newly-issued Fund shares at a price equal to the greater of the shares’ NAV or 95% of the shares’ market
value on the last business day immediately prior to the purchase date. Distributions received to purchase shares in the open market will
normally be invested shortly after the distribution payment date. No interest will be paid on distributions awaiting reinvestment. Because
the market price of the shares may increase before purchases are completed, the average purchase price per share may exceed the market
price at the time of valuation, resulting in the acquisition of fewer shares than if the distribution had been paid in shares issued by
the Fund. A pro rata portion of any applicable brokerage commissions on open market purchases will be paid by Dividend Reinvestment Plan
(the “Plan”) participants. These commissions usually will be lower than those charged on individual transactions.
Flexible
You may change your distribution option or withdraw from the Plan
at any time, should your needs or situation change. You can reinvest whether your shares are registered in your name, or in the name of
a brokerage firm, bank, or other nominee. Ask your investment advisor if his or her firm will participate on your behalf. Participants
whose shares are registered in the name of one firm may not be able to transfer the shares to another firm and continue to participate
in the Plan. The Fund reserves the right to amend or terminate the Plan at any time. Although the Fund reserves the right to amend the
Plan to include a service charge payable by the participants, there is no direct service charge to participants in the Plan at this time.
Call today to start reinvesting distributions
For more information on the Nuveen Automatic Reinvestment Plan or
to enroll in or withdraw from the Plan, speak with your financial professional or call us at (800) 257-8787.
84
CHANGES OCCURRING DURING THE FISCAL YEAR
The following information in this annual report is a summary
of certain changes during the most recent fiscal year. This information may not reflect all of the changes that have occurred since you
purchased shares of a Fund.
During the most recent fiscal year, there have been no changes to:
(i) the Funds’ investment objectives and principal investment policies that have not been approved by shareholders, (ii) the principal
risks of the Fund, (iii) the portfolio managers of the Funds; (iv) a Fund’s charter or by-laws that would delay or prevent a change
of control of the Fund that have not been approved by shareholders except as follows:
Developments Regarding the Funds’
Control Share By-Law
On October 5, 2020, the Nuveen Intermediate Duration Municipal Term
Fund and the Nuveen Intermediate Duration Quality Municipal Term Fund (each a “Fund” and collectively the “Funds”)
and certain other closed-end funds in the Nuveen fund complex amended their by-laws. Among other things, the amended by-laws included
provisions pursuant to which, in summary, a shareholder who obtains beneficial ownership of common shares in a Control Share Acquisition
(as defined in the by-laws) shall have the same voting rights as other common shareholders only to the extent authorized by the other
disinterested shareholders (the “Control Share By-Law”). On January 14, 2021, a shareholder of certain Nuveen closed-end funds
filed a civil complaint in the U.S. District Court for the Southern District of New York (the “District Court”) against certain
Nuveen funds and their trustees, seeking a declaration that such funds’ Control Share By-Laws violate the 1940 Act, rescission of
such fund’s Control Share By-Laws and a permanent injunction against such funds applying the Control Share By-Laws. On February
18, 2022, the District Court granted judgment in favor of the plaintiff’s claim for rescission of such funds’ Control Share
By-Laws and the plaintiff’s declaratory judgment claim, and declared that such funds’ Control Share By-Laws violate Section
18(i) of the 1940 Act. Following review of the judgment of the District Court, on February 22, 2022, the Board amended the Funds’
bylaws to provide that the Funds’ Control Share By-Law shall be of no force and effect for so long as the judgment of the District
Court is effective and that if the judgment of the District Court is reversed, overturned, vacated, stayed, or otherwise nullified, the
Funds’ Control Share By-Law will be automatically reinstated and apply to any beneficial owner of common shares acquired in a Control
Share Acquisition, regardless of whether such Control Share Acquisition occurs before or after such reinstatement, for the duration of
the stay or upon issuance of the mandate reversing, overturning, vacating or otherwise nullifying the judgment of the District Court.
On February 25, 2022, the Board and the Funds appealed the District Court’s decision to the U.S. Court of Appeals for the Second
Circuit.
85
Important Tax Information (Unaudited)
As required by the Internal Revenue Code and Treasury Regulations,
certain tax information, as detailed below, must be provided to shareholders. Shareholders are advised to consult their tax advisor with
respect to the tax implications of their investment. The amounts listed below may differ from the actual amounts reported on Form 1099-DIV,
which will be sent to shareholders shortly after calendar year end.
Long-Term Capital Gains
As of year end, each Fund designates the following distribution
amounts, or maximum amount allowable, as being from net long-term capital gains pursuant to Section 852(b)(3) of the Internal Revenue
Code:
| |
|
| |
Net Long-Term |
| Fund |
Capital Gains |
| NID |
$ — |
| NIQ |
— |
86
Additional Fund Information (Unaudited)
| |
|
|
|
|
|
| Board
of Trustees |
|
|
|
|
|
| Jack
B. Evans |
William
C. Hunter |
Amy
B. R. Lancellotta |
Joanne
T. Medero |
Albin
F. Moschner |
John
K. Nelson |
| Judith
M. Stockdale |
Carole
E. Stone |
Mathew
Thornton III |
Terence
J. Toth |
Margaret
L. Wolff |
Robert
L. Young |
| Investment
Adviser |
Custodian |
Legal
Counsel |
Independent
Registered |
Transfer
Agent and |
| Nuveen
Fund Advisors, LLC |
State
Street Bank |
Chapman
and Cutler LLP |
Public
Accounting Firm |
Shareholder
Services |
| 333
West Wacker Drive |
&
Trust Company |
Chicago,
IL 60603 |
KPMG
LLP |
Computershare
Trust |
| Chicago,
IL 60606 |
One
Lincoln Street |
|
200
East Randolph Street |
Company,
N.A. |
| |
Boston,
MA 02111 |
|
Chicago,
IL 60601 |
150
Royall Street |
| |
|
|
|
Canton,
MA 02021 |
| |
|
|
|
(800)
257-8787 |
Portfolio of Investments Information
Each Fund is required to file its complete schedule of portfolio
holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year as an exhibit to its report
on Form N-PORT. You may obtain this information on the SEC’s website at http://www.sec.gov.
Nuveen Funds’ Proxy Voting Information
You may obtain (i) information regarding how each fund voted proxies
relating to portfolio securities held during the most recent twelve-month period ended June 30, without charge, upon request, by calling
Nuveen toll-free at (800) 257-8787 or on Nuveen’s website at www.nuveen.com and (ii) a description of the policies and procedures
that each fund used to determine how to vote proxies relating to portfolio securities without charge, upon request, by calling Nuveen
toll free at (800) 257-8787. You may also obtain this information directly from the SEC. Visit the SEC on-line at http://www.sec.gov.