Certified Annual Shareholder Report for Management Investment Companies (n-csr)

ITEM 1 – Reports to Stockholders

 

 

 

 

The Tax-Exempt Bond Fund of America ®

 

 

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Special feature

The ongoing search for income

See page 6

Annual report for the year ended August 31, 2012

 

 

The Tax-Exempt Bond Fund of America seeks a high level of federally tax-exempt current income, consistent with preservation of capital, through a diversified portfolio of municipal bonds.

This fund is one of more than 40 offered by American Funds, which is one of the nation’s largest mutual fund families. For more than 80 years, Capital Research and Management Company, SM the American Funds adviser, has invested with a long-term focus based on thorough research and attention to risk.

Fund results shown in this report, unless otherwise indicated, are for Class A shares at net asset value. If a sales charge (maximum 3.75%) had been deducted, the results would have been lower. Results are for past periods and are not predictive of results for future periods. Current and future results may be lower or higher than those shown. Share prices and returns will vary, so investors may lose money. Investing for short periods makes losses more likely. Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value. For current information and month-end results, visit americanfunds.com.

Here are the average annual total returns on a $1,000 investment with all distributions reinvested for periods ended September 30, 2012 (the most recent calendar quarter-end):
Class A shares		1 year				5 years				10 years
Reflecting 3.75% maximum sales charge			6.00	%			4.65	%			4.20	%

The total annual fund operating expense ratio is 0.55% for Class A shares as of the prospectus dated November 1, 2012 (unaudited).

Investment results assume all distributions are reinvested and reflect applicable fees and expenses. When applicable, investment results reflect fee waivers, without which results would have been lower. Visit americanfunds.com for more information.

The fund’s 30-day yield for Class A shares as of September 30, 2012, calculated in accordance with the U.S. Securities and Exchange Commission (SEC) formula, was 2.10%. (For investors in the 35% tax bracket, this is equivalent to a taxable yield of 3.23%.) The fund’s 12-month distribution rate for Class A shares as of that date was 3.45%. Both reflect the 3.75% maximum sales charge. The SEC yield reflects the rate at which the fund is earning income on its current portfolio of securities while the distribution rate reflects the fund’s past dividends paid to shareholders. Accordingly, the fund’s SEC yield and distribution rate may differ.

Results for other share classes can be found on page 4.

The return of principal for bond funds and for funds with significant underlying bond holdings is not guaranteed. Fund shares are subject to the same interest rate, inflation and credit risks associated with the underlying bond holdings. Bond ratings, which typically range from Aaa/AAA (highest) to D (lowest), are assigned by credit rating agencies such as Moody’s, Standard & Poor’s and/or Fitch as an indication of an issuer’s creditworthiness. Income may be subject to state or local taxes. Also, distributions from gains on the sale of certain bonds purchased at less than par value and capital gain distributions, if any, are taxable. Refer to the fund prospectus and the Risk Factors section of this report for more information on these and other risks associated with investing in the fund.

 

 

Fellow investors:

The most recently concluded fiscal year proved to be a favorable period for municipal bond returns. Prices for most types of tax-exempt bonds rose throughout the year, supported by surging investor demand, persistently low interest rates and signs that U.S. economic growth was slowing.

For the 12 months ended August 31, 2012, The Tax-Exempt Bond Fund of America provided investors with a steady stream of federally tax-exempt income totaling about 47 cents a share. Those who reinvested their dividends recorded an income return of 3.92%. To match this, investors in the top federal income tax bracket of 35% would have had to earn 6.03% from a taxable investment.

This income return, along with a strong gain in the fund’s share price, helped produce a total return of 10.71%. This result exceeded the 8.78% total return of the Barclays Municipal Bond Index, which tracks only investment-grade municipal bonds and has no expenses. However, the fund’s total return trailed the 11.00% gain of the Lipper General & Insured Municipal Debt Funds Average, a measure of the fund’s peer group. Results for longer time frames are displayed in the table on page 2.

Municipal market overview

As we reported six months ago, a broad bond market rally was under way at the start of the fiscal year. With economic conditions weakening, investors sought the relative stability of fixed-income securities. High demand for U.S. Treasuries kept yields near historic lows for much of the 12-month period.

Back in early 2011, high volatility in the municipal bond market left yields (which move in the opposite direction of prices) at elevated levels for many types of tax-exempt bonds. As it became clearer that some predictions of municipal bankruptcies would not occur on the scale predicted, investor sentiment strengthened. Increasingly, investors turned to tax-exempt bonds for their relative value compared to Treasuries. The rally in Treasuries helped lift the tax-exempt bond market, and municipal bond prices rose throughout the period, sending yields lower.

Demand for municipal bonds remains high. As of August 31, municipal bond mutual funds have seen more than $39.4 billion in inflows in 2012, according to the Investment Company Institute.

To help support economic growth, the Federal Reserve maintained its accommodative monetary policy and held its benchmark interest rate near zero. These conditions, along with the elevated demand for tax-exempt bonds, made the search for attractive yield opportunities more challenging. Increasingly, investors turned to lower-rated bonds and securities with relatively longer durations for the higher yields they offer, and spreads tightened across the credit spectrum. To learn more about the steps we take in our effort to uncover opportunities for attractive income, we invite you to read this year’s feature article, “The ongoing search for income,” which begins on page 6.

 

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[Begin Sidebar]

In this report
Special feature
6	The ongoing search for income
	In today’s low-rate environment, seeking attractive income feels like looking for pearls in the ocean. In this year’s feature article, we explain how your fund’s investment professionals look for yield — and how patience, research and diversification have contributed to the fund’s long-term success.
Contents
1	Letter to investors
5	The value of a long-term perspective
12	Summary investment portfolio
17	Financial statements
31	Board of trustees and other officers

[End Sidebar]

Inside the portfolio

As has been the case in recent years, revenue bonds — securities backed by dedicated revenue streams from local enterprise projects such as airports, toll roads and hospitals — were a chief focus of the fund. The fiscal challenges confronting many state and local governments have very little impact on the potential success of the projects supporting these revenue bonds. As of August 31, 2012, revenue bonds accounted for more than 90% of the fund’s holdings. Some of the fund’s largest holdings were in bonds backed by hospitals (14.3%), electric utilities (7.8%) and colleges and universities (7.5%).

The portfolio counselors who manage the fund maintain a cautious view of general obligation (G.O.) bonds issued by local governments, as they believe the potential rewards associated with many of these securities are not commensurate with the risks involved. This is reflected in the fund’s relatively light concentration of state and local G.O. bonds (5.6%). However, as circumstances are constantly changing, we continue to monitor G.O. bonds for potentially attractive opportunities in the future.

The fund’s outsize return was made possible by positive contributions from virtually every sector of the municipal markets. Results for holdings of bonds supporting hospitals, as well as life care and assisted living facilities, were particularly strong.

 

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A look forward

We are pleased with the fund’s exceptional returns for the past 12 months. However, we wish to caution investors that these results are partly due to highly favorable conditions, and we do not expect these conditions to continue indefinitely. We do believe that through our conservative approach and diligent research we can provide relatively steady income and add value for our investors over time.

[Begin Sidebar]

Results at a glance
For periods ended August 31, 2012 (with all distributions reinvested)
		Total returns				Average annual total returns
		1 year				5 years				10 years
The Tax-Exempt Bond Fund of America
(Class A shares)			10.71	%			5.59	%			4.72	%
Lipper General & Insured Municipal
Debt Funds Average			11.00				5.33				4.46
Barclays Municipal Bond Index*			8.78				6.24				5.20
*The index is unmanaged and, therefore, has no expenses.

[End Sidebar]

To be sure, there is a great deal of uncertainty in the short term. State and local governments face the dual pressures of strained tax revenues and soaring costs. While well publicized predictions of widespread municipal defaults have not materialized, there were a few noteworthy municipal bankruptcies recently and we could see more in the coming months. The pending presidential election and uncertainty over the direction of fiscal and tax policy further cloud the picture for investors.

In its effort to stimulate the economy, the Fed will pursue an accommodative monetary policy. Shortly after the close of the fiscal year, the Fed announced plans for a third round of quantitative easing, indicating they would purchase mortgage bonds and other assets until the U.S. job market shows signs of improvement. The central bank also indicated that it would keep its target rate near zero until at least mid-2015. This further complicates the search for attractive income.

Nevertheless, we maintain an optimistic long-term view. The municipal bond market is a vast market with a great deal of diversity and we believe that through patience and careful research we can find attractive potential investment opportunities.

We wish to take this opportunity to welcome the many new investors in the fund and thank those who continue to invest with us. For the year, the number of investor accounts rose by 10.95%. As always, we are working hard to help achieve your fund’s investment objectives.

We look forward to reporting to you on the fund’s progress in six months.

Sincerely,

/s/ Neil L. Langberg

Neil L. Langberg

President

October 12, 2012

For current information about the fund, visit americanfunds.com.

[Begin Sidebar]

Tax-exempt yields vs. taxable yields

 

Find your estimated 2012 taxable income below to determine your federal tax rate,* then look in the right-hand column to see what you would have had to earn from a taxable investment to equal the fund’s 3.47% tax-exempt distribution rate † as of August 31, 2012. For example, investors in the highest tax bracket (35%) would need a taxable distribution rate of 5.34% to match the fund’s distribution rate.

												The fund’s tax-exempt
If your taxable income is …												distribution rate of
								… then your federal				3.47% is equivalent
Single				Joint				tax rate is ...				to a taxable rate of …
$	0 – 8,700			$	0 – 17,400				10.0	%			3.86	%
	8,701 – 35,350				17,401 – 70,700				15.0				4.08
	35,351 – 85,650				70,701 – 142,700				25.0				4.63
	85,651 – 178,650				142,701 – 217,450				28.0				4.82
	178,651 – 388,350				217,451 – 388,350				33.0				5.18
Over 388,350				Over 388,350					35.0				5.34

*Based on 2012 federal tax rates. The federal rates do not include an adjustment for the loss of personal exemptions and the phase-out of itemized deductions that are applicable to certain taxable income levels.

† The distribution rate is based on dividends paid over the last 12 months divided by the maximum offering price as of August 31, 2012. Capital gain distributions, if any, are added back at the maximum offering price to determine the rate.

[End Sidebar]

Other share class results

unaudited

 

Classes B, C and F

Fund results shown are for past periods and are not predictive of results for future periods. Current and future results may be lower or higher than those shown. Share prices and returns will vary, so investors may lose money. For current information and month-end results, visit americanfunds.com.

Average annual total returns for periods ended September 30, 2012 (the most recent calendar quarter-end):
										10 years/
		1 year				5 years				Life of class 1
Class B shares 2
Reflecting applicable contingent deferred sales charge
(CDSC), maximum of 5%, payable only if shares
are sold within six years of purchase			4.31	%			4.33	%			3.98	%
Not reflecting CDSC			9.31				4.67				3.98
Class C shares
Reflecting CDSC, maximum of 1%, payable only
if shares are sold within one year of purchase			8.25				4.61				3.75
Not reflecting CDSC			9.25				4.61				3.75
Class F-1 shares 3
Not reflecting annual asset-based fee charged
by sponsoring firm			9.99				5.35				4.49
Class F-2 shares 3 — first sold 8/1/08
Not reflecting annual asset-based fee charged
by sponsoring firm			10.27				—				6.65

1 Applicable to Class F-2 shares only. All other share classes reflect 10-year results.

2 These shares are not available for purchase.

3 These shares are sold without any initial or contingent deferred sales charge.

Investment results assume all distributions are reinvested and reflect applicable fees and expenses. When applicable, investment results reflect fee waivers, without which results would have been lower. Visit americanfunds.com for more information.

For information regarding the differences among the various share classes, refer to the fund prospectus.

The value of a long-term perspective

How a $10,000 investment has grown

 

Fund results shown are for Class A shares and, unless otherwise indicated, reflect deduction of the maximum sales charge of 3.75% on the $10,000 investment. 1 Thus, the net amount invested was $9,625. 2 Results are for past periods and are not predictive of results for future periods. Current and future results may be lower or higher than those shown. Share prices and returns will vary, so investors may lose money. For current information and month-end results, visit americanfunds.com.

 

Here’s how a $10,000 investment in The Tax-Exempt Bond Fund of America grew between October 3, 1979, when the fund began operations, and August 31, 2012, the end of the fund’s latest fiscal year. As you can see, the $10,000 investment would have grown to $89,158 with the 3.75% maximum sales charge included and all distributions reinvested, an average annual total return of 6.87%.

 

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		The fund at maximum offering price 5				The fund at net asset value 4				Consumer Price Index (inflation) 7					Barclays Muni Bond Index 3					Lipper General & Insured Muni Debt Funds Average 6
10/3/79		$	9,625			$	10,000			$	10,000		(9/30/79)		$	10,000		(12/31/79)		$	10,000		(9/30/79)
1980 #			9,447				9,815				11,166					9,543					8,861
1981			8,598				8,933				12,373					8,017					7,742
1982			10,809				11,230				13,097					10,544					9,912
1983			12,576				13,066				13,432					12,179					11,825
1984			13,502				14,028				14,008					13,234					12,764
1985			15,719				16,332				14,477					15,435					15,062
1986			19,536				20,298				14,705					18,999					18,543
1987			19,741				20,511				15,335					19,879					18,964
1988			21,067				21,888				15,952					21,246					20,338
1989			23,224				24,130				16,702					23,580					22,691
1990			24,353				25,302				17,641					25,093					23,800
1991			27,204				28,265				18,311					28,052					26,670
1992			30,132				31,307				18,887					31,184					29,696
1993			33,869				35,189				19,410					34,989					33,413
1994			33,796				35,114				19,973					35,038					33,117
1995			36,737				38,170				20,496					38,144					35,602
1996			38,763				40,274				21,086					40,142					37,436
1997			42,402				44,055				21,555					43,853					40,896
1998			45,905				47,695				21,903					47,646					44,437
1999			46,007				47,801				22,399					47,884					43,932
2000			48,432				50,320				23,164					51,128					46,358
2001			53,381				55,462				23,794					56,339					51,158
2002			56,218				58,410				24,223					59,856					53,561
2003			57,654				59,902				24,745					61,734					55,019
2004			61,786				64,195				25,402					66,121					58,953
2005			64,797				67,323				26,327					69,633					62,364
2006			66,860				69,467				27,332					71,743					64,354
2007			67,928				70,577				27,871					73,392					65,204
2008			69,881				72,605				29,368					76,682					66,624
2009			71,732				74,529				28,932					81,031					68,609
2010			79,070				82,153				29,264					88,952					75,943
2011			80,528				83,668				30,368					91,318					77,135
2012			89,158				92,635				30,882					99,335					85,946

[end mountain chart]

1 As outlined in the prospectus, the sales charge is reduced for amounts (and aggregated investments) of $100,000 or more and is eliminated for purchases of $1 million or more. There is no sales charge on dividends or capital gain distributions that are reinvested in additional shares.

2 The maximum initial sales charge was 4.75% prior to January 10, 2000.

3 The index, which started on January 1, 1980, is unmanaged and, therefore, has no expenses.

4 Includes reinvested dividends of $68,298 and reinvested capital gain distributions of $2,462.

5 Includes reinvested dividends of $65,735 and reinvested capital gain distributions of $2,370.

6 Results of the Lipper General & Insured Municipal Debt Funds Average do not reflect any sales charges.

7 Widely used as a measure of inflation, the Consumer Price Index is computed from data supplied by the U.S. Department of Labor, Bureau of Labor Statistics.

8 For the period October 3, 1979 (when the fund began operations), through August 31, 1980.

The results shown are before taxes on fund distributions and sale of fund shares.

 

 

Average annual total returns based on a $1,000 investment (for periods ended August 31, 2012)*
		1 year				5 years				10 years
Class A shares			6.55	%			4.79	%			4.32	%
*Assumes reinvestment of all distributions and payment of the maximum 3.75% sales charge.

 

Investment results assume all distributions are reinvested and reflect applicable fees and expenses. When applicable, investment results reflect fee waivers, without which results would have been lower. Visit americanfunds.com for more information.

 

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[Begin Pull Quote]

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“This is a frustrating time for folks who need investment income. Fortunately, the municipal bond market is vast and diverse, and compelling yield opportunities are found in a variety of places.”

Neil Langberg, portfolio counselor

[End Pull Quote]

 

 

The ongoing search for income

In today’s low-rate environment, seeking attractive income feels like looking for pearls in the ocean. The extensive municipal bond market offers a range of income opportunities, each with their own set of risks. In the following pages, we explain how your fund’s investment professionals look for yield — and how patience, research and diversification have contributed to the fund’s long-term success.

Recent conditions are not very encouraging for investors with income needs. With the U.S. economy seemingly treading water, the Federal Reserve held its target interest rate near zero to help stimulate growth. This, in turn, led to reduced yields across the fixed-income universe, including those of high-quality municipal bonds that many investors rely on to meet their needs for tax-exempt income.

Nevertheless, investors — worried about economic uncertainty in the U.S. and Europe’s sovereign debt crisis — view municipal bonds as a relatively safe haven. As of August 29, municipal bond funds had positive inflows for 20 consecutive weeks and 49 of the previous 52 weeks, according to The Bond Buyer, an industry publication. This strong demand drove up bond prices, putting further pressure on yields, which typically move in the opposite direction of prices.

At the same time, risk increased in the municipal market as many state and local governments confront the twin pressures of strained tax revenues and escalating costs. On the other hand, depressed yields are a bright spot for struggling municipal governments that take advantage of the opportunity to refinance debt at lower rates. Through the first seven months of 2012, refinancing deals accounted for $95.7 billion of issuance — a 135% increase from the first half of 2011.

These developments have only made the hunt for attractive yield that much more challenging. For the portfolio counselors and analysts who help manage The Tax-Exempt Bond Fund of America, meeting that challenge starts with a cautious approach based on diligent research and broad diversification.

“With rates so low, this is a frustrating time for folks who need investment income,” says Neil Langberg, president of the fund and a portfolio counselor. “Fortunately, the municipal bond market is vast and diverse, and compelling yield opportunities can be found in a variety of places.”

A big pond to fish in

Indeed, the sheer size and diversity of the municipal bond market give the fund’s counselors ample opportunity to build a broadly diversified portfolio. According to a report issued by the U.S. Securities and Exchange Commission in July, there are more than 1 million municipal bonds outstanding whose total face value is approximately $3.7 trillion. The market features about 44,000 issuers, including state and local governments, school districts, utilities, hospitals and other public and private entities.

Different types of bonds react differently to changing circumstances. Diversifying among the various market sectors can help the fund weather a variety of economic and market conditions. While diversity does not eliminate risk, it can help limit the impact of risks faced by individual issuers — such as defaults or credit downgrades.

Considering that The Tax-Exempt Bond Fund of America holds more than 2,000 securities with differing maturities and credit structures and representing various sectors, investors are not likely to feel the effect of a negative event that is specific to one or even a few holdings. “It would be extremely difficult for an individual investor to achieve that level of diversification by investing in individual bonds,” points out Karl Zeile, a portfolio counselor. “Investors in the fund also benefit from the judgment of experienced investment professionals who intensively research this expansive market.”

Cautiously navigating the shoals

To be sure, investors who indiscriminately pursue the highest available yields are inviting danger. Bonds that offer higher income often involve a higher level of risk. The counselors and analysts who help manage the fund work carefully to strike a balance between risk and reward.

“We are digging and scratching for income every day,” Neil emphasizes, “but it is essential to understand all of the risks associated with a given investment. In this low-yield environment we do what we have done for the life of the fund: focus on the long term, conduct diligent research and carefully weigh the balance between risk and reward.”

[Begin Sidebar]

Income has helped power the fund’s total returns

The portfolio counselors who manage The Tax-Exempt Bond Fund of America focus on providing shareholders with a relatively high level of tax-exempt income. This chart shows the income return and total return for each of the fund’s past 20 fiscal years. As you can see, income return has varied less than total return.

 

[begin bar chart]

		n Total Return				n Income Return
09/01/1992 - 08/31/1993			12.40	%			5.95	%
09/01/1993 - 08/31/1994			-0.22	%			5.52	%
09/01/1994 - 08/31/1995			8.71	%			6.01	%
09/01/1995 - 08/31/1996			5.51	%			5.55	%
09/01/1996 - 08/31/1997			9.39	%			5.56	%
09/01/1997 - 08/31/1998			8.26	%			5.19	%
09/01/1998 - 08/31/1999			0.23	%			4.85	%
09/01/1999 - 08/31/2000			5.27	%			5.23	%
09/01/2000 - 08/31/2001			10.22	%			5.23	%
09/01/2001 - 08/31/2002			5.31	%			4.72	%
09/01/2002 - 08/31/2003			2.55	%			4.41	%
09/01/2003 - 08/31/2004			7.17	%			4.35	%
09/01/2004 - 08/31/2005			4.87	%			4.13	%
09/01/2005 - 08/31/2006			3.18	%			4.03	%
09/01/2006 - 08/31/2007			1.60	%			4.09	%
09/01/2007 - 08/31/2008			2.87	%			4.22	%
09/01/2008 - 08/31/2009			2.65	%			4.22	%
09/01/2009 - 08/31/2010			10.23	%			4.10	%
09/01/2010 - 08/31/2011			1.85	%			3.92	%
09/01/2011 - 08/31/2012			10.71	%			3.92	%

[end bar chart]

Fund results shown are for Class A shares at net asset value. If a sales charge (maximum 3.75%) had been deducted, the results would have been lower. Results are for past periods and are not predictive of results for future periods. Current and future results may be lower or higher than those shown. Share prices and returns will vary, so investors may lose money. For current information and month-end results, visit americanfunds.com.

[End Sidebar]

[Begin Pull Quote]

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“We have been able to pick up some additional yield by investing in these A-rated bonds that offered less attractive yield when they were insured and rated AAA. Of course, without the insurance each of these issues has to be carefully analyzed.”

Brenda Ellerin, portfolio counselor

[End Pull Quote]

The fund’s portfolio counselors work closely with a team of investment analysts and traders — each specializing in a particular sector of the muni market — to fully understand the risks as well as the potential rewards associated with each bond that goes into the portfolio. They continually monitor each security for changing circumstances that could alter the income stream it produces. The counselors, analysts and traders are supported by a team of economists and tax and political specialists who help provide a broad backdrop against which individual investment decisions are made.

Making the most of maturity

Yields across the municipal bond market vary widely depending on a number of factors, including economic conditions, prevailing interest rates, the credit health of the issuer, and the type of security and its maturity.

Bonds with longer maturities offer relatively higher income returns than short-term instruments because the longer term securities are more sensitive to changes in interest rates and economic conditions. In recent months investor appetite for yield boosted demand for longer duration municipal bonds. “Investors are moving out of cash and out along the yield curve into securities with longer maturities,” Neil says. “Remember that bond prices fall when interest rates rise. If the economy improves at some point and the Federal Reserve begins to raise rates, longer maturities will decline more than shorter term ones. In my view, this is not the time to be pushing the envelope on maturity but to maintain our conservative approach.”

 

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[Begin Pull Quote]

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“The fund holds bonds purchased over a range of interest rate cycles. Whether rates rise or fall, existing holdings continue to generate income — and reinvestment of interest and principal allows us to invest new capital in every interest rate environment.”

Karl Zeile, portfolio counselor

[End Pull Quote]

 

[photo of a child picking up shells from a beach]

Of course, the diversity of maturities that the fund holds helps smooth out results over interest rate cycles. “One potential advantage of investing in The Tax-Exempt Bond Fund of America rather than owning individual bonds is that the fund holds bonds purchased over a range of interest rate cycles,” says Karl. “Whether rates rise or fall, existing holdings continue to generate income — and reinvestment of interest and principal allows us to invest new capital in every interest rate environment.”

Rather than looking to bonds with the longest maturities for income, the fund’s counselors can add some incremental yield by investing in securities with specialized structures. Consider, for example, bonds with so-called “put” features, which are offered by various types of issuers. A put is a feature that requires the bondholder to sell the security back to the issuer at a specified date, usually for 100% of the face value.

“These bonds typically have nominal long maturities, but they may be ‘putable’ in three or five years — well ahead of the final maturity date,” explains Brenda Ellerin, a portfolio counselor for the fund. “These bonds are priced to their effective maturity or put date, but offer some additional yield because of the complexity of the structure.”

Bonds with put features are good defensive holdings because if interest rates are higher at the put date, the holder sells back the bond and reinvests the principal in one paying a higher coupon.

Spanning the credit spectrum

The fund’s counselors also strive to generate additional income by investing in bonds of lower credit quality. The Tax-Exempt Bond Fund of America has the flexibility to invest across the credit spectrum, from highest quality securities to lower rated high-yield securities.

Bonds are judged by credit rating agencies to be of higher or lower quality based on the issuer’s ability to make timely payments of interest and principal. Securities that are judged to be of investment grade are given ratings ranging from AAA to BBB, while riskier bonds are rated BB or below. Lower rated bonds tend to pay higher yields because they are considered riskier investments. While the fund focuses largely on higher quality bonds, it has the flexibility to invest a portion of assets in lower rated investment grade as well as high yield bonds. As of August 31, in fact, nearly 20% of the fund’s holdings were rated BBB or below or unrated.

The additional income these securities offer often comes at a price, and investors must balance the search for yield with their feelings about risk. “With more cash available and high-quality bonds yielding so little, we have certainly been looking at opportunities to invest in lower rated bonds,” says Neil. “Our mandate is to focus on generating income while seeking to preserve investor capital. To do that we must rely on our experience, judgment and research strength to find the appropriate balance.”

Interestingly, the reduced participation of bond insurers in the municipal bond market opened up opportunities for better yield among some types of investment-grade bonds (rated BBB and above). Prior to the 2008 financial crisis, nearly half of the new issue market was backed by bond insurers, who conferred their own AAA ratings on the bonds they insured. During the crisis, some of these insurers were downgraded by the rating agencies. As a result, the market put less faith in the value of the insurance and, today, very little new municipal debt is insured.

“Without the insurers, there are now considerably more A-rated bonds in the market,” says Brenda. “So we have been able to pick up some additional yield by investing in these A-rated bonds that offered less attractive yield when they were insured and rated AAA. Of course, without the insurance each of these issues has to be carefully analyzed, which is something we have been doing all along.”

Differences among sectors

Gaining a clear understanding of how bonds in different sectors of the muni market react to different conditions also helps the fund’s investment professionals identify opportunities for attractive yield. Consider, for example, housing bonds. “While they are not a significant portion of the fund, our investments in bonds supporting both multifamily and single-family housing can help us incrementally add yield spread to the portfolio. What’s more, they are less volatile than other types of bonds with similar maturities,” says Brenda.

Multifamily housing bonds are typically issued to help developers finance affordable housing and are backed by loans to developers, but they can be guaranteed by the municipal authority issuing the debt. Single-family housing bonds are supported by pools of mortgages from first-time home buyers. These securities can be backed by federal mortgage agencies like Fannie Mae or Ginnie Mae.

Housing bonds are generally priced cheaper than other types of bonds with similar credit ratings and maturities because they are subject to early redemptions triggered by refinancings, prepayments and sometimes foreclosures. To determine whether these bonds represent good value, investors must have an understanding of the complex structures of the bonds as well as regional housing markets and demographics — which is where the experience of our investment professionals proves particularly valuable.

A focus on the long term

The municipal bond market experienced a great deal of change over the years. By staying true to its conservative, research-driven approach, the fund rewarded its long-term investors largely through the income it generated. For the 10 calendar years ended December 31, 2011, the fund provided investors with a relatively high level of income — an average 12-month yield of 4.15%, slightly better than the 4.07% average of its peer group, the Lipper General & Insured Municipal Debt Funds Average.

Not surprisingly, income generated by the fund played a key role in the total returns it has produced over time, as you can see in the chart on page 8. Economic and market conditions continue to evolve. Through all the changes, the investment professionals who help manage The Tax-Exempt Bond Fund of America remain focused on the long term. Through patience and research, they pursue what they believe are solid income opportunities while striving to protect investor principal. n

 

 

Summary investment portfolio     August 31, 2012

 

The following summary investment portfolio is designed to streamline the report and help investors better focus on the fund’s principal holdings. See the inside back cover for details on how to obtain a complete schedule of portfolio holdings.

 

[begin pie chart]

Quality ratings*				Percent of net assets
Aaa/AAA					10.5	%
Aa/AA					31.5
A/A					31.1
Baa/BBB					12.5
Below investment-grade					2.6
Unrated					4.7
Short-term securities & other assets less liabilities					7.1
*Bond ratings, which typically range from Aaa/AAA (highest) to D (lowest), are assigned by credit rating agencies such as Moody's, Standard & Poor's and/or Fitch as an indication of an issuer's creditworthiness. If agency ratings differ, the security will be considered to have received the highest of those ratings, consistent with the fund's investment policies. Securities in the "unrated" category (above) have not been rated by a rating agency; however, the investment adviser performs its own credit analysis and assigns comparable ratings that are used for compliance with the fund's investment policies. The ratings are not covered by the Report of Independent Registered Public Accounting Firm.

[end pie chart]

 

 

		Principal								Percent
		amount				Value				of net
Bonds & notes  - 92.91%			(000	)			(000	)		assets
Arizona  - 3.86%
City of Phoenix Civic Improvement Corp., Airport Rev. Bonds, Series 2010-A, 5.00% 2040		$	20,000			$	22,104				.23	%
Salt River Project Agricultural Improvement and Power Dist., Salt River Project Electric System Rev. Bonds, Series 2008-A, 5.00% 2038			18,860				20,906				.21
City of Scottsdale Municipal Property Corp., Excise Tax Rev. Ref. Bonds, Series 2006, 5.00% 2030			23,000				29,049				.30
Other securities							302,316				3.12
							374,375				3.86
California  - 11.48%
Bay Area Toll Auth., San Francisco Bay Area Toll Bridge Rev. Ref. Bonds, Series 2009-F-1, 5.00% 2034			20,000				22,570				.23
Econ. Recovery Bonds, Ref. Series 2009-A, 5.25% 2021			17,750				21,613				.22
Orange County Sanitation Dist., Certs. of Part., Series 2007-B, Assured Guaranty Municipal insured, 5.00% 2037			35,000				39,117				.40
City of San Buenaventura, Rev. Bonds (Community Memorial Health System), Series 2011, 7.50% 2041			19,600				23,808				.25
Airport Commission, City and County of San Francisco, San Francisco International Airport, Second Series Rev. Bonds, Series 2009-E, 5.25% 2032			16,500				18,948				.20
Other securities							987,976				10.18
							1,114,032				11.48
Colorado  - 2.53%
Health Facs. Auth., Health Facs. Rev. Ref. Bonds (Evangelical Lutheran Good Samaritan Society Project), Series 2012, 5.00% 2042			19,500				20,648				.21
Regional Transportation Dist., Tax-Exempt Private Activity Bonds (Denver Transit Partners Eagle P3 Project), Series 2010, 6.00% 2041			23,765				27,511				.29
Other securities							197,189				2.03
							245,348				2.53
District of Columbia  - 1.24%
University Rev. Bonds (Georgetown University Issue), Series 2001-C, 5.25% 2034 (put 2023)			24,000				26,979				.28
Other securities							93,428				.96
							120,407				1.24
Florida  - 8.84%
Citizens Property Insurance Corp., High-Risk Account Secured Bonds, Series 2009-A-1, 6.00% 2017			23,000				27,129				.28
Hurricane Catastrophe Fund Fin. Corp., Rev. Bonds, Series 2010-A, 5.00% 2016			25,500				29,063				.30
Other securities							801,891				8.26
							858,083				8.84
Georgia  - 3.80%
Dev. Auth. of Burke County, Pollution Control Rev. Bonds (Oglethorpe Power Corp. Vogtle Project), Series 2008-E, 7.00% 2023			19,670				23,536
Dev. Auth. of Burke County, Pollution Control Rev. Ref. Bonds (Oglethorpe Power Corp. Vogtle Project), Series 2008-C, 5.70% 2043			20,000				21,774				.47
City of Atlanta, Water and Wastewater Rev. Ref. Bonds, Series 1999-A, FGIC-National insured, 5.50% 2022			20,500				24,771				.26
Municipal Electric Auth., Project One Rev. Ref. Bonds, Series 2008-D, 5.75% 2019			23,000				28,144				.29
Other securities							269,984				2.78
							368,209				3.80
Illinois  - 9.08%
Fin. Auth., Student Housing Rev. Ref. Bonds (CHF-DeKalb II, L.L.C. - Northern Illinois University Project), Series 2011, 6.875% 2043			27,500				32,550				.34
State Toll Highway Auth., Toll Highway Rev. Bonds, Series 2008-B, 5.50% 2033			21,710				24,111				.25
Other securities							823,863				8.49
							880,524				9.08
Louisiana  - 2.26%
Citizens Property Insurance Corp., Assessment Rev. Bonds, Series 2006-B, AMBAC insured, 5.00% 2019			22,000				24,438				.25
Local Government Environmental Facs. and Community Dev. Auth., Rev. Bonds (Westlake Chemical Corp. Projects), Series 2007, 6.75% 2032			22,500				25,361				.26
Parish of St. John the Baptist, Rev. Bonds (Marathon Oil Corp. Project), Series 2007-A, 5.125% 2037			22,200				23,552				.25
Other securities							145,779				1.50
							219,130				2.26
Massachusetts  - 2.57%
Dev. Fin. Agcy., Rev. Ref. Bonds (Boston University Issue), Series V-1, 5.00% 2029			17,800				20,147				.21
Other securities							229,561				2.36
							249,708				2.57
Michigan  - 3.52%
City of Detroit, Water Supply System Rev. Bonds, Series 2011-A, 5.25% 2041			34,350				36,196				.37
Other securities							305,469				3.15
							341,665				3.52
Nevada  - 2.83%
Clark County, Airport System Rev. Bonds, Series 2004-A-2, FGIC-National insured, 5.00% 2036			20,000				21,124
Clark County, Airport System Rev. Bonds, Series 2010-B, 5.125% 2036			18,000				19,846				.42
Other securities							233,309				2.41
							274,279				2.83
New Hampshire  - 0.45%
Business Fin. Auth., Rev. Bonds (Elliot Hospital Obligated Group Issue), Series 2009-A, 6.125% 2039			18,115				20,582				.21
Other securities							22,797				.24
							43,379				.45
New Jersey  - 2.35%
Tobacco Settlement Fncg. Corp., Tobacco Settlement Asset-backed Rev. Ref. Bonds, Series 2007-1-A, 4.625% 2026			29,750				27,286				.28
Transit Corp., Certs. of Part., Series 2003-A, AMBAC insured, 5.25% 2013			5,500				5,760
Transit Corp., Certs. of Part., Series 2005-A, FGIC-National insured, 5.00% 2018			7,750				8,492
Transit Corp., Certs. of Part., Series 2005-A, FGIC-National insured, 5.00% 2021			5,000				5,452
Transportation Trust Fund Auth., Transportation System Bonds (Capital Appreciation Bonds), Series 2010-A, 0% 2030			10,000				4,630
Transportation Trust Fund Auth., Transportation System Bonds (Capital Appreciation Bonds), Series 2010-A, 0% 2037			10,000				3,047
Transportation Trust Fund Auth., Transportation System Bonds (Capital Appreciation Bonds), Series 2010-A, 0% 2040			18,000				4,724
Transportation Trust Fund Auth., Transportation System Bonds, Series 2004-A, FGIC-National insured, 5.75% 2025			5,000				6,474
Transportation Trust Fund Auth., Transportation System Bonds, Series 2005-D, 5.00% 2020			4,000				4,412
Transportation Trust Fund Auth., Transportation System Bonds, Series 2008-A, 6.00% 2038			3,255				3,822
Transportation Trust Fund Auth., Transportation System Bonds, Series 2011-B, 5.50% 2031			2,000				2,381
Transportation Trust Fund Auth., Transportation System Rev. Ref. Bonds, Current Interest Bonds, Series 2006-A, 5.25% 2020			10,000				12,480
Transportation Trust Fund Auth., Transportation System Rev. Ref. Bonds, Current Interest Bonds, Series 2006-A, 5.25% 2021			10,000				12,503
Transportation Trust Fund Auth., Transportation System Rev. Ref. Bonds, Current Interest Bonds, Series 2006-A, 5.25% 2022			20,000				25,042
Transportation Trust Fund Auth., Transportation System Rev. Ref. Bonds, Series 2005-B, AMBAC insured, 5.25% 2023			8,000				10,060				1.13
Other securities							91,688				.94
							228,253				2.35
New York  - 5.54%
Liberty Dev. Corp., Liberty Rev. Ref. Bonds (Bank of America Tower at One Bryant Park Project), Series 2010, 6.375% 2049			19,800				22,755				.23
Other securities							514,946				5.31
							537,701				5.54
Ohio  - 3.23%
Air Quality Dev. Auth., Air Quality Dev. Rev. Bonds (FirstEnergy Generation Corp. Project), Series 2009-A, 5.70% 2020			16,215				18,906
Air Quality Dev. Auth., Pollution Control Rev. Ref. Bonds (FirstEnergy Generation Corp. Project), Series 2009-C, 5.625% 2018			17,200				19,990				.40
Buckeye Tobacco Settlement Fncg. Auth., Tobacco Settlement Asset-backed Bonds, Current Interest Bonds, Series 2007-A-2, 5.875% 2030			39,585				32,985				.34
Other securities							241,363				2.49
							313,244				3.23
South Carolina  - 1.55%
Building Equity Sooner for Tomorrow (BEST), Installment Purchase Rev. Ref. Bonds (School Dist. of Greenville County, South Carolina Project), Series 2006, 5.00% 2023			19,845				22,982				.24
Public Service Auth., Rev. Ref. Obligations (Santee Cooper), Series 2008-A, 5.50% 2038			20,000				23,576				.24
Other securities							104,281				1.07
							150,839				1.55
Texas  - 10.53%
Bexar County Hospital Dist., Combination Tax and Rev. Certificates of Obligation, Series 2008, 5.00% 2032			20,500				22,609				.23
G.O. Bonds, Water Financial Assistance Bonds (Water Infrastructure Fund), Series 2009, Subseries 2009-A, 5.00% 2028			1,500				1,792
G.O. Bonds, Water Financial Assistance Bonds, Series 2011-B, 5.00% 2031			8,000				9,509
Public Fin. Auth., G.O. Bonds, Series 2007, 5.00% 2023			1,525				1,816
Public Fin. Auth., G.O. Bonds, Series 2007, 5.00% 2024			1,525				1,804
Transportation Commission, G.O. Mobility Fund Bonds, Series 2008, 4.75% 2037			10,000				11,180
Transportation Commission, G.O. Mobility Fund Bonds, Series 2008, 5.00% 2017			2,250				2,682
Transportation Commission, G.O. Mobility Fund Bonds, Series 2008, 5.00% 2021			12,545				15,116
Transportation Commission, G.O. Mobility Fund Bonds, Series 2008, 5.00% 2028			7,000				8,289				.54
Harris County, Metropolitan Transit Auth., Sales and Use Tax Bonds, Series 2011-A, 5.00% 2036			18,875				21,741				.23
North Texas Tollway Auth., System Rev. Ref. Bonds, Current Interest Bonds, Series 2008-A, 5.50% 2018			1,000				1,192
North Texas Tollway Auth., System Rev. Ref. Bonds, Current Interest Bonds, Series 2008-A, 5.625% 2033			15,100				16,878
North Texas Tollway Auth., System Rev. Ref. Bonds, Current Interest Bonds, Series 2008-A, 6.00% 2021			3,760				4,491
North Texas Tollway Auth., System Rev. Ref. Bonds, Current Interest Bonds, Series 2008-A, 6.00% 2023			12,570				14,909
North Texas Tollway Auth., System Rev. Ref. Bonds, Current Interest Bonds, Series 2008-A, 6.00% 2025			5,000				5,977
North Texas Tollway Auth., System Rev. Ref. Bonds, Insured Capital Appreciation Bonds, Series 2008-D, Assured Guaranty insured, 0% 2028			10,000				5,150
North Texas Tollway Auth., System Rev. Ref. Bonds, Series 2008-E, Subseries 2008-E-3, 5.75% 2038 (put 2016)			2,150				2,477
North Texas Tollway Auth., System Rev. Ref. Bonds, Series 2008-F, 5.75% 2033			11,000				12,169
North Texas Tollway Auth., System Rev. Ref. Bonds, Series 2008-F, 5.75% 2038			8,500				9,329
North Texas Tollway Auth., System Rev. Ref. Bonds, Series 2009-A, 6.00% 2028			16,000				18,876
North Texas Tollway Auth., System Rev. Ref. Bonds, Series 2009-A, 6.10% 2028			5,000				5,927
North Texas Tollway Auth., System Rev. Ref. Bonds, Series 2009-A, 6.25% 2039			5,000				5,758
North Texas Tollway Auth., System Rev. Ref. Bonds, Series 2010, 6.00% 2034			1,500				1,791
North Texas Tollway Auth., System Rev. Ref. Bonds, Series 2010, 6.00% 2038			5,000				5,875
North Texas Tollway Auth., System Rev. Ref. Bonds, Series 2011-B, 5.00% 2038			8,000				8,827
North Texas Tollway Auth., System Rev. Ref. Bonds, Series 2012-B, 5.00% 2042			12,000				13,222				1.37
Private Activity Bond Surface Transportation Corp., Rev. Bonds (NTE Mobility Partners LLC North Tarrant Express Managed Lanes Project), Series 2009, 6.875% 2039			24,250				29,171				.30
Other securities							762,930				7.86
							1,021,487				10.53
Washington  - 2.95%
Energy Northwest, Electric Rev. Ref. Bonds (Project 1), Series 2012-A, 5.00% 2017			20,000				24,022				.25
Health Care Facs. Auth., Rev. Ref. Bonds (Virginia Mason Medical Center), Series 2007-A, 6.125% 2037			18,500				20,413				.21
Other securities							242,081				2.49
							286,516				2.95
Wisconsin  - 1.70%
General Fund Annual Appropriation Rev. Ref. Bonds, Series 2009-A, 6.00% 2036			52,960				64,987				.67
Other securities							100,274				1.03
							165,261				1.70
Other states & U.S. territories - 12.60%
Other securities							1,222,355				12.60
Total bonds & notes (cost: $8,245,764,000)							9,014,795				92.91
		Principal								Percent
		amount				Value				of net
Short-term securities  - 6.77%			(000	)			(000	)		assets
State of Colorado, General Fund Tax and Rev. Anticipation Notes, Series 2012-A, 2.00% 6/27/2013		$	19,200				19,491
State of Colorado, General Fund Tax and Rev. Anticipation Notes, Series 2012-A, 2.50% 6/27/2013			12,800				13,046				.34
Dist. of Columbia, G.O. Demand Ref. Bonds, Series 2008-D, Wells Fargo Bank LOC, 0.16% 2034 (1)			28,000				28,000				.29
School Dist. of Miami-Dade County, Florida, Tax Anticipation Notes, Series 2012, 2.50% 2/28/2013			50,000				50,574				.52
State of Idaho, Tax Anticipation Notes, Series 2012, 2.00% 6/28/2013			22,000				22,338				.23
Illinois Fin. Auth., Rev. Bonds (Resurrection Health Care), Series 2005-B, JPMorgan Chase LOC, 0.19% 2035 (1)			20,630				20,630				.21
Jackson County, Mississippi, Port Fac. Rev. Ref. Bonds (Chevron U.S.A. Inc. Project), Series 1993, 0.19% 2023 (1)			14,500				14,500
Mississippi Business Fin. Corp., Gulf Opportunity Zone Industrial Dev. Rev. Bonds (Chevron U.S.A. Inc. Project), Series 2009-A, 0.17% 2030 (1)			1,900				1,900
Mississippi Business Fin. Corp., Gulf Opportunity Zone Industrial Dev. Rev. Bonds (Chevron U.S.A. Inc. Project), Series 2009-E, 0.17% 2030 (1)			4,700				4,700				.22
New Hampshire Health and Education Facs. Auth., Rev. Ref. Bonds (Dartmouth College Issue), Series 2007-A, 0.21% 2031 (1)			14,220				14,220
New Hampshire Health and Education Facs. Auth., Rev. Ref. Bonds (Dartmouth College Issue), Series 2007-B, 0.21% 2041 (1)			16,000				16,000				.31
State of Oregon, Full Faith and Credit Tax Anticipation Notes, Series 2012-A, 2.00% 6/28/2013			40,000				40,608				.42
State of Texas, Tax and Rev. Anticipation Notes, Series 2012, 2.50% 8/30/2013			125,000				127,881				1.32
Other securities							282,829				2.91
Total short-term securities (cost: $656,628,000)							656,717				6.77
Total investment securities (cost: $8,902,392,000)							9,671,512				99.68
Other assets less liabilities							30,897				.32
Net assets						$	9,702,409				100.00	%

 

"Other securities" includes all issues that are not disclosed separately in the summary investment portfolio, including securities which were valued under fair value procedures adopted by authority of the board of trustees. The total value of all such securities was $3,936,000, which represented .04% of the net assets of the fund. Some of “Other securities” (with an aggregate value of $60,925,000, which represented .63% of the net assets of the fund) were acquired in transactions exempt from registration under Rule 144A of the Securities Act of 1933 and may be resold in the U.S. in transactions exempt from registration, normally to qualified institutional buyers.

(1) Coupon rate may change periodically. For short-term securities, the date of the next scheduled coupon rate change is considered to be the maturity date.

Key to abbreviations

Agcy. = Agency

Auth. = Authority

Certs. of Part. = Certificates of Participation

Dept. = Department

Dev. = Development

Dist. = District

Econ. = Economic

Fac. = Facility

Facs. = Facilities

Fin. = Finance

Fncg. = Financing

G.O. = General Obligation

LOC = Letter of Credit

Preref. = Prerefunded

Redev. = Redevelopment

Ref. = Refunding

Rev. = Revenue

TECP = Tax-Exempt Commercial Paper

See Notes to Financial Statements

 

 

 

Financial statements

 

Statement of assets and liabilities
at August 31, 2012		(dollars in thousands)
Assets:
Investment securities, at value (cost: $8,902,392)						$	9,671,512
Cash							47
Receivables for:
Sales of investments		$	2,470
Sales of fund's shares			18,174
Interest			103,414				124,058
							9,795,617
Liabilities:
Payables for:
Purchases of investments			69,977
Repurchases of fund's shares			13,889
Dividends on fund's shares			2,992
Investment advisory services			1,981
Services provided by related parties			4,167
Trustees' deferred compensation			200
Other			2				93,208
Net assets at August 31, 2012						$	9,702,409
Net assets consist of:
Capital paid in on shares of beneficial interest						$	9,033,395
Undistributed net investment income							5,428
Accumulated net realized loss							(105,534	)
Net unrealized appreciation							769,120
Net assets at August 31, 2012						$	9,702,409

 

 

	(dollars and shares in thousands, except per-share amounts)
Shares of beneficial interest issued and outstanding (no stated par value) -
unlimited shares authorized (741,561 total shares outstanding)
		Net assets				Shares outstanding				Net asset value per share
Class A		$	7,444,946				569,022			$	13.08
Class B			30,267				2,313				13.08
Class C			420,332				32,126				13.08
Class F-1			1,526,185				116,647				13.08
Class F-2			239,237				18,285				13.08
Class R-6			41,442				3,168				13.08
See Notes to Financial Statements

 

 

Statement of operations
for the year ended August 31, 2012		(dollars in thousands)
Investment income:
Income:
Interest						$	385,032
Fees and expenses*:
Investment advisory services		$	22,562
Distribution services			25,145
Transfer agent services			3,740
Administrative services			1,430
Reports to shareholders			266
Registration statement and prospectus			221
Trustees' compensation			78
Auditing and legal			99
Custodian			21
Federal and state income taxes			140
State and local taxes			47
Other			73				53,822
Net investment income							331,210
Net realized loss and unrealized appreciation on investments:
Net realized loss on investments							(1,791	)
Net unrealized appreciation on investments							583,007
Net realized loss and unrealized appreciation on investments							581,216
Net increase in net assets resulting from operations						$	912,426
(*) Additional information related to class-specific fees and expenses is included
in the Notes to Financial Statements.
See Notes to Financial Statements
Statements of changes in net assets
			(dollars in thousands)
		Year ended August 31
			2012				2011
Operations:
Net investment income		$	331,210			$	349,755
Net realized loss on investments			(1,791	)			(15,557	)
Net unrealized appreciation (depreciation) on investments			583,007				(240,849	)
Net increase in net assets resulting from operations			912,426				93,349
Dividends paid or accrued to shareholders from net investment income			(330,173	)			(349,603	)
Net capital share transactions			600,697				(1,112,834	)
Total increase (decrease) in net assets			1,182,950				(1,369,088	)
Net assets:
Beginning of year			8,519,459				9,888,547
End of year (including undistributed
net investment income: $5,428 and $6,161, respectively)		$	9,702,409			$	8,519,459
See Notes to Financial Statements

 

 

Notes to financial statements

1.	Organization

The Tax-Exempt Bond Fund of America (the "fund") is registered under the Investment Company Act of 1940 as an open-end, diversified management investment company. The fund seeks a high level of federally tax-exempt current income, consistent with the preservation of capital, through a diversified portfolio of municipal bonds.

The fund has six share classes consisting of five retail share classes (Classes A, B and C, as well as two F share classes, F-1 and F-2) and one share class that is only available to the American Funds Portfolio Series (Class R-6). Some share classes are only available to limited categories of investors. The fund’s share classes are further described below:

Share class	Initial sales charge	Contingent deferred sales charge upon redemption	Conversion feature
Class A	Up to 3.75%	None (except 1% for certain redemptions within one year of purchase without an initial sales charge)	None
Class B*	None	Declines from 5% to 0% for redemptions within six years of purchase	Class B converts to Class A after eight years
Class C	None	1% for redemptions within one year of purchase	Class C converts to Class F-1 after 10 years
Classes F-1 and F-2	None	None	None
Class R-6	None	None	None

* Class B shares of the fund are not available for purchase.

Holders of all share classes have equal pro rata rights to assets, dividends and liquidation proceeds.   Each share class has identical voting rights, except for the exclusive right to vote on matters affecting only its class. Share classes have different fees and expenses ("class-specific fees and expenses"), primarily due to different arrangements for distribution, administrative and shareholder services. Differences in class-specific fees and expenses will result in differences in net investment income and, therefore, the payment of different per-share dividends by each class.

2.	Significant accounting policies

The financial statements have been prepared to comply with accounting principles generally accepted in the United States of America. These principles require management to make estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates. The fund follows the significant accounting policies described below, as well as the valuation policies described in the next section on valuation.

Security transactions and related investment income – Security transactions are recorded by the fund as of the date the trades are executed with brokers. Realized gains and losses from security transactions are determined based on the specific identified cost of the securities.   In the event a security is purchased with a delayed payment date, the fund will segregate liquid assets sufficient to meet its payment obligations. Interest income is recognized   on an accrual basis. Market discounts, premiums and original issue discounts on fixed-income securities are amortized daily over the expected life of the security.

Class allocations – Income, fees and expenses (other than class-specific fees and expenses) are allocated daily among the various share classes based on the relative value of their settled shares. Realized and   unrealized gains and losses are allocated daily among the various share classes based on their relative net assets. Class-specific fees and expenses, such as distribution, administrative and shareholder services, are charged directly to the respective share class.

Dividends and distributions to shareholders – Dividends paid to shareholders are declared daily after the determination of the fund’s net investment income and are paid to shareholders monthly. Distributions paid to shareholders are recorded on the ex-dividend date.

3.

Valuation

Capital Research and Management Company (“CRMC”), the fund’s investment adviser, values the fund’s investments at fair value as defined by accounting principles generally accepted in the United States of America. The net asset value of each share class of the fund is generally determined as of approximately 4:00 p.m. New York time each day the New York Stock Exchange is open.

Methods and inputs – The fund’s investment adviser uses the following methods and inputs to establish the fair value of the fund’s assets and liabilities. Use of particular methods and inputs may vary over time based on availability and relevance as market and economic conditions evolve.

Fixed-income securities, including short-term securities purchased with more than 60 days left to maturity, are generally valued at prices obtained from one or more pricing vendors. Vendors value such securities based on one or more of the following inputs: benchmark yields, transactions, bids, offers, quotations from dealers and trading systems, new issues, spreads and other relationships observed in the markets among comparable securities; and proprietary pricing models such as yield measures calculated using factors such as cash flows, financial or collateral performance and other reference data. For certain distressed securities, valuations may include cash flows or liquidation values using a net present value calculation based on inputs that include, but are not limited to, financial statements and debt contracts.

When the fund’s investment adviser deems it appropriate to do so (such as when vendor prices are unavailable or not deemed to be representative), fixed-income securities will be valued in good faith at the mean quoted bid and ask prices that are reasonably and timely available (or bid prices, if ask prices are not available) or at prices for securities of comparable maturity, quality and type.

Short-term securities purchased within 60 days to maturity are valued at amortized cost, which approximates fair value. The value of short-term securities originally purchased with maturities greater than 60 days is determined based on an amortized value to par when they reach 60 days.

Securities and other assets for which representative market quotations are not readily available or are considered unreliable by the fund’s investment adviser are fair valued as determined in good faith under fair value guidelines adopted by authority of the fund’s   board of trustees as further described below. The investment adviser follows fair valuation guidelines, consistent with U.S. Securities and Exchange Commission rules and guidance, to consider relevant principles and factors when making fair value determinations. The investment adviser considers relevant indications of value that are reasonably and timely available to it in determining the fair value to be assigned to a particular security, such as the type and cost of the security; contractual or legal restrictions on resale of the security; relevant financial or business developments of the issuer; actively traded similar or related securities; conversion or exchange rights on the security; related corporate actions; significant events occurring after the close of trading in the security; and changes in overall market conditions. Fair valuations and valuations of investments that are not actively trading involve judgment and may differ materially from valuations that would have been used had greater market activity occurred.

Processes and structure – The fund’s board of trustees has delegated authority to the fund’s   investment adviser to make fair value determinations, subject to board oversight. The investment adviser has established a Joint Fair Valuation Committee (the “Fair Valuation Committee”) to administer, implement and oversee the fair valuation process, and to make fair value decisions. The Fair Valuation Committee regularly reviews its own fair value decisions, as well as decisions made under its standing instructions to the investment adviser’s valuation teams. The Fair Valuation Committee reviews changes in fair value measurements from period to period and may, as deemed appropriate, update the fair valuation guidelines to better reflect the results of back testing and address new or evolving issues. The Fair Valuation Committee reports any changes to the fair valuation guidelines to the board of trustees with supplemental information to support the changes. The fund’s board and audit committee also regularly review reports that describe fair value determinations and methods.

The fund’s investment adviser has also established a Fixed-Income Pricing Review Group to administer and oversee the fixed-income valuation process, including the use of fixed-income pricing vendors. This group regularly reviews pricing vendor information and market data. Pricing decisions, processes and controls over security valuation are also subject to additional internal reviews, including an annual control self-evaluation program facilitated by the investment adviser’s compliance group.

Classifications – The fund’s investment adviser classifies the fund’s assets and liabilities into three levels based on the inputs used to value the assets or liabilities. Level 1 values are based on quoted prices in active markets for identical securities. Level 2 values are based on significant observable market inputs, such as quoted prices for similar securities and quoted prices in inactive markets. Level 3 values are based on significant unobservable inputs that reflect the investment adviser’s determination of assumptions that market participants might reasonably use in valuing the securities. The valuation levels are not necessarily an indication of the risk or liquidity associated with the underlying investment. For example, U.S. government securities are reflected as Level 2 because the inputs used to determine fair value may not always be quoted prices in an active market.

The following table presents the fund’s valuation levels as of August 31, 2012 (dollars in thousands):

 

			Investment securities
			Level 1				Level 2				Level 3				Total
Assets:
Bonds & notes:
	California		$	-			$	1,114,032			$	-			$	1,114,032
	Texas			-				1,021,487				-				1,021,487
	Illinois			-				880,524				-				880,524
	Florida			-				856,221				1,862				858,083
	New York			-				537,701				-				537,701
	Arizona			-				374,375				-				374,375
	Georgia			-				368,209				-				368,209
	Michigan			-				341,665				-				341,665
	Ohio			-				313,244				-				313,244
	Washington			-				286,516				-				286,516
	Other states & U.S. territories			-				2,916,885				2,074				2,918,959
Short-term securities				-				656,717				-				656,717
Total			$	-			$	9,667,576			$	3,936			$	9,671,512

4.	Risk factors

Investing in the fund may involve certain risks including, but not limited to, those described below.

Market conditions – The prices of, and the income generated by, the securities held by the fund may decline due to market conditions and other factors, including those directly involving the issuers of securities held by the fund.

Investing in bonds – Rising interest rates will generally cause the prices of bonds and other debt securities to fall. Longer maturity debt securities may be subject to greater price fluctuations than shorter maturity debt securities. In addition, falling interest rates may cause an issuer to redeem, call or refinance a security before its stated maturity, which may result in the fund having to reinvest the proceeds in lower yielding securities.

Bonds and other debt securities are subject to credit risk, which is the possibility that the credit strength of an issuer will weaken and/or an issuer of a debt security will fail to make timely payments of principal or interest and the security will go into default.

Thinly traded securities – There may be little trading in the secondary market for particular bonds or other debt securities, which may make them more difficult to value, acquire or sell.

Credit and liquidity support – Changes in the credit quality of banks and financial institutions providing credit and liquidity support features with respect to securities held by the fund could cause the values of these securities to decline.

Investing in lower rated bonds – Lower rated bonds and other lower rated debt securities generally have higher rates of interest and involve greater risk of default or price declines due to changes in the issuer’s creditworthiness than those of higher quality debt securities. The market prices of these securities may fluctuate more than the prices of higher quality debt securities and may decline significantly in periods of general economic difficulty. These risks may be increased with respect to investments in junk bonds.

Investing in similar municipal bonds – Investing significantly in municipal obligations of issuers in the same state or backed by revenues of similar types of projects or industries may make the fund more susceptible to certain economic, political or regulatory occurrences. As a result, the potential for fluctuations in the fund’s share price may increase.

Management – The investment adviser to the fund actively manages the fund’s investments. Consequently, the fund is subject to the risk that the methods and analyses employed by the investment adviser in this process may not produce the desired results. This could cause the fund to lose value or its investment results to lag relevant benchmarks or other funds with similar objectives.

5.	Taxation and distributions

 

Federal income taxation – The fund complies with the requirements under Subchapter M of the Internal Revenue Code applicable to mutual funds and intends to distribute substantially all of its net income and net capital gains each year. The fund is not subject to income taxes to the extent taxable income and net capital gains are distributed. Generally, income earned by the fund is exempt from federal income taxes; however, the fund may earn taxable income from certain investments.

As of and during the period ended August 31, 2012, the fund did not have a liability for any unrecognized tax benefits. The fund recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the statement of operations. During the period, the fund did not incur any significant interest or penalties.

The fund is not subject to examination by U.S. federal tax authorities for tax years before 2008 and by state tax authorities for tax years before 2007.

Distributions – Distributions paid to shareholders are based on net investment income and net realized gains determined on a tax basis, which may differ from net investment income and net realized gains   for financial reporting purposes. These differences are due primarily to different treatment for items such as short-term capital gains and losses; capital losses related to sales of certain securities within 30 days of purchase; deferred expenses; cost of investments sold; net capital losses; amortization of discounts; and income on certain investments.   The fiscal year in which amounts are distributed may differ from the year in which the net investment income and net realized gains are recorded by the fund for financial reporting purposes.

During the year ended August 31, 2012, the fund reclassified $800,000 from accumulated net realized loss to undistributed net investment income, $2,570,000 from undistributed net investment income to capital paid in on shares of beneficial interest and $4,175,000 from capital paid in on shares of beneficial interest to accumulated net realized loss to align financial reporting with tax reporting.

Under the Regulated Investment Company Modernization Act of 2010 (the “Act”), net capital losses recognized after August 31, 2011, may be carried forward indefinitely, and their character is retained as short-term and/or long-term losses. Previously, net capital losses were carried forward for eight years and treated as short-term losses. As a transition rule, the Act requires that post-enactment net capital losses be used before pre-enactment net capital losses.

As of August 31, 2012, the tax basis components of distributable earnings, unrealized appreciation (depreciation) and cost of investment securities were as follows:

	(dollars in thousands)
Undistributed tax-exempt income					$	3,106
Capital loss carryforward*:
No expiration		$	(18,967	)
Expiring 2015			(3,035	)
Expiring 2016			(560	)
Expiring 2017			(22,520	)
Expiring 2018			(59,742	)		(104,824	)
Gross unrealized appreciation on investment securities						823,729
Gross unrealized depreciation on investment securities						(48,211	)
Net unrealized appreciation on investment securities						775,518
Cost of investment securities						8,895,994
*Reflects the expiration of capital loss carryforward of $4,175,000. The capital loss carryforward will be used to offset any capital gains realized by the fund in future years through the expiration dates. The fund will not make distributions from capital gains while a capital loss carryforward remains.

 

 

Tax-exempt income distributions paid or accrued to shareholders were as follows (dollars in thousands):

 

		Year ended August 31
Share class		2012				2011
Class A		$	258,693			$	273,244
Class B			1,043				1,809
Class C			11,462				13,051
Class F-1			50,382				53,370
Class F-2			8,330				8,129
Class R-6 (*)			263				-
Total		$	330,173			$	349,603
(*) Class R-6 shares were offered beginning May 11, 2012.

6.	Fees and transactions with related parties

 

CRMC, the fund’s investment adviser, is the parent company of American Funds Distributors,® Inc. ("AFD"), the principal underwriter of the fund’s shares, and American Funds Service Company® ("AFS"), the fund’s transfer agent.

Investment advisory services – The fund has an investment advisory and service agreement with CRMC that provides   for monthly fees accrued daily. These fees are based on a series of decreasing annual rates beginning with 0.30% on the first $60 million of daily net assets and decreasing to 0.12% on such assets in excess of $10 billion. The agreement also provides for monthly fees, accrued daily, based on a series of decreasing rates beginning with 3.00% on the first $3,333,333 of the fund's monthly gross income and decreasing to 2.00% on such income in excess of $8,333,333. For the year ended August 31, 2012, the investment advisory services fee was $22,562,000, which was equivalent to an annualized rate of 0.251% of average daily   net assets.

Class-specific fees and expenses – Expenses that are specific to individual share classes are accrued directly to the respective share class. The principal class-specific fees and expenses are described below:

Distribution services – The fund has plans of distribution for all share classes, except Class F-2 and R-6 shares. Under the plans, the board of trustees approves certain categories of expenses that are used to finance activities primarily intended to sell fund shares and service existing accounts. The plans provide for payments, based on an annualized percentage of average daily net assets, ranging from 0.25% to 1.00% as noted below. In some cases, the board of trustees has limited the amounts that may be paid to less than the maximum allowed by the plans.   All share classes with a plan may use up to 0.25% of average daily net assets to pay service fees, or to compensate AFD for paying service fees, to firms that have entered into agreements with AFD to provide certain shareholder services. The remaining amounts available to be paid under each plan are paid to dealers to compensate them for their sales activities.

For Class A shares, distribution-related expenses include the reimbursement of dealer and wholesaler commissions paid by AFD for certain shares sold without a sales charge. This   share   class reimburses   AFD for amounts billed within the prior 15 months but only to the extent that the overall annual expense limit of 0.25%   is not exceeded. As of August 31, 2012, unreimbursed expenses subject to reimbursement totaled $3,323,000 for Class A shares.

Share class	Currently approved limits	Plan limits
Class A	0.25%	0.25%
Class B	1.00	1.00
Class C	1.00	1.00
Class F-1	0.25	0.50

Transfer agent services –   The fund has a shareholder services agreement with AFS under which the fund compensates AFS for providing transfer agent services to each of the fund’s share classes. These services include recordkeeping, shareholder communications and transaction processing. In addition, the fund reimburses AFS for amounts paid to third parties for performing transfer agent services on behalf of fund shareholders.

During the period September 1, 2011, through December 31, 2011, only Class A and B shares were subject to the shareholder services agreement with AFS. During this period, AFS and other third parties were compensated for providing transfer agent services to Class C and F shares through the fees paid by the fund to CRMC under the fund’s administrative services agreement with CRMC as described in the administrative services section below; CRMC paid for any transfer agent services expenses in excess of 0.10% of the respective average daily net assets of each of such share classes.

Effective January 1, 2012, the shareholder services agreement with AFS was modified to include Class C and F shares and payment for transfer agent services for such classes under the administrative services agreement terminated. Under this structure, transfer agent services expenses for some classes may exceed 0.10% of average daily net assets, resulting in an increase in expenses paid by some share classes.

For the year ended August 31, 2012, the total transfer agent services fee paid under these agreements was $3,740,000, of which $3,253,000 was paid by the fund to AFS and $487,000 was paid by the fund to CRMC through its administrative services agreement with the fund. Amounts paid to CRMC by the fund were then paid by CRMC to AFS and other third parties.

Administrative services – The fund has an administrative services agreement with CRMC under which the fund compensates CRMC for providing administrative services to Class A, C, F and R shares. These services include, but are not limited to, coordinating, monitoring, assisting and overseeing third parties that provide services to fund shareholders.

During the period September 1, 2011, through December 31, 2011, the agreement applied only to Class C and F shares. The agreement also required CRMC to arrange for the provision of transfer agent services for such share classes, which paid CRMC annual fees up to 0.15% of their respective average daily net assets. During this period, up to 0.05% of these fees were used to compensate CRMC for performing administrative services; all other amounts paid under this agreement were used to compensate AFS and other third parties for transfer agent services.

Effective January 1, 2012, the administrative services agreement with CRMC was modified to include Class A shares. Under the revised agreement, Class A shares pay an annual fee of 0.01% and Class C and F shares pay an annual fee of 0.05% of their respective average daily net assets to CRMC for administrative services. Fees for transfer agent services are no longer included as part of the administrative services fee paid by the fund to CRMC. Effective April 1, 2012, the administrative services agreement was amended to include Class R shares. Class R shares pay an annual fee of 0.05% of their respective average daily net assets to CRMC for administrative services.

For the year ended August 31, 2012, total fees paid to CRMC for performing administrative services were $1,430,000.

Class-specific expenses under the agreements described above for the year ended August 31, 2012, were as follows (dollars in thousands):

 

Share class		Distribution services				Transfer agent services				Administrative services
Class A		$	17,399			$	2,016			$	475
Class B			348				9			Not applicable
Class C			3,909				114				193
Class F-1			3,489				1,413				653
Class F-2		Not applicable					188				106
Class R-6 (*)		Not applicable					-				3
Total class-specific expenses		$	25,145			$	3,740			$	1,430
(*) Class R-6 shares were offered beginning May 11, 2012.

Trustees’ deferred compensation – Trustees who are unaffiliated with CRMC   may elect to defer the cash payment of part or all of their compensation. These deferred amounts, which remain as liabilities of the fund, are treated as if invested in shares of the fund or other American Funds. These amounts represent general, unsecured liabilities of the fund and vary according to the total returns of the selected funds. Trustees’ compensation of $78,000, shown on the accompanying financial statements, includes $70,000 in current fees (either paid in cash or deferred) and a net increase of $8,000 in the value of the deferred amounts.

Affiliated officers and trustees – Officers and certain trustees of the fund are or may be considered to be affiliated with CRMC, AFS and AFD. No affiliated officers or trustees received any compensation directly from the fund.

7.	Capital share transactions

 

Capital share transactions in the fund were as follows (dollars and shares in thousands):

 

		Sales (*)								Reinvestments of dividends								Repurchases (*)								Net increase (decrease)
Share class		Amount				Shares				Amount				Shares				Amount				Shares				Amount				Shares
Year ended August 31, 2012
Class A		$	1,110,952				87,424			$	230,874				18,149			$	(903,292	)			(71,308	)		$	438,534				34,265
Class B			3,157				248				965				76				(16,810	)			(1,328	)			(12,688	)			(1,004	)
Class C			97,430				7,659				10,365				815				(82,627	)			(6,515	)			25,168				1,959
Class F-1			415,779				32,717				49,821				3,915				(386,444	)			(30,571	)			79,156				6,061
Class F-2			77,435				6,086				6,382				502				(54,378	)			(4,280	)			29,439				2,308
Class R-6 (†)			43,416				3,346				265				20				(2,593	)			(198	)			41,088				3,168
Total net increase
(decrease)		$	1,748,169				137,480			$	298,672				23,477			$	(1,446,144	)			(114,200	)		$	600,697				46,757
Year ended August 31, 2011
Class A		$	743,275				61,503			$	233,946				19,447			$	(1,956,006	)			(163,722	)		$	(978,785	)			(82,772	)
Class B			2,794				231				1,587				132				(38,878	)			(3,240	)			(34,497	)			(2,877	)
Class C			59,619				4,919				11,418				949				(161,960	)			(13,583	)			(90,923	)			(7,715	)
Class F-1			524,497				43,660				51,196				4,258				(570,088	)			(47,399	)			5,605				519
Class F-2			80,521				6,689				5,803				482				(100,558	)			(8,442	)			(14,234	)			(1,271	)
Total net increase
(decrease)		$	1,410,706				117,002			$	303,950				25,268			$	(2,827,490	)			(236,386	)		$	(1,112,834	)			(94,116	)
(*) Includes exchanges between share classes of the fund.
(†) Class R-6 shares were offered beginning May 11, 2012.

8.	Investment transactions

 

The fund made purchases and sales of investment securities, excluding short-term securities and U.S. government obligations, if any, of $1,678,971,000 and $1,233,721,000, respectively, during the year ended August 31, 2012.

 

 

 

Financial highlights

 

						Income from investment operations (1)
		Net asset value, beginning of period				Net investment income				Net gains (losses) on securities (both realized and unrealized)				Total from investment operations				Dividends (from net investment income)				Net asset value, end of period				Total return (2) (3)				Net assets, end of period (in millions)				Ratio of expenses to average net assets before waivers				Ratio of expenses to average net assets after waivers (3)				Ratio of net income to average net assets (3)
Class A:
Year ended 8/31/2012		$	12.26			$	.47			$	.82			$	1.29			$	(.47	)		$	13.08				10.71	%		$	7,445				.55	%			.55	%			3.73	%
Year ended 8/31/2011			12.53				.48				(.27	)			.21				(.48	)			12.26				1.85				6,557				.55				.55				4.01
Year ended 8/31/2010			11.82				.48				.71				1.19				(.48	)			12.53				10.23				7,740				.54				.54				3.92
Year ended 8/31/2009			12.03				.50				(.21	)			.29				(.50	)			11.82				2.65				7,130				.56				.56				4.39
Year ended 8/31/2008			12.19				.51				(.16	)			.35				(.51	)			12.03				2.87				6,319				.56				.53				4.16
Class B:
Year ended 8/31/2012			12.26				.38				.82				1.20				(.38	)			13.08				9.90				30				1.29				1.29				3.01
Year ended 8/31/2011			12.53				.39				(.27	)			.12				(.39	)			12.26				1.08				40				1.30				1.30				3.26
Year ended 8/31/2010			11.82				.38				.71				1.09				(.38	)			12.53				9.41				78				1.30				1.30				3.18
Year ended 8/31/2009			12.03				.41				(.21	)			.20				(.41	)			11.82				1.88				107				1.32				1.31				3.65
Year ended 8/31/2008			12.19				.41				(.16	)			.25				(.41	)			12.03				2.10				114				1.31				1.28				3.42
Class C:
Year ended 8/31/2012			12.26				.37				.82				1.19				(.37	)			13.08				9.85				420				1.34				1.34				2.94
Year ended 8/31/2011			12.53				.39				(.27	)			.12				(.39	)			12.26				1.03				370				1.35				1.35				3.21
Year ended 8/31/2010			11.82				.38				.71				1.09				(.38	)			12.53				9.35				475				1.34				1.34				3.11
Year ended 8/31/2009			12.03				.41				(.21	)			.20				(.41	)			11.82				1.83				399				1.36				1.36				3.58
Year ended 8/31/2008			12.19				.41				(.16	)			.25				(.41	)			12.03				2.05				313				1.36				1.33				3.36
Class F-1:
Year ended 8/31/2012			12.26				.46				.82				1.28				(.46	)			13.08				10.59				1,526				.66				.66				3.62
Year ended 8/31/2011			12.53				.47				(.27	)			.20				(.47	)			12.26				1.73				1,356				.66				.66				3.90
Year ended 8/31/2010			11.82				.46				.71				1.17				(.46	)			12.53				10.12				1,380				.64				.64				3.80
Year ended 8/31/2009			12.03				.49				(.21	)			.28				(.49	)			11.82				2.56				976				.65				.64				4.31
Year ended 8/31/2008			12.19				.50				(.16	)			.34				(.50	)			12.03				2.79				1,020				.63				.61				4.07
Class F-2:
Year ended 8/31/2012			12.26				.49				.82				1.31				(.49	)			13.08				10.88				239				.40				.40				3.87
Year ended 8/31/2011			12.53				.50				(.27	)			.23				(.50	)			12.26				1.99				196				.41				.41				4.15
Year ended 8/31/2010			11.82				.50				.71				1.21				(.50	)			12.53				10.41				216				.37				.37				4.09
Year ended 8/31/2009			12.03				.51				(.21	)			.30				(.51	)			11.82				2.80				253				.39				.39				4.36
Period from 8/1/2008 to 8/31/2008 (4)			11.94				.04				.09				.13				(.04	)			12.03				1.10				3				.04				.03				.34
Class R-6:
Period from 5/11/2012 to 8/31/2012 (4)			12.94				.14				.15				.29				(.15	)			13.08				2.25				42				.09				.09				1.15

 

 

		Year ended August 31
		2012				2011				2010				2009				2008
Portfolio turnover rate for all share classes			14	%			12	%			16	%			18	%			20	%

 

 

(1) Based on average shares outstanding.

(2) Total returns exclude any applicable sales charges, including contingent deferred sales charges.

(3) This column reflects the impact, if any, of certain waivers from CRMC. During some of the periods shown, CRMC reduced fees for investment advisory services.

(4) Based on operations for the period shown and, accordingly, is not representative of a full year.

See Notes to Financial Statements

 

 

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Trustees and Shareholders of The Tax-Exempt Bond Fund of America

In our opinion, the accompanying statement of assets and liabilities, including the summary investment portfolio, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of The Tax-Exempt Bond Fund of America (the "Fund") at August 31, 2012, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at August 31, 2012 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

Los Angeles, California

October 12, 2012

 

 

 

Expense example             

                                                                                                                                         unaudited

 

As a shareholder of the fund, you incur two types of costs: (1) transaction costs, such as initial sales charges on purchase payments and contingent deferred sales charges on redemptions (loads), and (2) ongoing costs, including management fees, distribution and service (12b-1) fees, and other expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the fund so you can compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire six-month period (March 1, 2012, through August 31, 2012).

 

Actual expenses:

The first line of each share class in the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses paid during period" to estimate the expenses you paid on your account during this period.

 

Hypothetical example for comparison purposes:

The second line of each share class in the table below provides information about hypothetical account values and hypothetical expenses based on the actual expense ratio for the share class and an assumed rate of return of 5.00% per year before expenses, which is not the actual return of the share class. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the fund and other funds. To do so, compare this 5.00% hypothetical example with the 5.00% hypothetical examples that appear in the shareholder reports of the other funds.

 

Notes:

There are some account fees that are charged to certain types of accounts, such as individual retirement accounts (generally, a $10 fee is charged to set up the account and an additional $10 fee is charged to the account annually), that would increase the amount of expenses paid on your account. In addition, Class F-1 and F-2 shareholders may be subject to fees charged by financial intermediaries, typically ranging from 0.75% to 1.50% of assets annually depending on services offered. You can estimate the impact of these fees by adding the amount of the fees to the total estimated expenses you paid on your account during the period as calculated above. In addition, your ending account value would be lower by the amount of these fees.

 

Note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads). Therefore, the second line of each share class in the table is useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.

 

		Beginning account value 3/1/2012				Ending account value 8/31/2012				Expenses paid during period*				Annualized expense ratio
Class A -- actual return		$	1,000.00			$	1,038.07			$	2.77				.54	%
Class A -- assumed 5% return			1,000.00				1,022.42				2.75				.54
Class B -- actual return			1,000.00				1,034.25				6.55				1.28
Class B -- assumed 5% return			1,000.00				1,018.70				6.50				1.28
Class C -- actual return			1,000.00				1,034.01				6.75				1.32
Class C -- assumed 5% return			1,000.00				1,018.50				6.70				1.32
Class F-1 -- actual return			1,000.00				1,037.41				3.38				.66
Class F-1 -- assumed 5% return			1,000.00				1,021.82				3.35				.66
Class F-2 -- actual return			1,000.00				1,038.92				1.90				.37
Class F-2 -- assumed 5% return			1,000.00				1,023.28				1.88				.37
Class R-6 -- actual return †			1,000.00				1,022.54				.90				.29
Class R-6 -- assumed 5% return †			1,000.00				1,023.68				1.48				.29
*The “expenses paid during period” are equal to the “annualized expense ratio,” multiplied by the average account value over the period, multiplied by the number of days in the period, and divided by 366   (to reflect the one-half year period).
† The period for the “annualized expense ratio” and “actual return” line is based on the number of days since the initial sale of the share class on May 11, 2012. The "assumed 5% return" line is based on 184 days.

 

 

 

Approval of Investment Advisory and Service Agreement

The fund’s board has approved the fund’s Investment Advisory and Service Agreement (the “agreement”) with Capital Research and Management Company (“CRMC”) for an additional one-year term through March 31, 2013. The board approved the agreement following the recommendation of the fund’s Contracts Committee (the “committee”), which is composed of all of the fund’s independent board members. The board and the committee determined that the fund’s advisory fee structure was fair and reasonable in relation to the services provided and that approving the agreement was in the best interests of the fund and its shareholders.

In reaching this decision, the board and the committee took into account information furnished to them throughout the year, as well as information prepared specifically in connection with their review of the agreement and were advised by their independent counsel. They considered the factors discussed below, among others, but did not identify any single issue or particular piece of information that, in isolation, was the controlling factor.

1. Nature, extent and quality of services

The board and the committee considered the depth and quality of CRMC’s investment management process, including its global research capabilities; the experience, capability and integrity of its senior management and other personnel; the low turnover rates of its key personnel; the overall financial strength and stability of its organization; and the ongoing evolution of CRMC’s organizational structure designed to maintain and strengthen these qualities. The board and the committee also considered the nature, extent and quality of administrative, compliance and shareholder services provided by CRMC to the fund under the agreement and other agreements as well as the benefits to fund shareholders from investing in a fund that is part of a large family of funds. The board and the committee concluded that the nature, extent and quality of the services provided by CRMC have benefited and should continue to benefit the fund and its shareholders.

2. Investment results

The board and the committee considered the investment results of the fund in light of its objective of providing high current income exempt from regular federal income tax, consistent with the preservation of capital. They compared the fund’s total returns with those of other relevant funds (including the other funds that are the basis of the Lipper index for the category in which the fund is included) and market data such as relevant market indices, in each case as available at the time of the related board and committee meetings. This report, including the letter to shareholders and related disclosures, contains certain information about the fund’s investment results. The board and the committee concluded that the fund’s long-term results have been satisfactory and that CRMC’s record in managing the fund indicated that its continued management should benefit the fund and its shareholders.

3. Advisory fees and total expenses

The board and the committee compared the advisory fees and total expense levels of the fund to those of other relevant funds. They observed that the fund’s advisory fees and expenses remain significantly below those of most other relevant funds. The board and the committee also noted the breakpoint discounts in the fund’s advisory fee structure that reduce the level of fees charged by CRMC to the fund as fund assets increase. In addition, they reviewed information regarding the advisory fees paid by clients of an affiliate of CRMC. They noted that, to the extent there were differences between the advisory fees paid by the fund and the advisory fees paid by those clients, the differences appropriately reflected the investment, operational and regulatory differences between advising the fund and the other clients. The board and the committee concluded that the fund’s cost structure was fair and reasonable in relation to the services provided, and that the shareholders receive reasonable value in return for the advisory fees and other amounts paid to CRMC by the fund.

4. Ancillary benefits

The board and the committee considered a variety of other benefits received by CRMC and its affiliates as a result of CRMC’s relationship with the fund and the other American Funds, including fees for administrative services provided to certain share classes; fees paid to CRMC’s affiliated transfer agent; sales charges and distribution fees received and retained by the fund’s principal underwriter, an affiliate of CRMC; and possible ancillary benefits to CRMC’s institutional management affiliates. The board and the committee reviewed CRMC’s portfolio trading practices, noting that while CRMC receives the benefit of research provided by broker-dealers executing portfolio transactions on behalf of the fund, it does not obtain third-party research or other services in return for allocating brokerage to such broker-dealers. The board and the committee took these ancillary benefits into account in evaluating the reasonableness of the advisory fees and other amounts paid to CRMC by the fund.

5. Adviser financial information

The board and the committee reviewed information regarding CRMC’s costs of providing services to the American Funds, including personnel, systems and resources of investment, compliance, trading, accounting and other administrative operations. They considered CRMC’s costs and willingness to invest in technology, infrastructure and staff to maintain and expand services and capabilities, respond to industry and regulatory developments and attract and retain qualified personnel. They noted information regarding the compensation structure for CRMC’s investment professionals. The board and the committee also compared CRMC’s profitability to the reported results of several large, publicly held investment management companies. The board and the committee noted the competitiveness and cyclicality of both the mutual fund industry and the capital markets, and the importance in that environment of CRMC’s long-term profitability for maintaining its independence, company culture and management continuity. They further considered the breakpoint discounts in the fund’s advisory fee structure. The board and the committee concluded that the fund’s advisory fee structure reflected a reasonable sharing of benefits between CRMC and the fund’s shareholders.

 

 

Tax information                                                                                                                 

      unaudited

We are required to advise you of the federal tax status of certain distributions received by shareholders during the fiscal year. The fund hereby designates the following amount for the fund’s fiscal year ended August 31, 2012:

Exempt interest dividends

100

%

Individual shareholders should refer to their Form 1099 or other tax information, which will be mailed in January 2013, to determine the calendar year amounts to be included on their 2012 tax returns. Shareholders should consult their tax advisers .

Board of trustees and other officers

“Independent” trustees 1
	Year first
	elected a
	trustee of
Name and age	the fund 2	Principal occupation(s) during past five years
William H. Baribault, 67	2010	Chairman of the Board and CEO, Oakwood Enterprises (private investment and consulting)
James G. Ellis, 65	2006	Dean and Professor of Marketing, Marshall School of
		Business, University of Southern California
Leonard R. Fuller, 66	1994	President and CEO, Fuller Consulting (financial
		management consulting firm)
W. Scott Hedrick, 67	2010	Founding General Partner, InterWest Partners
		(venture capital firm)
R. Clark Hooper, 66	2005	Private investor
Chairman of the Board
(Independent and Non-Executive)
Merit E. Janow, 54	2010	Professor, Columbia University, School of
		International and Public Affairs; former Member,
		World Trade Organization Appellate Body
Laurel B. Mitchell, Ph.D., 57	2010	Clinical Professor and Director, Accounting Program,
		University of Redlands
Frank M. Sanchez, 69	1999	Principal, The Sanchez Family Corporation dba
		McDonald’s Restaurants (McDonald’s licensee)
Margaret Spellings, 54	2010	President and CEO, Margaret Spellings & Company
		(public policy and strategic consulting); President,
		U.S. Forum for Policy Innovation and Senior Advisor
		to the President and CEO, U.S. Chamber of
		Commerce; former United States Secretary of
		Education, United States Department of Education
Steadman Upham, Ph.D., 63	2007	President and University Professor,
		The University of Tulsa
“Independent” trustees 1
	Number of
	portfolios
	in fund
	complex 3
	overseen by
Name and age	trustee	Other directorships 4 held by trustee
William H. Baribault, 67	58	None
James G. Ellis, 65	62	Quiksilver, Inc.
Leonard R. Fuller, 66	62	None
W. Scott Hedrick, 67	58	Hot Topic, Inc.; Office Depot, Inc.
R. Clark Hooper, 66	64	JPMorgan Value Opportunities Fund, Inc.;
Chairman of the Board		The Swiss Helvetia Fund, Inc.
(Independent and Non-Executive)
Merit E. Janow, 54	61	The NASDAQ Stock Market LLC;
		Trimble Navigation Limited
Laurel B. Mitchell, Ph.D., 57	58	None
Frank M. Sanchez, 69	58	None
Margaret Spellings, 54	61	None
Steadman Upham, Ph.D., 63	61	None

Lee A. Ault III, a trustee of the fund since 2010, and Martin Fenton, a trustee of the fund since 1989, have retired from the board. The trustees thank Mr. Ault and Mr. Fenton for their dedication and service to the fund.

See page 32 for footnotes.

“Interested” trustee 5,6
	Year first
	elected a
	trustee or	Principal occupation(s) during past five years
Name, age and	officer of	and positions held with affiliated entities or the
position with fund	the fund 2	principal underwriter of the fund
Karl J. Zeile, 45	2009	Senior Vice President — Fixed Income, Capital
Vice President		Research and Management Company; Vice
		President, Capital Guardian Trust Company 7
“Interested” trustee 5,6
	Number of
	portfolios in
	fund complex 3
Name, age and	overseen
position with fund	by trustee	Other directorships 4 held by trustee
Karl J. Zeile, 45	6	None
Vice President

The fund’s statement of additional information includes further details about fund trustees and is available without charge upon request by calling American Funds Service Company at 800/421-4225 or by visiting the American Funds website at americanfunds.com. The address for all trustees and officers of the fund is 333 South Hope Street, Los Angeles, CA 90071, Attention: Secretary.

Other officers 6
	Year first
	elected	Principal occupation(s) during past five years
Name, age and	an officer	and positions held with affiliated entities or the
position with fund	of the fund 2	principal underwriter of the fund
Neil L. Langberg, 59	1985	Senior Vice President — Fixed Income, Capital
President		Research and Management Company; Vice
		President, Capital Guardian Trust Company 7
Brenda S. Ellerin, 49	1999	Senior Vice President — Fixed Income, Capital
Senior Vice President		Research and Management Company
Kristine M. Nishiyama, 42	2003	Senior Vice President and Senior Counsel — Fund
Senior Vice President		Business Management Group, Capital Research and
		Management Company; Vice President and Senior
		Counsel, Capital Bank and Trust Company 7
Courtney R. Taylor, 37	2006	Assistant Vice President — Fund Business
Secretary		Management Group, Capital Research and
		Management Company
Karl C. Grauman, 44	2010	Vice President — Fund Business Management
Treasurer		Group, Capital Research and Management Company
Steven I. Koszalka, 48	2010	Vice President — Fund Business Management
Assistant Secretary		Group, Capital Research and Management Company
Brian C. Janssen, 40	2012	Vice President — Fund Business Management
Assistant Treasurer		Group, Capital Research and Management Company
Dori Laskin, 61	2010	Vice President — Fund Business Management
Assistant Treasurer		Group, Capital Research and Management Company

1 The term “independent” trustee refers to a trustee who is not an “interested person” of the fund within the meaning of the Investment Company Act of 1940.

2 Trustees and officers of the fund serve until their resignation, removal or retirement.

3 Capital Research and Management Company manages the American Funds. Capital Research and Management Company also manages American Funds Insurance Series, ® which is composed of 19 funds and serves as the underlying investment vehicle for certain variable insurance contracts; American Funds Target Date Retirement Series, ® which is composed of 10 funds and is available through tax-deferred retirement plans and IRAs; American Funds Portfolio Series, SM which is composed of eight funds; and American Funds College Target Date Series, SM which is composed of seven funds.

4 This includes all directorships (other than those in the American Funds or other funds managed by Capital Research and Management Company) that are held by each trustee as a trustee or director of a public company or a registered investment company.

5 “Interested persons” within the meaning of the Investment Company Act of 1940, on the basis of their affiliation with the fund’s investment adviser, Capital Research and Management Company, or affiliated entities (including the fund’s principal underwriter).

6 All of the officers listed are officers and/or directors/trustees of one or more of the other funds for which Capital Research and Management Company serves as investment adviser.

7 Company affiliated with Capital Research and Management Company.

Offices

Offices of the fund and of the investment adviser

Capital Research and Management Company

333 South Hope Street

Los Angeles, CA 90071-1406

6455 Irvine Center Drive

Irvine, CA 92618

Transfer agent for shareholder accounts

American Funds Service Company

(Write to the address near you.)

P.O. Box 6007

Indianapolis, IN 46206-6007

P.O. Box 2280

Norfolk, VA 23501-2280

Custodian of assets

JPMorgan Chase Bank

270 Park Avenue

New York, NY 10017-2070

Counsel

Bingham McCutchen LLP

355 South Grand Avenue, Suite 4400

Los Angeles, CA 90071-3106

Independent registered public accounting firm

PricewaterhouseCoopers LLP

350 South Grand Avenue

Los Angeles, CA 90071-2889

Principal underwriter

American Funds Distributors, Inc.

333 South Hope Street

Los Angeles, CA 90071-1406

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectus and summary prospectus, which can be obtained from your financial professional and should be read carefully before investing. You may also call American Funds Service Company (AFS) at 800/421-4225 or visit the American Funds website at americanfunds.com.

“American Funds Proxy Voting Procedures and Principles” — which describes how we vote proxies relating to portfolio securities — is available on the American Funds website or upon request by calling AFS. The fund files its proxy voting record with the U.S. Securities and Exchange Commission (SEC) for the 12 months ended June 30 by August 31. The proxy voting record is available free of charge on the SEC website at sec.gov and on the American Funds website.

A complete August 31, 2012, portfolio of The Tax-Exempt Bond Fund of America’s investments is available free of charge by calling AFS or visiting the SEC website (where it is part of Form N-CSR).

The Tax-Exempt Bond Fund of America files a complete list of its portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. This filing is available free of charge on the SEC website. You may also review or, for a fee, copy this filing at the SEC’s Public Reference Room in Washington, D.C. Additional information regarding the operation of the Public Reference Room may be obtained by calling the SEC’s Office of Investor Education and Advocacy at 800/SEC-0330. Additionally, the list of portfolio holdings is available by calling AFS.

This report is for the information of shareholders of The Tax-Exempt Bond Fund of America, but it also may be used as sales literature when preceded or accompanied by the current prospectus or summary prospectus, which gives details about charges, expenses, investment objectives and operating policies of the fund. If used as sales material after December 31, 2012, this report must be accompanied by an American Funds statistical update for the most recently completed calendar quarter.

 

 

The American Funds difference

Since 1931, American Funds has helped investors pursue long-term investment success. Our consistent approach — in combination with a proven system — has resulted in a superior long-term track record.

Consistent approach

We base our decisions on a long-term perspective because we believe it is the best way to achieve superior long-term investment results. Our portfolio counselors average 25 years of investment experience, including 21 years at our company, reflecting a career commitment to our long-term approach. 1

Proven system

Our system combines individual accountability with teamwork. Each fund is divided into portions that are managed by investment professionals with varied backgrounds, ages and investment styles. An extensive global research effort is the backbone of our system.

Superior long-term track record

Our equity funds have beaten their Lipper peer indexes in 91% of 10-year periods and 96% of 20-year periods. Our fixed-income funds have beaten their Lipper indexes in 60% of 10-year periods and 67% of 20-year periods. 2 Our fund management fees have been among the lowest in the industry. 3

1 As of 12/31/11.

2 Based on Class A share results for periods through 12/31/11. Periods covered are the shorter of the fund’s lifetime or since the comparable Lipper index inception date.

3 Based on management fees for the 20-year period ended 12/31/11 versus comparable Lipper categories, excluding funds of funds.

American Funds span a range of investment objectives

•Growth funds

AMCAP Fund ®

EuroPacific Growth Fund ®

The Growth Fund of America ®

The New Economy Fund ®

New Perspective Fund ®

New World Fund ®

SMALLCAP World Fund ®

•Growth-and-income funds

American Mutual Fund ®

Capital World Growth and Income Fund ®

Fundamental Investors SM

International Growth and Income Fund SM

The Investment Company of America ®

Washington Mutual Investors Fund SM

•Equity-income funds

Capital Income Builder ®

The Income Fund of America ®

•Balanced funds

American Balanced Fund ®

American Funds Global Balanced Fund SM

•Bond funds

American Funds Mortgage Fund ®

American High-Income Trust ®

The Bond Fund of America ®

Capital World Bond Fund ®

Intermediate Bond Fund of America ®

Short-Term Bond Fund of America ®

U.S. Government Securities Fund ®

•Tax-exempt bond funds

American Funds Short-Term Tax-Exempt Bond Fund ®

American High-Income Municipal Bond Fund ®

Limited Term Tax-Exempt Bond Fund of America ®

The Tax-Exempt Bond Fund of America ®

State-specific tax-exempt funds

American Funds Tax-Exempt Fund of New York ®

The Tax-Exempt Fund of California ®

The Tax-Exempt Fund of Maryland ®

The Tax-Exempt Fund of Virginia ®

•Money market fund

American Funds Money Market Fund ®

 

•American Funds Portfolio Series SM

American Funds Global Growth Portfolio SM

American Funds Growth Portfolio SM

American Funds Growth and Income Portfolio SM

American Funds Balanced Portfolio SM

American Funds Income Portfolio SM

American Funds Tax-Advantaged Income Portfolio SM

American Funds Preservation Portfolio SM

American Funds Tax-Exempt Preservation Portfolio SM

•American Funds Target Date Retirement Series ®

•American Funds College Target Date Series SM

The Capital Group Companies

American Funds     Capital Research and Management     Capital International     Capital Guardian     Capital Bank and Trust

Lit No. MFGEAR-919-1012P

 

Litho in USA WG/L/8068-S33516

 

Printed on paper containing 10% post-consumer waste

 

Printed with inks containing soy and/or vegetable oil

 

 

ITEM 2 – Code of Ethics

The Registrant has adopted a Code of Ethics that applies to its Principal Executive Officer and Principal Financial Officer.  The Registrant undertakes to provide to any person without charge, upon request, a copy of the Code of Ethics.  Such request can be made to American Funds Service Company at 800/421-0180 or to the Secretary of the Registrant, 333 South Hope Street, Los Angeles, California 90071.