UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT

INVESTMENT COMPANIES

Investment Company Act file number: 811-04802

Name of Fund:   BlackRock Strategic Municipal Opportunities Fund of BlackRock Municipal Series Trust

Fund Address:    100 Bellevue Parkway, Wilmington, DE 19809

Name and address of agent for service: John M. Perlowski, Chief Executive Officer, BlackRock Strategic Municipal Opportunities Fund of BlackRock Municipal Series Trust, 55 East 52^nd Street, New York, NY 10055

Registrant’s telephone number, including area code: (800) 441-7762

Date of fiscal year end: 05/31/2020

Date of reporting period: 05/31/2020

Item 1 – Report to Stockholders

		MAY 31, 2020

BlackRock California Municipal Series Trust

BlackRock Multi-State Municipal Series Trust

BlackRock Municipal Series Trust

Table of Contents

Investment Objective

BlackRock California Municipal Opportunities Fund’s (the “Fund”) investment objective is to provide shareholders with income exempt from Federal and California income taxes.

Portfolio Management Commentary

How did the Fund perform?

For the 12-month period ended May 31, 2020, the Fund underperformed its primary benchmark, the S&P^® Municipal Bond Index, and its secondary benchmark, the S&P^® California Municipal Bond Index. The following discussion of relative performance pertains to the S&P^® California Municipal Bond Index.

What factors influenced performance?

Municipal bonds performed well for most of the period thanks to accommodative Fed policy and favorable supply-and-demand trends in the market. This supportive backdrop changed abruptly in March once the spread of the coronavirus pandemic led to travel restrictions, business closures and stay-at-home orders. The prospect of a sharp economic downturn caused significant, broad-based weakness across the financial markets. Tax-exempt issues were hard hit in the sell-off, as investors withdrew cash from municipal bond funds and limited market liquidity inhibited efficient pricing. Municipal bonds subsequently recovered in April and May following aggressive stimulus from the Fed and U.S. Congress, allowing the sector to post a gain for the full 12 months.

California municipal bonds outperformed the national market due to strong demand from both retail and institutional investors. The high tax regime for state residents, together with the anticipation of potential higher taxes nationally to finance growing deficits, helped make California municipal bonds an attractive investment vehicle. Despite concerns about the coronavirus pandemic, California’s diverse economic base gave investors confidence that the state’s debt service remained safely covered.

The Fund’s use of U.S. Treasury futures to manage interest rate risk proved detrimental to Fund performance given the breakdown in correlation between the Treasury and municipal markets in the first quarter of 2020. While municipal bond yields rose due to a substantial increase in yield spreads, Treasury yields declined amid investors’ “flight to quality.” (Prices and yields move in opposite directions.)

The Fund’s allocation to non-investment grade (high yield) issues performed poorly late in the period as coronavirus concerns caused investors to question municipalities’ ability to service debt in a time of economic stress. The Fund’s above-average cash position, which prevented the Fund from earning the higher income it would have with a more fully invested posture, also detracted from performance.

On the positive side, positions in higher-quality, longer-maturity securities outperformed. The Fund also benefited from an overweight in utilities, as essential-service revenue bonds held up best once the economic concerns associated with coronavirus became the primary driver of market performance. The Fund’s use of leverage, which helped generate additional yield, was a further positive.

Describe recent portfolio activity.

The Fund aims to deliver a balance of competitive total return and tax-free income using an active strategy designed to capitalize on credit, yield curve and interest rate trends.

The investment adviser gradually increased cash reserves throughout 2019 as valuations became less attractive. The Fund retained a cash position above its historical average at the end of May, as yield spreads in California’s market had returned to narrow levels following the rally in the final three months of the period. For the 12-month period, the cash position did not have a material impact on the Fund’s performance. Despite the elevated cash reserve, the Fund’s duration relative to its benchmark was still at a neutral posture.

The investment adviser used the market’s strength late in the period to reduce duration (interest-rate sensitivity) and lock in higher prices on certain positions. The investment adviser raised the Fund’s weighting in high yield debt to approximately 16% in the first half 2019 and kept the allocation close to that level for the remainder of the period.

Describe portfolio positioning at period end.

The Fund was positioned in a defensive manner. Its duration was 5.6 years when risk-management strategies were included, compared with 6.1 years for the index, due in part to the managers’ decision to rotate toward shorter-maturity debt. The Fund also continued to pursue risk-management strategies with respect to interest rates given the low absolute level of yields. The investment adviser maintained a high-quality bias, with an average credit rating of AA.

Leverage stood at about 5% at the end of May, compared to a high of 7.5% mid-way through the period. The portfolio’s weighting in taxable bonds remained stable at approximately 5%.

The views expressed reflect the opinions of BlackRock as of the date of this report and are subject to change based on changes in market, economic or other conditions. These views are not intended to be a forecast of future events and are no guarantee of future results.

TOTAL RETURN BASED ON A $10,000 INVESTMENT

Performance Summary for the Period Ended May 31, 2020

N/A — Not applicable as share class and index do not have a sales charge.

Past performance is not indicative of future results.

Performance results may include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles.

Investment Objective

BlackRock New Jersey Municipal Bond Fund’s (the “Fund”) investment objective is to provide shareholders with income exempt from Federal income tax and New Jersey personal income taxes.

Portfolio Management Commentary

How did the Fund perform?

For the 12-month period ended May 31, 2020, the Fund underperformed both its primary benchmark, the S&P^® Municipal Bond Index, and its secondary benchmark, the Custom New Jersey Index. The following discussion of relative performance pertains to the Custom New Jersey Index.

What factors influenced performance?

Municipal bonds performed well for most of the period thanks to accommodative Fed policy and favorable supply-and-demand trends in the market. This supportive backdrop changed abruptly in March once the spread of the coronavirus pandemic led to travel restrictions, business closures and stay-at-home orders. The prospect of a sharp economic downturn caused significant, broad-based weakness across the financial markets. Tax-exempt issues were hard hit in the sell-off, as investors withdrew cash from municipal bond funds and low market liquidity inhibited efficient pricing. Municipal bonds subsequently recovered in April and May following aggressive stimulus from the Fed and U.S. Congress, allowing the sector to post a gain for the full 12 months.

New Jersey municipal bonds lagged the national index. The state’s revenue had exceeded spending prior to the pandemic, providing a cushion in the form of rising reserves. However, the loss of revenue resulting from the pandemic is certain to put stress on the state’s budget and pressure funding for education, infrastructure and underfunded pension liabilities. New Jersey reported a 14% decline in all major revenues in May, and Governor Murphy has said the state may have to cut half of its 400,000 public employees if the federal government doesn’t help make up a $10.1 billion revenue shortage through June 2021.

The Fund’s use of U.S. Treasury futures to manage interest rate risk proved detrimental to Fund performance given the breakdown in correlation between the Treasury and municipal markets in the first quarter of 2020. While municipal bond yields rose due to a substantial increase in yield spreads, Treasury yields declined amid investors’ “flight to quality.” (Prices and yields move in opposite directions.) An underweight in the education sector also played a role in the Fund’s underperformance, as did exposure to the high yield segment of the market.

On the positive side, the Fund benefited from its holdings in higher-quality bonds, particularly during the latter half of the period. Positions in the health care, corporate and state tax-backed sectors also added value. Pre-refunded bonds, which tend to be higher-quality securities with attractive income characteristics, further contributed to results.

Describe recent portfolio activity.

The Fund reduced its allocation to the higher education and airline-related sectors, both of which faced adverse effects from the coronavirus.

The investment adviser sought to capitalize on market turbulence related to the pandemic by raising the Fund’s allocation to the hospital sector. In addition, the portfolio increased its weightings in the state tax-backed sector through the addition of Puerto Rico issues. The investment adviser continued to favor the Puerto Rico Sales Tax Financing Corporation and general obligation bonds, the latter of which were recently settled at recovery rates significantly higher than current market prices. The investment adviser also raised the Fund’s cash weighting through sales and holdings in bonds that matured.

Describe portfolio positioning at period end.

The Fund maintained an underweight in state tax-backed securities due to the sector’s high benchmark weighting and the investment adviser’s long-standing focus on diversification and managing concentration risk. The Fund retained overweights in the health care, corporate and education sectors. The Fund continued to emphasize careful security selection with a focus on higher-quality sectors. Specifically, it preferred issuers whose durable revenues should help them navigate the effects of the pandemic.

The portfolio’s duration (interest-rate sensitivity) remained above that of the benchmark. The Fund focused the majority of its purchases on longer-term bonds to capitalize on their yield advantage.

The views expressed reflect the opinions of BlackRock as of the date of this report and are subject to change based on changes in market, economic or other conditions. These views are not intended to be a forecast of future events and are no guarantee of future results.

TOTAL RETURN BASED ON A $10,000 INVESTMENT

Performance Summary for the Period Ended May 31, 2020

N/A — Not applicable as share class and index do not have a sales charge.

Past performance is not indicative of future results.

Performance results may include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles.

Investment Objective

BlackRock Pennsylvania Municipal Bond Fund’s (the “Fund”) investment objective is to provide shareholders with income exempt from Federal income tax and Pennsylvania personal income taxes.

Portfolio Management Commentary

How did the Fund perform?

For the 12-month period ended May 31, 2020, the Fund underperformed both its primary benchmark, the S&P^® Municipal Bond Index, and its secondary benchmark, the Custom Pennsylvania Index. The following discussion of relative performance pertains to the Custom Pennsylvania Index.

What factors influenced performance?

Municipal bonds performed well for most of the period thanks to accommodative Fed policy and favorable supply-and-demand trends in the market. This supportive backdrop changed abruptly in March once the spread of the coronavirus pandemic led to travel restrictions, business closures and stay-at-home orders. The prospect of a sharp economic downturn caused significant, broad-based weakness across the financial markets. Tax-exempt issues were hard hit in the sell-off, as investors withdrew cash from municipal bond funds and low market liquidity inhibited efficient pricing. Municipal bonds subsequently recovered in April and May following aggressive stimulus from the Fed and U.S. Congress, allowing the sector to post a gain for the full 12 months.

Pennsylvania municipal bonds outpaced the national index. The state’s revenue had exceeded spending prior to the pandemic, providing a cushion in the form of rising reserves. However, the downturn in economic growth is likely to put stress on the state’s budget and pressure funding for education, infrastructure and underfunded pension liabilities.

The Fund’s use of U.S. Treasury futures to manage interest rate risk proved detrimental to Fund performance given the breakdown in correlation between the Treasury and municipal markets in the first quarter of 2020. While municipal bond yields rose due to a substantial increase in yield spreads, Treasury yields declined amid investors’ “flight to quality.” (Prices and yields move in opposite directions.)

The Fund’s positioning in the housing sector further detracted from performance. The Fund was invested in a multi-family housing issue that was downgraded multiple notches to a below investment-grade rating by the S&P. The downgrade was a result of the facility owners’ financial trouble in an unrelated entity. The Fund continued to hold the securities at the close of the period based on the investment adviser’s view that they were trading below their intrinsic value.

Underweights in the state tax-backed, local tax-backed and transportation sectors also detracted, as did an allocation to high-yield issues.

On the positive side, the Fund benefited from its positions in higher-quality bonds, particularly during the latter half of the period. Positions in the health care and corporate sectors added value, as did an allocation to Puerto Rico. Pre-refunded bonds, which tend to be higher-quality securities with attractive income characteristics, further contributed to results.

Describe recent portfolio activity.

The Fund reduced its allocation to the senior living sectors, which faced adverse effects from the coronavirus. Conversely, the investment adviser increased the portfolio’s weightings in the state tax-backed sector through the addition of Puerto Rico issues. The investment adviser continued to favor the Puerto Rico Sales Tax Financing Corporation and general obligation bonds, the latter of which were recently settled at recovery rates significantly higher than current market prices.

The investment adviser also raised the Fund’s cash weighting through sales and holdings in bonds that matured. Higher liquidity allows the Fund to meet possible redemptions and provides greater flexibility for the Fund to take advantage of values that arise from market volatility. Despite a somewhat elevated cash position, the Fund was not positioned defensively since its duration (interest rate sensitivity) was above that of the benchmark.

Describe portfolio positioning at period end.

The investment adviser continued to emphasize careful security selection with a focus on higher-quality sectors. Specifically, it preferred issuers that should be well positioned to navigate the pandemic by virtue of their durable revenues.

The views expressed reflect the opinions of BlackRock as of the date of this report and are subject to change based on changes in market, economic or other conditions. These views are not intended to be a forecast of future events and are no guarantee of future results.

TOTAL RETURN BASED ON A $10,000 INVESTMENT

Performance Summary for the Period Ended May 31, 2020

N/A — Not applicable as share class and index do not have a sales charge.

Past performance is not indicative of future results.

Performance results may include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles.

Investment Objective

BlackRock Strategic Municipal Opportunities Fund’s (the “Fund”) investment objective is to provide shareholders with a high level of income exempt from Federal income taxes.

Portfolio Management Commentary

How did the Fund perform?

For the 12-month period ended May 31, 2020, the Fund underperformed its primary benchmark, the S&P^® Municipal Bond Index, as well as its custom blended secondary benchmark comprised of 65% S&P^® Municipal Bond Investment Grade Index, 30% S&P^® Municipal Bond High Yield Index and 5% Bloomberg Barclays Taxable Municipal: U.S. Aggregate Eligible Index. The following discussion of relative performance pertains to the custom blended benchmark.

Municipal bonds performed well for most of the period thanks to accommodative Fed policy and favorable supply-and-demand trends in the market. This supportive backdrop changed abruptly in March once the spread of the coronavirus pandemic led to travel restrictions, business closures and stay-at-home orders. The prospect of a sharp economic downturn caused significant, broad-based weakness across the financial markets. Tax-exempt issues were hard hit in the sell-off, as investors withdrew cash from municipal bond funds and limited market liquidity inhibited efficient pricing. Municipal bonds subsequently recovered in April and May following aggressive stimulus from the Fed and U.S. Congress, allowing the sector to post a gain for the full 12 months.

The Fund’s use of U.S. Treasury futures to manage interest rate risk hurt Fund performance due to the breakdown in correlation between the Treasury and municipal markets in the first quarter of 2020. While municipal bond yields rose due to a substantial increase in yield spreads, Treasury yields declined amid investors’ “flight to quality.” (Prices and yields move in opposite directions.) This aspect of the Fund’s strategy accounted for the majority of its 12-month underperformance. An overweight in BBB rated issues also detracted, as did the underperformance of certain holdings in the utilities sector.

The Fund’s sector allocations and yield curve positioning contributed positively, led by overweights in housing issues and bonds with maturities of 20 years and above, respectively. An underweight position in non-rated credits was an additional positive.

Describe recent portfolio activity.

The Fund opened the period with a duration of 4.51 years and closed with a duration of 6.94. (Duration is a measure of interest rate sensitivity.) This shift was largely the result of the investment adviser’s decision to reduce the extent of its interest rate risk management program.

At the sector level, the Fund reduced its allocation to state tax-backed debt and increased its weighting in housing issues. The Fund maintained a high-quality bias, with its largest allocations to the AA and A rating tiers. About 22% of the Fund’s assets were in high yield (below investment grade) bonds at the close of the period, up from 18% one year ago. The majority of the high-yield position was held in the tobacco sector and Puerto Rico. With that said, the Fund’s was focused on identifying opportunities to reduce select high yield issues in order to boost liquidity and improve the portfolio’s overall credit profile. The investment adviser continued to be selective in its effort to reduce exposure to virus-prone sectors while adding to those in which it saw more compelling opportunities.

The Fund held an allocation of approximately 57% to bonds with maturities of 20 years and above, unchanged from the beginning of the period. The Fund’s weighting in taxable securities was 5%, down from 6% a year ago at the end of May 2019.

Describe portfolio positioning at period end.

The Fund’s duration was in line with the benchmark. The Fund was overweight in the transportation and housing sectors, and it was in underweight school districts and tax-backed debt. The Fund’s average credit quality was A+.

The views expressed reflect the opinions of BlackRock as of the date of this report and are subject to change based on changes in market, economic or other conditions. These views are not intended to be a forecast of future events and are no guarantee of future results.

TOTAL RETURN BASED ON A $10,000 INVESTMENT

Performance Summary for the Period Ended May 31, 2020

N/A — Not applicable as share class and index do not have a sales charge.

Past performance is not indicative of future results.

Performance results may include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles.

Portfolio Information  as of May 31, 2020

Portfolio Information  as of May 31, 2020 (continued)

About Fund Performance

Institutional Shares are not subject to any sales charge. These shares bear no ongoing distribution or service fees and are available only to certain eligible investors.

Class K Shares are not subject to any sales charge. These shares bear no ongoing distribution or service fees and are available only to certain eligible investors. For each Fund, Class K Shares performance shown prior to the Class K Shares inception date of January 25, 2018 is that of Institutional Shares. The performance of the Funds’ Class K Shares would be substantially similar to Institutional Shares because Class K Shares and Institutional Shares invest in the same portfolio of securities and performance would only differ to the extent that Class K Shares and Institutional Shares have different expenses. The actual returns of Class K Shares would have been higher than those of the Institutional Shares because Class K Shares have lower expenses than the Institutional Shares.

Service Shares (available only in BlackRock New Jersey Municipal Bond Fund and BlackRock Pennsylvania Municipal Bond Fund) are not subject to any sales charge. These shares are subject to a service fee of 0.25% per year (but no distribution fee) and are only available to certain eligible investors.

Investor A Shares are subject to a maximum initial sales charge (front-end load) of 4.25% and a service fee of 0.25% per year (but no distribution fee). Certain redemptions of these shares may be subject to a contingent deferred sales charge (“CDSC”) where no initial sales charge was paid at the time of purchase. These shares are generally available through financial intermediaries. On February 24, 2020, BlackRock California Municipal Opportunities Fund, BlackRock New Jersey Municipal Bond Fund and BlackRock Pennsylvania Municipal Bond Fund issued and outstanding Investor C1 Shares converted into Investor A Shares with the same relative aggregate net asset value (“NAV”).

Investor A1 Shares (for all Funds except BlackRock Strategic Municipal Opportunities Fund) are subject to a maximum initial sales charge (front-end load) of 4.00% and a service fee of 0.10% per year (but no distribution fee). Investor A1 Shares for BlackRock Strategic Municipal Opportunities Fund incur a maximum initial sales charge (front-end load) of 1.00% and a service fee of 0.10% per year (but no distribution fee). The maximum initial sales charge does not apply to current eligible shareholders of Investor A1 Shares of the Funds. Certain redemptions of these shares may be subject to a CDSC where no initial sales charge was paid at the time of purchase. However, the CDSC does not apply to redemptions by certain employer-sponsored retirement plans or to redemptions of shares acquired through the reinvestment of dividends and capital gains by existing shareholders and, for BlackRock California Municipal Opportunities Fund only, fee based programs previously approved by the Fund.

Investor C Shares are subject to a 1.00% CDSC if redeemed within one year of purchase. In addition, these shares are subject to a distribution fee of 0.75% per year and a service fee of 0.25% per year. These shares are generally available through financial intermediaries. These shares automatically convert to Investor A Shares after approximately ten years.

Investor A1 Shares are only available for dividend and capital gain reinvestment by existing shareholders, and for purchase by certain employer-sponsored retirement plans and, for BlackRock California Municipal Opportunities Fund only, fee based programs previously approved by the Fund.

Performance information reflects past performance and does not guarantee future results. Current performance may be lower or higher than the performance data quoted. Refer to blackrock.com to obtain performance data current to the most recent month-end. Performance results do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Figures shown in the performance tables on the previous pages assume reinvestment of all distributions, if any, at NAV on the ex-dividend date or payable date, as applicable. Investment return and principal value of shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Distributions paid to each class of shares will vary because of the different levels of service, distribution and transfer agency fees applicable to each class, which are deducted from the income available to be paid to shareholders.

BlackRock Advisors, LLC (the “Manager”), each Fund’s investment adviser, has contractually and/or voluntarily agreed to waive and/or reimburse a portion of each Fund’s expenses. Without such waiver and/or reimbursement, each Fund’s performance would have been lower. With respect to each Fund’s voluntary waiver, the Manager is under no obligation to waive and/or reimburse or to continue waiving and/or reimbursing its fees and such voluntary waivers may be reduced or discontinued at any time. With respect to each Fund’s contractual waivers, the Manager is under no obligation to continue waiving and/or reimbursing its fees after the applicable termination date of such agreement. See Note 6 of the Notes to Financial Statements for additional information on waivers and/or reimbursements. The standardized 30-day yield includes the effects of any waivers and/or reimbursements. The unsubsidized 30-day yield excludes the effects of any waivers and/or reimbursements.

Bloomberg Barclays Taxable Municipal: U.S. Aggregate Eligible Index — represents securities that are taxable, dollar-denominated, and issued by a U.S. state or territory, and have at least one year to final maturity regardless of call features, have at least $250 million par amount outstanding, and are rated investment-grade (at least BBB- by S&P or Fitch Ratings (“Fitch”) and/or Baa3 by Moody’s) by at least two of the following ratings agencies: S&P, Moody’s and Fitch.

S&P^® Municipal Bond High Yield Index — a market-value-weighted index that consists of bonds in the S&P Municipal Bond Index that are nonrated or that are rated BB+ by S&P and/or Ba1 by Moody’s or lower; bonds that are prerefunded or escrowed to maturity are not included in this index.

S&P^® Municipal Bond Investment Grade Index — a market-value-weighted index that consists of bonds in the S&P Municipal Bond Index that are rated at least BBB- by S&P and/or Baa3 by Moody’s.

Shareholders of each Fund may incur the following charges: (a) transactional expenses, such as sales charges; and (b) operating expenses, including investment advisory fees, service and distribution fees, including 12b-1 fees, acquired fund fees and expenses, and other Fund expenses. The expense examples shown below (which are based on a hypothetical investment of $1,000 invested on December 1, 2019 and held through May 31, 2020) are intended to assist shareholders both in calculating expenses based on an investment in each Fund and in comparing these expenses with similar costs of investing in other mutual funds.

The expense examples provide information about actual account values and actual expenses. In order to estimate the expenses a shareholder paid during the period covered by this report, shareholders can divide their account value by $1,000 and then multiply the result by the number corresponding to their Fund and share class under the heading entitled “Expenses Paid During the Period.”

The expense examples also provide information about hypothetical account values and hypothetical expenses based on a Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses. In order to assist shareholders in comparing the ongoing expenses of investing in these Funds and other funds, compare the 5% hypothetical examples with the 5% hypothetical examples that appear in shareholder reports of other funds.

The expenses shown in the expense examples are intended to highlight shareholders’ ongoing costs only and do not reflect transactional expenses, such as sales charges, if any. Therefore, the hypothetical examples are useful in comparing ongoing expenses only, and will not help shareholders determine the relative total expenses of owning different funds. If these transactional expenses were included, shareholder expenses would have been higher.

Expense Examples

Expense Examples (continued)

The Benefits and Risks of Leveraging

The Funds may utilize leverage to seek to enhance returns and NAV. However, there is no guarantee that these objectives can be achieved in all interest rate environments.

Each Fund may leverage its assets through the use of proceeds received in tender option bond (“TOB”) transactions, as described in the Notes to Financial Statements. In a TOB Trust transaction, each Fund transfers municipal bonds or other municipal securities into a special purpose entity (a “TOB Trust”). TOB investments generally provide each Fund with economic benefits in periods of declining short-term interest rates, but expose each Fund to risks during periods of rising short-term interest rates. Additionally, fluctuations in the market value of municipal bonds deposited into a TOB Trust may adversely affect each Fund’s NAV per share.

In general, the concept of leveraging is based on the premise that the financing cost of leverage, which is based on short-term interest rates, is normally lower than the income earned by each Fund on its longer-term portfolio investments purchased with the proceeds from leverage. To the extent that the total assets of each Fund (including the assets obtained from leverage) are invested in higher-yielding portfolio investments, each Fund’s shareholders benefit from the incremental net income.

The interest earned on securities purchased with the proceeds from leverage is distributed to each Fund’s shareholders, and the value of these portfolio holdings is reflected in each Fund’s per share NAV. However, in order to benefit shareholders, the return on assets purchased with leverage proceeds must exceed the ongoing costs associated with the leverage. If interest and other ongoing costs of leverage exceed a Fund’s return on assets purchased with leverage proceeds, income to shareholders is lower than if the Funds had not used leverage.

Furthermore, the value of each Fund’s portfolio investments generally varies inversely with the direction of long-term interest rates, although other factors can also influence the value of portfolio investments. As a result, changes in interest rates can influence each Fund’s NAV positively or negatively in addition to the impact on each Fund’s performance from leverage. Changes in the direction of interest rates are difficult to predict accurately, and there is no assurance that a Fund’s leveraging strategy will be successful.

The use of leverage also generally causes greater changes in each Fund’s NAV and dividend rates than comparable portfolios without leverage. In a declining market, leverage is likely to cause a greater decline in the NAV of a Fund’s shares than if the Fund were not leveraged. In addition, each Fund may be required to sell portfolio securities at inopportune times or at distressed values in order to comply with regulatory requirements applicable to the use of leverage or as required by the terms of the leverage instruments, which may cause the Fund to incur losses. The use of leverage may limit a Fund’s ability to invest in certain types of securities or use certain types of hedging strategies. Each Fund incurs expenses in connection with the use of leverage, all of which are borne by each Fund’s shareholders and may reduce income.

Derivative Financial Instruments

The Funds may invest in various derivative financial instruments. These instruments are used to obtain exposure to a security, commodity, index, market, and/or other assets without owning or taking physical custody of securities, commodities and/or other referenced assets or to manage market, equity, credit, interest rate, foreign currency exchange rate, commodity and/or other risks. Derivative financial instruments may give rise to a form of economic leverage and involve risks, including the imperfect correlation between the value of a derivative financial instrument and the underlying asset, possible default of the counterparty to the transaction or illiquidity of the instrument. The Funds’ successful use of a derivative financial instrument depends on the investment adviser’s ability to predict pertinent market movements accurately, which cannot be assured. The use of these instruments may result in losses greater than if they had not been used, may limit the amount of appreciation a Fund can realize on an investment and/or may result in lower distributions paid to shareholders. The Funds’ investments in these instruments, if any, are discussed in detail in the Notes to Financial Statements.