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<SEC-DOCUMENT>/in/edgar/work/0000950147-00-001615/0000950147-00-001615.txt : 20001024
<SEC-HEADER>0000950147-00-001615.hdr.sgml : 20001024
ACCESSION NUMBER:		0000950147-00-001615
CONFORMED SUBMISSION TYPE:	N-2/A
PUBLIC DOCUMENT COUNT:		12
FILED AS OF DATE:		20001023

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			PILGRIM PRIME RATE TRUST
		CENTRAL INDEX KEY:			0000826020
		STANDARD INDUSTRIAL CLASSIFICATION:	 [0000
]		IRS NUMBER:				956874587
		STATE OF INCORPORATION:			MA
		FISCAL YEAR END:			0228
</COMPANY-DATA>

		FILING VALUES:
			FORM TYPE:		N-2/A
			SEC ACT:		
			SEC FILE NUMBER:	333-44918
			FILM NUMBER:		743842
</FILING-VALUES>

			FILING VALUES:
				FORM TYPE:		N-2/A
				SEC ACT:		
				SEC FILE NUMBER:	811-05410
				FILM NUMBER:		743843
</FILING-VALUES>

				BUSINESS ADDRESS:	
					STREET 1:		TWO RENAISSANCE SQ
					STREET 2:		40 N CENTRAL STE 1200
					CITY:			PHOENIX
					STATE:			AZ
					ZIP:			85004-4424
					BUSINESS PHONE:		6024178100
</BUSINESS-ADDRESS>

					MAIL ADDRESS:	
						STREET 1:		TWO RENAISSANCE SQ
						STREET 2:		40 N CENTRAL STE 1200
						CITY:			PHOENIX
						STATE:			AZ
						ZIP:			85004-4424
</MAIL-ADDRESS>

						FORMER COMPANY:	
							FORMER CONFORMED NAME:	PILGRIM PRIME RATE TRUST
							DATE OF NAME CHANGE:	19920703
</FORMER-COMPANY>
</FILER>
</SEC-HEADER>
<DOCUMENT>
<TYPE>N-2/A
<SEQUENCE>1
<FILENAME>0001.txt
<DESCRIPTION>PRE-EFFECTIVE AMENDMENT NO. 1 TO FORM N-2
<TEXT>


     As filed with the Securities and Exchange Commission on October 23, 2000

                                                      1933 Act File No. 33-44918
                                                     1940 Act File No. 811-05410
================================================================================


                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM N-2
                        (Check appropriate box or boxes)


    REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X] Pre-Effective Amendment No. 1
    and
    REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] Amendment No. 38


                            PILGRIM PRIME RATE TRUST
                   (formerly Pilgrim America Prime Rate Trust)
                  Exact Name of Registrant Specified in Charter


                         7337 East Doubletree Ranch Road
                              Scottsdale, AZ 85258
 Address of Principal Executive Offices (Number, Street, City, State, Zip Code)


                                 (800) 992-0180
               Registrant's Telephone Number, Including Area Code


                             James M. Hennessy, Esq.
                             ING Pilgrim Group, Inc.
                         7337 East Doubletree Ranch Road
                              Scottsdale, AZ 85258
     Name and Address (Number, Street, State, Zip Code) of Agent for Service


                                 With copies to:

Jeffrey S. Puretz, Esq.  Margaret A. Bancroft, Esq.      Sarah E. Cogan, Esq.
        Dechert                   Dechert             Simpson Thacher & Bartlett
  1775 Eye Street, NW      30 Rockefeller Plaza          425 Lexington Avenue
 Washington, DC 20006       New York, NY 10112            New York, NY 10017

Approximate Date of Proposed Public Offering: As soon as practical after the
effective date of this Registration Statement.

If any securities  being registered on this form will be offered on a delayed or
continuous basis in reliance on Rule 415 under the Securities Act of 1933, other
than securities  offered in connection with a dividend  reinvestment plan, check
the following box. [ ]

================================================================================
<PAGE>
        CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933

================================================================================
                                         Proposed      Proposed
                                         Maximum        Maximum
                                         Offering      Aggregate      Amount of
Title of Securities     Amount Being      Price        Offering     Registration
 Being Registered        Registered      Per Unit        Price          Fee(1)
- --------------------------------------------------------------------------------
Shares of Auction
Rate Cumulative
Preferred Stock,
par value $0.01
per share                 10,800         $25,000     $270,000,000      $71,280
================================================================================

(1) Previously paid.



<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

                  SUBJECT TO COMPLETION, DATED OCTOBER 23, 2000

PROSPECTUS


                                  $270,000,000
                            Pilgrim Prime Rate Trust
          Auction Rate Cumulative Preferred Shares ("Preferred Shares")
                             3,600 Shares, Series M
                             3,600 Shares, Series W
                             3,600 Shares, Series F

                    Liquidation Preference $25,000 Per Share


     Pilgrim Prime Rate Trust (the "Trust") is offering 3,600 Series M, 3,600
Series W and 3,600 Series F Auction Rate Cumulative Preferred Shares. The Trust
is a closed-end, diversified management investment company. The Trust's
investment adviser is ING Pilgrim Investments, Inc. ("ING Pilgrim Investments"
or the "Adviser"), formerly known as Pilgrim Investments, Inc. The Trust's
investment objective is to seek as high a level of current income for holders of
its common shares as is consistent with the preservation of capital. The Trust
seeks to achieve its objective by acquiring interests in senior floating-rate
loans ("Senior Loans") with interest rates that float periodically based on a
benchmark indicator of prevailing interest rates. Normally, at least 80% of the
Trust's total assets are invested in Senior Loans. Senior Loans hold a senior
position in the capital structure of the borrower, are usually secured with
specific collateral, and have a claim on the assets of the borrower that comes
before other lenders to and holders of securities of the borrower, such as
holders of subordinated debt, preferred stock or common stock. However, Senior
Loans typically are below investment grade quality and have speculative
characteristics. There is no assurance that the Trust will achieve its
investment objective.

                                   ----------

     Investing in Preferred Shares involves risks. See the "Risk Factors"
section beginning on page 23 of this Prospectus. The minimum purchase amount for
Preferred Shares is $25,000.


     Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined that this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

                                   ----------

                                                Per Share         Total
                                                ---------      ------------
     Public Offering Price                       $25,000       $270,000,000
     Sales Load                                  $             $
     Proceeds to Trust (1)                       $             $

- ----------
(1)  Not including offering expenses incurred by the Trust, estimated to be
     $446,318.


     The public offering price per share will be increased by the amount of
dividends, if any, that have accumulated from the date the Preferred Shares are
first issued.


     The underwriters are offering the Preferred Shares subject to various
conditions. The underwriters expect to deliver the Preferred Shares to an
investor's broker-dealer, in book-entry form through The Depository Trust
Company, on or about ________, 2000.

                                   ----------

                              Salomon Smith Barney
                            PaineWebber Incorporated
                                 Lehman Brothers
                                  Gruntal & Co.


________, 2000


<PAGE>
     Investors in Preferred Shares will be entitled to receive cash dividends at
an annual rate that may vary for the successive dividend periods for such
shares. The dividend rate on the Series M Preferred Shares for the initial
period from and including the date of issue to but excluding ________, 2000 will
be ___% per year. The dividend rate on the Series W Preferred Shares for the
initial period from and including the date of issue to but excluding ________,
2000 will be ___% per year. The dividend rate on the Series F Preferred Shares
for the initial period from and including the date of issue to but excluding
________, 2000 will be ___% per year. For each subsequent period, the auction
agent will determine the dividend rate for a particular period by an auction
conducted on the business day prior to that period. Preferred Shares are not
listed on an exchange. Investors in Preferred Shares may participate in auctions
through broker-dealers that have entered into an agreement with the auction
agent and the Trust in accordance with the procedures specified herein.
Broker-dealers are not required to maintain a secondary market in Preferred
Shares, and a secondary market may not provide you with liquidity. The Trust may
redeem Preferred Shares as described under "Description of Preferred Shares --
Redemption."


     The Preferred Shares will be senior to shares of the Trust's outstanding
common shares, par value $0.01 per share. The Trust's common shares are traded
on the New York Stock Exchange under the symbol "PPR." It is a condition of
closing this offering that the Preferred Shares be offered with a rating of
"aaa" from Moody's Investors Service, Inc. and "AAA" from Standard & Poor's.


     This Prospectus sets forth concisely the information you should know before
investing, including information about risks. You should read this Prospectus
before you invest and keep it for future reference. The Trust's Statement of
Additional Information ("SAI") dated _____, 2000, contains additional
information about the Trust and is incorporated by reference into (which means
it is considered to be a part of) this Prospectus. You may obtain a free copy of
the SAI by calling 1-800-992-0180 or by writing to the Trust at 7337 East
Doubletree Ranch Road, Scottsdale, Arizona 85258. A table of contents to the SAI
is located at page 49 of this Prospectus. The SAI is available along with other
Trust-related materials at the Securities and Exchange Commission's internet web
site (http://www.sec.gov).
<PAGE>
     You should rely only on the information contained in or incorporated by
reference in this Prospectus. Neither the Trust nor the underwriters have
authorized any other person to provide you with different information. If anyone
provides you with different or inconsistent information, you should not rely on
it. Neither the Trust nor the underwriters are making an offer to sell these
securities in any jurisdiction where the offer or sale is not permitted. You
should assume that the information appearing in this Prospectus is accurate as
of the date on the front cover of this Prospectus only. The Trust's business,
financial condition, results of operations and prospects may have changed since
that date.

                                   ----------

                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----
Prospectus Summary..........................................................   3
Financial Highlights and Investment Performance.............................  10
The Trust...................................................................  12
Use of Proceeds.............................................................  12
Capitalization..............................................................  12
Trust Characteristics and Composition.......................................  13
Investment Objective and Policies...........................................  14
General Information on Senior Loans.........................................  18
Description of Credit Facility Program......................................  21
Risk Factors................................................................  23
Net Asset Value.............................................................  26
The Auction.................................................................  28
Description of Preferred Shares.............................................  31
Rating Agency Guidelines....................................................  37
Management of the Trust.....................................................  38
Custodian and Auction Agent, Transfer Agent,
  Dividend Paying Agent and Registrar.......................................  41
Federal Taxation............................................................  41
Description of Capital Structure............................................  44
Underwriting................................................................  47
Legal Matters...............................................................  48
Experts.....................................................................  48
Further Information.........................................................  48
Table of Contents for the Statement of Additional Information...............  49


                                        2
<PAGE>
                               PROSPECTUS SUMMARY

     THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS. IT MAY
NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND THE
OFFERING OF THE PREFERRED SHARES FULLY, YOU SHOULD READ THIS ENTIRE PROSPECTUS
CAREFULLY, INCLUDING THE RISK FACTORS. THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO THE DETAILED INFORMATION INCLUDED IN THIS PROSPECTUS AND THE
SAI.


The Offering.............  The Trust is offering 3,600 Series M Preferred
                           Shares, 3,600 Series W Preferred Shares and
                           3,600 Series F Preferred Shares (collectively,
                           "Preferred Shares"), each at a purchase price of
                           $25,000 per share plus dividends, if any, that
                           have accumulated from the date the Trust first
                           issues the shares. Salomon Smith Barney Inc.,
                           PaineWebber Incorporated, Lehman Brothers Inc.
                           and Gruntal & Co., L.L.C. are offering the
                           Preferred Shares as underwriters.


                           The Preferred Shares will be preferred shares of
                           the Trust that entitle their holders to receive
                           cash dividends at an annual rate that may vary
                           for the successive dividend periods for such
                           shares. In general, except as described under
                           "-- Dividends and Dividend Periods" and
                           "Description of Preferred Shares -- Dividends
                           and Dividend Periods," each dividend period will
                           be seven days. The auction agent will determine
                           the dividend rate for a particular period by an
                           auction conducted on the business day
                           immediately prior to the start of that dividend
                           period.

                           Preferred Shares are not listed on an exchange.
                           Investors and potential investors in Preferred
                           Shares may participate in auctions for the
                           Preferred Shares through broker-dealers that
                           have entered into an agreement with the auction
                           agent and the Trust.

                           Generally, investors in Preferred Shares will
                           not receive certificates representing ownership
                           of their shares. The securities depository (The
                           Depository Trust Company or any successor) or
                           its nominee for the account of the investor's
                           broker-dealer will maintain record ownership of
                           the Preferred Shares in book-entry form. An
                           investor's broker-dealer, in turn, will maintain
                           records of that investor's beneficial ownership
                           of Preferred Shares.


                           Subject to market conditions, the Trust expects
                           to offer within the next 30 days up to 3,600
                           shares each of Series T Preferred Shares and of
                           Series Th Preferred Shares. No offer will be
                           made until such time as the Trust shall have
                           filed a registration statement with the
                           Securities and Exchange Commission relating to
                           the additional series.

                                        3
<PAGE>
Ratings..................  The Trust will not issue Preferred Shares unless
                           such shares have a rating of "aaa" from Moody's
                           Investors Service, Inc. ("Moody's") and "AAA"
                           from Standard & Poor's ("S&P").

The Trust................  Pilgrim Prime Rate Trust is a closed-end,
                           diversified management investment company. The
                           Trust was organized as a Massachusetts business
                           trust on December 2, 1987, and is registered
                           under the Investment Company Act of 1940, as
                           amended (the "1940 Act"). The Trust's principal
                           office is located at 7337 East Doubletree Ranch
                           Road, Scottsdale, Arizona 85258, and its
                           telephone number is 1-800-992-0180.


                           The Trust commenced investment operations on May
                           12, 1988 upon the closing of an initial public
                           offering of its common shares of beneficial
                           interest, par value $0.01 per share. As of
                           September 30, 2000, the Trust had total assets
                           of approximately $1.7 billion and net assets of
                           approximately $1.2 billion. The Trust is
                           offering pursuant to this Prospectus 3,600
                           preferred shares of beneficial interest, par
                           value $0.01 per share, designated Series M
                           Auction Rate Cumulative Preferred Shares, 3,600
                           preferred shares of beneficial interest, par
                           value $0.01 per share, designated Series W
                           Auction Rate Cumulative Preferred Shares and
                           3,600 preferred shares of beneficial interest,
                           par value $0.01 per share, designated Series F
                           Auction Rate Cumulative Preferred Shares.

Investment
Adviser..................  The Trust's investment adviser is ING Pilgrim
                           Investments, Inc. Organized in December 1994,
                           ING Pilgrim Investments serves as investment
                           manager to 41 open-end funds, one closed-end
                           fund, 10 variable annuity funds, and other
                           institutional and privately managed accounts,
                           and had assets under management of approximately
                           $20.8 billion as of September 30, 2000. ING
                           Pilgrim Investments is an indirect wholly-owned
                           subsidiary of ING Group (NYSE: ING). ING Group
                           is a global financial institution active in the
                           field of insurance, banking and asset management
                           in more than 60 countries, with almost 90,000
                           employees.


Investment Objective
and Policies.............  The Trust's investment objective is to seek as
                           high a level of current income for holders of
                           its common shares as is consistent with the
                           preservation of capital.

                           The Trust seeks to achieve its objective by
                           acquiring interests in Senior Loans with
                           interest rates that float periodically based on
                           a benchmark indicator of prevailing interest
                           rates, such as the Prime Rate or the London
                           Inter-Bank Offered Rate ("LIBOR"). The Trust may
                           also use techniques such as borrowing for
                           investment purposes.

                                        4
<PAGE>

Diversification..........  The Trust maintains a diversified investment
                           portfolio. As a diversified management
                           investment company, the Trust, with respect to
                           75% of its total assets, may invest no more than
                           5% of the value of its total assets in any one
                           issuer (other than the U.S. Government). This
                           strategy of diversification is intended to seek
                           to manage risk by limiting exposure to any one
                           issuer.


General Investment
Guidelines...............  *    Normally, at least 80% of the Trust's total
                                assets are invested in Senior Loans.

                           *    A maximum of 25% of the Trust's assets may
                                be invested in one industry.


                           *    The Trust only acquires interests in Senior
                                Loans of U.S. corporations, partnerships,
                                limited liability companies, or other
                                business entities organized under U.S. law
                                or domiciled in Canada or U.S. territories
                                and possessions. The Senior Loans are
                                usually collateralized and must be
                                denominated in U.S. dollars.


Leverage.................  The Trust uses financial leverage for investment
                           purposes. In addition to issuing Preferred
                           Shares, the Trust borrows money through a credit
                           facility program. The amount of leverage
                           represented by the credit facility program
                           currently is approximately 30% of the Trust's
                           total assets. By utilizing the proceeds of the
                           Preferred Shares to pay down borrowings under the
                           credit facility program, it is currently anticipated
                           that the amount of leverage represented by the credit
                           facility program will be reduced to approximately
                           14% of the Trust's total assets. It is currently
                           anticipated that, after issuing the Preferred Shares
                           and paying down the credit facility program with the
                           proceeds, the amount of leverage will represent
                           approximately 30% (and in no event will it exceed
                           50%) of the Trust's total assets.

                           It is also anticipated that the Trust will
                           borrow additional amounts under the credit
                           facility program as investment opportunities in
                           additional Senior Loans become available. The
                           Trust's obligations under the credit facility
                           program are senior to the Preferred Shares.
                           Payments to holders of Preferred Shares in
                           liquidation or otherwise will be subject to the
                           prior payment of all outstanding indebtedness,
                           including the Trust's obligations under the
                           credit facility program. As of September 30,
                           2000, the Trust had outstanding borrowings of
                           approximately $505 million under the credit
                           facility program.

                                        5
<PAGE>
Principal Investment
Risks....................  Risk is inherent in all investing. The primary
                           risks of investing in Preferred Shares are:

                           *    the Trust will not be permitted to declare
                                dividends or other distributions with
                                respect to your Preferred Shares or redeem
                                your Preferred Shares unless the Trust
                                meets certain asset coverage requirements
                                and is not in default under the terms of
                                any senior indebtedness (including the
                                credit facility program);

                           *    senior indebtedness of the Trust may also
                                constitute a substantial lien and burden on
                                your Preferred Shares by reason of its
                                prior claim against the income of the Trust
                                and against the net assets of the Trust in
                                liquidation;

                           *    if an auction fails you may not be able
                                to sell some or all of your Preferred
                                Shares;

                           *    you could receive less than the price you
                                paid for your Preferred Shares if you sell
                                them outside of the auction, especially
                                when market interest rates are rising;

                           *    a rating agency could downgrade Preferred
                                Shares, which could affect liquidity; and

                           *    the Trust may be forced to redeem your
                                Preferred Shares to meet regulatory or
                                rating agency requirements or may
                                voluntarily redeem your Preferred Shares in
                                certain circumstances.

                           The primary risks of investing in the Trust are:

                           *    borrowers under Senior Loans may default on
                                obligations to pay principal or interest
                                when due, lenders may have difficulty
                                liquidating the collateral securing the
                                Senior Loans or enforcing their rights
                                under the terms of the Senior Loans, and
                                the Trust's investment objective may not be
                                realized;

                           *    any change in the net asset value ("NAV")
                                of the common shares would be somewhat
                                greater as a result of the issuance of the
                                Preferred Shares. In addition, the leverage
                                effect created by the issuance of the
                                Preferred Shares could magnify the effect
                                on the holders of the common shares of any
                                increase or decrease in the yield on the
                                Trust's portfolio for a given period of
                                time;

                           *    in extraordinary circumstances the Trust
                                may not earn sufficient income from its
                                investments to pay dividends;

                                        6
<PAGE>

                           *    if long term rates rise, the value of the
                                Trust's investment portfolio may decline;

                           *    because of a limited secondary market for
                                Senior Loans, the Trust may be limited in
                                its ability to sell portfolio holdings at
                                carrying value to generate gains or avoid
                                losses; and

                           *    an increase in demand for Senior Loans may
                                adversely affect the rate of interest
                                payable on Senior Loans acquired by the
                                Trust.

                           For further discussion of the risks of investing
                           in the Preferred Shares and the Trust, see "Risk
                           Factors."

Dividends and Dividend
Periods..................  The table below shows the dividend rates for the
                           initial rate periods on Preferred Shares offered
                           in this Prospectus. For subsequent dividend
                           periods, Preferred Shares will pay dividends
                           based on a rate set at auctions, normally held
                           every 7 days. In most instances dividends are
                           also payable every 7 days, on the first business
                           day following the end of the rate period. See
                           "Description of Preferred Shares -- Dividends
                           and Dividend Periods" and "The Auction."

                           The table below also shows the dividend payment
                           dates for the initial dividend periods. If the day
                           on which dividends otherwise would be paid is not
                           a business day, then dividends will be paid on the
                           first business day that falls after that day.

                           Finally, the table below shows the number of days
                           of the initial dividend periods for Preferred
                           Shares. Subsequent rate periods generally will be
                           7 days. The dividend payment date for special
                           rate periods of more than 7 days will be set out
                           in the notice designating a special rate period.
                           See "Description of Preferred Shares -- Designation
                           of Special Rate Periods."

                                                         Dividend      Number of
                                                       Payment Dates    Days of
                                                        for Initial     Initial
                           Preferred       Initial       Dividend      Dividend
                             Shares    Dividend Rates     Periods       Periods
                             ------    --------------     -------       -------
                           Series M
                           Series W
                           Series F

                                        7
<PAGE>
Asset
Maintenance..................   Under the Trust's Certificate of Designation for
                                Preferred Shares (the "Certificate"), which
                                establishes and fixes the rights and preferences
                                of the shares of Preferred Shares, the Trust
                                must maintain:

                                *    asset coverage of the Preferred Shares as
                                     required by the rating agency or agencies
                                     rating the Preferred Shares, and

                                *    asset coverage of the Preferred Shares of
                                     at least 200% as required by the Investment
                                     Company Act of 1940.

                                Based on the composition of the Trust's
                                portfolio and market conditions as of September
                                30, 2000, the asset coverage of the Preferred
                                Shares as measured pursuant to the 1940 Act
                                would be approximately 330% if the Trust were to
                                issue all Preferred Shares offered in this
                                Prospectus, representing approximately 16% of
                                the Trust's total assets.

                                In addition, under the credit facility program,
                                the Trust may not permit the Trust's asset
                                coverage ratio (as defined separately by related
                                credit agreements) to fall below 300% at any
                                time without causing an event of default under
                                the credit agreements. See "Description of
                                Credit Facility Program."

Redemption...................   Although the Trust ordinarily does not expect to
                                redeem Preferred Shares, it may be required to
                                redeem shares if, for example, the Trust does
                                not correct a failure to meet an asset coverage
                                ratio required by law or a rating agency
                                guideline in a timely manner. The Trust
                                voluntarily may redeem Preferred Shares under
                                certain conditions. See "Description of
                                Preferred Shares -- Redemption."

Liquidation
Preference...................   The liquidation preference (that is, the amount
                                the Trust must pay to holders of Preferred
                                Shares if the Trust is liquidated) for Preferred
                                Shares will be $25,000 per share plus
                                accumulated but unpaid dividends, if any,
                                whether or not earned or declared.


Voting Rights................   The 1940 Act requires that the holders of
                                Preferred Shares, and the holders of any other
                                series of preferred shares of the Trust, voting
                                as a separate class, have the right to:

                                *    elect at least two trustees at all times,
                                     and

                                *    elect a majority of the trustees at any
                                     time when dividends on any series of the
                                     Preferred Shares, or any other series of
                                     preferred shares of the Trust, are unpaid
                                     for two full years and will continue to be
                                     so represented until all dividends in
                                     arrears shall have been paid or otherwise
                                     provided for.


                                        8
<PAGE>

                                The holders of common shares will elect the
                                remaining trustees. The holders of Preferred
                                Shares, and the holders of any other series of
                                preferred shares of the Trust, will vote as a
                                separate class or series on other matters as
                                required under the Trust's Agreement and
                                Declaration of Trust (the "Declaration of
                                Trust"), the 1940 Act and Massachusetts law.
                                Each common share, each Preferred Share, and
                                each share of any other series of preferred
                                shares of the Trust is entitled to one vote per
                                share.

Federal Income
Taxes........................   The distributions with respect to Preferred
                                Shares (other than distributions in redemption
                                of Preferred Shares subject to Section 302(b) of
                                the Internal Revenue Code of 1986, as amended
                                (the "Code")) will constitute dividends to the
                                extent of the Trust's current or accumulated
                                earnings and profits, as calculated for federal
                                income tax purposes. Such dividends generally
                                will be taxable as ordinary income to holders.
                                Because the Trust's portfolio income will
                                consist principally of interest income,
                                corporate investors in the Preferred Shares
                                generally will not be entitled to the 70%
                                dividends received deduction regardless of the
                                holders' respective holding periods for their
                                Preferred Shares. Distributions to holders of
                                net capital gain that are designated by the
                                Trust as capital gain dividends will be treated
                                as long-term capital gains in the hands of
                                holders. The Internal Revenue Service ("IRS")
                                currently requires that a regulated investment
                                company that has two or more classes of stock
                                allocate to each such class proportionate
                                amounts of each type of its income (such as
                                ordinary income and capital gains). Accordingly,
                                the Trust intends to designate distributions of
                                net capital gain made with respect to Preferred
                                Shares as capital gain dividends in proportion
                                to the Preferred Shares' share of total
                                dividends paid during the year. Because the
                                Trust currently has a significant capital loss
                                carry forward, it is not anticipated that the
                                Trust will distribute net capital gains to
                                shareholders, including holders of the Preferred
                                Shares, for the foreseeable future. See "Federal
                                Taxation."


Secondary Market
Trading......................   Broker-dealers may, but are not obligated to,
                                maintain a secondary market in Preferred Shares
                                outside of auctions. There can be no assurance
                                that a secondary market will develop or, if it
                                does develop, that it will provide owners with
                                liquidity of investment. Preferred Shares may be
                                transferred outside of auctions only to a
                                broker-dealer or such other persons who may be
                                permitted by the Trust.

Custodian, Auction Agent,
Transfer Agent, Dividend
Paying Agent and Registrar...   State Street Bank and Trust -- Kansas City
                                serves as the Trust's custodian. Bankers Trust
                                Company serves as auction agent, transfer agent,
                                dividend paying agent and registrar for the
                                Preferred Shares.

                                        9
<PAGE>
                 FINANCIAL HIGHLIGHTS AND INVESTMENT PERFORMANCE

Financial Highlights Table


     The table below sets forth selected financial information for a common
share of beneficial interest of the Trust outstanding throughout each period
presented which has been derived from the financial statements in the Trust's
Annual Report dated February 29, 2000 and Semi-Annual Report dated August 31,
2000. For the fiscal years ended February 29, 2000, February 28, 1999, 1998 and
1997, and February 29, 1996, the information in the table below has been audited
by KPMG LLP, independent auditors. For all periods ended prior to February 29,
1996, the financial information was audited by the Trust's former auditors. The
Trust's February 29, 2000 Annual Report and August 31, 2000 Semi-Annual Report
are incorporated by reference in the SAI. This information should be read in
conjunction with the financial statements and notes thereto included in the
Trust's February 29, 2000 Annual Report and August 31, 2000 Semi-Annual Report,
which are available without charge by calling the Trust at 1-800-992-0180.

<TABLE>
<CAPTION>
                                                  Six Months
                                                    Ended
                                                  August 31,            Years Ended February 28 or February 29,
                                                     2000        ----------------------------------------------------
                                                  (Unaudited)       2000          1999(7)        1998(7)     1997(7)
                                                  -----------    ----------     ----------     ----------  ----------
<S>                                               <C>             <C>             <C>             <C>          <C>
PER SHARE OPERATING PERFORMANCE
NAV, beginning of period ......................   $     8.95     $     9.24     $     9.34     $     9.45  $     9.61
                                                  ----------     ----------     ----------     ----------  ----------
Net investment income .........................         0.43           0.79           0.79           0.87        0.82
Net realized and unrealized gain (loss)
   on investments .............................        (0.24)         (0.30)         (0.10)         (0.13)      (0.02)
                                                  ----------     ----------     ----------     ----------  ----------
Increase in NAV from investment operations.....         0.19           0.49           0.69           0.74        0.80
Distributions from net investment income ......        (0.44)         (0.78)         (0.82)         (0.85)      (0.82)
Increase in NAV from share offerings ..........           --             --           0.03             --          --
Reduction in NAV from rights offering .........           --             --             --             --       (0.14)
Increase in NAV from repurchase of
 capital stock ................................           --             --             --             --          --
                                                  ----------     ----------     ----------     ----------  ----------
NAV, end of period ............................   $     8.70     $     8.95     $     9.24     $     9.34  $     9.45
                                                  ==========     ==========     ==========     ==========  ==========
Closing market price at end of period .........   $     8.75     $     8.25     $     9.56     $    10.31  $    10.00
                                                  ==========     ==========     ==========     ==========  ==========
TOTAL RETURN
Total investment return at closing
 market price(3)...............................        11.58%         (5.88%)         1.11%         12.70%      15.04%(5)
Total investment return based on NAV(4) .......         2.26%          5.67%          7.86%          8.01%       8.06%(5)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .............   $1,188,168     $1,217,339     $1,202,565     $1,034,403  $1,031,089
Average Borrowings (000's) ....................   $  529,326     $  524,019     $  490,978     $  346,110  $  131,773

Ratios to average net assets plus borrowings:
 Expenses (before interest and other fees
  related to revolving credit facility)........         1.17%(1)       1.00%(8)       1.05%(8)       1.04%       1.13%
 Expenses .....................................         3.25%(1)       2.79%(8)       2.86%(8)       2.65%       1.92%
 Net investment income ........................         6.72%(1)       6.12%          6.00%          6.91%       7.59%

Ratios to average net assets:
 Expenses (before interest and other fees
  related to revolving credit facility)........         1.69%(1)       1.43%(8)       1.50%(8)       1.39%       1.29%
 Expenses .....................................         4.68%(1)       4.00%(8)       4.10%(8)       3.54%       2.20%
 Net investment income ........................         9.70%(1)       8.77%          8.60%          9.23%       8.67%
Portfolio turnover rate .......................           28%            71%            68%            90%         82%
Shares outstanding at end of period (000's)....      136,511        136,036        130,206        110,764     109,140


                                                                 Years Ended February 28 or February 29,
                                                  --------------------------------------------------------------------
                                                    1996(6)     1995         1994        1993       1992        1991
                                                  ---------   --------     --------    --------   --------    --------
PER SHARE OPERATING PERFORMANCE
NAV, beginning of period ......................   $    9.66   $  10.02     $  10.05    $   9.96   $   9.97   $    10.00
                                                  ---------   --------     --------    --------   --------   ----------
Net investment income .........................        0.89       0.74         0.60        0.60       0.76         0.98
Net realized and unrealized gain (loss)
 on investments ...............................       (0.08)      0.07        (0.05)       0.01      (0.02)       (0.05)
                                                  ---------   --------     --------    --------   --------   ----------
Increase in NAV from investment operations.....        0.81       0.81         0.55        0.61       0.74         0.93
Distributions from net investment income ......       (0.86)     (0.73)       (0.60)      (0.57)     (0.75)       (0.96)
Increase in NAV from share offerings ..........          --         --           --          --         --           --
Reduction in NAV from rights offering .........          --      (0.44)          --          --         --           --
Increase in NAV from repurchase of
 capital stock ................................          --         --     $   0.02    $   0.05         --           --
                                                  ---------   --------     --------    --------   --------   ----------
NAV, end of period ............................   $    9.61   $   9.66     $  10.02    $  10.05   $   9.96   $     9.97
                                                  =========   ========     ========    ========   ========   ==========
Closing market price at end of period .........   $    9.50   $   8.75     $   9.25    $   9.13         --           --
                                                  =========   ========     ========    ========   ========   ==========
TOTAL RETURN
Total investment return at closing
 market price(3) ..............................       19.19%      3.27%(5)     8.06%      10.89%        --           --
Total investment return based on NAV(4) .......        9.21%      5.24%(5)     6.28%       7.29%      7.71%        9.74%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .............   $ 862,938   $867,083     $719,979    $738,810   $874,104   $1,158,224
Average Borrowings (000's) ....................   $      --   $     --     $     --    $     --   $     --   $       --

Ratios to average net assets plus borrowings:
 Expenses (before interest and other fees
  related to revolving credit facility)......            --         --           --          --         --           --
 Expenses ...................................            --         --           --          --         --           --
 Net investment income ......................            --         --           --          --         --           --

Ratios to average net assets:
 Expenses (before interest and other fees
  related to revolving credit facility)......            --         --           --          --         --           --
 Expenses ...................................          1.23%      1.30%        1.31%       1.42%      1.42%(2)     1.38%
 Net investment income ......................          9.23%      7.59%        6.04%       5.88%      7.62%(2)     9.71%
Portfolio turnover rate .....................            88%       108%          87%         81%        53%          55%
Shares outstanding at end of period (000's)..        89,794     89,794       71,835      73,544     87,782      116,022
</TABLE>

                                       10
<PAGE>

Notes to Financial Highlights Table:

- ----------
(1)  Annualized.
(2)  Prior to the waiver of expenses, the ratios of expenses to average net
     assets were 1.95% (annualized), 1.48% and 1.44% for the period from May 12,
     1988 to February 28, 1989, and for the fiscal years ended February 28, 1990
     and February 29, 1992, respectively, and the ratios of net investment
     income to average net assets were 8.91% (annualized), 10.30% and 7.60% for
     the period from May 12, 1988 to February 28, 1989, and for the fiscal years
     ended February 28, 1990 and February 29, 1992, respectively.
(3)  Total investment return measures the change in the market value of your
     investment assuming reinvestment of dividends and capital gain
     distributions, if any, in accordance with the provisions of the dividend
     reinvestment plan. On March 9, 1992, the shares of the Trust were initially
     listed for trading on the New York Stock Exchange. Accordingly, the total
     investment return for the year ended February 28, 1993, covers only the
     period from March 9, 1992, to February 28, 1993. Total investment return
     for periods prior to the year ended February 28, 1993 , are not presented
     since market values for the Trust's shares were not available. Total
     returns for less than one year are not annualized.
(4)  Total investment return at net asset value has been calculated assuming a
     purchase at net asset value at the beginning of each period and a sale at
     net asset value at the end of each period and assumes reinvestment of
     dividends and capital gain distributions in accordance with the provisions
     of the dividend reinvestment plan. This calculation differs from total
     investment return because it excludes the effects of changes in the market
     values of the Trust's shares. Total returns for less than one year are not
     annualized.
(5)  Calculation of total return excludes the effects of the per share dilution
     resulting from the rights offering as the total account value of a fully
     subscribed shareholder was minimally impacted.
(6)  Pilgrim Investments, Inc., the Trust's investment manager, acquired certain
     assets of Pilgrim Management Corporation, the Trust's former investment
     manager, in a transaction that closed on April 7, 1995.
(7)  The Adviser agreed to reduce its fee for a period of three years from the
     Expiration Date of the November 12, 1996 Rights Offering to 0.60% of the
     average daily net assets, plus the proceeds of any outstanding borrowings,
     over $1.15 billion.

(8)  Calculated on total expenses before impact of earnings credits.

                                       11
<PAGE>
                                    THE TRUST


     The Trust is a closed-end, diversified management investment company. The
Trust was organized as a Massachusetts business trust on December 2, 1987, and
is registered under the 1940 Act. The Trust commenced investment operations on
May 12, 1988 upon the closing of an initial public offering of its common shares
of beneficial interest. As of September 30, 2000, the Trust had total assets of
approximately $1.7 billion and net assets of approximately $1.2 billion. On
September 30, 2000, the Trust had outstanding approximately 136,680,787 common
shares. The Trust's principal office is located at 7337 East Doubletree Ranch
Road, Scottsdale, Arizona 85258, and its telephone number is 1-800-992-0180.


                                 USE OF PROCEEDS


     The estimated net proceeds of this offering will be $266,853,682 million
after payment of offering expenses and the sales load. The Trust will use all of
the net proceeds of the offering to repay part of the Trust's outstanding
amounts borrowed under a credit facility within its credit facility program,
which as of September 30, 2000 had an annualized interest rate of 6.93% and a
maturity date of September 16, 2003.


                                 CAPITALIZATION


     The following table sets forth the unaudited capitalization of the Trust as
of September 30, 2000, and as adjusted to give effect to the issuance of the
shares of Preferred Shares offered hereby (including estimated offering expenses
and sales load of $3,146,318).

                                                   Actual         As Adjusted
                                               --------------    --------------
Shareholders' Equity:
 Preferred Shares, $.01 par value per share
  (no shares issued; 3,600 Series M shares,
  3,600 Series W shares and 3,600 Series F
  shares issued, as adjusted, at $25,000
  per share liquidation preference)            $           --    $  270,000,000
 Common Shares, $.01 par value per share
  (136,680,787 shares outstanding*)                 1,366,808         1,366,808
Capital in excess of par value                  1,290,466,771     1,287,320,453
Undistributed (overdistributed) net
 investment income                                 11,197,005        11,197,005
Net realized gain (loss) from
 investment transactions                          (63,355,340)      (63,355,340)
Net unrealized appreciation
 (depreciation) of investments                    (61,368,239)      (61,368,239)
                                               --------------    --------------
Net assets                                     $1,178,307,005    $1,445,160,687
                                               ==============    ==============


- ----------
*    None of these outstanding shares is held by or for the account of the
     Trust.

                                       12
<PAGE>
                      TRUST CHARACTERISTICS AND COMPOSITION


     The following tables set forth certain information with respect to the
characteristics and the composition of the Trust's investment portfolio in terms
of percentages of net assets and total assets as of September 30, 2000.

                            PORTFOLIO CHARACTERISTICS

     Net Assets                                              $1,178,307,005
     Assets Invested in Senior and Other Loans*              $1,660,953,667
     Total Number of Senior and Other Loans                  184
     Average Amount Outstanding per Loan                     $9,026,922
     Total Number of Industries                              34
     Average Loan Amount per  Industry                       $48,851,578
     Portfolio Turnover (Fiscal Year to Date)                32%
     Weighted Average Days to Interest Rate Reset            34 days
     Average Loan Maturity                                   62 months
     Average Age of Loans Held in Portfolio                  11 months

     (*   Includes Senior Loans, other floating rate loan investments and other
          debt received through restructures.)

                       TOP 10 MOODY'S INDUSTRIES AS A % OF

                                                Net Assets     Total Assets
                                                ----------     ------------
     Cellular                                      10.5%           7.3%
     Healthcare, Education, Childcare              10.4%           7.2%
     Containers, Packaging, Glass                   9.5%           6.6%
     Buildings and Real Estate                      7.5%           5.2%
     Ecological                                     7.5%           5.2%
     Hotels, Motels, Inns, Gaming                   7.4%           5.1%
     Leisure, Amusement, Entertainment              6.9%           4.8%
     Aerospace and Defense                          5.5%           3.8%
     Finance                                        5.1%           3.6%
     Automobile                                     5.1%           3.5%

                          TOP 10 SENIOR LOANS AS A % OF

                                                Net Assets     Total Assets
                                                ----------     ------------
     Voicestream Wireless                           7.0%           4.9%
     Allied Waste Industries                        6.3%           4.4%
     Nextel Finance                                 4.1%           2.9%
     Stone Container Corp.                          2.7%           1.9%
     Riverwood International                        2.4%           1.7%
     Ventas Realty Ltd.                             2.1%           1.5%
     Century Cable Holdings LLP                     2.0%           1.4%
     Wyndham International                          2.0%           1.4%
     Charter Communications                         2.0%           1.4%
     Safelite Glass Corp.                           1.7%           1.2%

                                       13
<PAGE>

                              PORTFOLIO STATISTICS
                  (Moody's / S&P --- As of September 30, 2000)+

     Securities Ratings
     ------------------
     Aaa/AAA                                                             0%
     Aa/AA                                                               0%
     A/A                                                                 0%
     Baa/BBB                                                           1.3%
     Ba/BB                                                            26.7%
     B/B                                                              33.1%
     Caa/CCC                                                           3.7%
     Ca/CC                                                             0.1%
     C/C                                                                 0%
     D                                                                   0%
     Not rated++                                                      35.1%

+    The ratings of Moody's and S&P represent their opinions as to the quality
     of securities that they undertake to rate. The percentage shown reflects
     the higher of Moody's or S&P's ratings. Ratings are relative and subjective
     and not absolute standards of quality. Moody's ratings categories may be
     modified further by a 1, 2 or 3 in Aa, A, Baa, Ba, B and Caa ratings. S&P's
     rating categories may be modified further by a plus (+) or minus (-) in AA,
     A, BBB, BB, B and CCC ratings.

++   Securities that are not rated by Moody's or S&P may be rated by nationally
     recognized statistical rating organizations other than Moody's or S&P, or
     may not be rated by any such organization. With respect to the percentage
     of the Trust's assets invested in such securities, the Adviser believes
     that these are of comparable quality to rated securities. This
     determination is based on the Adviser's own internal evaluation and does
     not necessarily reflect how such securities would be rated by Moody's or
     S&P if either were to rate the securities. The Adviser's determination of
     the equivalent quality of the trust's unrated securities is as follows:
     Aaa/AAA = 0%, Aa/AA = 0%, A/A = 0%, Baa/BBB = 0%, Ba/BB = 44.1%, B/B =
     29.4%, Caa/CCC = 9.4%, Ca/CC = 0%, C/C = 0% and D = 17.1%.

                        INVESTMENT OBJECTIVE AND POLICIES

     The Trust's investment objective is to seek as high a level of current
income for holders of its common shares as is consistent with the preservation
of capital. The Trust seeks to achieve its objective by acquiring interests in
Senior Loans with interest rates that float periodically based on a benchmark
indicator of prevailing interest rates, such as the Prime Rate or LIBOR. The
Trust only acquires interests in Senior Loans of U.S. corporations,
partnerships, limited liability companies, or other business entities organized
under U.S. law or domiciled in Canada or U.S. territories and possessions. The
Senior Loans are usually collateralized and must be denominated in U.S. dollars.
Normally, at least 80% of the Trust's total assets are invested in Senior Loans.
A maximum of 25% of the Trust's assets may be invested in one industry.

                                       14
<PAGE>

     Under the Trust's policies, Senior Loans are loans that hold a senior
position in the capital structure of the borrower. These may include loans that
hold the most senior position, that hold an equal ranking with other senior
debt, or loans that are, in the judgment of ING Pilgrim Investments, in the
category of senior debt of the borrower. Generally, the Senior Loans in which
the Trust invests are collateralized with assets of the borrower. The Trust also
only purchases interests in Senior Loans of borrowers that ING Pilgrim
Investments believes can meet debt service requirements from cash flow. Senior
Loans vary in yield according to their terms and conditions, how often they pay
interest, and when rates are reset. The Trust does not invest in Senior Loans
whose interest rates are tied to non-domestic interest rates other than LIBOR.

     Senior Loans that the Trust may acquire include participation interests in
lease financings ("Lease Participations") where the collateral quality, credit
quality of the borrower and the likelihood of payback are believed by ING
Pilgrim Investments to be the same as those applied to conventional Senior
Loans. A Lease Participation is also required to have a floating interest rate
that is indexed to a benchmark indicator of prevailing interest rates, such as
LIBOR or the Prime Rate.


     Subject to certain limitations, the Trust may acquire Senior Loans of
borrowers engaged in any industry. With respect to no more than 25% of its total
assets, the Trust may acquire Senior Loans that are unrestricted as to the
percentage of a single issue the Trust may hold and, with respect to at least
75% of its total assets, the Trust will hold no more than 25% of the amount
borrowed from all lenders in a single Senior Loan or other issue. The investment
standards in this paragraph are fundamental and may not be changed without
approval by a majority of all shareholders, including the vote of a majority of
the holders of Preferred Shares (and any other preferred shares that may be
issued in the future) voting separately as a class.

     Substantial increases in interest rates may cause an increase in loan
defaults as borrowers may lack resources to meet higher debt service
requirements. The value of the Trust's assets may also be affected by other
uncertainties such as economic developments affecting the market for Senior
Loans or affecting borrowers generally. For additional information on Senior
Loans, see "General Information on Senior Loans -- About Senior Loans."

PORTFOLIO MATURITY

     Although the Trust has no restrictions on portfolio maturity, normally at
least 80% of the total assets invested in Senior Loans are composed of Senior
Loans with maturities of one to ten years with rates of interest which typically
reset either daily, monthly, or quarterly. The maximum period of time of
interest rate reset on any Senior Loans in which the Trust may invest is one
year. In addition, the Trust will ordinarily maintain a dollar-weighted average
time to next interest rate adjustment on its Senior Loans of 90 days or less.

     In the event of a change in the benchmark interest rate on a Senior Loan,
the rate payable to lenders under the Senior Loan will, in turn, change at the
next scheduled reset date. If the benchmark rate goes up, the Trust as lender
would earn interest at a higher rate, but only on and after the reset date. If
the benchmark rate goes down, the Trust as lender would earn interest at a lower
rate, but only on and after the reset date.

                                       15
<PAGE>

CREDIT ANALYSIS

     In acquiring a Senior Loan, ING Pilgrim Investments considers the following
factors: positive cash flow coverage of debt service; adequate working capital;
appropriate capital structure; leverage ratio consistent with industry norms;
historical experience of attaining business and financial projections; the
quality and experience of management; and adequate collateral coverage. The
Trust does not impose any minimum standard regarding the rating of any
outstanding debt securities of borrowers.

     ING Pilgrim Investments performs its own independent credit analysis of the
borrower. In so doing, ING Pilgrim Investments may utilize information and
credit analyses from the agents that originate or administer loans, other
lenders investing in a Senior Loan, and other sources. These analyses will
continue on a periodic basis for any Senior Loan purchased by the Trust. See
"Risk Factors -- General Risks of Investing in the Trust -- Credit Risks and
Realization of Investment Objective."

OTHER INVESTMENTS

     Assets not invested in Senior Loans will generally consist of other
instruments, including Hybrid Loans (as described below), unsecured loans,
subordinated loans, short-term debt instruments with remaining maturities of 120
days or less (which may have yields tied to the Prime Rate, commercial paper
rates, federal funds rate or LIBOR), longer term debt securities, equity
securities acquired in connection with an investment in or restructuring of a
Senior Loan, and other instruments as described under "Additional Information
About Investments and Investment Techniques" in the SAI. Short-term instruments
may include (i) commercial paper rated P-1 by Moody's Investors Service, Inc. or
A-1 by Standard & Poor's Ratings Services, or of comparable quality as
determined by ING Pilgrim Investments, (ii) certificates of deposit, bankers
acceptances, and other bank deposits and obligations, and (iii) securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities.
During periods when, in the opinion of ING Pilgrim Investments, a temporary
defensive posture in the market is appropriate, the Trust may hold up to 100% of
its assets in cash, or in the instruments described above.

HYBRID LOANS

     The growth of the syndicated loan market has produced loan structures with
characteristics similar to Senior Loans but which resemble bonds in some
respects, and generally offer fewer covenant or other protections than
traditional Senior Loans while still being collateralized ("Hybrid Loans"). The
Trust may invest only in Hybrid Loans that are secured debt of the borrower,
although they may not in all instances be considered senior debt of the
borrower. With Hybrid Loans, the Trust may not possess a senior claim to all of
the collateral securing the Hybrid Loan. Hybrid Loans also may not include
covenants that are typical of Senior Loans, such as covenants requiring the
maintenance of minimum interest coverage ratios. As a result, Hybrid Loans
present additional risks besides those associated with traditional Senior Loans,
although they may provide a relatively higher yield. Because the lenders in
Hybrid Loans waive or forego certain loan covenants, their negotiating power or
voting rights in the event of a default may be diminished. As a result, the
lender's interests may not be represented as significantly as in the case of a
conventional Senior Loan. In addition, because the Trust's security interest in
some of the collateral may be subordinate to other creditors, the risk of

                                       16
<PAGE>

nonpayment of interest or loss of principal may be greater than would be the
case with conventional Senior Loans. The Trust will invest only in Hybrid Loans
which meet credit standards established by ING Pilgrim Investments with respect
to Hybrid Loans and nonetheless provide certain protections to the lender such
as collateral maintenance or call protection. The Trust may only invest up to
20% of its assets in Hybrid Loans as part of its investment in "Other
Investments" as described above, and Hybrid Loans will not count toward the 80%
of the Trust's total assets that are normally invested in Senior Loans.

SUBORDINATED AND UNSECURED LOANS

     The Trust may also invest up to 5% of its total assets, measured at the
time of investment, in subordinated and unsecured loans. The Trust may acquire a
subordinated loan only if, at the time of acquisition, it acquires or holds a
Senior Loan from the same borrower. The primary risk arising from a loan's
subordination is the potential loss in the event of default by the issuer of the
loans. Subordinated loans in an insolvency bear an increased share, relative to
senior secured lenders, of the ultimate risk that the borrower's assets are
insufficient to meet its obligations to its creditors. Unsecured loans are not
secured by any specific collateral of the borrower. They do not enjoy the
security associated with collateralization and may pose a greater risk of
nonpayment of interest or loss of principal than do secured loans. The Trust
will acquire unsecured loans only where the Adviser believes, at the time of
acquisition, that the Trust would have the right to payment upon default that is
not subordinate to any other creditor. The maximum of 5% of the Trust's assets
invested in subordinated and unsecured loans will constitute part of the 20% of
the Trust's assets that may be invested in "Other Investments" as described
above, and will not count toward the 80% of the Trust's total assets that are
normally invested in Senior Loans.

USE OF LEVERAGE

     The Trust is permitted to borrow up to 33 1/3% (50% in the case of the
issuance of preferred shares), or such other percentage permitted by law, of its
total assets (including the amount borrowed) less all liabilities other than
borrowings (or, in the case of the issuance of senior securities, less all
liabilities and indebtedness not represented by senior securities).

     The Trust is currently a party to credit facilities with financial
institutions that permit the Trust to borrow up to $620 million. Borrowing may
be made for the purpose of acquiring additional income-producing investments
when the Adviser believes that such use of borrowed proceeds will enhance the
Trust's net yield. The amount of outstanding borrowings may vary with prevailing
market or economic conditions. In addition, although the Trust has not conducted
a tender offer since 1992 or repurchased its shares since January 1994, in the
event that it determines to again conduct a tender offer or repurchase its
shares, the Trust may use borrowings to finance the purchase of its shares. For
information on risks associated with borrowing, see "Risk Factors -- Risks of
Investing in Preferred Shares -- Leverage Risk."

                                       17
<PAGE>
                       GENERAL INFORMATION ON SENIOR LOANS

PRIMARY MARKET OVERVIEW

 1989   1990   1991   1992   1993   1994   1995   1996    1997    1998    1999
 ----   ----   ----   ----   ----   ----   ----   ----    ----    ----    ----
  333    241    234    376    389    665    817    888   1,112     872   1,017

     The primary market for Senior Loans has become much larger since inception
of the Trust. The volume of loans originated in the Senior Loan market has
increased from $376 billion in 1992 to $1 trillion in 1999. Senior Loans
tailored to the institutional investor, such as the Trust, have increased from
$2.5 billion in 1993 to $320 billion in 1999.

Source: Loan Pricing Corporation.


     At the same time that primary Senior Loan volume has grown, demand has
remained strong as institutional investors other than banks have entered the
Senior Loan market. Investment companies, insurance companies and private
investment vehicles are joining U.S. and foreign banks as lenders. At March 31,
2000, Senior Loan assets invested in retail oriented investment companies
exceeded $35 billion, up from under $5 billion in 1989. The entrance of new
investors has helped create a bank loan trading market with approximately $65
billion in trading volume during 1999. The secondary market, coupled with banks'
focus on portfolio management and the move toward standard market practices, has
helped increase liquidity for Senior Loans. With this growth in volume and
demand, Senior Loans have adopted innovative structures and characteristics, as
described elsewhere in this Prospectus.

     Through September 2000, Senior Loan volume is estimated to be 25% below
levels realized in 1999. Credit quality is the primary issue impacting the loan
market. The industry is experiencing deteriorating credit quality, high profile
corporate bankruptcies, rising corporate debt defaults and concerns about the
direction of the general economy. As a result, average new Senior Loan credit
statistics are at their most conservative levels in the past 10 years.


ABOUT SENIOR LOANS

     Senior Loans vary from other types of debt in that they generally hold the
most senior position in the capital structure of a borrower. Priority liens are
obtained by the lenders that typically provide the first right to cash flows or
proceeds from the sale of a borrower's collateral if the borrower becomes
insolvent (subject to the limitations of bankruptcy law, which may provide
higher priority to certain claims such as, for example, employee salaries,
employee pensions and taxes). Thus, Senior Loans are generally repaid before
unsecured bank loans, corporate bonds, subordinated debt, trade creditors, and
preferred or common stockholders.

     Senior Loans typically will be secured by pledges of collateral from the
borrower in the form of tangible assets such as cash, accounts receivable,
inventory, property, plant and equipment, common and/or preferred stock of
subsidiaries, and intangible assets including trademarks, copyrights, patent
rights and franchise value. The Trust may also receive guarantees as a form of
collateral. In some instances, the Trust may invest in Senior Loans that are

                                       18
<PAGE>
secured only by stock of the borrower or its subsidiaries or affiliates.
Generally, the agent on a Senior Loan is responsible for monitoring collateral
and for exercising remedies available to the lenders such as foreclosure upon
collateral.

     Senior Loans generally are arranged through private negotiations between a
borrower and several financial institutions ("lenders") represented in each case
by an agent ("agent"), which usually is one or more of the lenders. The Trust
will acquire Senior Loans from and sell Senior Loans to the following lenders:
money center banks, selected regional banks and selected non-banks, insurance
companies, finance companies, other investment companies, private investment
funds, and lending companies. The Trust may also acquire Senior Loans from and
sell Senior Loans to U.S. branches of foreign banks which are regulated by the
Federal Reserve System or appropriate state regulatory authorities. On behalf of
the lenders, generally the agent is primarily responsible for negotiating the
loan agreement ("loan agreement"), which establishes the terms and conditions of
the Senior Loan and the rights of the borrower and the lenders. The agent and
the other original lenders typically have the right to sell interests
("participations") in their share of the Senior Loan to other participants. The
agent and the other original lenders also may assign all or a portion of their
interests in the Senior Loan to other participants.

     The Trust's investment in Senior Loans generally may take one of several
forms including: acting as one of the group of lenders originating a Senior Loan
(an "original lender"), purchase of an assignment ("assignment") or a portion of
a Senior Loan from a third party, or acquiring a participation in a Senior Loan.
The Trust may pay a fee or forego a portion of interest payments to the lender
selling a participation or assignment under the terms of such participation or
assignment.


     The agent that arranges a Senior Loan is frequently a commercial or
investment bank or other entity that originates a Senior Loan and the entity
that invites other parties to join the lending syndicate. In larger
transactions, it is common to have several agents; however, generally only one
such agent has primary responsibility for documentation and administration of
the Senior Loan. Agents are typically paid fees by the borrower for their
services. The Trust has the authority to serve as the agent or co-agent for a
Senior Loan but has not done so to date, and it does not expect to do so in the
future. See "Additional Information About Investments and Investment Techniques
- -- Originating Senior Loans" in the SAI.

     When the Trust is a member of the originating syndicate group for a Senior
Loan, it may share in a fee paid to the original lenders. When the Trust is an
original lender or acquires an assignment, it will have a direct contractual
relationship with the borrower, may enforce compliance by the borrower with the
terms of the Senior Loan agreement, and may have rights with respect to any
funds acquired by other lenders through set-off. Lenders also have certain
voting and consent rights under the applicable Senior Loan agreement. Actions
subject to lender vote or consent generally require the vote or consent of the
holders of some specified percentage of the outstanding principal amount of the
Senior Loan. Certain decisions, such as reducing the amount or increasing the
time for payment of interest on or repayment of principal of a Senior Loan, or
releasing collateral therefor, frequently require the unanimous vote or consent
of all lenders affected.

                                       19
<PAGE>

     When the Trust is a purchaser of an assignment, it typically succeeds to
all the rights and obligations under the loan agreement of the assigning lender
and becomes a lender under the loan agreement with the same rights and
obligations as the assigning lender. Assignments are, however, arranged through
private negotiations between potential assignees and potential assignors, and
the rights and obligations acquired by the purchaser of an assignment may be
more limited than those held by the assigning lender. The Trust will purchase an
assignment or act as lender with respect to a syndicated Senior Loan only where
the agent with respect to such Senior Loan is determined by the Adviser to be
creditworthy at the time of acquisition.


     To a lesser extent, the Trust invests in participations in Senior Loans.
With respect to any given Senior Loan, the rights of the Trust when it acquires
a participation may be more limited than the rights of original lenders or of
investors who acquire an assignment. Participations may entail certain risks
relating to the creditworthiness of the parties from which the participations
are obtained. Participation by the Trust in a lender's portion of a Senior Loan
typically results in the Trust having a contractual relationship only with the
lender, not with the borrower. The Trust has the right to receive payments of
principal, interest and any fees to which it is entitled only from the lender
selling the participation and only upon receipt by such lender of such payments
from the borrower.


     In connection with purchasing participations, the Trust generally will have
no right to enforce compliance by the borrower with the terms of the Senior Loan
agreement, nor any rights with respect to any funds acquired by other lenders
through set-off against the borrower . As a result , the Trust may be subject to
delays, expenses and risks that are greater than those that exist where the
Trust is the original lender, and the Trust may not directly benefit from the
collateral supporting the Senior Loan because it may be treated as a creditor of
the lender instead of the borrower. Consequently, the Trust may assume the
credit risk of both the borrower and the lender selling the participation. In
the event of insolvency of the lender selling a participation, the Trust may be
treated as a general creditor of such lender, and may not benefit from any
set-off between such lender and the borrower. In the event of bankruptcy or
insolvency of the borrower, the obligation of the borrower to repay the Senior
Loan may be subject to certain defenses that can be asserted by such borrower as
a result of improper conduct of the lender selling the participation. The Trust
will only acquire participations if the lender selling the participations and
any other persons interpositioned between the Trust and the lender are
determined by the Adviser to be creditworthy.

     When the Trust is an original lender, it will have a direct contractual
relationship with the borrower. If the terms of an interest in a Senior Loan
provide that the Trust is in privity with the borrower, the Trust has direct
recourse against the borrower in the event the borrower fails to pay scheduled
principal or interest. In all other cases, the Trust looks to the agent to use
appropriate credit remedies against the borrower. When the Trust purchases an
assignment, the Trust typically succeeds to the rights of the assigning lender
under the Senior Loan agreement, and becomes a lender under the Senior Loan
agreement. When the Trust purchases a participation in a Senior Loan, the Trust
typically enters into a contractual arrangement with the lender selling the
participation, and not with the borrower.


     Should an agent become insolvent, or enter Federal Deposit Insurance
Corporation ("FDIC") receivership or bankruptcy, any interest in the Senior Loan

                                       20
<PAGE>
transferred by such person and any Senior Loan repayment held by the agent for
the benefit of participants may be included in the agent's estate. Where the
Trust acquires a participation interest from an original lender, should that
original lender become insolvent, or enter FDIC receivership or bankruptcy, any
interest in the Senior Loan transferred by the original lender may be included
in its estate. In such an event, the Trust might incur certain costs and delays
in realizing payment or may suffer a loss of principal and interest.

                     DESCRIPTION OF CREDIT FACILITY PROGRAM

GENERAL


     The Trust is permitted to borrow up to 33 1/3% (50% in the case of the
issuance of preferred shares), or such other percentage permitted by law, of its
total assets (including the amount borrowed) less all liabilities other than
borrowings (or, in the case of the issuance of senior securities, less all
liabilities and indebtedness not represented by senior securities), without the
consent of holders of preferred shares, including the Preferred Shares. Within
these limitations, the Trust may issue notes, commercial paper or other
evidences of indebtedness and may secure such borrowings by mortgaging,
pledging, or otherwise granting a security interest in the Trust's assets. The
Trust may use the proceeds from borrowings for investment purposes. The terms of
any such borrowings are subject to the provisions of the 1940 Act, as further
described below. The terms of such borrowings also will be subject to the
provisions of any credit agreements related to the borrowings, to the provisions
of any other credit agreements with respect to indebtedness incurred by the
Trust, and, to the extent that the Trust seeks a rating for the borrowings, any
additional guidelines imposed by rating agencies rating such borrowings. Such
provisions and guidelines may be more restrictive than those imposed by the 1940
Act.

CREDIT FACILITY PROGRAM

     In May 1996, the Trust began a policy of borrowing to acquire
income-producing investments which, by their terms, pay interest at a rate
higher than the rate the Trust pays on borrowings. Accordingly, borrowing has
the potential to increase the Trust's total income. The Trust currently is a
party to two credit facilities with financial institutions that permit the Trust
to borrow up to an aggregate of $620 million. Interest is payable on the credit
facilities by the Trust at a variable rate that is tied to either LIBOR, the
federal funds rate, or a commercial paper based rate and includes a facility fee
on unused commitments. As of September 30, 2000, the Trust had outstanding
borrowings under the credit facilities of $505 million. Collectively, the
lenders under the credit facilities have a security interest in all assets of
the Trust. Under each of the credit facilities, the lenders have the right to
liquidate Trust assets in the event of default by the Trust under such credit
facility, and the Trust may be prohibited from paying dividends in the event of
certain adverse events or conditions respecting the Trust or Adviser until the
credit facility is repaid in full or until the event or condition is cured.

RANKING OF SENIOR INDEBTEDNESS

     The rights of lenders to receive payments of principal, interest, fees and
other obligations owing to the lenders by the Trust, including those made under
the credit facility program, will be senior to the rights of holders of
preferred shares, including the Preferred Shares, with respect to the payment of
dividends or upon liquidation.

                                       21
<PAGE>
RESTRICTIVE COVENANTS AND 1940 ACT RESTRICTIONS


     The credit agreements governing the credit facility program (the "Credit
Agreements") include usual and customary covenants for their respective type of
transaction, including limits on the Trust's ability to (i) issue preferred
shares , (ii) incur liens or pledge portfolio securities, (iii) change its
investment objective or fundamental investment restrictions without the approval
of lenders, (iv) make changes in any of its business objectives, purposes or
operations that could result in a material adverse effect, (v) make any changes
in its capital structure, (vi) amend the Trust documents in a manner which could
adversely affect the rights, interests or obligations of any of the lenders,
(vii) engage in any business other than the businesses currently engaged in,
(viii) create, incur, assume or permit to exist certain debt except for certain
specified types of debt, and (ix) permit any of its ERISA affiliates to cause or
permit to occur an event that could result in the imposition of a lien under the
Internal Revenue Code or ERISA. In addition, the Credit Agreements do not permit
the Trust's asset coverage ratio (as defined in the Credit Agreements) to fall
below 300% at any time (the "Credit Agreements Asset Coverage Test").

     The Credit Agreements limit the Trust's ability to pay dividends or make
other distributions, including with respect to the Preferred Shares, or purchase
or redeem shares, including Preferred Shares, unless the Trust complies with the
Credit Agreements Asset Coverage Test. In addition, the Credit Agreements do not
permit the Trust to declare dividends or other distributions with respect to the
Preferred Shares or purchase or redeem shares of Preferred Shares (i) at any
time that an event of default under a Credit Agreement for the credit facility
program has occurred and is continuing; or (ii) if, after giving effect to such
declaration, the Trust would not meet the asset coverage ratios set forth in the
Credit Agreements.


     Under the requirements of the 1940 Act, the Trust must have asset coverage
of at least 300% immediately after any borrowing, including borrowings under the
credit facility program. For this purpose, asset coverage means the ratio which
the value of the total assets of the Trust, less liabilities and indebtedness
not represented by senior securities, bears to the aggregate amount of
borrowings representing indebtedness of the Trust.


     The Credit Agreements have specified events of default which permit the
lenders to seek remedies against the assets of the Trust. These events of
default are customary for the types of transaction reflected by the Credit
Agreements and include: (a) cross-default and cross-acceleration events with
respect to the Trust or the Adviser; (b) a bankruptcy or insolvency event with
respect to the Trust or Adviser; (c) specified judgments against the Trust or
Adviser; (d) misrepresentations by the Trust or Adviser to the lenders; (e)
liens by certain governmental agencies against the Trust or Adviser; (f) failure
for the lenders to have a first priority perfected security interest in the
assets of the Trust; (g) material modifications of certain specified transaction
documents; (h) a material reduction in the value of the Trust's investments; (i)
change of control or change of management in the Adviser; and (j) failure to
comply with terms of the Credit Agreements.

                                       22
<PAGE>
                                  RISK FACTORS

     Risk is inherent in all investing. Before investing you should consider
carefully the following risks that you assume when you invest in Preferred
Shares.

RISKS OF INVESTING IN PREFERRED SHARES


     PAYMENT AND REDEMPTION RESTRICTIONS. Under the terms of the Credit
Agreements governing the credit facility program, the Trust is not permitted to
declare dividends or other distributions, including dividends and distributions
with respect to Preferred Shares, or purchase or redeem shares, including
Preferred Shares unless (i) at the time thereof the Trust meets the Credit
Agreements Asset Coverage Test and (ii) there is no event of default under the
credit facility program. See "Description of Credit Facility Program --
Restrictive Covenants and 1940 Act Restrictions."

     LEVERAGE RISK. The Trust uses financial leverage for investment purposes by
employing leverage instruments (E.G., borrowing, issuing commercial paper or
notes and preferred shares of beneficial interest) in an amount currently
anticipated to represent approximately 30% (and in no event exceeding 50%) of
its total assets (including the proceeds from such leverage instruments). In
addition to issuing shares of Preferred Shares, the Trust borrows money pursuant
to a credit facility program in an amount currently representing approximately
30% of the Trust's total assets.

     The Trust's leveraged capital structure creates special risks not
associated with unleveraged funds having similar investment objectives and
policies. Borrowed funds pursuant to any credit facility constitute a
substantial lien and burden on the Preferred Shares by reason of their prior
claim against the income of the Trust and against the total assets of the Trust
in liquidation. In the event of a default under the credit facility program, the
lenders have the right to cause a liquidation of the collateral (I.E., sell
Senior Loans and other assets of the Trust) and if any such default is not cured
within five days of written notice by the lenders, the lenders can control the
liquidation as well.


     The Trust reserves the right at any time, if it believes that market
conditions are appropriate, to increase its level of debt or other senior
securities to maintain or increase the Trust's current level of leverage to the
extent permitted by the 1940 Act and existing agreements between the Trust and
third parties.

     Because the fee paid to the Adviser will be calculated on the basis of the
Trust's managed assets, the fee will be higher when leverage is utilized, giving
the Adviser an incentive to utilize leverage.

     AUCTION RISK. You may not be able to sell your Preferred Shares at an
auction if the auction fails, that is, if there are more Preferred Shares
offered for sale than there are buyers for those shares. Also, if you place hold
orders (orders to retain Preferred Shares) at an auction only at a specified
rate, and that bid rate exceeds the rate set at the auction, you will not retain
your Preferred Shares. Finally, if you buy shares or elect to retain shares
without specifying a rate below which you would not wish to continue to hold
those shares, and the auction sets a below-market rate, you may receive a lower
rate of return on your shares than the market rate.

                                       23
<PAGE>

     SECONDARY MARKET RISK. Broker-dealers may maintain a secondary trading
market in Preferred Shares outside of auctions, but may discontinue this
activity any time. You may transfer Preferred Shares outside of auctions only to
or through a broker-dealer or such other persons who may be permitted by the
Trust. If you try to sell your Preferred Shares between auctions, you may not be
able to sell any or all of your shares, or you may not be able to sell them for
$25,000 per share or $25,000 per share plus accumulated dividends. If the Trust
has designated a special rate period (a rate period of more than 7 days),
changes in interest rates could affect the price you would receive if you sold
your shares in the secondary market. Broker-dealers that maintain a secondary
trading market for Preferred Shares are not required to maintain this market,
and the Trust is not required to redeem shares either if an auction or an
attempted secondary market sale fails because of a lack of buyers. Preferred
Shares are not registered on a stock exchange or the NASDAQ stock market. If you
sell your Preferred Shares to a broker-dealer between auctions, you may receive
less than the price you paid for them, especially when market interest rates
have risen since the last auction and especially during a special rate period .

     RATINGS AND ASSET COVERAGE RISK. While Moody's and S&P assign ratings of
"aaa" or "AAA" to the Preferred Shares, respectively, the ratings do not
eliminate or necessarily mitigate the risks of investing in Preferred Shares. A
rating agency could downgrade Preferred Shares, which may make the shares less
liquid at an auction or in the secondary market. If a rating agency downgrades
Preferred Shares, the dividend rate on the Preferred Shares will be the
applicable maximum rate based on the credit rating of the Preferred Shares. See
"Rating Agency Guidelines" for a description of the asset maintenance tests the
Trust must meet.

GENERAL RISKS OF INVESTING IN THE TRUST

     CREDIT RISKS AND REALIZATION OF INVESTMENT OBJECTIVE. While all investments
involve some amount of risk, Senior Loans generally involve less risk than
equity instruments of the same issuer because the payment of principal of and
interest on debt instruments in most instances takes precedence over the payment
of dividends, or the return of capital, to the issuer's shareholders. Generally,
the Senior Loans in which the Trust invests are collateralized with assets of
the borrower. The value of the collateral may decline below the principal amount
of the Senior Loan subsequent to the Trust's investment in such Senior Loan,
causing the Senior Loan to be undercollateralized.


     Senior Loans are also subject to the risk of nonpayment of scheduled
interest or principal payments. Issuers of Senior Loans may have either issued
debt securities that are rated lower than investment grade, I.E., rated lower
than "Baa" by Moody's or "BBB" by S&P, or, if they had issued debt securities,
such debt securities would likely be rated lower than investment grade. Debt
securities rated lower than investment grade are frequently called "junk bonds,"
and are generally considered predominantly speculative with respect to the
issuing company's ability to meet principal and interest payments. However,
unlike other types of debt securities, the Senior Loans in which the Trust
invests are generally collateralized.


     In the event a borrower fails to pay scheduled interest or principal
payments on a Senior Loan held by the Trust, the Trust could experience a
reduction in its income and a decline in the market value of the Senior Loan,
and may experience a decline in the NAV of the Trust's common shares or the

                                       24
<PAGE>

amount of its dividends. Because the primary source of income for the Trust is
the interest and principal payments on the Senior Loans in which it invests, any
payment default by an issuer of a Senior Loan would have a negative impact on
the Trust's ability to pay dividends on the common shares or Preferred Shares,
and could result in the redemption of some or all of the Preferred Shares.

     If a Senior Loan is acquired from another lender, the Trust may be subject
to certain credit risks with respect to that lender. See "General Information on
Senior Loans -- About Senior Loans." Further, the liquidation of the collateral
underlying a Senior Loan may not satisfy the issuer's obligation to the Trust in
the event of non-payment of scheduled interest or principal, and the collateral
may not be readily liquidated. The risk of non-payment of interest and principal
also applies to other debt instruments in which the Trust may invest. As of
September 30, 2000, approximately 6.5% of the Trust's net assets and 4.5% of
total assets consisted of non-performing Senior Loans.


     In the event of a bankruptcy of a borrower, the Trust could experience
delays to or limitations on its ability to realize the benefits of the
collateral securing the Senior Loan. Among the credit risks involved in a
bankruptcy would be an assertion that the pledging of collateral to secure the
Senior Loan constituted a fraudulent conveyance or preferential transfer that
would have the effect of nullifying or subordinating the Trust's rights to the
rights of other creditors of the borrower under applicable law.

     Investment decisions will be based largely on the credit analysis performed
by the Adviser, and such analysis may be difficult to perform for many issuers.
Information about interests in Senior Loans generally will not be in the public
domain, and some interests are not currently rated by any nationally recognized
rating service. Many issuers have not issued securities to the public and are
not subject to reporting requirements under federal securities laws. Generally,
issuers are required to provide financial information to lenders, including the
Trust, and information may be available from other senior Loan participants or
agents that originate or administer Senior Loans.


     INTEREST RATE RISK. When interest rates decline, the value of a portfolio
invested in Senior Loans can be expected to rise. Conversely, when interest
rates rise, the value of a portfolio invested in Senior Loans can be expected to
decline. Although the income available to the Trust will vary, the Adviser
expects the Trust's policy of acquiring interests in floating rate Senior Loans
to minimize fluctuations in NAV of the Trust resulting from changes in market
interest rates. However, because floating or variable rates on Senior Loans only
reset periodically, changes in prevailing interest rates can be expected to
cause some fluctuations in the Trust's NAV. Similarly, a sudden and significant
increase in market interest rates may cause a decline in the Trust's NAV. A
material decline in the Trust's NAV may impair the Trust's ability to maintain
required levels of asset coverage.

     LIMITED SECONDARY MARKET FOR SENIOR LOANS. Although it is growing, the
secondary market for Senior Loans is currently limited. There is no organized
exchange or board of trade on which Senior Loans may be traded. Instead, the
secondary market for Senior Loans is an unregulated inter-dealer or inter-bank
market. Accordingly, some or many of the Senior Loans in which the Trust invests
will be relatively illiquid. In addition, Senior Loans in which the Trust
invests may require the consent of the borrower prior to sale or assignment.

                                       25
<PAGE>

These consent requirements may delay or impede the Trust's ability to sell
Senior Loans. The Trust may have difficulty disposing of illiquid assets if it
needs cash to repay debt, to pay dividends, to pay expenses or to take advantage
of new investment opportunities. Although the Trust has not conducted a tender
offer since 1992, if it determines to again conduct a tender offer, limitations
of a secondary market may result in difficulty raising cash to purchase tendered
Shares. These events may cause the Trust to sell securities at lower prices than
it would otherwise consider to meet cash needs and may cause the Trust to
maintain a greater portion of its assets in cash equivalents than it would
otherwise, which could negatively impact performance. If the Trust purchases a
relatively large Senior Loan to generate income, the limitations of the
secondary market may inhibit the Trust from selling a portion of the Senior Loan
and reducing its exposure to a borrower when the Adviser would prefer to do so.


     In addition, because the secondary market for Senior Loans is currently
limited, it may be difficult to value many Senior Loans. Market quotations may
not be available and valuation may require more research than for liquid
securities. In addition, elements of judgment may play a greater role in the
valuation, because there is less reliable, objective data available.

     DEMAND FOR SENIOR LOANS. Although the volume of Senior Loans has increased
in recent years, demand for Senior Loans has also grown. An increase in demand
may benefit the Trust by providing increased liquidity for Senior Loans, but may
also adversely affect the rate of interest payable on Senior Loans acquired by
the Trust and the rights provided to the Trust under the terms of the Senior
Loan.

     INCOME RISK. The Trust invests primarily in Senior Loans whose interest
rates reset frequently. If market interest rates fall, these interest rates will
be reset at lower levels, reducing the Trust's income.

     RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS. Restrictions imposed on
the declaration and payment of dividends or other distributions to the holders
of the Trust's common shares and Preferred Shares, both by the 1940 Act and by
reason of requirements imposed by lenders and rating agencies, might impair the
Trust's ability to maintain its qualification as a regulated investment company
for federal income tax purposes. While the Trust intends to pay down borrowings
and redeem Preferred Shares in order to permit the Trust to distribute its
income as required to maintain its qualification as a regulated investment
company under the Code, there can be no assurance that such actions can be
effected in time to meet Code requirements. See "Federal Taxation -- Federal
Income Tax Treatment of the Trust."

                                 NET ASSET VALUE


     The NAV per common share of the Trust is determined once daily at 4:00 p.m.
on each day the NYSE is open. NAV per common share is determined by dividing the
value of the Trust's portfolio securities plus all cash and other assets
(including dividends accrued but not collected) less all liabilities (including
accrued expenses but excluding capital and surplus) by the number of shares
outstanding. In accordance with generally accepted accounting principles for
investment companies, dividend income is accrued on the ex-dividend date. The
NAV per common share is made available for publication.

                                       26
<PAGE>

     The Senior Loans in which the Trust invests are not listed on any
securities exchange or board of trade. Some Senior Loans are traded by
institutional investors in an over-the-counter secondary market that has
developed in the past several years. This secondary market generally has fewer
trades and less liquidity than the secondary markets for other types of
securities. Some Senior Loans have few or no trades. Accordingly, determinations
of the market value of Senior Loans may be based on infrequent and dated trades.
Because there is less reliable, objective data available, elements of judgment
may play a greater role in the valuation of Senior Loans than in the valuation
of other types of securities. For further information, see "Risk Factors --
General Risks of Investing in the Trust -- Limited Secondary Market for Senior
Loans."

     Senior Loans are normally valued on the basis of one or more quotations
obtained from a pricing service or other sources believed to be reliable. Senior
Loans for which reliable quotations are not available, which may include those
deemed unreliable under criteria established by the Trust's Board of Trustees,
may be valued with reference to another Senior Loan or a group of Senior Loans
for which quotations are more readily available and whose characteristics are
comparable to the Senior Loan being valued. Under this approach, the comparable
Senior Loan or Loans serve as a "proxy" for changes in value. The Trust has
engaged an independent pricing service to provide quotations from dealers in
Senior Loans and to calculate values under the "proxy" procedure described
above. Senior Loans are valued at the mean between bid and asked quotations.

     ING Pilgrim Investments may believe that the price for a Senior Loan
derived from market quotations or the "proxy" procedure described above is not
reliable or accurate. Among other reasons, this may be the result of information
about a particular Senior Loan or borrower known to ING Pilgrim Investments that
ING Pilgrim Investments believes may not be known to the pricing service. In
this event, the Senior Loan is valued at fair value as determined in good faith
under procedures established by the Trust's Board of Trustees. Fair value is
determined by ING Pilgrim Investments and ratified and monitored by the Trust's
Board of Trustees through its Valuation Committee.

     In determining the fair value of a Senior Loan, consideration is given to
several factors, which may include, among others, the following: (i) the
characteristics of and fundamental analytical data relating to the Senior Loan,
including the cost, size, current interest rate, period until the next interest
rate reset, maturity and base lending rate of the Senior Loan, the terms and
conditions of the Senior Loan and any related agreements, and the position of
the Senior Loan in the borrower's debt structure; (ii) the nature, adequacy and
value of the collateral, including the Trust's rights, remedies and interests
with respect to the collateral; (iii) the creditworthiness of the borrower and
the cash flow coverage of outstanding principal and interest, based on an
evaluation of the borrower's financial condition, financial statements and
information about the borrower's business, cash flows, capital structure and
future prospects; (iv) information relating to the market for the Senior Loan,
including price quotations for and trading in the Senior Loan and interests in
similar Senior Loans and the market environment and investor attitudes towards
the Senior Loan and interests in similar Senior Loans; (v) the reputation and
financial condition of the agent of the Senior Loan and any intermediate
participants in the Senior Loans; (vi) the borrower's management; and (vii) the
general economic and market conditions affecting the fair value of the Senior
Loan.

                                       27
<PAGE>
     Securities for which the primary market is a national securities exchange
or the NASDAQ National Market System are stated at the last reported sale price
on the day of valuation. Debt and equity securities traded in the
over-the-counter market and listed securities for which no sale was reported on
that date are valued at the mean between the last reported bid and asked price.

                                   THE AUCTION

SUMMARY OF AUCTION PROCEDURES

     The following is a brief summary of the auction procedures. They are
described in more detail in the SAI. The auction determines the dividend rate
for Preferred Shares, but the dividend rate will not be higher than the maximum
rate. See "Description of Preferred Shares -- Dividends and Dividend Periods."
You may buy, sell or hold Preferred Shares in the auction.

     If you own shares of Preferred Shares, you may instruct, orally or in
writing, a broker-dealer to enter an order in the auction. Existing holders of
Preferred Shares can enter three kinds of orders regarding their Preferred
Shares: sell, bid, and hold.

*    If you enter a sell order, you indicate that you want to sell Preferred
     Shares at $25,000 per share, no matter what the next rate period's dividend
     rate will be.

*    If you enter a bid (or "hold at a rate") order, you indicate that you want
     to sell Preferred Shares only if the next rate period's dividend rate is
     less than the rate you specify.

*    If you enter a hold order, you indicate that you want to continue to own
     Preferred Shares, no matter what the next rate period's dividend rate will
     be.

     You may enter different types of orders for your Preferred Shares, as well
as orders for additional Preferred Shares. All orders must be for whole shares.
All orders you submit are irrevocable. There are a fixed number of Preferred
Shares, and the dividend rate likely will vary from auction to auction depending
on the number of bidders, the number of shares the bidders seek to buy, and
general economic conditions including current interest rates. If you own
Preferred Shares and submit a bid higher than the maximum rate, your bid will be
treated as a sell order. If you do not enter an order, the broker-dealer will
assume that you want to continue to hold Preferred Shares, but if you fail to
submit an order and the rate period is longer than 7 days, the broker-dealer
will treat your failure to submit a bid as a sell order.

     If you do not currently own Preferred Shares, or want to buy more shares,
you may instruct a broker-dealer to enter a bid order to buy shares in an
auction at $25,000 per share at or above a specified dividend rate. If your bid
specifies a rate higher than the maximum rate, your order will not be accepted.

     Broker-dealers will submit orders from existing and potential shareholders
to the auction agent. Neither the Trust nor the auction agent will be

                                       28
<PAGE>
responsible for a broker-dealer's failure to submit orders from existing
shareholders and potential shareholders. A broker-dealer's failure to submit
orders for Preferred Shares held by it or its customers will be treated in the
same manner as a shareholder's failure to submit an order to the broker-dealer.
A broker-dealer may submit orders to the auction agent for its own account
provided it is not an affiliate of the Trust.

     The auction agent after each auction for Preferred Shares will pay to each
broker-dealer, from funds provided by the Trust, a service charge at the annual
rate of 1/4 of 1% in the case of any auction immediately preceding a rate period
of less than one year, or a percentage agreed to by the Trust and the
broker-dealers, in the case of any auction immediately preceding a rate period
of one year or longer, of the purchase price of Preferred Shares placed by the
broker-dealers at the auction.

     If the number of Preferred Shares subject to bid orders with a dividend
rate equal to or lower than the maximum rate for Preferred Shares is at least
equal to the number of Preferred Shares subject to sell orders, then the
dividend rate for the next rate period will be the lowest rate submitted which,
taking into account that rate and all lower rates submitted in order from
existing and potential shareholders, would result in existing and potential
shareholders owning all the Preferred Shares available for purchase in the
auction.

     If the number of Preferred Shares subject to bid orders with a dividend
rate equal to or lower than the maximum rate for Preferred Shares is less than
the number of Preferred Shares subject to sell orders, then the auction is
considered to be a failed auction, and the dividend rate will be the maximum
rate. In that event, existing shareholders that have submitted sell orders (or
are treated as having submitted sell orders) may not be able to sell any or all
of the shares for which they submitted sell orders.

     The auction agent will not accept a bid above the maximum rate. The purpose
of the maximum rate is to place an upper limit on dividends of Preferred Shares
and in so doing to help protect the earnings available to pay common share
dividends, and to serve as the dividend rate in the event of a failed auction
(that is, an auction where there are more Preferred Shares offered for sale than
there are buyers for those shares).


     If broker-dealers submit or are deemed to submit hold orders for all
outstanding Preferred Shares, that is considered an "all hold" auction and the
dividend rate for the next rate period will be the all hold rate. The "all hold
rate" is 80% of the "AA" Financial Composite Commercial Paper Rate (the interest
equivalent of rates applicable to "AA"-rated securities for time periods that
vary depending on the dividend period).


     The auction procedures include a pro rata allocation of shares for purchase
and sale. This allocation process may result in an existing shareholder
continuing to hold or selling, or a potential shareholder buying, fewer shares
than the number of shares in its order. If this happens, broker-dealers will be
required to make appropriate pro rata allocations among their customers.


     Settlement of purchases and sales will be made on the next business day
(which also is a dividend payment date) after the auction date through The
Depository Trust Company. Purchasers will pay for their shares through
broker-dealers in same-day funds to The Depository Trust Company against

                                       29
<PAGE>

delivery to the broker-dealers. The Depository Trust Company will make payment
to the sellers' broker-dealers in accordance with its normal procedures, which
require broker-dealers to make payment against delivery in same-day funds.
Throughout this Prospectus, a business day is a day on which the NYSE is open
for trading, and which is neither a Saturday, Sunday nor any other day on which
banks in New York, New York are authorized or obligated by law to close.


     The first auction for Series M Preferred Shares will be held on Monday,
________, 2000, the business day preceding the dividend payment date for the
initial rate period. Thereafter, except during special rate periods, auctions
for Series M Preferred Shares will normally be held every Monday, and each
subsequent rate period for Series M Preferred Shares will normally begin on the
following Tuesday.

     The first auction for Series W Preferred Shares will be held on Wednesday,
________, 2000, the business day preceding the dividend payment date for the
initial rate period. Thereafter, except during special rate periods, auctions
for Series W Preferred Shares will normally be held every Wednesday, and each
subsequent rate period for Series W Preferred Shares will normally begin on the
following Thursday.

     The first auction for Series F Preferred Shares will be held on Friday,
________, 2000, the business day preceding the dividend payment date for the
initial rate period. Thereafter, except during special rate periods, auctions
for Series F Preferred Shares will normally be held every Friday, and each
subsequent rate period for Series F Preferred Shares will normally begin on the
following Saturday.

     The following is a simplified example of how a typical auction works.
Assume that the Trust has 1,000 outstanding Preferred Shares, and three current
shareholders. The three current shareholders and three potential shareholders
submit orders through broker-dealers at the auction:

Current               Owns 500 shares, wants         Bid order of 6.5% rate for
Shareholder A         to sell  all 500 shares        all 500 shares
                      if auction rate is less
                      than 6.5%

Current               Owns 300 shares, wants         Hold order -- will take the
Shareholder B         to hold                        auction rate

Current               Owns 200 shares, wants         Bid order of 6.3% rate for
Shareholder C         to sell all 200 shares         all 200 shares
                      if auction rate is less
                      than 6.3%

Potential             Wants to buy 200 shares        Places order to buy at or
Shareholder D                                        above 6.4%

Potential             Wants to buy 300 shares        Places order to buy at or
Shareholder E                                        above 6.3%

Potential             Wants to buy 200 shares        Places order to buy at or
Shareholder F                                        above 6.5%

     The lowest dividend rate that will result in all 1,000 Preferred Shares
continuing to be held is 6.4% (the offer by D). Therefore, the dividend rate

                                       30
<PAGE>
will be 6.4%. Current shareholders B and C will continue to own their shares.
Current shareholder A will sell its shares because A's dividend rate bid was
higher than the dividend rate. Potential shareholder D will buy 200 shares and
potential shareholder E will buy 300 shares because their bid rates were at or
below the dividend rate. Potential shareholder F will not buy any shares because
its bid rate was above the dividend rate.

SECONDARY MARKET TRADING AND TRANSFER OF PREFERRED SHARES

     The broker-dealers (including the underwriters) expect, but are not
obligated, to maintain a secondary trading market in Preferred Shares outside of
auctions. There can be no assurance that a secondary trading market for
Preferred Shares will develop or, if it does develop, that it will provide
owners with liquidity of investment. The Preferred Shares will not be registered
on any stock exchange or on the NASDAQ stock market. Investors who purchase
Preferred Shares in an auction for a special rate period should note that
because the dividend rate on such shares will be fixed for the length of that
rate period, the value of such shares may fluctuate in response to the changes
in interest rates, and may be more or less than their original cost if sold on
the open market in advance of the next auction thereof, depending on market
conditions.

     An existing shareholder may sell, transfer, or otherwise dispose of
Preferred Shares only in whole shares and only (1) pursuant to a bid or sell
order placed with the auction agent in accordance with the auction procedures,
(2) to a broker-dealer or (3) to such other persons as may be permitted by the
Trust; PROVIDED, HOWEVER, that (a) a sale, transfer or other disposition of
Preferred Shares from a customer of a broker-dealer who is listed on the records
of that broker-dealer as the holder of such shares to that broker-dealer or
another customer of that broker-dealer shall not be deemed to be a sale,
transfer or other disposition for purposes of the foregoing if such
broker-dealer remains the existing shareholder of the shares so sold,
transferred or disposed of immediately after such sale, transfer or disposition
and (b) in the case of all transfers other than pursuant to auctions, the
broker-dealer (or other person, if permitted by the Trust) to whom such transfer
is made shall advise the auction agent of such transfer.

                         DESCRIPTION OF PREFERRED SHARES

GENERAL

     The following is a brief description of the terms of the Preferred Shares.
For the complete terms of the Preferred Shares, you may refer to the Trust's
Certificate filed as an exhibit to the Trust's registration statement on Form
N-2.


     Under the Declaration of Trust, the Trust is authorized to issue an
unlimited number of preferred shares, in one or more series, with rights as
determined by the Board of Trustees without the approval of common shareholders.
The Trust's Certificate currently authorizes the creation of up to 18,000
Preferred Shares. The Preferred Shares will have a liquidation preference of
$25,000 per share, plus an amount equal to accumulated dividends. The Preferred
Shares, when issued by the Trust and sold, will be fully paid and
non-assessable, will not by their terms be convertible into or exchangeable for
shares of another class and will have no preemptive rights. Preferred Shares
will not be subject to any sinking fund, but will be subject to mandatory
redemption under the certain circumstances described below.

                                       31
<PAGE>
DIVIDENDS AND DIVIDEND PERIODS

     GENERAL. The following is a general description of dividends and rate
periods. See the SAI for a more detailed discussion of this topic.


     The dividend rate for the initial rate period for Preferred Shares will be
the rate set out on the cover of this Prospectus. For subsequent rate periods,
Preferred Shares will pay dividends based on a rate set at the auction, normally
held weekly, but the rate set at the auction will not exceed the maximum rate.
Rate periods generally will be seven days, and a rate period will begin on the
first calendar day after an auction. In most instances, dividends are also paid
weekly, on the business day following the end of the rate period. The Trust,
subject to some limitations, may change the length of rate periods, designating
them as "special rate periods." See "-- Designation of Special Rate Periods."

     DIVIDEND PAYMENTS. Except as provided below, the dividend payment date will
be the first business day after the rate period ends. The dividend payment date
for special rate periods of more than 7 days will be set out in the notice
designating a special rate period. See "-- Designation of Special Rate Periods"
for a discussion of payment dates for a special rate period.


     Dividends on Preferred Shares will be paid on the dividend payment date to
holders of record as their names appear on the Trust's record books on the
business day next preceding the dividend payment date. If dividends are in
arrears, they may be declared and paid at any time to holders of record as their
names appear on the Trust's record books on such date, not more than 15 days
before the payment date, as the Trust's Board of Trustees may fix.

     The Depository Trust Company, in accordance with its current procedures, is
expected to credit in same-day funds on each dividend payment date dividends
received from the Trust to the accounts of broker-dealers who act on behalf of
holders of Preferred Shares. Such broker-dealers, in turn, are expected to
distribute dividend payments to the person for whom they are acting as agents.
If a broker-dealer does not make dividends available to holders of Preferred
Shares in same-day funds, these shareholders will not have funds available until
the next business day.


     DIVIDEND RATE SET AT AUCTION. Preferred Shares pay dividends based on a
rate set at auction. The auction usually is held weekly, but may be held less
frequently. The auction sets the dividend rate, and Preferred Shares may be
bought and sold at the auction. Bankers Trust Company, the auction agent,
reviews orders from broker-dealers on behalf of existing shareholders that wish
to sell, hold at the auction rate, or hold only at a specified rate, and on
behalf of potential shareholders that wish to buy Preferred Shares. The auction
agent then determines the lowest dividend rate that will result in all of the
outstanding Preferred Shares continuing to be held. The shares in this offering
will trade at auctions starting in the week following this offering. See "The
Auction."

     DETERMINATION OF DIVIDEND RATES. The Trust computes the dividends per share
by multiplying the dividend rate determined at the auction by a fraction, the
numerator of which normally is seven and the denominator of which normally is
360. This rate is then multiplied by $25,000 to arrive at the dividend per
share. The numerator may be different if the rate period includes a holiday.

                                       32
<PAGE>
     If an auction for any subsequent rate period of Preferred Shares is not
held for any reason other than as described below, the dividend rate on those
shares will be the maximum rate on the auction date for that subsequent rate
period.


     MAXIMUM RATE. The dividend rate that results from an auction for Preferred
Shares will not be greater than the "maximum rate." The maximum rate means the
applicable percentage of the "AA" Financial Composite Commercial Paper Rate on
the date of such auction determined as set forth below based on the lower of the
credit ratings assigned to the Preferred Shares by Moody's and S&P:

     Moody's Credit Rating     S&P Credit Rating     Applicable Percentage
     ---------------------     -----------------     ---------------------
         aa3 or Above            AA- or Above                150%
           a3 to a1                A- to A+                  160%
         baa3 to baa1            BBB- to BBB+                250%
          Below baa3              Below BBB-                 275%

     EFFECT OF FAILURE TO PAY DIVIDENDS IN A TIMELY MANNER. If the Trust fails
to pay, in a timely manner, the auction agent the full amount of any dividend on
any Preferred Shares, but the Trust cures the failure and pays any late charge
before 12:00 noon New York City time on the third business day following the
date the failure occurred, no auction will be held for Preferred Shares of that
series for the first subsequent rate period thereafter, and the dividend rate
for Preferred Shares of that series for that subsequent rate period will be the
maximum rate.

     However, if the Trust does not effect a timely cure, no auction will be
held for Preferred Shares of that series for the first subsequent rate period
thereafter (and for any rate period thereafter, to and including the rate period
during which the failure is cured and the late charge is paid), and the dividend
rate for Preferred Shares of that series for each subsequent rate period will be
the default rate.

     The default rate means 300% of the applicable "AA" Financial Composite
Commercial Paper Rate for a dividend period of fewer than 184 days and 300% of
the applicable Treasury Index Rate for a dividend period of 184 days or more.
Late charges are also calculated at the applicable default rate.

     RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS. When the Trust has any
Preferred Shares outstanding, the Trust may not pay any dividend or distribution
(other than a dividend or distribution paid in shares , or options, warrants or
rights to subscribe for or purchase, common shares) in respect of common shares
or call for redemption, redeem, purchase or otherwise acquire for consideration
any common shares (except by conversion into or exchange for shares of the Trust
ranking junior to the Preferred Shares as to the payment of dividends and the
distribution of assets upon liquidation), unless (1) it has paid all cumulative
dividends on Preferred Shares; (2) it has redeemed any Preferred Shares that it
has called for mandatory redemption; and (3) after paying the dividend, the
Trust meets both asset coverage requirements described under "Rating Agency
Guidelines."

                                       33
<PAGE>

     Except as set forth in the next sentence, no dividends shall be declared or
paid or set apart for payment on any series of shares of the Trust ranking, as
to the payment of dividends, on a parity with the Preferred Shares for any
period unless full cumulative dividends have been or contemporaneously are
declared and paid on the Preferred Shares through their most recent dividend
payment date. When dividends are not paid in full upon the Preferred Shares
through their most recent dividend payment date or upon any other series of
shares ranking on a parity as to the payment of dividends with Preferred Shares
through their most recent respective dividend payment dates, all dividends
declared upon Preferred Shares and any other such series of shares ranking on a
parity as to the payment of dividends with Preferred Shares shall be declared
pro rata so that the amount of dividends declared per share on Preferred Shares
and such other series of preferred shares shall in all cases bear to each other
the same ratio that accumulated dividends per share on the Preferred Shares and
such other series of preferred shares bear to each other.


DESIGNATION OF SPECIAL RATE PERIODS


     The Trust may instruct the auction agent to hold auctions and pay dividends
less frequently than weekly. The Trust may do this if, for example, the Trust
expects that short-term rates might increase or market conditions otherwise
change, in an effort to optimize the effect of the Trust's leverage on common
shareholders. The Trust does not currently expect to hold auctions and pay
dividends less frequently than weekly in the near future. If the Trust
designates a special rate period, changes in interest rates could affect the
price received if the shares were sold in the secondary market.

     Before the Trust designates a special rate period: (1) at least 7 business
days (or 2 business days in the event the duration of the dividend period prior
to such special rate period is less than 8 days) and not more than 30 business
days before the first day of the proposed special rate period, the Trust must
issue a press release stating its intention to designate a special rate period
and inform the auction agent of the proposed special rate period by telephonic
or other means and confirm it in writing promptly thereafter and (2) the Trust
must inform the auction agent of the proposed special rate period by 3:00 p.m.
New York City time on the second business day before the first day of the
proposed special rate period.


VOTING RIGHTS

     In addition to voting rights described below under "Description of Capital
Structure" and in the SAI under "Investment Restrictions," holders of Preferred
Shares, voting as a separate class, are entitled to elect (1) two trustees of
the Trust at all times and (2) a majority of the trustees if at any time
dividends on Preferred Shares shall be unpaid in an amount equal to two years'
dividends thereon, and to continue to be so represented until all dividends in
arrears shall have been paid or otherwise provided for.


     So long as any of the Preferred Shares are outstanding, the Trust will not,
without the affirmative vote of the holders of a majority of the outstanding
Preferred Shares, (i) institute any proceedings to be adjudicated bankrupt or
insolvent, or consent to the institution of bankruptcy or insolvency proceedings
against it, or file a petition seeking or consenting to reorganization or relief
under any applicable federal or state law relating to bankruptcy or insolvency,

                                       34
<PAGE>

or consent to the appointment of a receiver, liquidator, assignee, trustee,
sequestrator (or other similar official) of the Trust or a substantial part of
its property, or make any assignment for the benefit of creditors, or, except as
may be required by applicable law, admit in writing its inability to pay its
debts generally as they become due or take any corporate action in furtherance
of any such action; (ii) create, incur or suffer to exist, or agree to create,
incur or suffer to exist, or consent to cause or permit in the future (upon the
happening of a contingency or otherwise) the creation, incurrence or existence
of any material lien, mortgage, pledge, charge, security interest, security
agreement, conditional sale or trust receipt or other material encumbrance of
any kind upon any of the Trust's assets as a whole, except (A) liens the
validity of which are being contested in good faith by appropriate proceedings,
(B) liens for taxes that are not then due and payable or that can be paid
thereafter without penalty, (C) liens, pledges, charges, security interests,
security agreements or other encumbrances arising in connection with any
indebtedness senior to the Preferred Shares, (D) liens, pledges, charges,
security interests, security agreements or other encumbrances arising in
connection with any indebtedness permitted under clause (iii) below and (E)
liens to secure payment for services rendered including, without limitation,
services rendered by the Trust's Paying Agent and the Auction Agent; or (iii)
create, authorize, issue, incur or suffer to exist any indebtedness for borrowed
money or any direct or indirect guarantee of such indebtedness for borrowed
money or any direct or indirect guarantee of such indebtedness, except the Trust
may borrow as may be permitted by the Trust's investment restrictions; PROVIDED,
HOWEVER, that transfers of assets by the Trust subject to an obligation to
repurchase shall not be deemed to be indebtedness for purposes of this provision
to the extent that after any such transaction the Trust has eligible assets with
an aggregate discounted value at least equal to the Preferred Shares Basic
Maintenance Amount as of the immediately preceding valuation date.

     In addition, the affirmative vote of the holders of a majority of the
outstanding Preferred Shares shall be required to approve any plan of
reorganization (as such term is used in the 1940 Act) adversely affecting such
shares or any action requiring a vote of security holders of the Trust under
Section 13(a) of the 1940 Act. In the event a vote of holders of Preferred
Shares is required pursuant to the provisions of Section 13(a) of the 1940 Act,
the Trust shall, not later than ten Business Days prior to the date on which
such vote is to be taken, notify each Rating Agency that such vote is to be
taken and the nature of the action with respect to which such vote is to be
taken and shall, not later than ten Business Days after the date on which such
vote is taken, notify each Rating Agency of the results of such vote.

     The affirmative vote of the holders of a majority of the outstanding
Preferred Shares of any series, voting separately from any other series, shall
be required with respect to any matter that materially and adversely affects the
rights, preferences, or powers of that series in a manner different from that of
other series or classes of the Trust's shares of capital stock. For purposes of
the foregoing, no matter shall be deemed to adversely affect any right,
preference or power unless such matter (i) alters or abolishes any preferential
right of such series; (ii) creates, alters or abolishes any right in respect of
redemption of such series; or (iii) creates or alters (other than to abolish)
any restriction on transfer applicable to such series. The vote of holders of
any series described in this paragraph will in each case be in addition to a
separate vote of the requisite percentage of common shares and/or preferred
shares necessary to authorize the action in question.

                                       35
<PAGE>
REDEMPTION


     MANDATORY REDEMPTION. In the event the Trust does not timely cure a failure
to (1) maintain a discounted value of its portfolio equal to the Preferred
Shares Basic Maintenance Amount , (2) maintain the 1940 Act Preferred Shares
Asset Coverage, or (3) file a required certificate related to asset coverage on
time, the Preferred Shares will be subject to mandatory redemption out of funds
legally available therefor in accordance with the Declaration of Trust, the
Certificate and applicable law, at the redemption price of $25,000 per share
plus an amount equal to accumulated but unpaid dividends thereon (whether or not
earned or declared) to (but not including) the date fixed for redemption. Any
such redemption will be limited to the number of Preferred Shares necessary to
restore the required discounted value or the 1940 Act Preferred Shares Asset
Coverage, as the case may be.

     In determining the number of Preferred Shares required to be redeemed in
accordance with the foregoing, the Trust will allocate the number of shares
required to be redeemed to satisfy the Preferred Shares Basic Maintenance Amount
or the 1940 Act Preferred Shares Asset Coverage, as the case may be, pro rata
among the Preferred Shares and other preferred shares of the Trust, subject to
redemption or retirement. If fewer than all outstanding shares of any series
are, as a result, to be redeemed, the Trust may redeem such shares by lot or
other method that it deems fair and equitable.

     OPTIONAL REDEMPTION. To the extent permitted under the 1940 Act and
Massachusetts law, the Trust at its option may redeem Preferred Shares having a
dividend period of one year or less, in whole or in part, on the business day
after the last day of such dividend period upon not less than 15 calendar days
and not more than 40 calendar days prior notice. The optional redemption price
per share shall be $25,000 per share, plus an amount equal to accumulated but
unpaid dividends thereon (whether or not earned or declared) to the date fixed
for redemption. Preferred Shares having a dividend period of more than one year
are redeemable at the option of the Trust, in whole or in part, prior to the end
of the relevant dividend period, subject to any specific redemption provisions,
which may include the payment of redemption premiums to the extent required
under any applicable specific redemption provisions. The Trust shall not effect
any optional redemption unless after giving effect thereto that (i) the Trust
has available certain deposit securities with maturity or tender dates not later
than the day preceding the applicable redemption date and having a value not
less than the amount (including any applicable premium) due to holders of
Preferred Shares by reason of the redemption of Preferred Shares on such date
fixed for the redemption and (ii) the Trust would have eligible assets with an
aggregate discounted value at least equal to the Preferred Shares Basic
Maintenance Amount.

     Notwithstanding the foregoing, no Preferred Shares may be redeemed at the
option of the Trust unless all dividends in arrears on the outstanding Preferred
Shares , including all outstanding preferred shares, have been or are being
contemporaneously paid or set aside for payment; PROVIDED HOWEVER, that the
foregoing shall not prevent the purchase or acquisition of outstanding preferred
shares pursuant to the successful completion of an otherwise lawful purchase or
exchange offer made on the same terms to holders of all outstanding preferred
shares.

                                       36
<PAGE>

LIQUIDATION

     Subject to the rights of holders of any series ranking on a parity with
Preferred Shares with respect to the distribution of assets upon liquidation of
the Trust, whether voluntary or involuntary, the holders of Preferred Shares
then outstanding will be entitled to receive and to be paid out of the assets of
the Trust available for distribution to its shareholders, before any payment or
distribution shall be made on the common shares, an amount equal to the
liquidation preference with respect to such shares ($25,000 per share), plus an
amount equal to all dividends thereon (whether or not earned or declared)
accumulated but unpaid to and including the date of final distribution . After
the payment to the holders of the Preferred Shares of the full preferential
amounts provided for as described herein, the holders of the Preferred Shares as
such shall have no right or claim to any of the remaining assets of the Trust.

     Neither the consolidation nor merger of the Trust with or into any other
corporation or corporations, nor the sale, lease, exchange or transfer by the
Trust of all or substantially all of its property and assets, shall be deemed to
be a liquidation, dissolution or winding up of the Trust for the purposes of the
foregoing paragraph.

                            RATING AGENCY GUIDELINES

     The Trust is required under Moody's and S&P guidelines to maintain assets
having in the aggregate a discounted value at least equal to the Preferred
Shares Basic Maintenance Amount. Moody's and S&P have each established separate
guidelines for determining discounted value. To the extent any particular
portfolio holding does not satisfy the applicable rating agency's guidelines,
all or a portion of such holding's value will not be included in the calculation
of discounted value (as defined by such rating agency). The Moody's and S&P
guidelines also impose certain diversification requirements on the Trust's
overall portfolio. The Preferred Shares Basic Maintenance Amount includes the
sum of (i) the aggregate liquidation preference of the Preferred Shares then
outstanding , (ii) the total principal of any senior debt (plus accrued and
projected dividends), (iii) certain Trust expenses and (iv) certain other
current liabilities.

     The Trust is also required under rating agency guidelines to maintain, with
respect to the Preferred Shares, as of the last business day of each month in
which any Preferred Shares are outstanding, asset coverage of at least 200% with
respect to senior securities which are shares of beneficial interest in the
Trust, including Preferred Shares (or such other asset coverage as may in the
future be specified in or under the 1940 Act as the minimum asset coverage for
senior securities which are shares of a closed-end investment company as a
condition of declaring dividends on its common shares) ("1940 Act Preferred
Shares Asset Coverage"). Based on the composition of the Trust's portfolio and
market conditions as of September 30, 2000, the 1940 Act Preferred Shares Asset
Coverage with respect to Preferred Shares, assuming the issuance on the date
hereof of all Preferred Shares offered hereby and the use of the proceeds as
intended, would be computed as follows:

                                       37
<PAGE>

Value of Trust assets less liabilities not
  constituting senior securities                          $1,686,048,374
- -----------------------------------------------------  =  --------------  = 330%
Senior securities representing indebtedness plus
  liquidation value of the Preferred Shares                 $510,887,687


     In the event the Trust does not timely cure a failure to maintain (1) a
discounted value of its portfolio equal to the Preferred Shares Basic
Maintenance Amount or (2) the 1940 Act Preferred Shares Asset Coverage, in each
case in accordance with the requirements of the rating agency or agencies then
rating the Preferred Shares, the Trust will be required to redeem Preferred
Shares as described above under "Description of Preferred Shares--Redemption."


     The Trust may, but is not required to, adopt any modifications to the
guidelines that may hereafter be established by Moody's or S&P. Failure to adopt
any such modifications, however, may result in a change in the ratings described
above or a withdrawal of ratings altogether. In addition, any rating agency
providing a rating for the Preferred Shares may, at any time, change or withdraw
any such rating. The Board of Trustees may, without shareholder approval, amend,
alter, add to or repeal any or all of the definitions and related provisions
which have been adopted by the Trust pursuant to the rating agency guidelines in
the event the Trust receives written confirmation from Moody's or S&P, or both,
as appropriate, that any such change would not impair the ratings then assigned
by Moody's and S&P to Preferred Shares.


     As described by Moody's and S&P, a preferred share rating is an assessment
of the capacity and willingness of an issuer to pay preferred share obligations.
The ratings on the Preferred Shares are not recommendations to purchase, hold or
sell Preferred Shares, inasmuch as the ratings do not comment as to market price
or suitability for a particular investor. The rating agency guidelines described
above also do not address the likelihood that an owner of Preferred Shares will
be able to sell such shares in an auction or otherwise. The ratings are based on
current information furnished to Moody's and S&P by the Trust and the Adviser,
and information obtained from other sources. The ratings may be changed,
suspended or withdrawn as a result of changes in, or the unavailability of, such
information.

     The rating agency guidelines will apply to Preferred Shares only so long as
such rating agency is rating such shares. The Trust will pay fees to Moody's or
S&P, or both, for rating Preferred Shares.

                             MANAGEMENT OF THE TRUST

BOARD OF TRUSTEES

     The management of the Trust, including general supervision of the duties
performed by the Adviser under the Trust's investment advisory agreement, is the
responsibility of the Trust's Board of Trustees under the laws of the
Commonwealth of Massachusetts.

                                       38
<PAGE>
INVESTMENT ADVISER


     ING Pilgrim Investments, 7337 East Doubletree Ranch Road, Scottsdale,
Arizona 85258, serves as the investment adviser to the Trust and has overall
responsibility for the management of the Trust. The Trust and ING Pilgrim
Investments have entered into an Investment Management Agreement that requires
ING Pilgrim Investments to provide all investment advisory and portfolio
management services for the Trust. It also requires ING Pilgrim Investments to
assist in managing and supervising all aspects of the general day-to-day
business activities and operations of the Trust, including custodial, transfer
agency, dividend disbursing, accounting, auditing, compliance and related
services. ING Pilgrim Investments provides the Trust with the personnel
necessary to administer the Trust. The agreement with ING Pilgrim Investments
can be canceled by the Board of Trustees upon 60 days' written notice. Organized
in December 1994, ING Pilgrim Investments is registered as an investment adviser
under the Investment Adviser's Act of 1940, as amended. ING Pilgrim Investments
serves as investment manager to 41 open-end funds, one closed-end fund, 10
variable annuity funds, and other institutional and privately managed accounts,
and has assets under management of approximately $20.8 billion as of September
30, 2000.

     ING Pilgrim Investments is an indirect wholly-owned subsidiary of ING Group
(NYSE: ING). ING Group is a global financial institution active in the field of
insurance, banking and asset management in more than 60 countries, with almost
90,000 employees.

     ING Pilgrim Investments bears its expenses of providing the services
described above. ING Pilgrim Investments currently receives from the Trust an
annual fee, paid monthly, of 0.80% of "managed assets." Managed assets means the
Trust's average daily gross asset value, minus the sum of the Trust's accrued
and unpaid dividends on any outstanding preferred shares and accrued liabilities
(other than liabilities for the principal amount of any borrowings incurred,
commercial paper or notes issued by the Trust and the liquidation preference of
any outstanding preferred shares).

     The Trust pays all operating and other expenses of the Trust not borne by
ING Pilgrim Investments including, but not limited to, audit and legal fees,
transfer agent, registrar and custodian fees, expenses in preparing tender
offers, shareholder reports and proxy solicitation materials and other
miscellaneous business expenses. The Trust also pays all taxes imposed on it and
all brokerage commissions and loan-related fees. The Trust is responsible for
paying all of the expenses of the offering.


     PORTFOLIO MANAGEMENT. The Trust's portfolio is managed by a portfolio
management team consisting of Senior Portfolio Managers, Assistant Portfolio
Managers, and credit analysts.


     JAMES R. REIS is Executive Vice President, Chief Credit Officer, and
     Assistant Secretary of the Trust. Mr. Reis is Director, Vice Chairman
     (since December 1994), Executive Vice President (since April 1995), and
     Director of Senior Lending and Structured Finance (since April 1998), of
     ING Pilgrim Group, Inc. and ING Pilgrim Investments; Director (since
     December 1994) and Vice Chairman (since November 1995) of ING Pilgrim
     Securities, Inc. Mr. Reis is also Executive Vice President, Assistant
     Secretary of each of the other Pilgrim Funds. Mr. Reis currently serves or
     has served as an officer or director of other affiliates of ING Pilgrim
     Capital Corporation.

                                       39
<PAGE>

     DANIEL A. NORMAN is Senior Vice President, Treasurer and Co-Senior
     Portfolio Manager of the Trust. He has served as Assistant Portfolio
     Manager of the Trust from September 1996 to December 1999. Mr. Norman is a
     Senior Vice President of ING Pilgrim Investments (since December 1994) and
     Senior Vice President of ING Pilgrim Securities, Inc. (since November
     1995). Mr. Norman has served as an officer of other affiliates of ING
     Pilgrim Capital since February 1992. Mr. Norman co-manages the Trust with
     Jeffrey A. Bakalar.

     JEFFREY A. BAKALAR is Senior Vice President and Co-Senior Portfolio Manager
     of the Trust. He served as Vice President and Assistant Portfolio Manager
     of the Trust from February 1998 to December 1999. Prior to joining ING
     Pilgrim Investments, Inc. Mr. Bakalar was Vice President of The First
     National Bank of Chicago (July 1994-January 1998) and Corporate Finance
     Officer of the Securitized Products Group of Continental Bank (November
     1993-July 1994). Mr. Bakalar co-manages the Trust with Daniel A. Norman.

     MICHEL PRINCE, CFA, has served as Portfolio Manager of the Trust since May
     1998. Mr. Prince is a Vice President of ING Pilgrim Investments (since May
     1998). Prior to joining ING Pilgrim Investments, Mr. Prince was Vice
     President of Rabobank International, Chicago Branch (July 1996-April 1998)
     and Vice President of Fuji Bank, Chicago Branch (April 1992-July 1996).

     ROBERT L. WILSON has served as Portfolio Manager of the Trust since July
     1998. Mr. Wilson is a Vice President of ING Pilgrim Investments (since July
     1998). Prior to joining ING Pilgrim Investments, Mr. Wilson was a Vice
     President of Bank of Hawaii (May 1997-June 1998); Vice President of Union
     Bank of California (November 1994-May 1997); and Vice President of Bank of
     California (October 1990-November 1994).

     JASON T. GROOM has served as Portfolio Manager of the Trust since May 2000.
     Mr. Groom is a Vice President of ING Pilgrim Investments (since June 2000).
     He served as an Assistant Vice President from July 1998 to May 2000. Prior
     to joining ING Pilgrim Investments, Mr. Groom was an Associate in the
     Corporate Finance Group of NationsBank (January 1998-June 1998); Assistant
     Vice President, Corporate Finance Group of The Industrial Bank of Japan
     Limited (August 1995-December 1997); and an Associate in the Corporate
     Finance Group of The Long-Term Credit Bank of Japan Limited (August
     1994-August 1995).

     CURTIS F. LEE has served as Senior Credit Officer since August 1999. Mr.
     Lee is a is Vice President of ING Pilgrim Investments (since August 1999).
     Prior to joining ING Pilgrim Investments, Mr. Lee held a series of
     positions with Standard Chartered Bank in the credit approval and problem
     loan management functions (1992-1999).

     CHARLES EDWARD LEMIEUX, CFA, has served as Assistant Portfolio Manager of
     the Trust since July 1998. Mr. LeMieux is a Vice President of ING Pilgrim
     Investments (since June 2000). He served as an Assistant Vice President
     from July 1998 to May 2000. Prior to joining ING Pilgrim Investments, Mr.
     LeMieux was Assistant Treasurer Cash Management with Salt River Project
     (October 1993-June 1998) and Senior Metals Trader/Senior Financial Analyst
     with Phelps Dodge Corporation (January 1992-October 1993).

                                       40
<PAGE>

     MARK F. HAAK is an Assistant Portfolio Manager of the Trust. Mr. Haak is an
     Assistant Vice President of ING Pilgrim Investments (June 1999). Prior to
     joining ING Pilgrim Investments, Mr. Haak was Assistant Vice President,
     Corporate Banking with Norwest Bank (December 1997 - June 1998); Lead
     Financial Analyst and Portfolio Manager for Bank One AZ, N.A. (May 1996 -
     December 1997); and Credit Manager, Norwest Financial (May 1994 - May
     1996).

     WILLIAM F. NUTTING, JR. is a Senior Portfolio Analyst, Assistant Vice
     President and a Secondary Loan Trader for the Trust. Mr. Nutting is an
     Assistant Vice President of ING Pilgrim Investments (since December 1999)
     and joined ING Pilgrim Group in July 1995 as an Operations Associate.


                  CUSTODIAN AND AUCTION AGENT, TRANSFER AGENT,
                       DIVIDEND PAYING AGENT AND REGISTRAR


     The Trust's securities and cash are held under a custodian agreement by
State Street Bank and Trust -- Kansas City, whose principal place of business is
801 Pennsylvania Avenue, Kansas City, Missouri 64105. DST Systems, Inc., whose
principal place of business is 330 West 9th Street, Kansas City, Missouri 64105,
serves as transfer agent, dividend paying agent and registrar for the Trust's
common shares. The Depository Trust Company ("DTC") will act as securities
depository for the Preferred Shares. Bankers Trust Company, whose principal
place of business is 4 Albany Street, New York, New York 10006, will act as
auction agent, transfer agent, dividend paying agent, and registrar for the
Preferred Shares.


                                FEDERAL TAXATION

     The following is intended to be a general summary of certain federal income
tax consequences of investing in Preferred Shares and is based on the applicable
tax laws of the United States, which are subject to change retroactively or
prospectively, as of the date of this Prospectus. It is not intended as a
complete discussion of all such tax consequences, nor does it purport to deal
with all categories of investors. Investors are therefore advised to consult
with their tax advisers before making an investment in the Trust.

FEDERAL INCOME TAX TREATMENT OF THE TRUST

     The Trust has elected to be treated as a regulated investment company under
Subchapter M of the Code and intends to qualify under those provisions each
year. As a regulated investment company, the Trust generally will not be subject
to federal income tax on its investment company taxable income and net capital
gain (net long-term capital gains in excess of the sum of net short-term capital
losses and capital loss carryovers from prior years), if any, that it
distributes to shareholders. However, the Trust would be subject to corporate
income tax (currently at a 35% maximum effective rate) on any undistributed
income. The Trust intends to distribute to its shareholders, at least annually,
substantially all of its investment company taxable income and net capital gain.

     Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are also subject to a nondeductible 4% federal
excise tax. To prevent imposition of the tax, the Trust must distribute during

                                       41
<PAGE>
each calendar year an amount equal to the sum of (1) at least 98% of its
ordinary income (not taking into account any capital gains or losses) for the
calendar year, (2) at least 98% of its capital gains in excess of its capital
losses (adjusted for certain ordinary losses) for the twelve month period ending
on October 31 of the calendar year, and (3) all such ordinary income and capital
gains for previous years that were not distributed during such years. A
distribution will be treated as having been paid on December 31 if it is
declared by the Trust in October, November or December with a record date in
such months and is paid by the Trust in January of the following year.
Accordingly, such distributions will be taxable to shareholders in the calendar
year in which the distributions are declared. To prevent application of the
excise tax, the Trust intends to make its distributions in accordance with the
calendar year distribution requirement.

     If in any taxable year the Trust fails to qualify as a regulated investment
company under the Code, the Trust would be taxed in the same manner as an
ordinary corporation and distributions to its shareholders would not be
deductible by the Trust in computing its taxable income. In addition, in the
event of a failure to qualify, the Trust's distributions, to the extent derived
from the Trust's current or accumulated earnings and profits, would constitute
dividends (eligible for the corporate dividends received deduction) which are
taxable to shareholders as ordinary income, even though those distributions
might otherwise (at least in part) have been treated in the shareholders' hands
as long-term capital gains.

FEDERAL INCOME TAX TREATMENT OF HOLDERS OF PREFERRED SHARES


     Based in part on its lack of any present intention to redeem or purchase
Preferred Shares at any time in the future and upon the advice of tax counsel,
the Trust believes that under present law the Preferred Shares will constitute
stock of the Trust and distributions with respect to the Preferred Shares (other
than distributions in redemption of Preferred Shares that are treated as
exchanges of stock under Section 302(b) of the Code) thus will constitute
dividends to the extent of the Trust's current and accumulated earnings and
profits as calculated for federal income tax purposes. Such dividends generally
will be taxable as ordinary income to holders and generally will not qualify for
the dividends received deduction available to corporations under Section 243 of
the Code. This view relies in part on a published ruling of the IRS stating that
certain preferred stock similar in many material respects to the Preferred
Shares represents equity. It is possible, however, that the IRS might take a
contrary position asserting, for example, that the Preferred Shares constitute
debt of the Trust. If this position were upheld, the discussion of the treatment
of distributions below would not apply. Instead, distributions by the Trust to
holders of Preferred Shares would constitute interest, whether or not they
exceeded the earnings, and profits of the Trust would be included in full in the
income of the recipient and would be taxed as ordinary income. Dechert has
advised the Trust that, in its opinion, should the IRS pursue in court the
position that the Preferred Shares should be treated as debt for federal income
tax purposes, the IRS would be unlikely to prevail. Distributions of net capital
gain that are designated by the Trust as capital gain dividends will be treated
as long-term capital gains in the hands of holders regardless of the holders'
respective holding periods for their Preferred Shares. The IRS currently
requires that a regulated investment company that has two or more classes of
stock allocate to each such class proportionate amounts of each type of its
income (such as ordinary income and capital gains). Accordingly, the Trust
intends to designate distributions of net capital gain made with respect to

                                       42
<PAGE>

Preferred Shares as capital gain dividends in proportion to the Preferred
Shares' share of total dividends paid during the year. Because the Trust
currently has a significant capital loss carry forward, it is not anticipated
that the Trust will distribute net capital gains to shareholders, including
holders of the Preferred Shares, for the foreseeable future. See "Tax Matters --
Federal Income Tax Treatment of Holders of Preferred Shares" in the SAI.


SALE OF SHARES

     The sale of Preferred Shares will be a taxable transaction for federal
income tax purposes. Selling holders of Preferred Shares will generally
recognize gain or loss in an amount equal to the difference between their basis
in the Preferred Shares and the amount received in exchange therefor. If such
shares of Preferred Shares are held as a capital asset, the gain or loss will
generally be a capital gain or loss. Similarly, a redemption (including a
redemption resulting from liquidation of the Trust), if any, of shares of
Preferred Shares by the Trust generally will give rise to capital gain or loss
if the shareholder does not own (and is not regarded under certain tax law rules
of constructive ownership as owning) any common shares in the Trust and provided
that the redemption proceeds do not represent declared but unpaid dividends.
Generally, a holder's gain or loss will be a long-term gain or loss if the
shares have been held for more than one year. Any loss realized upon a taxable
disposition of shares of Preferred Shares held for six months or less will be
treated as a long-term capital loss to the extent of any capital gain dividends
received by the shareholder (or credited to the shareholder as an undistributed
capital gain) with respect to such shares. Also, any loss realized upon a
taxable disposition of shares of Preferred Shares may be disallowed if other
shares of Preferred Shares are acquired within a 61-day period beginning 30 days
before and ending 30 days after the date the shares are disposed of. If
disallowed, the loss will be reflected by an upward adjustment to the basis of
the shares acquired.

BACKUP WITHHOLDING

     The Trust may be required to withhold, for U.S. federal income taxes, 31%
of all dividends and redemption proceeds payable to shareholders who fail to
provide the Trust with their correct taxpayer identification number or who fail
to make required certifications, or if the Trust or a shareholder has been
notified by the IRS that they are subject to backup withholding. Corporate
shareholders and other shareholders specified in the Code are exempt from such
backup withholding. Backup withholding is not an additional tax. Any amounts
withheld may be credited against the shareholder's U.S. federal income tax
liability if the appropriate information is provided to the IRS.

OTHER TAXATION

     Foreign shareholders, including shareholders who are nonresident aliens,
may be subject to U.S. withholding tax on certain distributions at a rate of 30%
or such lower rates as may be prescribed by any applicable treaty. Investors are
advised to consult their own tax advisors with respect to the application to
their own circumstances of the above-described general taxation rules and with
respect to the state, local or foreign tax consequences to them of an investment
in Preferred Shares.

                                       43
<PAGE>
                        DESCRIPTION OF CAPITAL STRUCTURE


     The Trust is an unincorporated business trust established under the laws of
the Commonwealth of Massachusetts by the Declaration of Trust dated December 2,
1987. The Declaration of Trust provides that the Trustees of the Trust may
authorize separate classes of shares of beneficial interest. The Trustees have
authorized an unlimited number of shares of beneficial interest, par value $0.01
per share, all of which were initially classified as common shares. The
Declaration of Trust also authorizes the creation of an unlimited number of
shares of beneficial interest with preference rights, including preferred
shares, having a par value of $0.01 per share, in one or more series, with
rights as determined by the Board of Trustees, by action of the Board of
Trustees without the approval of the shareholders. For a description of the
Preferred Shares, see "Description of Preferred Shares." The following table
shows the amount of (i) shares authorized, (ii) shares held by the Trust for its
own account and (iii) shares outstanding, for each class of authorized
securities of the Trust as of September 30, 2000.

                                                   Amount Held by
                                      Amount       Trust for its       Amount
     Title of Class                 Authorized      Own Account      Outstanding
     --------------                 ----------      -----------      -----------
Common Shares                        unlimited           0           136,680,787
Preferred Shares, Series M             3,600             0                0
Preferred Shares, Series T             3,600             0                0
Preferred Shares, Series W             3,600             0                0
Preferred Shares, Series Th            3,600             0                0
Preferred Shares, Series F             3,600             0                0

     The common shares outstanding are fully paid and nonassessable by the
Trust. Holders of common shares are entitled to share equally in dividends
declared by the Board of Trustees payable to holders of common shares and in the
net assets of the Trust available for distribution to holders of common shares
after payment of the preferential amounts payable to holders of any outstanding
preferred shares. Neither holders of common shares nor holders of preferred
shares have pre-emptive or conversion rights and common shares are not
redeemable. Upon liquidation of the Trust, after paying or adequately providing
for the payment of all liabilities of the Trust and the liquidation preference
with respect to any outstanding preferred shares, and upon receipt of such
releases, indemnities and refunding agreements as they deem necessary for their
protection, the Trustees may distribute the remaining assets of the Trust among
the holders of the common shares. Under the rules of the NYSE applicable to
listed companies, the Trust is required to hold an annual meeting of
shareholders in each year. If the Trust is converted to an open-end investment
company or if for any other reason common shares are no longer listed on the
NYSE (or any other national securities exchange the rules of which require
annual meetings of shareholders), the Trust does not intend to hold annual
meetings of shareholders.


     Under Massachusetts law, shareholders, including holders of Preferred
Shares, could under certain circumstances be held personally liable for the
obligations of the Trust. However, the Declaration of Trust disclaims
shareholder liability for acts or obligations of the Trust and requires that
notice of such disclaimer be given in each agreement, obligation or instrument
entered into or executed by the Trust or the Trustees. The Declaration of Trust
provides for indemnification out of Trust property for all loss and expense of
any shareholder held personally liable for the obligations of the Trust. Thus,
the risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which the Fund would be unable to meet
its obligations.

                                       44
<PAGE>
     Holders of common shares are entitled to one vote for each share held and
will vote with the holders of any outstanding Preferred Shares or other
preferred shares on each matter submitted to a vote of holders of common shares,
except as described under "Description of Preferred Shares--Voting Rights."

     Shareholders are entitled to one vote for each share held. The common
shares, Preferred Shares and any other preferred shares do not have cumulative
voting rights, which means that the holders of more than 50% of the shares of
common shares, Preferred Shares and any other preferred shares voting for the
election of Trustees can elect all of the Trustees standing for election by such
holders, and, in such event, the holders of the remaining shares of common
shares, Preferred Shares and any other preferred shares will not be able to
elect any of such Trustees.

     So long as any Preferred Shares or any other preferred shares are
outstanding, holders of common shares will not be entitled to receive any
dividends of or other distributions from the Trust, unless at the time of such
declaration, (1) all accrued dividends on preferred shares or accrued interest
on borrowings has been paid and (2) the value of the Trust's total assets
(determined after deducting the amount of such dividend or other distribution),
less all liabilities and indebtedness of the Trust not represented by senior
securities, is at least 300% of the aggregate amount of such securities
representing indebtedness and at least 200% of the aggregate amount of
securities representing indebtedness plus the aggregate liquidation value of the
outstanding preferred shares (expected to equal the aggregate original purchase
price of the outstanding preferred shares plus redemption premium, if any,
together with any accrued and unpaid dividends thereon, whether or not earned or
declared and on a cumulative basis). In addition to the requirements of the 1940
Act, the Trust is required to comply with other asset coverage requirements as a
condition of the Trust obtaining a rating of the preferred shares from a rating
agency. These requirements include an asset coverage test more stringent than
under the 1940 Act.

     The Trust will send unaudited reports at least semi-annually and audited
financial statements annually to all of its shareholders.

     The Declaration of Trust further provides that obligations of the Trust are
not binding upon Trustees individually but only upon the property of the Trust
and that the Trustees will not be liable for errors of judgment or mistakes of
fact or law, but nothing in the Declaration of Trust protects a Trustee against
any liability to which he or she would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office.


     The common shares have traded on the NYSE since March 9, 1992. The
following table shows for the Trust's common shares for the periods indicated:
(1) the high and low closing prices as shown on the NYSE Composite Transaction
Tape; (2) the NAV per common share represented by each of the high and low
closing prices as shown on the NYSE Composite Transaction Tape; and (3) the
discount from or premium to NAV per common share (expressed as a percentage)
represented by these closing prices. The table also sets forth the aggregate
number of shares traded as shown on the NYSE Composite Transaction Tape during
the respective quarter.

                                       45
<PAGE>

<TABLE>
<CAPTION>
                                                             Premium/(Discount)
                           Price                NAV          Market Price To NAV
Calendar              ----------------    ----------------    ----------------      Reported
Quarter Ended          High      Low       High      Low      High       Low       NYSE Volume
- -------------         ------    ------    ------    ------    ----      ------     -----------
<S>                   <C>       <C>       <C>       <C>       <C>       <C>        <C>
September 30, 2000    $9.063    $8.563    $ 8.84    $ 8.71    2.52%     (1.60%)    14,119,000
June 30, 2000         $8.938    $8.063    $ 8.82    $ 8.89    1.34%     (9.30%)    18,560,000
March 31, 2000        $9.000    $7.938    $8.940    $8.920    0.67%    (11.00%)    22,230,000
December 31, 1999     $9.563    $7.873    $9.100    $8.930    5.09%    (11.84%)    18,387,700
</TABLE>

     On September 30, 2000, the last reported sales price of the Trust's common
shares on the NYSE was $8.69. The Trust's NAV on September 30, 2000 was $8.62.
On October 17, 2000, the last reported sales price of the Trust's common shares
on the NYSE was $8.44 representing a 1.4% discount below NAV as of that date.


CONVERSION TO OPEN-END FUND

     The Trustees may at any time propose conversion of the Trust to an open-end
management investment company depending upon their judgment as to the
advisability of such action in light of circumstances then prevailing. In
considering whether to submit an open-ending proposal to shareholders, the
Trustees might consider, among other factors, the differences in operating
expenses between open-end and closed-end funds (due to the expenses of
continuously selling shares and of standing ready to effect redemptions), the
potentially adverse tax consequences to non-redeeming shareholders once a fund
is open-ended, and the impact of open-ending on portfolio management policies.
Such a conversion would require the approval of both a majority of the Trust's
outstanding common shares and Preferred Shares voting together as a single class
and a majority of the outstanding Preferred Shares voting as a separate class on
such conversion. Conversion of the Trust to an open-end investment company would
require the redemption of all outstanding preferred shares, including the
Preferred Shares, which would eliminate the leveraged capital structure of the
Trust with respect to the common shares. A delay in conversion could result
following shareholder approval due to the Trust's inability to redeem the
preferred shares. Shareholders of an open-end investment company may require the
company to redeem their shares at any time (except in certain circumstances as
authorized by or under the 1940 Act) at their next computed NAV less any
redemption charge as might be in effect at the time of redemption. If the Trust
is converted to an open-end management investment company, it could be required
to liquidate portfolio securities to meet requests for redemption, and its
shares would no longer be listed on the NYSE. If the Trust were to experience
significant redemptions as an open-end fund, the decrease in total assets could
result in a higher expense ratio and inefficiencies in portfolio management. In
this regard, the Trust could reserve the right to effect redemptions in-kind
with portfolio securities, which would subject redeeming shareholders to
transaction costs in liquidating those securities.

REPURCHASE OF COMMON SHARES


     In recognition of the possibility that the Trust's common shares may trade
at a discount to their NAV, the Trust may from time to time take action to
attempt to reduce or eliminate a market value discount from NAV by repurchasing
its common shares in the open market or by tendering for its common shares at
NAV. So long as any Preferred Shares are outstanding, the Trust may not

                                       46
<PAGE>

purchase, redeem or otherwise acquire any common shares unless (1) all
accumulated dividends on the Preferred Shares have been paid or set aside for
payment through the date of such purchase, redemption or other acquisition and
(2) at the time of such purchase, redemption or acquisition the Preferred Shares
Basic Maintenance Amount and the 1940 Act Preferred Shares Asset Coverage
(determined after deducting the acquisition price of the common shares) are met.
Repurchases of common shares may result in the Trust being required to redeem
Preferred Shares to satisfy asset coverage requirements.


PREFERRED SHARES

     Under the 1940 Act, the Trust is permitted to have outstanding more than
one series of preferred shares as long as no single series has priority over
another series as to the distribution of assets of the Trust or the payment of
dividends. Neither holders of common shares nor holders of preferred shares have
pre-emptive rights to purchase any Preferred Shares or any other preferred
shares that might be issued.


     The Trust's Declaration of Trust authorizes the issuance of a class of
preferred shares (which class may be divided into two or more series) as the
Trustees may, without shareholder approval, authorize. The Preferred Shares have
such preferences, voting powers, terms of redemption, if any, and special or
relative rights or privileges (including conversion rights, if any) as the
Trustee may determine and as are set forth in the Trust's Certificate
establishing the terms of the Preferred Shares. The number of shares of the
preferred class or series authorized is unlimited, and the shares authorized may
be represented in part by fractional shares. Under the Trust's Certificate , the
Trustees have authorized the creation of 18,000 Auction Rate Cumulative
Preferred Shares, having a par value of $0.01 per share, with a liquidation
preference of $25,000 per share, classified as Series M, T, W, Th and F Auction
Rate Cumulative Preferred Shares.


                                  UNDERWRITING

     The underwriters named below (the "underwriters"), acting through Salomon
Smith Barney Inc., have severally agreed, subject to the terms and conditions of
the Underwriting Agreement with the Trust (the "Underwriting Agreement"), to
purchase, and the Trust has agreed to sell, the number of Preferred Shares set
forth opposite their respective names offered hereby.


                                                            Number Of
                                                        Preferred Shares
                                                  ------------------------------
Underwriters                                      Series M   Series W   Series F
- ------------                                      --------   --------   --------
Salomon Smith Barney Inc.......................
PaineWebber Incorporated.......................
Lehman Brothers Inc............................
Gruntal & Co., L.L.C...........................
   Total.......................................


     The Underwriting Agreement provides that the obligations of the
underwriters to purchase the shares included in this offering are subject to the
approval of certain legal matters by counsel and to certain other conditions.
The underwriters are obligated to purchase all of the Preferred Shares offered
hereby if they purchase any of the shares. In the Underwriting Agreement, the
Trust and the Adviser have agreed to indemnify the underwriters against certain

                                       47
<PAGE>
liabilities, including liabilities arising under the Securities Act of 1933, as
amended, or to contribute payments the underwriters may be required to make for
any of those liabilities.


     The Trust has been advised by the underwriters that they propose initially
to offer some of the Preferred Shares directly to the public at the public
offering price set forth on the cover page of this Prospectus and some of the
shares to selected dealers at the public offering price less a concession not in
excess of $ ____ per share. The sales load the Trust will pay of $ 250 per share
is equal to 1% of the initial offering price. The underwriters may allow, and
such dealers may reallow, a concession not in excess of $ _____ per share on
sales to certain other dealers. After the initial public offering, the
underwriters may change the public offering price and the concession. Investors
must pay for any Preferred Shares purchased in the initial public offering on or
before ________, 2000.

     The Trust anticipates that the underwriters may from time to time act as
brokers or dealers in connection with the execution of the Trust's portfolio
transactions after they have ceased to be underwriters. The Trust anticipates
that the underwriters or their respective affiliates may from time to time act
in auctions as broker-dealers and receive fees as described under "The Auction"
and in the SAI. The underwriters are active underwriters of, and dealers in,
securities and act as market makers in a number of such securities, and
therefore can be expected to engage in portfolio transactions with, and perform
services for, the Trust.


     The principal business address of Salomon Smith Barney is 388 Greenwich
Street, New York, New York 10013.

                                  LEGAL MATTERS

     Certain legal matters in connection with the Preferred Shares offered
hereby will be passed upon for the Trust by Dechert, Washington, DC and for the
Underwriters by Simpson Thacher & Bartlett, New York, New York.

                                     EXPERTS

     The financial statements of the Trust at February 29, 2000 and the selected
per share data and ratios set forth under the caption "Financial Highlights" for
each of the fiscal years ended February 29, 1996 through February 29, 2000 have
been audited by KPMG LLP, independent auditors, as set forth in their report
incorporated by reference in the SAI, and are included in reliance upon their
report given upon KPMG LLP's authority as experts in accounting and auditing.
The address of KPMG is 355 South Grand Avenue, Los Angeles, California 90071.

                               FURTHER INFORMATION

     The Trust has filed with the SEC, Washington, DC, a registration statement
under the Securities Act of 1933 with respect to the Preferred Shares offered
hereby. Further information concerning these securities and the Trust may be
found in the registration statement, of which this Prospectus constitutes a
part, on file with the SEC. The registration statement may be inspected without
charge at the SEC's office in Washington, DC, and copies of all or any part
thereof may be obtained from such officer after payment of the fees prescribed
by the SEC.

                                       48
<PAGE>
     The Trust is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and the 1940 Act, and in accordance therewith
files reports and other information with the SEC. Such reports, proxy and
information statements and other information can be inspected and copied at the
public reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, DC 20549 and the SEC's regional offices, including offices at Seven
World Trade Center, New York, New York 10048. Call 1-800-SEC-0330 for
information about the public reference facilities. Copies of such material can
be obtained from the Public Reference Section of the SEC at 450 Fifth Street,
N.W., Washington, DC 20549 at prescribed rates. Such reports and other
information concerning the Fund may also be inspected at the offices of the
NYSE. The SEC maintains a web site (http://www.sec.gov) that contains the SAI,
material incorporated by reference into this Prospectus and the SAI, and
reports, proxy and information statements and other information regarding
registrants that file with the SEC. In addition, reports, proxy and information
statements and other information concerning the Trust can be inspected at the
offices of the NYSE, 20 Broad Street, New York, New York 10005.

          TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION


                                                                            Page
                                                                            ----
Change of Name............................................................  B-3
Additional Information about Investments and Investment Techniques........  B-3
Investment Restrictions...................................................  B-9
Trustees and Officers.....................................................  B-10
Code of Ethics............................................................  B-15
Investment Management and Other Services..................................  B-15
Portfolio Transactions....................................................  B-17
Additional Information Concerning the Auctions for Preferred Shares.......  B-18
Description of Preferred Shares...........................................  B-24
Moody's and S&P Guidelines................................................  B-33
Federal Taxation..........................................................  B-39
Advertising and Performance Data..........................................  B-42
Financial Statements......................................................  B-44
Glossary..................................................................  B-45
Appendix A: Ratings of Investments........................................  B-57


                                       49
<PAGE>

- --------------------------------------------------------------------------------

                                  $270,000,000

                            Pilgrim Prime Rate Trust

                    Auction Rate Cumulative Preferred Shares

                             3,600 Shares, Series M
                             3,600 Shares, Series W
                             3,600 Shares, Series F

                               -------------------

                                   Prospectus

                                  ______, 2000

                               -------------------

                              Salomon Smith Barney
                            PaineWebber Incorporated
                                 Lehman Brothers
                                  Gruntal & Co.


- --------------------------------------------------------------------------------
<PAGE>

                  SUBJECT TO COMPLETION, DATED OCTOBER 23, 2000

     The information in this Statement of Additional Information is not complete
and may be changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
Statement of Additional Information is not an offer to sell these securities and
is not soliciting an offer to buy these securities in any state where the offer
or sale is not permitted.

                            PILGRIM PRIME RATE TRUST

                       STATEMENT OF ADDITIONAL INFORMATION

                                 ________, 2000

     Pilgrim Prime Rate Trust (the "Trust") is a closed-end, diversified
management investment company registered under the Investment Company Act of
1940, as amended (the "1940 Act"). The Trust's investment objective is to seek
as high a level of current income for holders of its common shares as is
consistent with the preservation of capital. The Trust seeks to achieve its
objective by acquiring interests in senior floating-rate loans ("Senior Loans")
with interest rates that float periodically based upon a benchmark indicator of
prevailing interest rates, such as the Prime Rate or the London Inter-Bank
Offered Rate ("LIBOR"). Normally, at least 80% of the Trust's total assets are
invested in Senior Loans. The Trust is managed by ING Pilgrim Investments, Inc.
("ING Pilgrim Investments" or the "Adviser"), formerly known as Pilgrim
Investments, Inc.

     This Statement of Additional Information ("SAI") relating to this offering
does not constitute a prospectus, but should be read in conjunction with the
Prospectus relating thereto dated ____ ___, 2000. This SAI does not include all
information that a prospective investor should consider before purchasing shares
of Auction Rate Cumulative Preferred Shares ("Preferred Shares") in this
offering, and investors should obtain and read the Prospectus prior to
purchasing such shares. A copy of the Prospectus may be obtained without charge,
by calling ING Pilgrim Investments toll-free at 1-800 992-0180.

     Capitalized terms used in this SAI are defined in the glossary beginning on
page B-45.

                                       B-1
<PAGE>
                                TABLE OF CONTENTS


                                                                            Page
                                                                            ----
Change of Name............................................................  B-3
Additional Information about Investments and Investment Techniques........  B-3
Investment Restrictions...................................................  B-9
Trustees and Officers.....................................................  B-10
Code of Ethics............................................................  B-15
Investment Management and Other Services..................................  B-15
Portfolio Transactions....................................................  B-17
Additional Information Concerning the Auctions for Preferred Shares.......  B-18
Description of Preferred Shares...........................................  B-24
Moody's and S&P Guidelines................................................  B-33
Federal Taxation..........................................................  B-39
Advertising and Performance Data..........................................  B-42
Financial Statements......................................................  B-44
Glossary..................................................................  B-45
Appendix A: Ratings of Investments........................................  B-57


     The Prospectus and SAI omit certain information contained in the
registration statement filed with the Securities and Exchange Commission
("Commission" or "SEC"), Washington, D.C. The registration statement may be
obtained from the Commission upon payment of the fee prescribed, or inspected at
the Commission's office for no charge. The registration statement is also
available on the Commission's website (www.sec.gov).

                                      B-2
<PAGE>
                                 CHANGE OF NAME


     The Trust changed its name from "Pilgrim Prime Rate Trust" to "Pilgrim
America Prime Rate Trust" in April 1996, and then changed its name back to
"Pilgrim Prime Rate Trust" on November 16, 1998.

       ADDITIONAL INFORMATION ABOUT INVESTMENTS AND INVESTMENT TECHNIQUES

     Some of the different types of securities in which the Trust may invest,
subject to its investment objective, policies and restrictions, are described in
the Prospectus under "Investment Objective and Policies." Additional information
concerning certain of the Trust's investments and investment techniques is set
forth below.

EQUITY SECURITIES

     In connection with its purchase or holding of interests in Senior Loans,
the Trust may acquire (and subsequently sell) equity securities or exercise
warrants that it receives. The Trust will acquire such interests only as an
incident to the intended purchase or ownership of Senior Loans or if, in
connection with a reorganization of a borrower, the Trust receives an equity
interest in a reorganized corporation or other form of business entity or
warrants to acquire such an equity interest. The Trust normally will not hold
more than 20% of its total assets in equity securities. Equity securities will
not be treated as Senior Loans; therefore, an investment in such securities will
not count toward the 80% of the Trust's total assets that normally will be
invested in Senior Loans. Equity securities are subject to financial and market
risks and can be expected to fluctuate in value.


LEASE PARTICIPATIONS

     The credit quality standards and general requirements that the Trust
applies to Lease Participations, including collateral quality, the credit
quality of the borrower and the likelihood of payback, are substantially the
same as those applied to conventional Senior Loans. A Lease Participation is
also required to have a floating interest rate that is indexed to the federal
funds rate, LIBOR or Prime Rate in order to be eligible for investment.

     The Office of the Comptroller of the Currency has established regulations
which set forth circumstances under which national banks may engage in lease
financings. Among other things, the regulation requires that a lease be a
net-full payout lease representing the noncancelable obligation of the lessee,
and that the bank make certain determinations with respect to any estimated
residual value of leased property relied upon by the bank to yield a full return
on the lease. The Trust may invest in lease financings only if the Lease
Participation meets these banking law requirements.

REPURCHASE AGREEMENTS


     In general, the Trust does not engage, nor does it intend to engage in the
foreseeable future, in repurchase agreements. The Trust has the ability,
however, pursuant to its investment objective and policies, to enter into
repurchase agreements (a purchase of, and a simultaneous commitment to resell, a
financial instrument at an agreed upon price on agreed upon date) only with
member banks of the Federal Reserve System, member firms of the New York Stock
Exchange ("NYSE") or other entities determined by ING Pilgrim Investments to be
creditworthy. When participating in repurchase agreements, the Trust buys
securities from a vendor, E.G., a bank or brokerage firm, with the agreement
that the vendor will repurchase the securities at a higher price at a later
date. The Trust may be subject to various delays and risks of loss if the vendor
is unable to meet its obligation to repurchase. Under the 1940 Act, repurchase
agreements are deemed to be collateralized loans of money by the Trust to the
seller. In evaluating whether to enter into a repurchase agreement, ING Pilgrim
Investments will consider carefully the creditworthiness of the vendor. If the
member bank or member firm that is the party to the repurchase agreement
petitions for bankruptcy or otherwise becomes subject to the U.S. Bankruptcy
Code, the law regarding the rights of the Trust to enforce the terms of the
repurchase agreement is unsettled. The securities underlying a repurchase
agreement will be marked to market every business day so that the value of the
collateral is at least equal to the value of the loan, including the accrued

                                      B-3
<PAGE>

interest thereon, and ING Pilgrim Investments will monitor the value of the
collateral. No specific limitation exists as to the percentage of the Trust's
assets which may be used to participate in repurchase agreements.

REVERSE REPURCHASE AGREEMENTS

     In general, the Trust does not engage, nor does it intend to engage in the
foreseeable future, in reverse repurchase agreements. The Trust has the ability,
however, pursuant to its investment objective and policies, to enter into
reverse repurchase agreements. A reverse repurchase agreement is an instrument
under which the Trust may sell an underlying debt instrument and simultaneously
obtain the commitment of the purchaser to sell the security back to the Trust at
an agreed upon price on an agreed upon date. Reverse repurchase agreements will
be considered borrowings by the Trust, and as such are subject to the
restrictions on borrowing. Borrowings by the Trust create an opportunity for
greater total return, but at the same time, increase exposure to capital risk.
The Trust will maintain in a segregated account with its custodian cash or
liquid high grade portfolio securities in an amount sufficient to cover its
obligations with respect to the reverse repurchase agreements. The Trust will
receive payment for such securities only upon physical delivery or evidence of
book entry transfer by its custodian. Regulations of the Commission require
either that securities sold by the Trust under a reverse repurchase agreement be
segregated pending repurchase or that the proceeds be segregated on the Trust's
books and records pending repurchase. Reverse repurchase agreements may involve
certain risks in the event of default or insolvency of the other party,
including possible loss from delays or restrictions upon the Trust's ability to
dispose of the underlying securities. An additional risk is that the market
value of securities sold by the Trust under a reverse repurchase agreement could
decline below the price at which the Trust is obligated to repurchase them.

LENDING SENIOR LOANS AND OTHER PORTFOLIO INSTRUMENTS

     To generate additional income, the Trust may lend its portfolio securities
including an interest in a Senior Loan, in an amount up to 33 1/3% of total
Trust assets to broker-dealers, major banks, or other recognized domestic
institutional borrowers of securities. No lending may be made with any companies
affiliated with ING Pilgrim Investments. During the time portfolio securities
are on loan, the borrower pays the Trust any dividends or interest paid on such
securities, and the Trust may invest the cash collateral and earn additional
income, or it may receive an agreed-upon amount of interest income from the
borrower who has delivered equivalent collateral or a letter of credit. As with
other extensions of credit, there are risks of delay in recovery or even loss of
rights in the collateral should the borrower fail financially.


     The Trust may seek to increase its income by lending financial instruments
in its portfolio in accordance with present regulatory policies, including those
of the Board of Governors of the Federal Reserve System and the Commission. The
lending of financial instruments is a common practice in the securities
industry. The loans are required to be secured continuously by collateral,
consistent with the requirements of the 1940 Act discussed below, maintained on
a current basis at an amount at least equal to the market value of the portfolio
instruments loaned. The Trust has the right to call a Senior Loan and obtain the
portfolio instruments loaned at any time on such notice as specified in the
transaction documents. For the duration of the Senior Loan, the Trust will
continue to receive the equivalent of the interest paid by the issuer on the
portfolio instruments loaned and may also receive compensation for the loan of
the financial instrument. Any gain or loss in the market price of the
instruments loaned that may occur during the term of the Senior Loan will be for
the account of the Trust.


     The Trust may lend its portfolio instruments so long as the terms and the
structure of such loans are not inconsistent with the requirements of the 1940
Act, which currently require that (a) the borrower pledge and maintain with the
Trust collateral consisting of cash, a letter of credit issued by a domestic
U.S. bank, or securities issued or guaranteed by the U.S. government having a
value at all times not less than 100% of the value of the instruments loaned,
(b) the borrowers add to such collateral whenever the price of the instruments
loaned rises (I.E., the value of the loan is "marked to market" on a daily
basis), (c) the loan be made subject to termination by the Trust at any time,
and (d) the Trust receive reasonable interest on the loan (which may include the
Trust's investing any cash collateral in interest bearing short-term
investments), any distributions on the loaned instruments and increase in their

                                      B-4
<PAGE>

market value. The Trust may lend its portfolio instruments to member banks of
the Federal Reserve System, members of the NYSE or other entities determined by
ING Pilgrim Investments to be creditworthy. All relevant facts and
circumstances, including the creditworthiness of the qualified institution, will
be monitored by ING Pilgrim Investments, and will be considered in making
decisions with respect to the lending of portfolio instruments.

     The Trust may pay reasonable negotiated fees in connection with loaned
instruments. In addition, voting rights may pass with loaned securities, but if
a material event were to occur affecting such a loan, the Trust will retain the
right to call the loan and vote the securities. If a default occurs by the other
party to such transaction, the Trust will have contractual remedies pursuant to
the agreements related to the transaction, but such remedies may be subject to
bankruptcy and insolvency laws which could materially and adversely affect the
Trust's rights as a creditor. However, the loans will be made only to firms
deemed by ING Pilgrim Investments to be of good financial standing and when, in
the judgment of ING Pilgrim Investments, the consideration which can be earned
currently from loans of this type justifies the attendant risk.

INTEREST RATE HEDGING TRANSACTIONS

     Generally, the Trust does not engage, nor does it intend to engage in the
foreseeable future, in interest rate swaps, or the purchase or sale of interest
rate caps and floors. The Trust has the ability, however, pursuant to its
investment objectives and policies, to engage in certain hedging transactions
including interest rate swaps and the purchase or sale of interest rate caps and
floors. The Trust may undertake these transactions primarily for the following
reasons: to preserve a return on or value of a particular investment or portion
of the Trust's portfolio, to protect against decreases in the anticipated rate
of return on floating or variable rate financial instruments which the Trust
owns or anticipates purchasing at a later date, or for other risk management
strategies such as managing the effective dollar-weighted average duration of
the Trust's portfolio. Market conditions will determine whether and in what
circumstances the Trust would employ any of the hedging techniques described
below.

     Interest rate swaps involve the exchange by the Trust with another party of
their respective commitments to pay or receive interest, E.G., an exchange of an
obligation to make floating rate payments on a specified dollar amount referred
to as the "notional" principal amount for an obligation to make fixed rate
payments. For example, the Trust may seek to shorten the effective interest rate
redetermination period of a Senior Loan in its portfolio that has an interest
rate redetermination period of one year. The Trust could exchange its right to
receive fixed income payments for one year from a borrower for the right to
receive payment under an obligation that readjusts monthly. In such event, the
Trust would consider the interest rate redetermination period of such Senior
Loan to be the shorter period. The purchase of an interest rate cap entitles the
purchaser, to the extent that a specified index exceeds a predetermined interest
rate, to receive payments of interest on a notional principal amount from the
party selling such interest rate cap. The purchase of an interest rate floor
entitles the purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate floor. The Trust will
not enter into swaps, caps or floors if, on a net basis, the aggregate notional
principal amount with respect to such agreements exceeds the net assets of the
Trust or to the extent the purchase of swaps, caps or floors would be
inconsistent with the Trust's other investment restrictions.

     The Trust will not treat swaps covered in accordance with applicable
regulatory guidance as senior securities. The Trust will usually enter into
interest rate swaps on a net basis, I.E., where the two parties make net
payments with the Trust receiving or paying, as the case may be, only the net
amount of the two payments. The net amount of the excess, if any, of the Trust's
obligations over its entitlement with respect to each interest rate swap will be
accrued and an amount of cash or liquid securities having an aggregate net asset
value ("NAV") at least equal to the accrued excess will be maintained in a
segregated account. If the Trust enters into a swap on other than a net basis,
the Trust will maintain in the segregated account the full amount of the Trust's
obligations under each such swap. The Trust may enter into swaps, caps and
floors with member banks of the Federal Reserve System, members of the NYSE or
other entities determined by ING Pilgrim Investments to be creditworthy. If a
default occurs by the other party to such transaction, the Trust will have
contractual remedies pursuant to the agreements related to the transaction but
such remedies may be subject to bankruptcy and insolvency laws which could
materially and adversely affect the Trust's rights as a creditor.

                                      B-5
<PAGE>
     The swap, cap and floor market has grown substantially in recent years with
a large number of banks and financial services firms acting both as principals
and agents utilizing standard swap documentation. As a result, this market has
become relatively liquid. There can be no assurance, however, that the Trust
will be able to enter into interest rate swaps or to purchase interest rate caps
or floors at prices on the terms that ING Pilgrim Investments believes are
advantageous to the Trust. In addition, although the terms of interest rate
swaps, caps and floors may provide for termination, there can be no assurance
that the Trust will be able to terminate an interest rate swap or sell or offset
interest rate caps or floors that it has purchased.


     The successful utilization of hedging and risk management transactions
require skills different from those needed in the selection of the Trust's
portfolio securities and depends on ING Pilgrim Investments' ability to predict
correctly the direction and degree of movements in interest rates. Although the
Trust believes that use of the hedging and risk management techniques above will
benefit the Trust, if ING Pilgrim Investments' judgment about the direction or
extent of the movement in interest rates is incorrect, the Trust's overall
performance would be worse than if it had not entered into any such
transactions. The Trust will incur brokerage and other costs in connection with
its hedging transactions.


BORROWING

     Under the 1940 Act, the Trust is not permitted to incur indebtedness unless
immediately after such incurrence the Trust has an asset coverage of 300% of the
aggregate outstanding principal balance of indebtedness. Additionally, under the
1940 Act, the Trust may not declare any dividend or other distribution upon any
class of its capital stock, or purchase any such capital stock, unless the
aggregate indebtedness of the Trust has at the time of the declaration of any
such dividend or distribution or at the time of any such purchase an asset
coverage of at least 300% after deducting the amount of such dividend,
distribution, or purchase price, as the case may be.

ORIGINATING SENIOR LOANS


     Although the Trust does not act, nor does it intend to act in the
foreseeable future, as an "agent" in originating and administrating a loan on
behalf of all lenders or as one of a group of "co-agents" in originating Senior
Loans, it does have the ability to do so. Senior Loans are typically arranged
through private negotiations between a borrower and several financial
institutions ("lenders") represented in each case by one or more such lenders
acting as agent of several lenders. On behalf of the several lenders, the agent,
which is frequently the entity that originates the Senior Loan and invites the
other parties to join the lending syndicate, will be primarily responsible for
negotiating the Senior Loan agreements that establish the relative terms,
conditions and rights of the borrower and the several lenders. The co-agents, on
the other hand, are not responsible for administration of a Senior Loan, but are
part of the initial group of lenders that commit to providing funding for a
Senior Loan. In large transactions, it is common to have several agents;
however, one such agent typically has primary responsibility for documentation
and administration of the Senior Loan. The agent is required to administer and
manage the Senior Loan and to service or monitor the collateral. The agent is
also responsible for the collection of principal and interest and fee payments
from the borrower and the apportionment of these payments to the credit of all
lenders which are parties to the loan agreement. The agent is charged with the
responsibility of monitoring compliance by the borrower with the restrictive
covenants in the loan agreement and of notifying the lenders of any adverse
change in the borrower's financial condition. In addition, the agent generally
is responsible for determining that the lenders have obtained a perfected
security interest in the collateral securing the Senior Loan.


     Lenders generally rely on the agent to collect their portion of the
payments on the Senior Loan and to use the appropriate creditor remedies against
the borrower. Typically under loan agreements, the agent is given broad
discretion in enforcing the loan agreement and is obligated to use the same care
it would use in the management of its own property. The borrower compensates the
agent for these services. Such compensation may include special fees paid on
structuring and funding the Senior Loan and other fees on a continuing basis.
The precise duties and rights of an agent are defined in the loan agreement.

                                      B-6
<PAGE>
     When the Trust is an agent, it has, as a party to the loan agreement, a
direct contractual relationship with the borrower and, prior to allocating
portions of the Senior Loan to the lenders, if any, assumes all risks associated
with the Senior Loan. The agent may enforce compliance by the borrower with the
terms of the loan agreement. Agents also have voting and consent rights under
the applicable loan agreement. Action subject to agent vote or consent generally
requires the vote or consent of the holders of some specified percentage of the
outstanding principal amount of the Senior Loan, which percentage varies
depending on the relative loan agreement. Certain decisions, such as reducing
the amount or increasing the time for payment of interest on or repayment of
principal of a Senior Loan, or relating collateral therefor, frequently require
the unanimous vote or consent of all lenders affected.


     Pursuant to the terms of a loan agreement, the Trust as agent typically has
sole responsibility for servicing and administrating a loan on behalf of the
other lenders. Each lender in a Senior Loan is generally responsible for
performing their own credit analysis and their own investigation of the
financial condition of the borrower. Generally, loan agreements will hold the
Trust liable for any action taken or omitted that amounts to gross negligence or
willful misconduct. In the event of a borrower's default on a loan, the loan
agreements provide that the lenders do not have recourse against the Trust for
its activities as agent. Instead, lenders will be required to look to the
borrower for recourse.

     Acting in the capacity of an agent in a Senior Loan may subject the Trust
to certain risks in addition to those associated with the Trust's current role
as lender. An agent is charged with the above described duties and
responsibilities to lenders and borrowers subject to the terms of the loan
agreement. Failure to adequately discharge such responsibilities in accordance
with the standard of care set forth in the loan agreement may expose the Trust
to liability for breach of contract. If a relationship of trust is found between
the agent and the lenders, the agent will be held to a higher standard of
conduct in administering the loan. In consideration of such risks, the Trust
will invest no more than 10% of its total assets in Senior Loans in which it
acts as agent or co-agent and the size of any individual loan will not exceed 5%
of the Trust's total assets.


ADDITIONAL INFORMATION ON SENIOR LOANS

     Senior Loans are direct obligations of corporations or other business
entities and are arranged by banks or other commercial lending institutions and
made generally to finance internal growth, mergers, acquisitions, stock
repurchases, and leveraged buyouts. Senior Loans usually include restrictive
covenants which must be maintained by the borrower. Such covenants, in addition
to the timely payment of interest and principal, may include mandatory
prepayment provisions arising from free cash flow and restrictions on dividend
payments, and usually state that a borrower must maintain specific minimum
financial ratios as well as establishing limits on total debt. A breach of
covenant, which is not waived by the agent, is normally an event of
acceleration, I.E., the agent has the right to call the outstanding Senior Loan.
In addition, loan covenants may include mandatory prepayment provisions stemming
from free cash flow. Free cash flow is cash that is in excess of capital
expenditures plus debt service requirements of principal and interest. The free
cash flow shall be applied to prepay the Senior Loan in an order of maturity
described in the loan documents. Under certain interests in Senior Loans, the
Trust may have an obligation to make additional loans upon demand by the
borrower. The Trust intends to reserve against such contingent obligations by
segregating sufficient assets in high quality short-term liquid investments or
borrowing to cover such obligations.


     In a typical interest in a Senior Loan, the agent administers the loan and
has the right to monitor the collateral. The agent is also required to segregate
the principal and interest payments received from the borrower and to hold these
payments for the benefit of the lenders. The Trust normally looks to the agent
to collect and distribute principal of and interest on a Senior Loan.
Furthermore, the Trust looks to the agent to use normal credit remedies, such as
to foreclose on collateral, monitor loan covenants, and notify the lenders of
any adverse changes in the borrower's financial condition or declarations of
insolvency. At times the Trust may also negotiate with the agent regarding the
agent's exercise of credit remedies under a Senior Loan. The agent is
compensated for these services by the borrower as is set forth in the loan
agreement. Such compensation may take the form of a fee or other amount paid
upon the making of the Senior Loan and/or an ongoing fee or other amount.

                                      B-7
<PAGE>

     The loan agreement in connection with Senior Loans sets forth the standard
of care to be exercised by the agents on behalf of the lenders and usually
provides for the termination of the agent's agency status in the event that it
fails to act properly, becomes insolvent, enters FDIC receivership, or if not
FDIC insured, enters into bankruptcy or if the agent resigns. In the event an
agent is unable to perform its obligations as agent, another lender would
generally serve in that capacity.

     The Trust believes that the principal credit risk associated with acquiring
Senior Loans from another lender is the credit risk associated with the borrower
of the underlying Senior Loan. The Trust may incur additional credit risk,
however, when the Trust acquires a participation in a Senior Loan from another
lender because the Trust must assume the risk of insolvency or bankruptcy of the
other lender from which the Senior Loan was acquired. However, in acquiring
Senior Loans, the Trust conducts an analysis and evaluation of the financial
condition of each such lender. In this regard, if the lenders have a long-term
debt rating, the long-term debt of all such participants is rated "Baa" or
better by Moody's Investors Service, Inc. ("Moody's") or "BBB" or better by
Standard & Poor's ("S&P"), or has received a comparable rating by another
nationally recognized rating service. In the absence of rated long-term debt,
the lenders or, with respect to a bank, the holding company of such lenders have
commercial paper outstanding which is rated at least "P-1" by Moody's or "A-1"
by S&P. In the absence of such rated long-term debt or rated commercial paper,
the Trust may acquire participation's in Senior Loans from lenders whose
long-term debt and commercial paper is of comparable quality to the foregoing
rating standards as determined by the Adviser under the supervision of the
Trustees. The Trust also diversifies its portfolio with respect to lenders from
which the Trust acquires Senior Loans. See "Investment Restrictions."

     Senior Loans, unlike certain bonds, usually do not have call protection.
This means that interests comprising the Trust's portfolio, while having a
stated one to ten-year term, may be prepaid, often without penalty. The Trust
generally holds Senior Loans to maturity unless it has become necessary to sell
them to satisfy any shareholder tender offers or to adjust the Trust's portfolio
in accordance with ING Pilgrim Investments' view of current or expected economic
or specific industry or borrower conditions.


     Senior Loans frequently require full or partial prepayment of a loan when
there are asset sales or a securities issuance. Prepayments on Senior Loans may
also be made by the borrower at its election. The rate of such prepayments may
be affected by, among other things, general business and economic conditions, as
well as the financial status of the borrower. Prepayment would cause the actual
duration of a Senior Loan to be shorter than its stated maturity. Prepayment may
be deferred by the Trust. This should, however, allow the Trust to reinvest in a
new loan and recognize as income any unamortized loan fees. In many cases this
will result in a new facility fee payable to the Trust.


     Because interest rates paid on these Senior Loans periodically fluctuate
with the market, it is expected that the prepayment and a subsequent purchase of
a new Senior Loan by the Trust will not have a material adverse impact on the
yield of the portfolio. See "Portfolio Transactions."

     Under a Senior Loan, the borrower generally must pledge as collateral
assets which may include one or more of the following: cash, accounts
receivable, inventory, property, plant and equipment, both common and preferred
stock in its subsidiaries, trademarks, copyrights, patent rights and franchise
value. The Trust may also receive guarantees as a form of collateral. In some
instances, a Senior Loan may be secured only by stock in a borrower or its
affiliates. The market value of the assets serving as collateral will, at the
time of investment, in the opinion of the Adviser, equal or exceed the principal
amount of the Senior Loan. The valuations of these assets may be performed by an
independent appraisal. If the agent becomes aware that the value of the
collateral has declined, the agent may take action as it deems necessary for the
protection of its own interests and the interests of the other lenders,
including, for example, giving the borrower an opportunity to provide additional
collateral or accelerating the loan. There is no assurance, however, that the
borrower would provide additional collateral or that the liquidation of the
existing collateral would satisfy the borrower's obligation in the event of
nonpayment of scheduled interest or principal, or that such collateral could be
readily liquidated.

                                      B-8
<PAGE>
     The Trust may be required to pay and receive various fees and commissions
in the process of purchasing, selling and holding Senior Loans. The fee
component may include any, or a combination of, the following elements:
arrangement fees, non-use fees, facility fees, letter of credit fees and ticking
fees. Arrangement fees are paid at the commencement of a loan as compensation
for the initiation of the transaction. A non-use fee is paid based upon the
amount committed but not used under the loan. Facility fees are on-going annual
fees paid in connection with a loan. Letter of credit fees are paid if a loan
involves a letter of credit. Ticking fees are paid from the initial commitment
indication until loan closing if for an extended period. The amount of fees is
negotiated at the time of closing.

     In order to allow national banks to purchase shares of the Trust for their
own accounts without limitation, the Trust invests only in obligations which are
eligible for purchase by national banks for their own accounts pursuant to the
provisions of paragraph seven of Section 24 of the U.S. Code Title 12. National
banks which are contemplating purchasing shares of the Trust for their own
accounts should refer to Banking Circular 220, issued by the U.S. Comptroller of
the Currency on November 21, 1986, for a description of certain considerations
applicable to such purchases.

                             INVESTMENT RESTRICTIONS


     The Trust has adopted the following restrictions relating to its
investments and activities, which may not be changed with a Majority Vote, as
defined in the 1940 Act. The Trust may not:

     1.   Issue senior securities, except insofar as the Trust may be deemed to
          have issued a senior security by reason of (i) entering into certain
          interest rate hedging transactions, (ii) entering into reverse
          repurchase agreements, (iii) borrowing money in an amount not
          exceeding 33 1/3%, or such other percentage permitted by law, of the
          Trust's total assets (including the borrowed amount) less all
          liabilities other than borrowings, or (iv) issuing a class or classes
          of preferred shares in an amount not exceeding 50%, or such other
          percentage permitted by law, of the Trust's total assets less all
          liabilities and indebtedness not represented by senior securities.

     2.   Invest more than 25% of its total assets in any industry.

     3.   Invest in marketable warrants other than those acquired in conjunction
          with Senior Loans and such warrants will not constitute more than 5%
          of its assets .

     4.   Make investments in any one issuer other than U.S. government
          securities if, immediately after such purchase or acquisition, more
          than 5% of the value of the Trust's total assets would be invested in
          such issuer, or the Trust would own more than 25% of any outstanding
          issue, except that up to 25% of the Trust's total assets may be
          invested without regard to the foregoing restrictions. For the purpose
          of the foregoing restriction, the Trust will consider the borrower of
          a Senior Loan to be the issuer of such Senior Loan. In addition, with
          respect to a Senior Loan under which the Trust does not have privity
          with the borrower or would not have a direct cause of action against
          the borrower in the event of the failure of the borrower to pay
          scheduled principal or interest, the Trust will also separately meet
          the foregoing requirements and consider each interpositioned bank (a
          lender from which the Trust acquires a Senior Loan) to be an issuer of
          the Senior Loan.

     5.   Act as an underwriter of securities, except to the extent that it may
          be deemed to act as an underwriter in certain cases when disposing of
          its portfolio investments or acting as an agent or one of a group of
          co-agents in originating Senior Loans.

     6.   Purchase or sell equity securities (except that the Trust may,
          incidental to the purchase or ownership of an interest in a Senior
          Loan, or as part of a borrower reorganization, acquire, sell and

                                      B-9
<PAGE>

          exercise warrants and/or acquire or sell other equity securities),
          real estate, real estate mortgage loans, commodities, commodity
          futures contracts, or oil or gas exploration or development programs;
          or sell short, purchase or sell straddles, spreads, or combinations
          thereof, or write put or call options.

     7.   Make loans of money or property to any person, except that the Trust
          (i) may make loans to corporations or other business entities, or
          enter into leases or other arrangements that have the characteristics
          of a loan; (ii) may lend portfolio instruments; and (iii) may acquire
          securities subject to repurchase agreements.

     8.   Purchase shares of other investment companies, except in connection
          with a merger, consolidation, acquisition or reorganization.

     9.   Make investments on margin or hypothecate, mortgage or pledge any of
          its assets except for the purpose of securing borrowings as described
          above in connection with the issuance of senior securities and then
          only in an amount up to 33 1/3% (50% in the case of the issuance of a
          preferred class of shares), or such other percentage permitted by law,
          of the value of the Trust's total assets (including, with respect to
          borrowings the amount borrowed) less all liabilities other than
          borrowings (or, in the case of the issuance of senior securities, less
          all liabilities and indebtedness not represented by senior
          securities).

     If a percentage restriction is adhered to at the time of investment, a
later increase or decrease in percentage resulting from a change in value of the
Trust's investments or amount of total assets will not be considered a violation
of any of the foregoing restrictions.

     There is no limitation on the percentage of the Trust's total assets that
may be invested in instruments which are not readily marketable or subject to
restrictions on resale, and to the extent the Trust invests in such instruments,
the Trust's portfolio should be considered illiquid. The extent to which the
Trust invests in such instruments may affect its ability to realize the NAV of
the Trust in the event of the voluntary or involuntary liquidation of its
assets.

                              TRUSTEES AND OFFICERS

BOARD OF TRUSTEES

     The Trust is governed by its Board of Trustees. The Trustees and Officers
of the Trust are listed below.

     AL BURTON. (Age 72) Trustee. President of Al Burton Productions for more
     than the last five years. Mr. Burton is also a Director, Trustee or a
     member of the Advisory Board of each of the funds managed by the Adviser.


     PAUL S. DOHERTY. (Age 66) Trustee. President, of Doherty, Wallace,
     Pillsbury and Murphy, P.C., Attorneys. Mr. Doherty was formerly a Director
     of Tambrands, Inc. (1993 - 1998). Mr. Doherty is also a Director or Trustee
     of each of the funds managed by the Adviser.


     ROBERT B. GOODE. (Age 70) Trustee. Retired. Mr. Goode was formerly Chairman
     of American Direct Business Insurance Agency, Inc. (1996-2000). Mr. Goode
     is also a Director or Trustee of each of the funds managed by the Adviser.


     *ALAN L. GOSULE. (Age 59) Trustee. Partner and Chairman of the Tax
     Department of Clifford Chance Rogers & Wells LLP (since 1991). Mr. Gosule
     is a Director of F.L. Putnam Investment Management Co., Inc., Simpson
     Housing Limited Partnership, Home Properties of New York, Inc., CORE Cap,
     Inc. and Colonnade Partners. Mr. Gosule is also a Director or Trustee of
     each of the funds managed by the Adviser.

                                      B-10
<PAGE>
     WALTER H. MAY. (Age 63) Trustee. Retired. Mr. May was formerly Managing
     Director and Director of Marketing for Piper Jaffray, Inc. Mr. May is also
     a Director or Trustee of each of the funds managed by the Adviser.


     JOCK PATTON. (Age 54) Trustee. Private Investor. Director of Hypercom
     Corporation (since January 1999), and JDA Software Group, Inc. (since
     January 1999). Mr. Patton is also a Director of Buick of Scottsdale, Inc.,
     National Airlines, Inc., BG Associates, Inc., BK Entertainment, Inc.,
     Arizona Rotorcraft, Inc. and Director and Chief Executive Officer of
     Rainbow Multimedia Group, Inc. Mr. Patton was formerly Director of Stuart
     Entertainment, inc., Director of Artisoft, Inc. (August 1994 - July 1998);
     and a President and Co-owner of StockVal, Inc. (April 1993 - June 1997).
     Mr. Patton is also a Director or Trustee of each of the funds managed by
     the Adviser.

     DAVID W.C. PUTNAM. (Age 61) Trustee. President and Director of F.L. Putnam
     Securities Company, Inc. and its affiliates (since 1978). Mr. Putnam is
     Director of Anchor Investment Management Corporation and President and
     Director/Trustee of Anchor Accumulation Trust, Anchor International Bond
     Trust, Anchor Gold and Currency Trust, Anchor Resources and Commodities
     Trust and Anchor Strategic Assets Trust. Mr. Putnam was formerly Director
     of Trust Realty Corp. and Bow Ridge Mining Co. Mr. Putnam is also a
     Director or Trustee of each of the funds managed by the Adviser.

     JOHN R. SMITH. (Age 77) Trustee. President of New England Fiduciary Company
     (since 1991). Mr. Smith is Chairman of Massachusetts Educational Financing
     Authority (since 1987); Vice Chairman of Massachusetts Health and Education
     Authority (since 1979), Vice-Chairman of MHI, Inc. (Massachusetts
     Non-Profit Energy Purchasers Consortium) (since 1996). Mr. Smith is also a
     Director or Trustee of each of the funds managed by the Adviser.

     **ROBERT W. STALLINGS. (Age 51) Trustee. Chief Executive Officer and
     President. Chairman, Chief Executive Officer and President of ING Pilgrim
     Group, Inc. ("ING Pilgrim Group") (since December 1994); Chairman, ING
     Pilgrim Investments, Inc. (since December 1994); Chairman, ING Pilgrim
     Securities, Inc. ("ING Pilgrim Securities") (since December 1994);
     President and Chief Executive Officer of ING Pilgrim Funding. (since
     November 1999); and President and Chief Executive Officer of ING Pilgrim
     Capital (since October 1999) and its predecessors (since August 1991). Mr.
     Stallings is also a Director, Trustee, or a member of the Advisory Board of
     each of the funds managed by the Adviser.

     **JOHN G. TURNER. (Age 61) Chairman. Chairman and Chief Executive Officer
     of ReliaStar Financial Corp. and ReliaStar Life Insurance Co. (since 1993);
     Chairman of ReliaStar Life Insurance Company of New York (since 1995); and
     Chairman of Northern Life Insurance Company (since 1992). Mr. Turner was
     formerly Director of Northstar Investment Management Corporation and its
     affiliates (1993-1999) and President of ReliaStar Financial Corp. and
     ReliaStar Life Insurance Co. (1989-1991). Mr. Turner is also Chairman of
     each of the funds managed by the Adviser.


     DAVID W. WALLACE. (Age 76) Trustee. Chairman of FECO Engineered Systems,
     Inc. Mr. Wallace is President and Trustee of the Robert R. Young
     Foundation, Governor of the New York Hospital, Trustee of Greenwich
     Hospital and Director of UMC Electronics and Zurn Industries, Inc. Mr.
     Wallace was formerly Chairman of Lone Star Industries and Putnam and Trust
     Company, Chairman and Chief Executive Officer of Todd Shipyards, Bangor
     Punta Corporation, and National Securities & Research Corporation. Mr.
     Wallace is also a Director or Trustee of each of the funds managed by the
     Adviser.
                                      B-11
<PAGE>

- ----------
*    An "interested person, " as defined in the 1940 Act, of the Trust. Mr.
     Gosule is a partner at Clifford Chance Rogers & Wells LLP, which provided
     certain legal services for the Trust through 1999.

**   An "interested person, " as defined in the 1940 Act, by virtue of his
     affiliation with the Trust or ING Pilgrim Investments or any of its
     affiliates.

     In addition, the following individual serves as an Advisory Board Member to
the Trust.

     MARY A. BALDWIN, Ph.D. (Age 60) Advisory Board Member. Realtor, Caldwell
     Bankers Success Realty (formerly, The Prudential Arizona Realty) for more
     than the last five years. Ms. Baldwin is also Vice President, United States
     Olympic Committee (November 1996 - present), and formerly Treasurer, United
     States Olympic Committee (November 1992 - November 1996). Ms. Baldwin is an
     Advisory Board Member of each of the funds managed by the Adviser.

     The Trust currently pays each Trustee, or Advisory Board Member, who is not
an interested person of the Adviser a pro rata share, as described below, of (i)
an annual retainer of $20,000; (ii) $5,000 per quarterly Board meeting; (iii)
$500 per committee meeting; (iv) $500 per special telephonic meeting; and (v)
out-of-pocket expenses. The pro rata share paid by the Trust is based on the
Trust's average net assets as a percentage of the average net assets of all the
funds managed by ING Pilgrim Investments for which the Trustees serve in common
as Directors/Trustees or as Advisory Board Members, if applicable. Certain of
the ING Pilgrim Funds had different compensation schedules in place for the
Trustees during portions of 1999.


     The Trust currently has an Executive Committee, Audit Committee, Valuation
Committee and a Nominating Committee. The Audit, Valuation and Nominating
Committees consist entirely of Independent Trustees.


     The following individuals serve on the Trust's Executive Committee: Walter
H. May, Jock Patton, Robert W. Stallings and John G. Turner. Mr. Turner serves
as Chairman of the Executive Committee.

     The following individuals serve on the Trust's Audit Committee: Mary A.
Baldwin, Paul S. Doherty, Robert B. Goode, John R. Smith and David W. Wallace.
Mr. Wallace serves as Chairman of the Audit Committee.

     The following individuals serve on the Trust's Valuation Committee: Al
Burton, Alan L. Gosule, Walter H. May, Jock Patton and David W.C. Putnam. Mr.
Patton serves as Chairman of the Valuation Committee.

     The following individuals serve on the Trust's Nominating Committee: Mary
A. Baldwin, Al Burton, Paul S. Doherty, Robert B. Goode and Walter H. May. Mr.
May serves as Chairman of the Nominating Committee.

COMPENSATION OF TRUSTEES

     The following table sets forth the compensation paid to each of the
Trustees for the fiscal year ended February 29, 2000. Trustees who are
"interested persons " of ING Pilgrim Investments do not receive any compensation
from the Trust . In the column headed "Total Compensation From Fund Complex Paid
to Trustees," the number in parentheses indicates the total number of Boards in
the Pilgrim Fund complex on which the Trustee served during that year.

                                      B-12
<PAGE>
                               COMPENSATION TABLE
                       FISCAL YEAR ENDED FEBRUARY 29, 2000

                                     Aggregate             Total Compensation
                                 Compensation From         From  Fund Complex
Name and Position                    Registrant             Paid to Trustees
- -----------------                    ----------             ----------------
Walter E. Auch,                        $5,327                   $ 34,500
Trustee (1)                                                    (6 Boards)

Mary A. Baldwin,                       $6,823                   $ 44,188
Trustee (2)                                                    (8 Boards)

John P. Burke,                         $6,369                   $ 41,250
Trustee (1)                                                    (6 Boards)

Al Burton,                             $7,595                   $ 49,188
Trustee                                                       (13 Boards)

Paul S. Doherty,                       $3,542                   $ 22,938
Trustee                                                       (15 Boards)

Robert B. Goode                        $3,542                   $ 22,938
Trustee                                                       (15 Boards)

Alan  L. Gosule,                       $3,542                   $ 22,938
Trustee (3)                                                   (15 Boards)

Mark L. Lipson,                        $    0                   $      0
Trustee (4) (5)                                               (15 Boards)

Walter H. May,                         $3,542                   $ 22,938
Trustee                                                       (15 Boards)

Jock Patton,                           $7,595                   $ 49,188
Trustee                                                       (13 Boards)

David W.C. Putnam,                     $3,426                   $ 22,188
Trustee                                                       (15 Boards)

John R. Smith,                         $3,542                   $ 22,938
Trustee                                                       (15 Boards)

Robert W. Stallings,                   $    0                   $      0
Trustee (4)                                                   (13 Boards)

John G. Turner,                        $    0                   $      0
Trustee (4)                                                   (15 Boards)

David W. Wallace,                      $3,542                   $ 22,938
Trustee                                                       (15 Boards)

- ----------
(1)  Resigned as Trustee effective October 29, 1999.
(2)  Resigned as Trustee effective June 15, 2000.
(3)  An "interested person," as defined in the 1940 Act, of the Trust. Mr.
     Gosule is a partner at Clifford Chance Rogers & Wells LLP, which provided
     certain legal services for the Trust through 1999.
(4)  An "interested person, " as defined in the 1940 Act, because of his
     affiliation with ING Pilgrim Investments.
(5)  Resigned as Trustee effective July 26, 2000.

                                      B-13
<PAGE>

OFFICERS

     ROBERT W. STALLINGS, CHIEF EXECUTIVE OFFICER AND PRESIDENT AND CHIEF
     OPERATING OFFICER 7337 East Doubletree Ranch Road, Scottsdale, Arizona
     85258. (Age 51) Chairman, Chief Executive Officer and President of ING
     Pilgrim Group (since December 1994); Chairman, ING Pilgrim Investments and
     ING Pilgrim Securities (since December 1994); President and Chief Executive
     Officer of ING Pilgrim Funding (since November 1999) and President and
     Chief Executive Officer of ING Pilgrim Capital (since October 1999) and its
     predecessors (since August 1991). Mr. Stallings is also Director, Trustee,
     or a member of the Advisory Board of each of the funds managed by the
     Adviser.

     JAMES R. REIS, EXECUTIVE VICE PRESIDENT, CHIEF CREDIT OFFICER, AND
     ASSISTANT SECRETARY 7337 East Doubletree Ranch Road, Scottsdale, Arizona
     85258. (Age 43) Director, Vice Chairman (since December 1994), and
     Executive Vice President (since April 1995) and Director of Senior Lending
     and Structured Finance (since April 1998), ING Pilgrim Group and ING
     Pilgrim Investments; Director (since December 1994), Vice Chairman (since
     November 1995) and Assistant Secretary (since January 1995), ING Pilgrim
     Securities; Executive Vice President (since April 1995) and Assistant
     Secretary of each of the other Pilgrim Funds (since December 1997).
     Presently serves or has served as an officer or director of other
     affiliates of ING Pilgrim Capital.

     JAMES M. HENNESSY, SENIOR EXECUTIVE VICE PRESIDENT, CHIEF OPERATING OFFICER
     AND SECRETARY 7337 East Doubletree Ranch Road, Scottsdale, Arizona 85258.
     (Age 51) Senior Executive Vice President (since June 2000), Executive Vice
     President (October 1999 - June 2000), Secretary (since October 1999), ING
     Pilgrim Capital and its predecessors; Executive Vice President (since April
     1998) and Secretary (since April 1995), ING Pilgrim Group, ING Pilgrim
     Securities and ING Pilgrim Investments; Executive Vice President (since May
     1998) and Secretary (since April 1995) of each of the Pilgrim Funds.
     Formerly Senior Vice President of each of the Pilgrim Funds (April
     1995-April 1998). Presently serves or has served as an officer of other
     affiliates of ING Pilgrim Capital.

     DANIEL A. NORMAN, SENIOR VICE PRESIDENT, TREASURER, AND CO-SENIOR PORTFOLIO
     MANAGER 7337 East Doubletree Ranch Road, Scottsdale, Arizona 85258. (Age
     42) Senior Vice President (since December 1994) of ING Pilgrim Investments
     and ING Pilgrim Securities. Presently serves or has served as an officer of
     other affiliates of ING Pilgrim Capital.

     JEFFREY A. BAKALAR, SENIOR VICE PRESIDENT AND CO-SENIOR PORTFOLIO MANAGER
     7337 East Doubletree Ranch Road, Scottsdale, Arizona 85258. (Age 42) Senior
     Vice President of ING Pilgrim Investments (since November 1999).

     MICHAEL J. ROLAND, SENIOR VICE PRESIDENT AND PRINCIPAL FINANCIAL OFFICER
     7337 East Doubletree Ranch Road, Scottsdale, Arizona 85258. (Age 42) Senior
     Vice President and Chief Financial Officer ING Pilgrim Group, ING Pilgrim
     Investments, and ING Pilgrim Securities (since June 1998). Senior Vice
     President and Chief Financial Officer (since June 1998) of each of the

                                      B-14
<PAGE>

     Pilgrim Funds. Formerly served in same capacity (January, 1995 - April,
     1997). Formerly Chief Financial Officer of Endeaver Group (April, 1997 to
     June, 1998).

     ROBERT S. NAKA, SENIOR VICE PRESIDENT AND ASSISTANT SECRETARY 7337 East
     Doubletree Ranch Road, Scottsdale, Arizona 85258. (Age 37) Senior Vice
     President, ING Pilgrim Investments (since November 1999) and ING Pilgrim
     Group (since August 1999). Senior Vice President and Assistant Secretary of
     each of the funds in the Pilgrim Group of Funds. Formerly Vice President of
     ING Pilgrim Investments (April 1997-October 1999) and ING Pilgrim Group
     (February 1997-August 1999). Formerly Assistant Vice President of ING
     Pilgrim Group (August 1995-February 1997).

     To the knowledge of the Trust, as of September 30, 2000, no current Trustee
of the Trust owned 1% or more of the outstanding shares of the Trust and the
officers and Trustees of the Trust own, as a group, less than 1% of the shares
of the Trust.

     As of September 30, 2000, no person, to the knowledge of the Trust, owned
beneficially or of record more than 5% of the outstanding shares of the Trust.

                                 CODE OF ETHICS

     The Trust has adopted a Code of Ethics governing personal trading
activities of all Trustees and the officers of the Trust and persons who, in
connection with their regular functions, play a role in the recommendation of
any purchase or sale of a security by the Trust or obtain information pertaining
to such purchase or sale. The Code of Ethics is intended to prohibit fraud
against the Trust that may arise from personal trading. Personal trading is
permitted by such persons subject to certain restrictions; however, they are
generally required to pre-clear all security transactions with the Trust's Chief
Compliance Officer or her designee and to report all transactions on a regular
basis.

                    INVESTMENT MANAGEMENT AND OTHER SERVICES

THE ADVISER

     The Adviser serves as investment manager to the Trust and has overall
responsibility for the management of the Trust. The Investment Management
Agreement between the Trust and the Adviser requires the Adviser to oversee the
provision of all investment advisory services for the Trust. The Adviser, which
was organized in December 1994, is registered as an investment adviser with the
Commission and serves as investment adviser to 51 other registered investment
companies (or series thereof), as well as privately managed accounts, and as of
September 30, 2000 had total assets under management of approximately $20.8
billion.

     The Adviser is an indirect wholly-owned subsidiary of ING Group (NYSE:
ING). ING Group is a global financial institution active in the fields of
insurance, banking and asset management in more than 60 countries , with almost
90,000 employees.


     The Adviser pays all of its expenses from the performance of its
obligations under the Investment Management Agreement, including executive
salaries and expenses of the Trustees and Officers of the Trust who are
employees of the Adviser or its affiliates. Other expenses incurred in the
operation of the Trust are borne by the Trust, including, without limitation,
expenses incurred in connection with the sale, issuance, registration and
transfer of its shares; fees of its Custodian, Transfer and Shareholder
Servicing; salaries of officers and fees and expenses of Trustees or members of
any advisory board or committee of the Trust who are not members of, affiliated
with or interested persons of the Adviser; the cost of preparing and printing
reports, proxy statements and prospectuses of the Trust or other communications
for distribution to its shareholders; legal, auditing and accounting fees; the
fees of any trade association of which the Trust is a member; fees and expenses

                                      B-15
<PAGE>
of registering and maintaining registration of its shares for sale under federal
and applicable state securities laws; and all other charges and costs of its
operation plus any extraordinary or non-recurring expenses.


     For the fiscal years ended February 29, 2000, February 28, 1999 and
February 28, 1998, ING Pilgrim Investments was paid $13,076,669, $11,973,819 and
$10,369,772, respectively, for services rendered to the Trust.

     The Investment Management Agreement continues from year to year if
specifically approved at least annually by the Trustees or the Shareholders. In
either event, the Investment Management Agreement must also be approved by vote
of a majority of the Trustees who are not parties to the Investment Management
Agreement or "interested persons" of any party, cast in person at a meeting
called for that purpose.

     The use of the name "Pilgrim" in the Trust's name is pursuant to the
Investment Management Agreement between the Trust and ING Pilgrim Investments,
and in the event that the Agreement is terminated, the Trust has agreed to amend
its Agreement and Declaration of Trust to remove the reference to "ING Pilgrim."

THE ADMINISTRATOR

     The Administrator of the Trust is ING Pilgrim Group, which is an affiliate
of the Adviser. In connection with its administration of the corporate affairs
of the Trust, the Administrator bears the following expenses: the salaries and
expenses of all personnel of the Trust and the Administrator except for the fees
and expenses of Trustees not affiliated with the Administrator or ING Pilgrim
Investments; costs to prepare information; determination of daily NAV by the
recordkeeping and accounting agent; expenses to maintain certain of the Trust's
books and records that are not maintained by ING Pilgrim Investments, the
custodian, or transfer agent; costs incurred to assist in the preparation of
financial information for the Trust's income tax returns, proxy statements,
quarterly, semi-annual, and annual shareholder reports; costs of providing
shareholder services in connection with any tender offers or to shareholders
proposing to transfer their shares to a third party; providing shareholder
services in connection with the dividend reinvestment plan; and all expenses
incurred by the Administrator or by the Trust in connection with administrating
the ordinary course of the Trust's business other than those assumed by the
Trust, as described below.

     Except as indicated immediately above and under "The Adviser," the Trust is
responsible for the payment of its expenses including: the fees payable to ING
Pilgrim Investments; the fees payable to the Administrator; the fees and certain
expenses of the Trust's custodian and transfer agent, including the cost of
providing records to the Administrator in connection with its obligation of
maintaining required records of the Trust; the charges and expenses of the
Trust's legal counsel and independent auditors; commissions and any issue or
transfer taxes chargeable to the Trust in connection with its transactions; all
taxes and corporate fees payable by the Trust to governmental agencies; the fees
of any trade association of which the Trust is a member; the costs of share
certificates representing shares of the Trust; organizational and offering
expenses of the Trust and the fees and expenses involved in registering and
maintaining registration of the Trust and its shares with the Commission,
including the preparation and printing of the Trust's registration statement and
prospectuses for such purposes; allocable communications expenses with respect
to investor services, and all expenses of shareholders' and Trustees' meetings
and of preparing, printing and mailing reports, proxy statements and
prospectuses to shareholders; the cost of insurance; and litigation and
indemnification expenses and extraordinary expenses not incurred in the ordinary
course of the Trust's business.

     For the fiscal years ended February 29, 2000, February 28, 1999 and
February 28, 1998, ING Pilgrim Group was paid $2,139,091, $2,022,051 and
$1,778,473, respectively, for services rendered to the Trust.

                                      B-16
<PAGE>
                             PORTFOLIO TRANSACTIONS


     The Trust will generally have at least 80% of its total assets invested in
Senior Loans. The remaining assets of the Trust will generally consist of
short-term debt instruments with remaining maturities of 120 days or less and
certain other instruments such as subordinated loans up to a maximum of 5% of
the Trust's net assets, Hybrid Loans, unsecured loans, interest rate swaps, caps
and floors, repurchase agreements and reverse repurchase agreements. The Trust
will acquire Senior Loans from and sell Senior Loans to major money center
banks, selected regional banks and selected non-banks, insurance companies,
finance companies and leasing companies which usually act as lenders on senior
collateralized loans. The Trust may also purchase Senior Loans from and sell
Senior Loans to U.S. branches of foreign banks which are regulated by the
Federal Reserve System or appropriate state regulatory authorities. The Trust's
interest in a particular Senior Loan will terminate when the Trust receives full
payment on the loan or sells a Senior Loan in the secondary market. Costs
associated with purchasing or selling Senior Loans in the secondary market
include commissions paid to brokers and processing fees paid to agents. These
costs are allocated between the purchaser and seller as agreed between the
parties.

     Purchases and sales of short-term debt and other financial instruments for
the Trust's portfolio usually are principal transactions, and normally the Trust
will deal directly with the underwriters or dealers who make a market in the
securities involved unless better prices and execution are available elsewhere.
Such market makers usually act as principals for their own account. On occasion,
securities may be purchased directly from the issuer. Short-term debt
instruments are generally traded on a net basis and do not normally involve
either brokerage commissions or transfer taxes. The cost of portfolio securities
transactions of the Trust that are not transactions with principals will consist
primarily of brokerage commissions or dealer or underwriter spreads between the
bid and asked price, although purchases from underwriters may involve a
commission or concession paid by the issuer.

     While ING Pilgrim Investments seeks to obtain the most favorable net
results in effecting transactions in the Trust's portfolio securities, brokers
or dealers who provide research services may receive orders for transactions by
the Trust. Such research services ordinarily consist of assessments and analyses
of the business or prospects of a company, industry, or economic sector. ING
Pilgrim Investments is authorized to pay spreads or commissions to brokers or
dealers furnishing such services which are in excess of spreads or commissions
that other brokers or dealers not providing such research may charge for the
same transaction, even if the specific services were not imputed to the Trust
and were useful to the Adviser in advising other clients. Information so
received will be in addition to, and not in lieu of, the services required to be
performed by ING Pilgrim Investments under the Investment Management Agreement
between ING Pilgrim Investments and the Trust. The expenses of ING Pilgrim
Investments will not necessarily be reduced as a result of the receipt of such
supplemental information. ING Pilgrim Investments may use any research services
obtained in providing investment advice to its other investment advisory
accounts. Conversely, such information obtained by the placement of business for
ING Pilgrim Investments or other entities advised by ING Pilgrim Investments
will be considered by and may be useful to ING Pilgrim Investments in carrying
out its obligations to the Trust.


     The Trust does not intend to effect any brokerage transaction in its
portfolio securities with any broker-dealer affiliated directly or indirectly
with the Adviser, except for sales of portfolio securities pursuant to a tender
offer, in which event the Adviser will offset against the management fee a part
of any tender fees which legally may be received by such affiliated
broker-dealer. To the extent certain services which the Trust is obligated to
pay for under the Investment Management Agreement are performed by the Adviser,
the Trust will reimburse the Adviser for the costs of personnel involved in
placing orders for the execution of portfolio transactions.

     The Trust did not pay any brokerage commissions during the fiscal years
ended February 29, 2000, February 28, 1999 and February 28, 1998.

PORTFOLIO TURNOVER RATE


     The annual rates of the Trust's total portfolio turnover for the years
ended February 29, 2000, February 28, 1999 and February 28, 1998, were 71%, 68%
and 90%, respectively. The annual turnover rate of the Trust is generally

                                      B-17
<PAGE>

expected to be between 50% and 100%, although as part of its investment
policies, the Trust places no restrictions on portfolio turnover and the Trust
may sell any portfolio security without regard to the period of time it has been
held. The annual turnover rate of the Trust also includes Senior Loans for which
the full payment on the Senior Loan has been prepaid by the borrower. The
Adviser believes that prepaid Senior Loans generally comprise approximately 25%
to 75% of the Trust's total portfolio turnover each year.


       ADDITIONAL INFORMATION CONCERNING THE AUCTIONS FOR PREFERRED SHARES

GENERAL


     The Certificate provides that the Applicable Rate for each Dividend Period
of shares of each series shall be equal to the rate per annum that the Auction
Agent advises has resulted on the Business Day preceding the first day of a
Dividend Period for each such series (an "Auction Date") from implementation of
the Auction Procedures set forth in the Certificate and summarized below, in
which persons determine to hold or offer to sell or, based on dividend rates bid
by them, offer to purchase or sell shares of such series. Each periodic
implementation of the Auction Procedures is referred to herein as an "Auction."
The following summary is qualified by reference to the Auction Procedures set
forth in the Certificate.

     AUCTION AGENCY AGREEMENT . The Trust has entered into an Auction Agency
Agreement (the "Auction Agency Agreement") with the Auction Agent (currently,
Bankers Trust Company), which provides, among other things, that the Auction
Agent will follow the Auction Procedures for purposes of determining the
Applicable Rate for shares of each series of Preferred Shares so long as the
Applicable Rate for shares of such series is to be based on the results of the
Auction.

     BROKER-DEALER AGREEMENTS. Each Auction requires the participation of one or
more Broker-Dealers. The Auction Agent has entered into agreements
(collectively, the "Broker-Dealer Agreements") with several Broker-Dealers
selected by the Trust, which provides for the participation of those
Broker-Dealers in Auctions for shares of a series of Preferred Shares. See
"Broker-Dealers" below.

     SECURITIES DEPOSITORY. The Depository Trust Company ("DTC") will act as the
Securities Depository for the Agent Members with respect to shares of each
series of Preferred Shares. One certificate for all of the shares of each series
of Preferred Shares will be registered in the name of Cede & Co., as nominee of
the Securities Depository. Such certificate will bear a legend to the effect
that such certificate is issued subject to the provisions restricting transfers
of Preferred Shares contained in the Certificate. The Trust will also issue
stop-transfer instructions to the transfer agent for shares of each series of
Preferred Shares. Prior to the commencement of the right of Holders of preferred
shares to elect a majority of the Trust's Trustees, as described under
"Description of Preferred Shares-Voting Rights" in the Prospectus, Cede & Co.
will be the Holder of all shares of each series of Preferred Shares and owners
of such shares will not be entitled to receive certificates representing their
ownership interest in such shares.

     DTC, a New York chartered limited purpose trust company, performs services
for its participants (including Agent Members), some of whom (and/or their
representatives) own DTC. DTC maintains lists of its participants and will
maintain the positions (ownership interests) held by each such Agent Member in
shares of each series of Preferred Shares, whether for its own account or as a
nominee for another person.

Orders by Existing Holders and Potential Holders

     On or prior to the Submission Deadline on each Auction Date for shares of a
series of Preferred Shares:

     (a) each Beneficial Owner of shares of such series may submit to its
Broker-Dealer by telephone or otherwise a:

                                      B-18
<PAGE>

          (i) "Hold Order" -- indicating the number of Outstanding shares, if
     any, of such series that such Beneficial Owner desires to continue to hold
     without regard to the Applicable Rate for such shares of such series for
     the next succeeding Rate Period of such shares;

          (ii) "Bid" -- indicating the number of Outstanding shares, if any, of
     such series that such Beneficial Owner offers to sell if the Applicable
     Rate for such shares of such series for the next succeeding Rate Period
     shall be less than the rate per annum specified by such Beneficial Owner in
     such Bid; and/or

          (iii) "Sell Order" -- indicating the number of Outstanding shares, if
     any, of such that such Beneficial Owner offers to sell without regard to
     the Applicable Rate for such shares of such series for the next succeeding
     Rate Period; and

     (b) Broker-Dealers shall contact customers who are Potential Beneficial
Owners by telephone or otherwise to determine whether such customers desire to
submit Bids, in which they will indicate the number of shares, if any, of such
series that they offer to purchase if the Applicable Rate for shares of such
series for the next succeeding Rate Period is not less than the rate per annum
specified in such Bids.

     The communication to a Broker-Dealer of the foregoing information is herein
referred to as an "Order" and collectively as "Orders." A Beneficial Owner or a
Potential Beneficial Owner placing an Order with its Broker-Dealer is herein
referred to as a "Bidder" and collectively as "Bidders." The submission by a
Broker-Dealer of an Order to the Auction Agent shall likewise be referred to
herein as an "Order" and collectively as "Orders," and an Existing Holder or
Potential Holder who places an Order with the Auction Agent or on whose behalf
an Order is placed with the Auction Agent shall likewise be referred to herein
as a "Bidder" and collectively as "Bidders."

     A Beneficial Owner may submit different types of Orders to its
Broker-Dealer with respect to shares of a series of Preferred Shares then held
by such Beneficial Owner. A Bid placed by a Beneficial Owner specifying a rate
higher than the Applicable Rate determined in the Auction shall constitute an
irrevocable offer to sell the shares subject thereto. A Beneficial Owner that
submits a Bid to its Broker-Dealer having a rate higher than the Maximum Rate on
the Auction Date thereof will be treated as having submitted a Sell Order to its
Broker-Dealer. A Beneficial Owner that fails to submit to its Broker-Dealer
prior to the Submission Deadline for shares of such series an Order or Orders
covering all the Outstanding shares of such series held by such Beneficial Owner
will be deemed to have submitted a Hold Order to its Broker-Dealer covering the
number of Outstanding shares of such series held by such Beneficial Owner and
not subject to Orders submitted to its Broker-Dealer; provided, however, that if
a Beneficial Owner fails to submit to its Broker-Dealer prior to the Submission
Deadline for shares of a series of Preferred Shares an Order or Orders covering
all of the Outstanding shares of such series held by such Beneficial Owner for
an Auction relating to a Special Rate Period consisting of more than 7 Rate
Period Days, such Beneficial Owner will be deemed to have submitted a Sell Order
to its Broker-Dealer covering the number of Outstanding shares of such series
held by such Beneficial Owner and not subject to Orders submitted to its
Broker-Dealer. A Sell Order shall constitute an irrevocable offer to sell the
shares of such series of Preferred Shares subject thereto at a price per share
equal to $25,000. A Beneficial Owner of shares of a series of Preferred Shares
that offers to become the Beneficial Owner of additional shares of such series
of Preferred Shares is, for purposes of such offer, a Potential Beneficial
Owner.

     A Potential Beneficial Owner of shares of a series of Preferred Shares may
submit to its Broker-Dealer Bids in which it offers to purchase shares of a
series if the Applicable Rate for the next Rate Period is not less than the rate
specified in such Bid. A Bid placed by a Potential Beneficial Owner specifying a
rate not higher than the Maximum Rate shall constitute an irrevocable offer to
purchase the number of shares of a series of Preferred Shares specified in such
Bid if the rate determined in the Auction is equal to or greater than the rate
specified in such Bid.

     As described more fully below under "--Submission of Orders by
Broker-Dealers to Auction Agent," the Broker-Dealers will submit the Orders of
their respective customers who are Beneficial Owners and Potential Beneficial
Owners to the Auction Agent, designating themselves (unless otherwise permitted
by the Trust) as Existing Holders in respect of shares of such series of
Preferred Shares subject to Orders submitted or deemed submitted to them by

                                      B-19
<PAGE>

Beneficial Owners and as Potential Holders in respect of shares of such series
subject to Orders submitted to them by Potential Beneficial Owners. However,
neither the Trust nor the Auction Agent will be responsible for a
Broker-Dealer's failure to comply with the foregoing. Any Order placed with the
Auction Agent by a Broker-Dealer as or on behalf of an Existing Holder or a
Potential Holder will be treated in the same manner as an Order placed with a
Broker-Dealer by a Beneficial Owner or a Potential Beneficial Owner, as
described in the preceding paragraph. Similarly, any failure by a Broker-Dealer
to submit to the Auction Agent an Order in respect of any shares of a series of
Preferred Shares held by it or its customers who are Beneficial Owners will be
treated in the same manner as a Beneficial Owner's failure to submit to its
Broker-Dealer an Order in respect of shares of a series of Preferred Shares held
by it, as described in the second preceding paragraph. For information
concerning the priority given to different types of Orders placed by Existing
Holders, see "--Submission of Orders by Broker-Dealers to Auction Agent" below.

     Neither the Trust nor an affiliate may submit an Order in any Auction,
except that any Broker-Dealer that is an affiliate of the Trust may submit
Orders in an Auction, but only if such Orders are not for its own account.

     The Auction Procedures include a pro rata allocation of shares for purchase
and sale, which may result in an Existing Holder continuing to hold or selling,
or a Potential Holder purchasing, a number of shares of a series of Preferred
Share that is fewer than the number of shares of such series specified in its
Order. See "--Acceptance and Rejection of Submitted Bids and Submitted Sell
Orders and Allocation of Shares" below. To the extent the allocation procedures
have that result, Broker-Dealers that have designated themselves as Existing
Holders or Potential Holders in respect of customer Orders will be required to
make appropriate pro rata allocations among their respective customers. Each
purchase or sale shall be made for settlement on the Business Day next
succeeding the Auction Date at a price per share equal to $25,000. See
"--Notification of Results; Settlement" below.

     As described above, any Bid specifying a rate higher than the Maximum Rate
will (i) be treated as a Sell Order if submitted by a Beneficial Owner or an
Existing Holder and (ii) not be accepted if submitted by a Potential Beneficial
Owner or a Potential Holder. Accordingly, the Auction Procedures establish the
Maximum Rate as a maximum rate per annum that can result from an Auction. See
"--Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable
Rate" and "--Acceptance and Rejection of Submitted Bids and Submitted Sell
Orders and Allocation of Shares" below.


CONCERNING THE AUCTION AGENT

     The Auction Agent is acting as agent for the Trust in connection with
Auctions. In the absence of bad faith or negligence on its part, the Auction
Agent will not be liable for any action taken, suffered, or omitted or for any
error of judgment made by it in the performance of its duties under the Auction
Agency Agreement and will not be liable for any error of judgment made in good
faith unless the Auction Agent will have been negligent in ascertaining the
pertinent facts.


     The Auction Agent may rely upon, as evidence of the identities of the
Existing Holders of shares of a series of Preferred Shares, the Auction Agent's
registry of Existing Holders, the results of Auctions and notices from any
Broker-Dealer (or other person, if permitted by the Trust) with respect to
transfers described under "The Auction-Secondary Market Trading and Transfer of
Preferred Shares" in the Prospectus and notices from the Trust. The Auction
Agent is not required to accept any such notice for an Auction unless it is
received by the Auction Agent by 3:00 p.m., New York City time, on the Business
Day preceding such Auction.

     The Auction Agent may terminate the Auction Agency Agreement upon notice to
the Trust on a date no earlier than 60 days after such notice. If the Auction
Agent should resign, the Trust will use its best efforts to enter into an
agreement with a successor Auction Agent containing substantially the same terms
and conditions as the Auction Agency Agreement. The Trust may remove the Auction
Agent, provided that prior to such removal, the Trust shall have entered into
such an agreement with a successor Auction Agent.

                                      B-20
<PAGE>
BROKER-DEALERS


     The Auction Agent after each Auction for shares of a series of Preferred
Shares will pay to each Broker-Dealer, from funds provided by the Trust, a
service charge at the annual rate of 1/4 of 1% in the case of any Auction
immediately preceding a Dividend Period of less than one year, or a percentage
agreed to by the Trust and the Broker-Dealers in the case of any Auction
immediately preceding a Dividend Period of one year or longer, of the purchase
price of shares of such series of Preferred Shares placed by such Broker-Dealer
at such Auction. For the purposes of the preceding sentence, shares of a series
of Preferred Shares will be placed by a Broker-Dealer if such shares were (a)
the subject of Hold Orders deemed to have been submitted to the Auction Agent by
the Broker-Dealer and were acquired by such Broker-Dealer for its customers who
are Beneficial Owners or (b) the subject of an Order submitted by such
Broker-Dealer that is (i) a Submitted Bid of an Existing Holder that resulted in
such Existing Holder continuing to hold such shares as a result of the Auction
or (ii) a Submitted Bid of a Potential Holder that resulted in such Potential
Holder purchasing such shares as a result of the Auction or (iii) a valid Hold
Order.


     The Trust may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after such termination.

     The Broker-Dealer Agreement provides that a Broker-Dealer (other than an
affiliate of the Trust) may submit Orders in Auctions for its own account,
unless the Trust notifies all Broker-Dealers that they may no longer do so, in
which case Broker-Dealers may continue to submit Hold Orders and Sell Orders for
their own accounts. Any Broker-Dealer that is an affiliate of the Trust may
submit Orders in Auctions, but only if such Orders are not for its own account.
If a Broker-Dealer submits an Order for its own account in any Auction, it might
have an advantage over other Bidders because it would have knowledge of all
Orders submitted by it in that Auction. Such Broker-Dealer, however, would not
have knowledge of Orders submitted by other Broker-Dealers in that Auction.


SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT

     Prior to 1:00 P.M., New York City time, on each Auction Date, or such other
time on the Auction Date specified by the Auction Agent (i.e., the Submission
Deadline), each Broker-Dealer will submit to the Auction Agent in writing all
Orders obtained by it for the Auction to be conducted on such Auction Date,
designating itself (unless otherwise permitted by the Trust) as the Existing
Holder or Potential Holder, as the case may be, in respect of the shares of a
series of Preferred Shares subject to such Orders. Any Order submitted by a
Beneficial Owner or a Potential Beneficial Owner to its Broker-Dealer, or by a
Broker-Dealer to the Auction Agent, prior to the Submission Deadline on any
Auction Date, shall be irrevocable.

     If any rate specified in any Bid contains more than three figures to the
right of the decimal point, the Auction Agent will round such rate to the next
highest one-thousandth (0.001) of 1%.

     If one or more Orders of an Existing Holder is submitted to the Auction
Agent covering in the aggregate more than the number of Outstanding Preferred
Shares of a series subject to an Auction held by such Existing Holder, such
Orders will be considered valid in the following order of priority:

     (a) all Hold Orders for shares of such series will be considered valid, but
only up to and including in the aggregate the number of Outstanding shares of
such series held by such Existing Holder, and, if the number of shares of such
series subject to such Hold Orders exceeds the number of Outstanding shares of
such series held by such Existing Holder, the number of shares subject to each
such Hold Order shall be reduced pro rata to cover the number of Outstanding
shares held by such Existing Holder;

     (b) (i) any Bid for shares of such series will be considered valid up to
and including the excess of the number of shares of Outstanding shares of such
series held by such Existing Holder over the number of shares of such series
subject to any Hold Orders referred to in clause (a) above;

                                      B-21
<PAGE>

          (ii) subject to subclause (i), if more than one Bid of an Existing
Holder for shares of such series is submitted to the Auction Agent with the same
rate and the number of Outstanding shares of such series subject to such Bids is
greater than such excess, such Bids will be considered valid up to and including
the amount of such excess, and the number of shares of such series subject to
each Bid with the same rate will be reduced pro rata to cover the number of
shares of such series equal to such excess;

          (iii) subject to subclauses (i) and (ii), if more than one Bid of an
Existing Holder for shares of such series is submitted to the Auction Agent with
different rates, such Bids shall be considered valid in the ascending order of
their respective rates up to and including the amount of such excess; and

          (iv) in any such event, the number, if any, of such Outstanding shares
of such series subject to any portion of Bids considered not valid in whole or
in part under this clause (b) will be treated as the subject of a Bid for shares
of such series by or on behalf of a Potential Holder at the rate specified
therein; and

     (c) all Sell Orders for shares of such series will be considered valid up
to and including the excess of the number of Outstanding shares of such series
held by such Existing Holder over the sum of shares of such series subject to
valid Hold Orders referred to in clause (a) above and valid Bids referred to in
clause (b) above.

     If more than one Bid of a Potential Holder for shares of a series of
Preferred Shares is submitted to the Auction Agent by or on behalf of any
Potential Holder, each such Bid submitted will be a separate Bid with the rate
and number of shares of such series therein specified.

DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND APPLICABLE RATE

     Not earlier than the Submission Deadline on each Auction Date for shares of
a series of Preferred Shares, the Auction Agent will assemble all valid Orders
submitted or deemed submitted to it by the Broker-Dealers (each such Hold Order,
Bid or Sell Order as submitted or deemed submitted by a Broker-Dealer being
herein referred to as a "Submitted Hold Order," a "Submitted Bid" or a
"Submitted Sell Order," as the case may be, or as a "Submitted Order" and
collectively as "Submitted Hold Orders," "Submitted Bids" or "Submitted Sell
Orders," as the case may be, or as "Submitted Orders") and will determine the
excess of the number of Outstanding shares of such series over the number of
Outstanding shares of such series subject to Submitted Hold Orders (such excess
being herein referred to as the "Available Preferred Shares") and whether
Sufficient Clearing Bids have been made in the Auction. "Sufficient Clearing
Bids" will have been made if the number of Outstanding shares of such series
that are the subject of Submitted Bids of Potential Holders specifying rates not
higher than the Maximum Rate for all Dividend Periods equals or exceeds the
number of outstanding shares of such series that are the subject of Submitted
Sell Orders (including the number of shares of such series subject to Bids of
Existing Holders specifying rates higher than the Maximum Rate).

     If Sufficient Clearing Bids for shares of a series of Preferred Shares have
been made, the Auction Agent will determine the lowest rate specified in such
Submitted Bids (the "Winning Bid Rate" for shares of such series) which, taking
into account the rates in the Submitted Bids of Existing Holders, would result
in Existing Holders continuing to hold an aggregate number of Outstanding shares
of such series which, when added to the number of outstanding shares of such
series to be purchased by Potential Holders, based on the rates in their
Submitted Bids, would equal not less than the Available Preferred Shares. In
such event, the Winning Bid Rate will be the Applicable Rate for the next Rate
Period for all shares of such series.

     If Sufficient Clearing Bids have not been made (other than because all of
the outstanding shares of a series of Preferred Shares are subject to Submitted
Hold Orders), the Applicable Rate for the next Dividend Period for all shares of
such series will be equal to the Maximum Rate. If Sufficient Clearing Bids have
not been made, Beneficial Owners that have submitted or that are deemed to have
submitted Sell Orders may not be able to sell in the Auction all shares of such
series subject to such Sell Orders but will continue to own shares of such
series for the next Dividend Period. "--Acceptance and Rejection of Submitted
Bids and Submitted Sell Orders and Allocation of Shares" below.

                                      B-22
<PAGE>

     If all of the outstanding shares of a series of Preferred Shares are
subject to Submitted Hold Orders, the Applicable Rate for all shares of such
series for the next succeeding Dividend Period shall be the All Hold Rate.

ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS AND
ALLOCATION OF SHARES

     Based on the determinations made under "--Determination of Sufficient
Clearing Bids, Winning Bid Rate and Applicable Rate" above and, subject to the
discretion of the Auction Agent to round and allocate certain shares as
described below, Submitted Bids and Submitted Sell Orders will be accepted or
rejected in the order of priority set forth in the Auction Procedures, with the
result that Existing Holders and Potential Holders of shares of a series of
Preferred Shares will sell, continue to hold and/or purchase such shares as set
forth below. Existing Holders that submitted or were deemed to have submitted
Hold Orders (or on whose behalf Hold Orders were submitted or deemed to have
been submitted) will continue to hold the shares of such series subject to such
Hold Orders.

     If Sufficient Clearing Bids for shares of a series of Preferred Shares have
been made:

     (a)  Each Existing Holder that placed or on whose behalf was placed a
          Submitted Sell Order or Submitted Bid specifying any rate higher than
          the Winning Bid Rate will sell the outstanding shares of such series
          subject to such Submitted Sell Order or Submitted Bid;

     (b)  Each Existing Holder that placed or on whose behalf was placed a
          Submitted Bid specifying a rate lower than the Winning Bid Rate will
          continue to hold the Outstanding shares of such series subject to such
          Submitted Bid;

     (c)  Each Potential Holder that placed or on whose behalf was placed a
          Submitted Bid specifying a rate lower than the Winning Bid Rate will
          purchase the number of outstanding shares of such series subject to
          such Submitted Bid;

     (d)  Each Existing Holder that placed or on whose behalf was placed a
          Submitted Bid specifying a rate equal to the Winning Bid Rate will
          continue to hold the shares of such series subject to such Submitted
          Bid, unless the number of Outstanding Preferred Shares of such series
          subject to all such Submitted Bids is greater than the number of
          Preferred Shares ("remaining shares") in excess of the Available
          Preferred Shares over the number of Preferred Shares accounted for in
          clauses (b) and (c) above, in which event each Existing Holder with
          such a Submitted Bid will continue to hold Preferred Shares of such
          series subject to such Submitted Bid determined on a pro rata basis
          based on the number of Outstanding Preferred Shares subject to all
          such Submitted Bids of such Existing Holders; and

     (e)  Each Potential Holder that placed or on whose behalf was placed a
          Submitted Bid specifying a rate equal to the Winning Bid Rate for
          shares of such series will purchase any shares of Available Preferred
          Shares not accounted for in clauses (b) through (d) above on a pro
          rata basis based on the Outstanding Preferred Shares subject to all
          such Submitted Bids.

     If Sufficient Clearing Bids for shares of a series of Preferred Shares have
not been made (unless this results because all Outstanding shares of such series
are subject to Submitted Hold Orders):

     (a)  Each Existing Holder that placed or on whose behalf was placed a
          Submitted Bid specifying a rate equal to or lower than the Maximum
          Rate for shares of such series will continue to hold the Preferred
          Shares subject to such Submitted Bid;

     (b)  Each Potential Holder that placed or on whose behalf was placed a
          Submitted Bid specifying a rate equal to or lower than the Maximum
          Rate for shares of such series will purchase the number of Preferred
          Shares subject to such Submitted Bid; and

                                      B-23
<PAGE>

     (c)  Each Existing Holder that placed or on whose behalf was placed a
          Submitted Bid specifying a rate higher than the Maximum Rate for
          shares of such series or a Submitted Sell Order will sell a number of
          shares of such series subject to such Submitted Bid or Submitted Sell
          Order determined on a pro rata basis based on the number of
          Outstanding shares of such series subject to all such Submitted Bids
          and Submitted Sell Orders.

     If, as a result of the pro rata allocation described in clauses (d) or (e)
of the second preceding paragraph or clause (c) of the next preceding paragraph,
any Existing Holder would be entitled or required to sell, or any Potential
Holder would be entitled or required to purchase, a fraction of a share of
Preferred Shares of a series, the Auction Agent will, in such manner as, in its
sole discretion, it will determine, round up or down to the nearest whole share
the number of Preferred Shares of such series being sold or purchased on such
Auction Date so that the number of shares of such series sold or purchased by
each Existing Holder or Potential Holder will be whole shares of such series. If
as a result of the pro rata allocation described in clause (e) of the second
preceding paragraph, any Potential Holder would be entitled or required to
purchase less than a whole share of a series of Preferred Shares, the Auction
Agent will, in such manner as, in its sole discretion, it will determine,
allocate shares of such series for purchase among Potential Holders so that only
whole shares of such series are purchased by any such Potential Holder, even if
such allocation results in one or more of such Potential Holders not purchasing
shares of such series.

NOTIFICATION OF RESULTS; SETTLEMENT

     The Auction Agent will be required to advise each Broker-Dealer that
submitted an Order of the Applicable Rate for the next Dividend Period and, if
the Order was a Bid or Sell Order, whether such Bid or Sell Order was accepted
or rejected, in whole or in part, by telephone by approximately 3:00 P.M., New
York City time, on each Auction Date. Each Broker-Dealer that submitted an Order
for the account of a customer will then be required to advise such customer of
the Applicable Rate for the next Dividend Period and, if such Order was a Bid or
a Sell Order, whether such Bid or Sell Order was accepted or rejected, in whole
or in part, will be required to confirm purchases and sales with each customer
purchasing or selling shares of such series as a result of the Auction and will
be required to advise each customer purchasing or selling Preferred Shares as a
result of the Auction to give instructions to its Agent Member of the Securities
Depository to pay the purchase price against delivery of such shares or to
deliver such shares against payment therefor, as appropriate. The Auction Agent
will be required to record each transfer of shares of a series of Preferred
Shares on the registry of Existing Holders to be maintained by the Auction
Agent.

     In accordance with the Securities Depository's normal procedures, on the
Business Day after the Auction Date, the transactions described above will be
executed through the Securities Depository and the accounts of the respective
Agent Members at the Securities Depository will be debited and credited and
shares delivered as necessary to effect the purchases and sales of shares of a
series of Preferred Shares as determined in the Auction. Purchasers will make
payment through their Agent Members in same-day funds to the Securities
Depository against delivery through their Agent Members; the Securities
Depository will make payment in accordance with its normal procedures, which now
provide for payment against delivery by their Agent Members in same-day funds.

     If any Existing Holder selling shares of a series of Preferred Shares in an
Auction fails to deliver such shares, the Broker-Dealer of any person that was
to have purchased such shares in such Auction may deliver to such person a
number of whole shares of such series that is less than the number of shares of
such series that otherwise was to be purchased by such person. In such event,
the number of shares of such series to be so delivered shall be determined by
such Broker-Dealer. Delivery of such lesser number of shares of such series
shall constitute good delivery.

                         DESCRIPTION OF PREFERRED SHARES

     The descriptions of the Preferred Shares contained in this SAI do not
purport to be complete and are subject to and qualified in their entireties by
reference to the Declaration of Trust and the Certificate. Copies of the

                                      B-24
<PAGE>

Declaration of Trust and the Certificate are filed as exhibits to the
registration statement of which the Prospectus and this SAI are a part and may
be inspected, and copies thereof may be obtained, as described under "Further
Information" in the Prospectus.

GENERAL

     The Preferred Shares will rank on a parity with each other and with shares
of any other series of Preferred Shares as to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Trust.

DIVIDENDS AND DIVIDEND PERIODS

     GENERAL. Holders of Preferred Shares will be entitled to receive, when, as
and if declared by the Board of Trustees, out of funds legally available
therefor, cumulative cash dividends on their shares, at the Applicable Rate
determined as described under "--Determination of Dividend Rate," payable on the
respective dates set forth below. Dividends so declared and payable shall be
paid to the extent permitted under the Code, and to the extent available and in
preference to and priority over any dividend declared and payable on the Common
Shares.

     On the Business Day next preceding each Dividend Payment Date, the Trust is
required to deposit with the Paying Agent sufficient funds for the payment of
declared dividends. The Trust does not intend to establish any reserves for the
payment of dividends.

     Each dividend will be paid by the Paying Agent to the Holder, which Holder
is expected to be the nominee of the Securities Depository. The Securities
Depository will credit the accounts of the Agent Members of the beneficial
owners in accordance with the Securities Depository's normal procedures. The
Securities Depository's current procedures provide for it to distribute
dividends in same-day funds to Agent Members who are in turn expected to
distribute such dividends to the persons for whom they are acting as agents. The
Agent Member of a beneficial owner will be responsible for holding or disbursing
such payments on the applicable Dividend Payment Date to such beneficial owner
in accordance with the instructions of such beneficial owner.

     Holders will not be entitled to any dividends, whether payable in cash,
property or shares, in excess of full cumulative dividends except as described
under "--Determination of Dividend Rate." No interest will be payable in respect
of any dividend payment or payments which may be in arrears. See "--Default
Period."

     The amount of dividends per outstanding share payable (if declared) on each
Dividend Payment Date of each Dividend Period of less than one year (or in
respect of dividends on another date in connection with a redemption during such
Dividend Period) shall be computed by multiplying the Applicable Rate (or the
Default Rate) for such Dividend Period (or a portion thereof) by a fraction, the
numerator of which will be the number of days in such Dividend Period (or
portion thereof) such share was outstanding and for which the Applicable Rate or
the Default Rate was applicable and the denominator of which will be 360,
multiplying the amount so obtained by the liquidation value, and rounding the
amount so obtained to the nearest cent. During any Dividend Period of one year
or more, the amount of dividends per share payable on any Dividend Payment Date
(or in respect of dividends on another date in connection with a redemption
during such Dividend Period) shall be computed as described in the preceding
sentence, except that it will be determined on the basis of a year consisting of
twelve 30-day months.

     DETERMINATION OF DIVIDEND RATE. The dividend rate for the initial Dividend
Period (I.E. the period from and including the Date of Original Issue to and
including the initial Auction Date) and the initial Auction Date for each Series
are set forth on the cover page of the Prospectus. For each subsequent Dividend
Period, subject to certain exceptions, the dividend rate will be the Applicable
Rate that the Auction Agent advises the Trust has resulted from an Auction.

     Dividend Periods after the initial Dividend Period shall either be Standard
Rate Periods (7 days) or, subject to certain conditions and with notice to
Holders, Special Rate Periods.

                                      B-25
<PAGE>

     A Special Rate Period will not be effective unless Sufficient Clearing Bids
exist at the Auction in respect of such Special Rate Period (that is, in
general, the number of shares subject to Bids by Potential Beneficial Owners is
at least equal to the number of shares subject to Sell Orders by Existing
Holders). If Sufficient Clearing Bids do not exist at any Auction in respect of
a Special Rate Period, the Dividend Period commencing on the Business Day
succeeding such Auction will be the Standard Rate Period, and the Holders of the
shares of the affected series will be required to continue to hold such shares
for such Standard Rate Period.

     Dividends will accumulate at the Applicable Rate from the Date of Original
Issue and shall be payable on each Dividend Payment Date thereafter. Dividends
will be paid through the Securities Depository on each Dividend Payment Date.

     The Applicable Rate resulting from an Auction will not be greater than the
Maximum Rate. The Maximum Rate is subject to upward but not downward adjustment
in the discretion of the Board of Trustees after consultation with the
Broker-Dealers, provided that immediately following any such increase the Trust
would be in compliance with the Preferred Shares Basic Maintenance Amount.

     The Maximum Rate for the Preferred Shares will apply automatically
following an Auction for such shares in which Sufficient Clearing Bids have not
been made (other than because all Preferred Shares were subject to Submitted
Hold Orders) or following the failure to hold an Auction for any reason on the
Auction Date scheduled to occur (except for circumstances in which the Dividend
Rate is the Default Rate, as described below). The All Hold Rate will apply
automatically following an Auction in which all of the Outstanding Preferred
Shares for a particular Series are subject (or are deemed to be subject) to Hold
Orders.

     Prior to each Auction, Broker-Dealers will notify Holders of the term of
the next succeeding Dividend Period as soon as practicable after the
Broker-Dealers have been so advised by the Trust. After each Auction, on the
Auction Date, Broker-Dealers will notify Holders of the Applicable Rate for the
next succeeding Dividend Period and of the Auction Date of the next succeeding
Auction.

     NOTIFICATION OF DIVIDEND PERIOD. The Trust will designate the duration of
Dividend Periods of the Preferred Shares; provided, however, that no such
designation is necessary for a Standard Rate Period and that any designation of
a Special Rate Period shall be effective only if (i) notice thereof shall have
been given as provided herein, (ii) any failure to pay in the timely manner to
the Auction Agent the full amount of any dividend on, or the redemption price
of, the Preferred Shares shall have been cured as set forth under "--Default
Period," (iii) Sufficient Clearing Bids shall have existed in an Auction held on
the Auction Date immediately preceding the first day of such proposed Special
Rate Period, (iv) if the Trust shall have mailed a notice of redemption with
respect to any shares, as described under "--Redemption," the Redemption Price
with respect to such shares shall have been deposited with the Paying Agent, and
(v) the Trust has confirmed that, as of the Auction Date next preceding the
first day of such Special Rate Period, it has Eligible Assets with an aggregate
Discounted Value at least equal to the Preferred Shares Basic Maintenance Amount
and has consulted with the Broker-Dealers and has provided notice and a
Preferred Shares Basic Maintenance Certificate to each Rating Agency which is
then rating the Preferred Shares and so requires.

     If the Trust proposes to designate any Special Rate Period, not fewer than
7 Business Days (or two Business Days in the event the duration of the Special
Rate Period is fewer than 8 days) nor more than 30 Business Days prior to the
first day of such Special Rate Period , notice shall be (i) made by press
release and (ii) communicated by the Trust by telephonic or other means to the
Auction Agent and confirmed in writing promptly thereafter. Each such notice
shall state (A) that the Trust proposes to exercise its option to designate a
succeeding Special Rate Period, specifying the first and last days thereof and
(B) that the Trust will, by 3:00 p.m. New York City time, on the second Business
Day next preceding the first day of such Special Rate Period, notify the Auction
Agent, who will promptly notify the Broker-Dealers, of either (x) its
determination, subject to certain conditions, to proceed with such Special Rate
Period, in which case the Trust may specify the terms of any Specific Redemption

                                      B-26
<PAGE>

Provisions, or (y) its determination not to proceed with such Special Rate
Period in which latter event the succeeding Dividend Period shall be a Standard
Rate Period.

     No later than 3:00 p.m., New York City time, on the second Business Day
next preceding the first day of any proposed Special Rate Period, the Trust
shall deliver to the Auction Agent, who will promptly deliver to the
Broker-Dealers and Existing Holders, either:

          (i) a notice stating (A) that the Trust has determined to designate
     the next succeeding Dividend Period as a Special Rate Period, specifying
     the first and last days thereof and (B) the terms of the Specific
     Redemption Provisions, if any; or

          (ii) a notice stating that the Trust has determined not to exercise
     its option to designate a Special Rate Period.

     If the Trust fails to deliver either such notice with respect to any
designation of any proposed Special Rate Period to the Auction Agent or is
unable to make the confirmation described above by 3:00 p.m., New York City
time, on the second Business Day next preceding the first day of such proposed
Special Rate Period, the Trust shall be deemed to have delivered a notice to the
Auction Agent with respect to such Dividend Period to the effect set forth in
clause (ii) above, thereby resulting in a Standard Rate Period.

     DEFAULT PERIOD. A "Default Period" with respect to a particular Series will
commence on any date the Trust fails to deposit irrevocably in trust in same-day
funds, with the Paying Agent by 12:00 noon, New York City time, (A) the full
amount of any declared dividend on that Series payable on the Dividend Payment
Date (a "Dividend Default") or (B) the full amount of any redemption price (the
"Redemption Price") payable on the date fixed for redemption (the "Redemption
Date") (a "Redemption Default") and, together with a Dividend Default and a
Redemption Default, hereinafter referred to as "Default").

     A Default Period with respect to a Dividend Default or a Redemption Default
shall end on the Business Day on which, by 12:00 noon, New York City time, all
unpaid dividends and any unpaid Redemption Price shall have been deposited
irrevocably in trust in same-day funds with the Paying Agent.

     In the case of a Dividend Default, no Auction will be held during a Default
Period applicable to that Series and the Applicable Rate for each Dividend
Period commencing during a Default Period, will be equal to the Default Rate.

     Each subsequent Dividend Period commencing after the beginning of a Default
Period shall be a Standard Rate Period; provided, however, that the commencement
of a Default Period will not by itself cause the commencement of a new Dividend
Period. No Auction shall be held during a Default Period applicable to that
Series.

     No Default Period with respect to a Dividend Default or Redemption Default
shall be deemed to commence if the amount of any dividend or any Redemption
Price due (if such default is not solely due to the willful failure of the
Trust) is deposited irrevocably in trust, in same-day funds with the Paying
Agent by 12:00 noon, New York City time within three Business Days after the
applicable Dividend Payment Date or Redemption Date, together with an amount
equal to the Default Rate applied to the amount of such non-payment based on the
actual number of days comprising such period divided by 360. The Default Rate
shall be equal to the Reference Rate multiplied by three (3).

RESTRICTIONS ON DIVIDENDS, REDEMPTION AND OTHER PAYMENTS

     Under the 1940 Act, the Trust may not (i) declare any dividend with respect
to the Preferred Shares if, at the time of such declaration (and after giving
effect thereto), asset coverage with respect to the Trust's senior securities
representing indebtedness, including all outstanding senior indebtedness of the
Trust, including the Trust's obligations under any credit facility program,

                                      B-27
<PAGE>

would be less than 200% (or such other percentage as may in the future be
specified in or under the 1940 Act as the minimum asset coverage for senior
securities representing stock of a closed-end investment company as a condition
of declaring dividends on its preferred stock) or (ii) declare any other
distribution on the Preferred Shares or purchase or redeem Preferred Shares if
at the time of the declaration (and after giving effect thereto), asset coverage
with respect to the Trust's senior securities representing indebtedness would be
less than 300% (or such higher percentage as may in the future be specified in
or under the 1940 Act as the minimum asset coverage for senior securities
representing stock of a closed-end investment company as a condition of
declaring distributions, purchases or redemptions of its capital stock). A
declaration of a dividend or other distribution on or purchase or redemption of
Preferred Shares is prohibited unless there is no event of default under
indebtedness senior to the Preferred Shares, if any, and immediately after such
transaction, the Trust would have Eligible Assets with an aggregated Discounted
Value at least equal to the asset coverage requirements under indebtedness
senior to the Preferred Shares.

     For so long as the Preferred Shares are Outstanding, except as otherwise
provided in the Certificate, the Trust will not declare, pay or set apart for
payment any dividend or other distribution (other than a dividend or
distribution paid in shares of, or options, warrants or rights to subscribe for
or purchase, Common Shares or other shares, ranking junior to the Preferred
Shares as to dividends or upon liquidation) with respect to Common Shares or any
other shares of the Trust ranking junior to the Preferred Shares as to dividends
or upon liquidation, or call for redemption, redeem, purchase or otherwise
acquire for consideration any Common Shares or other shares ranking junior to
the Preferred Shares (except by conversion into or exchange for shares of the
Trust ranking junior to the Preferred Shares as to dividends and upon
liquidation), unless (i) immediately after such transaction, the Trust would
have Eligible Assets with an aggregate Discounted Value at least equal to the
Preferred Shares Basic Maintenance Amount and the 1940 Act Preferred Shares
Asset Coverage would be achieved, (ii) all cumulative and unpaid dividends due
on or prior to the date of the transaction have been declared and paid in full
with respect to the Trust's preferred shares, including the Preferred Shares,
and (iii) the Trust has redeemed the full number of preferred shares required to
be redeemed by any mandatory provision for redemption including shares of the
Preferred Shares required to be redeemed by any provision for mandatory
redemption contained in the Certificate.

     For so long as the Preferred Shares are Outstanding, except as set forth in
the next sentence, the Trust will not declare, pay or set apart for payment on
any series of shares of the Trust ranking, as to the payment of dividends, on a
parity with the Preferred Shares for any period unless full cumulative dividends
have been or contemporaneously are declared and paid on the Preferred Shares
through their most recent Dividend Payment Date. When dividends are not paid in
full upon the Preferred Shares through their most recent Dividend Payment Date
or upon any other series of shares ranking on a parity as to the payment of
dividends with Preferred Shares through their most recent respective Dividend
Payment Dates, all dividends declared upon Preferred Shares and any other such
series of shares ranking on a parity as to the payment of dividends with
Preferred Shares shall be declared pro rata so that the amount of dividends
declared per share on Preferred Shares and such other series of preferred shares
shall in all cases bear to each other the same ratio that accumulated dividends
per share on the Preferred Shares and such other series of preferred shares bear
to each other.

REDEMPTION

     OPTIONAL REDEMPTION. To the extent permitted under the 1940 Act and
Massachusetts law, the Trust at its option may redeem Preferred Shares having a
Dividend Period of one year or less, in whole or in part, on the Dividend
Payment Date upon not less than 15 days' and not more than 40 days' prior
notice. The optional redemption price per share shall be $25,000 per share, plus
an amount equal to accumulated but unpaid dividends thereon (whether or not
earned or declared) to the date fixed for redemption. Preferred Shares having a
Dividend Period of more than one year are redeemable at the option of the Trust,
in whole or in part, prior to the end of the relevant Dividend Period, subject
to any Specific Redemption Provisions, which may include the payment of
redemption premiums to the extent required under any applicable Specific
Redemption Provisions. The Trust shall not effect any optional redemption unless
after giving effect thereto (i) the Trust has available certain Deposit
Securities with maturity or tender dates not later than the day preceding the
applicable redemption date and having a value not less than the amount
(including any applicable premium) due to Holders of Preferred Shares by reason

                                      B-28
<PAGE>

of the redemption of Preferred Shares on such date fixed for the redemption and
(ii) the Trust would have Eligible Assets with an aggregate Discounted Value at
least equal to the Preferred Shares Basic Maintenance Amount.

     MANDATORY REDEMPTION. If the Trust fails as of any Valuation Date to meet
the Preferred Shares Basic Maintenance Amount Test or, as of the last Business
Day of any month, the 1940 Act Preferred Shares Asset Coverage, and such failure
is not cured within five Business Days following the relevant Valuation Date in
the case of a failure to meet the Preferred Shares Basic Maintenance Amount Test
or the last Business Day of the following month in the case of a failure to meet
the 1940 Act Preferred Shares Asset Coverage (each an "Asset Coverage Cure
Date"), the Preferred Shares will be subject to mandatory redemption out of
funds legally available therefor. The number of Preferred Shares to be redeemed
in such circumstances will be equal to the lesser of (A) the minimum number of
Preferred Shares the redemption of which, if deemed to have occurred immediately
prior to the opening of business on the relevant Asset Coverage Cure Date, would
result in the Trust meeting the Preferred Shares Basic Maintenance Amount Test,
and the 1940 Act Preferred Shares Asset Coverage, as the case may be, in either
case as of the relevant Asset Coverage Cure Date (provided that, if there is no
such minimum number of shares the redemption of which would have such result,
all Preferred Shares then Outstanding will be redeemed), and (B) the maximum
number of Preferred Shares that can be redeemed out of funds expected to be
available therefor on the Mandatory Redemption Date at the Mandatory Redemption
Price.

     Preferred shares may be subject to mandatory redemption in accordance with
the foregoing redemption provisions notwithstanding the terms of any Specific
Redemption Provision.

     The Trust shall effect any required mandatory redemption pursuant to: (A)
the Preferred Shares Basic Maintenance Amount Test, no later than 30 days after
the Trust last met the Preferred Shares Basic Maintenance Amount Test or (B) the
1940 Act Preferred Shares Asset Coverage, no later than 30 days after the Asset
Coverage Cure Date (the "Mandatory Redemption Date"), except that if the Trust
does not have funds legally available for the redemption of, or is not otherwise
legally permitted to redeem, all of the required number of Preferred Shares
which are subject to mandatory redemption, or the Trust otherwise is unable to
effect such redemption on or prior to such Mandatory Redemption Date, the Trust
will redeem those Preferred Shares on the earliest practicable date on which the
Trust will have such funds available, upon notice to record owners of Preferred
Shares and the Paying Agent. The Trust's ability to make a mandatory redemption
may be limited by the provisions of the 1940 Act or Massachusetts law.

     The redemption price per share in the event of any mandatory redemption
will be $25,000 per share, plus an amount equal to accumulated but unpaid
dividends (whether or not earned or declared) to the date fixed for redemption,
plus (in the case of a Dividend Period of more than one year) any redemption
premium, if any, determined by the Board of Trustees after consultation with the
Broker-Dealers and set forth in any applicable Specific Redemption Provisions
(the "Mandatory Redemption Price").

     REDEMPTION PROCEDURE. Pursuant to Rule 23c-2 under the 1940 Act, the Trust
will file a notice of its intention to redeem with the SEC so as to provide at
least the minimum notice required by such Rule or any successor provision
(notice currently must be filed with the SEC generally at least 30 days prior to
the redemption date). The Auction Agent will use its reasonable efforts to
provide telephonic notice to each Holder of Preferred Shares called for
redemption not later than the close of business on the Business Day immediately
following the Business Day on which the Auction Agent determines the shares to
be redeemed (or, during a Default Period with respect to such shares, not later
than the close of business on the Business Day immediately following the day on
which the Auction Agent receives notice of redemption from the Trust). Such
telephonic notice will be confirmed promptly in writing not later than the close
of business on the third Business Day preceding the redemption date by providing
the notice sent by the Paying Agent to each Holder of Preferred Shares called
for redemption, the Paying Agent (if different from the Auction Agent) and the
Securities Depository ("Notice of Redemption"). Notice of Redemption will be
addressed to the registered owners of the Preferred Shares at their addresses
appearing on the share records of the Trust. Such notice will set forth (i) the
redemption date, (ii) the number and identity of Preferred Shares to be
redeemed, (iii) the redemption price (specifying the amount of accumulated
dividends to be included therein), (iv) that dividends on the shares to be
redeemed will cease to accumulate on such redemption date, and (v) the provision
under which redemption shall be made.

                                      B-29
<PAGE>

     If fewer than all of the shares of a series of Preferred Shares are
redeemed on any date, the shares to be redeemed on such date will be selected by
the Trust on a pro rata basis in proportion to the number of shares held by such
Holders, by lot or by such other method as is determined by the Trust to be fair
and equitable, subject to the terms of any Specific Redemption Provisions.
Preferred Shares may be subject to mandatory redemption as described herein
notwithstanding the terms of any Specific Redemption Provisions. The Auction
Agent will give notice to the Securities Depository, whose nominee will be the
Holder of all of the Preferred Shares, and the Securities Depository will
determine the number of shares to be redeemed from the account of the Agent
Member of each beneficial owner. Each Agent Member will determine the number of
shares to be redeemed from the account of each beneficial owner for which it
acts as agent. An Agent Member may select for redemption shares from the
accounts of some beneficial owners without selecting for redemption any shares
from the accounts of other beneficial owners. Notwithstanding the foregoing, if
neither the Securities Depository nor its nominee is Holder of all of the
shares, the particular shares to be redeemed shall be selected by the Trust by
lot, on a pro rata basis between each series or by such other method as the
Trust shall deem fair and equitable, as contemplated above.

     If Notice of Redemption has been given, then upon the deposit of funds
sufficient to effect such redemption, all rights of the owners of the shares so
called for redemption will cease, except the right of the owners of such shares
to receive the redemption price, but without interest, and such shares will no
longer be deemed to be outstanding for any purpose. The Trust shall be entitled
to receive from the Paying Agent, promptly after the date fixed for redemption,
any cash deposited with the Paying Agent in excess of (i) the aggregate
redemption price of the Preferred Shares called for redemption on such date and
(ii) such other amounts, if any, to which Holders of Preferred Shares called for
redemption may be entitled. The Trust will be entitled to receive, from time to
time, from the Paying Agent the interest, if any, earned on such funds deposited
with the Paying Agent and the owners of shares so redeemed will have no claim to
any such interest. Any funds so deposited which are unclaimed two years after
such redemption date will be paid by the Paying Agent to the Trust upon its
request; provided, however, the Paying Agent shall notify all owners of the
shares whose funds are unclaimed by placing a notice in the Wall Street Journal
concerning the availability of such funds for three consecutive weeks. Thereupon
the Paying Agent will be relieved of all responsibility to the owners of such
shares and such owners may look only to the Trust for payment.

     So long as any Preferred Shares are held of record by the nominee of the
Securities Depository, the redemption price for such shares will be paid on the
redemption date to the nominee of the Securities Depository. The Securities
Depository's normal procedures provide for it to distribute the amount of the
redemption price to Agent Members who, in turn, are expected to distribute such
funds to the person for whom they are acting as agent.

     Notwithstanding the provisions for redemption described above, no Preferred
Shares may be redeemed at the option of the Trust unless all dividends in
arrears on the outstanding Preferred Shares, and all capital stock of the Trust
ranking on a parity with the Preferred Shares with respect to the payment of
dividends or upon liquidation, have been or are being contemporaneously paid or
set aside for payment, except in connection with the liquidation of the Trust in
which case all Preferred Shares and all shares ranking in a parity with the
Preferred Shares must receive proportionate amounts.

     Except for the provisions described above, nothing contained in the
Certificate limits any legal right of the Trust to purchase or otherwise acquire
any Preferred Shares outside of an Auction at any price, whether higher or lower
than the price that would be paid in connection with an optional or mandatory
redemption, so long as, at the time of any such purchase, there is no arrearage
in the payment of dividends on or the mandatory or optional redemption price
with respect to, any Preferred Shares for which Notice of Redemption has been
given and the Trust is in compliance with the 1940 Act Preferred Shares Asset
Coverage and has Eligible Assets with an aggregate Discounted Value at least
equal to the Preferred Shares Basic Maintenance Amount after giving effect to
such purchase or acquisition on the date thereof. Any shares which are
purchased, redeemed or otherwise acquired by the Trust shall have no voting
rights. If fewer than all the outstanding Preferred Shares are redeemed or
otherwise acquired by the Trust, the Trust shall give notice of such transaction
to the Auction Agent, in accordance with the procedures agreed upon by the Board
of Trustees.

                                      B-30
<PAGE>

ASSET MAINTENANCE

     The Trust is required to satisfy two separate asset maintenance
requirements in respect of the Preferred Shares: (1) the Trust must maintain
assets in its portfolio that have a value, discounted in accordance with the
Rating Agency Guidelines, at least equal to the aggregate liquidation preference
of the Preferred Shares plus specified liabilities, payment obligations and
other amounts; and (ii) the Trust must maintain asset coverage for Preferred
Shares of at least 200%.

     PREFERRED SHARES BASIC MAINTENANCE AMOUNT. The Trust will be required under
Rating Agency Guidelines to maintain, as of each Business Day on which the
Preferred Shares are outstanding, assets having in the aggregate a Discounted
Value at least equal to the Preferred Shares Basic Maintenance Amount
established by the rating agency or agencies then rating the Preferred Shares.
If the Trust fails to meet such requirement on any Valuation Date and such
failure is not cured by the Asset Coverage Cure Date, the Trust will be required
under certain circumstances to redeem certain of the Preferred Shares.

     The "Preferred Shares Basic Maintenance Amount" as of any Valuation Date is
defined as the dollar amount equal to the sum of:

          (i) (A) the sum of the products resulting from multiplying the number
     of Outstanding shares of each Series of Preferred Shares on such date by
     the Liquidation Preference per share of such Series; (B) the aggregate
     amount of dividends that will have accumulated at the Applicable Rate
     (whether or not earned or declared) to and including the first Dividend
     Payment Date for each Outstanding Preferred Share that follows such
     Valuation Date (or to the 30th day after such Valuation Date, if such 30th
     day occurs before the first following Dividend Payment Date); (C) the
     amount of anticipated Trust non-interest expenses for 90 days subsequent to
     such Valuation Date; (D) the amount of current outstanding balances of any
     indebtedness which is senior to the Preferred Shares plus interest actually
     accrued together with additional interest on the current outstanding
     balances calculated at the current rate multiplied by 1.93 and (E) any
     other current liabilities payable during the 30 days subsequent to such
     Valuation Date, including, without limitation, any indebtedness service to
     the Preferred Shares and indebtedness due within one year and any
     redemption premium due with respect to Preferred Shares for which a Notice
     of Redemption has been given, as of such Valuation Date to the extent
     reflected in any of (i)(A) through (i)(D): less

          (ii) the sum of any cash plus the value of any Trust assets
     irrevocably deposited by the Trust for payment of any (i)(B) through (i)(E)
     (except that if the security matures prior to the relevant redemption
     payment date and is either fully guaranteed by the U.S. Government or is
     rated P2 by Moody's and A2 by S&P, it will be valued at its face value).

     The Advance Rates, the criteria used to determine whether the assets held
in the Trust's portfolio are Eligible Assets, and guidelines for determining the
market value of the Trust's portfolio holdings for purposes of determining
compliance with the Preferred Shares Basic Maintenance Amount are based on the
criteria established in connection with the rating the Preferred Shares. The
Moody's Advance Rate and the S&P Advance Rate relating to any asset of the
Trust, the Preferred Shares Basic Maintenance Amount, the assets eligible for
inclusion in the calculation of the Moody's Advance Rate and S&P Advance Rate of
the Trust's portfolio and certain definitions and methods of calculation
relating thereto may be changed from time to time by the Trust, without
shareholder approval, but only in event that the Trust receives written
confirmation from each Rating Agency which is then rating the Preferred Shares
and which so requires that any such changes would not impair the "aaa" credit
rating from Moody's or the "AAA" credit rating from S&P.

     A Rating Agency's Guidelines will apply to the Preferred Shares only so
long as such Rating Agency is rating such shares. The Trust will pay certain
fees to Moody's and S&P for rating the Preferred Shares. The ratings assigned to

                                      B-31
<PAGE>

Preferred Shares are not recommendations to buy, sell or hold Preferred Shares.
Such ratings may be subject to revision or withdrawal by the assigning Rating
Agency at any time. Any rating of Preferred Shares should be evaluated
independently of any other rating.

     Upon any failure to maintain the required Discounted Value of the Trust's
Eligible Assets, the Trust will seek to alter the composition of its portfolio
to reattain the Preferred Shares Basic Maintenance Amount on or prior to the
Preferred Shares Basic Maintenance Cure Date, thereby incurring additional
transaction costs and possible losses and/or gains on dispositions of portfolio
securities.

     1940 ACT PREFERRED SHARES ASSET COVERAGE. The Trust is also required to
maintain, as of the last Business Day on any month in which the Preferred Shares
are outstanding, asset coverage of at least 200% (or such other percentage as
may in the future be specified in or under the 1940 Act as the minimum asset
coverage for senior securities representing shares of a closed-end company as a
condition of declaring dividends on its common shares). If the Trust fails to
maintain the 1940 Act Preferred Shares Asset Coverage as of the last Business
Day of any month and such failure is not cured as of the related Asset Coverage
Cure Date, the Trust will be required to redeem certain Preferred Shares.

     NOTICES. The Trust must deliver to the Auction Agent and each Rating Agency
a Preferred Shares Basic Maintenance Certificate which sets forth a
determination of (i) the Market Value of each Eligible Asset owned by the Trust
on that date, (ii) the Discounted Value of each such Eligible Asset, (iii)
whether the Preferred Shares Basic Maintenance Amount Test is met as of (A) the
Date of Original Issue, (B) the last Valuation Date of each month, (C) by any
Rating Agency, (D) a Business Day on or before any Asset Coverage Cure Date
relating to the Trust's cure of a failure to meet the Preferred Shares Basic
Maintenance Amount Test, and (E) on any day that Common or Preferred Shares are
redeemed. Such Preferred Shares Basic Maintenance Certificate shall be delivered
in the case of clause (A) above on the Date of Original Issue and in the case of
all other clauses above on or before the seventh Business Day after the relevant
Valuation Date or Asset Coverage Cure Date.

     The Trust is required to deliver to the Auction Agent, and each Rating
Agency a certificate which sets forth a determination of (i) the value (as used
in the 1940 Act) of the total assets of the Trust, less all liabilities and (ii)
whether the 1940 Act Preferred Shares Asset Coverage is met as of that date (a
"1940 Act Preferred Shares Asset Coverage Certificate") as of (A) the Date of
Original Issue, (B) the last Valuation Date of each quarter thereafter and (C) a
Business Day on or before any Asset Coverage Cure Date relating to the failure
to meet the 1940 Act Preferred Shares Asset Coverage. Such 1940 Act Preferred
Shares Asset Coverage Certificate shall be delivered in the case of clause (A)
above on the Date of Original Issue and in the case of clauses (B) and (C) above
on or before the seventh Business Day after the relevant Valuation Date or the
Asset Coverage Cure Date.

     Within ten Business Days of the Date of Original Issue, the Trust shall
deliver to the Auction Agent and each Rating Agency an Auditor's Certificate
regarding the accuracy of the calculations made by the Trust in the Preferred
Shares Basic Maintenance Certificate and the 1940 Act Preferred Shares Asset
Coverage Certificate required to be delivered by the Trust on the Date of
Original Issue. Within ten Business Days after delivery of the Preferred Shares
Basic Maintenance Certificate and the 1940 Act Preferred Shares Asset Coverage
Certificate relating to the last Valuation Date of each fiscal quarter of the
Trust, the Trust will deliver to the Auction Agent and each Rating Agency an
Auditor's Certificate regarding the accuracy of the calculations made by the
Trust in such Certificates and in one other Preferred Shares Basic Maintenance
Certificate randomly selected by the Trust's independent auditors during such
fiscal quarter. In addition, the Trust will deliver to the persons specified in
the preceding sentence an Auditor's Certificate regarding the accuracy of the
calculations made by the Trust on each Preferred Shares Basic Maintenance
Certificate and 1940 Act Preferred Shares Asset Coverage Certificate delivered
in relation to an Asset Coverage Cure Date within ten days after the relevant
Asset Coverage Cure Date. If an Auditor's Certificate shows that an error was
made in any such report, the calculation or determination made by the Trust's
independent auditors will be conclusive and binding on the Trust. The Auditor's
Certificate will confirm, based upon the independent auditors review of
portfolio data provided by the Trust, (i) the mathematical accuracy of the

                                      B-32
<PAGE>

calculations reflected in the related Preferred Shares Basic Maintenance Amount
Certificates, the 1940 Act Preferred Shares Asset Coverage Certificates, (ii)
that, based upon such calculations, the Trust had, at such Valuation Date, met
the Preferred Shares Basic Maintenance Amount Test, and (iii) that the Trust met
the Moody's General Portfolio Requirements and the S&P Diversity I or S&P
Diversity II requirements, as applicable.

VOTING

     All voting rights (as described in the Prospectus under "Description of
Capital Structure" and "Description of Preferred Shares - -Voting Rights") will
not apply with respect to Preferred Shares if, at or prior to the time when a
vote is required, such shares have been (i) redeemed or (ii) called for
redemption and sufficient funds have been deposited in trust to effect such
redemption.

     The Board of Trustees may without shareholder approval, amend, alter or
repeal any or all of the definitions and related provisions required to be
contained in the Certificate or Declaration of Trust by the Rating Agencies in
the event the Trust receives written confirmation from Moody's or S&P, or both,
as appropriate, that any such amendment, alteration or repeal would not impair
the ratings then assigned by Moody's or S&P, as the case may be, to the
Preferred Shares.

RESTRICTIONS ON TRANSFER

     Preferred Shares may be transferred only (a) pursuant to an Order placed in
an Auction, (b) to or through a Broker-Dealer, or (c) to the Trust or any
Affiliate. Notwithstanding the foregoing, a transfer other than pursuant to an
Auction will not be effective unless the selling Existing Holder or the Agent
Member of such Existing Holder, in the case of an Existing Holder whose shares
are listed in its own name on the books of the Auction Agent, or the
Broker-Dealer or Agent Member of such Broker-Dealer, in the case of a transfer
between persons holding Preferred Shares through different Broker-Dealers,
advises the Auction Agent of such transfer.

                           MOODY'S AND S&P GUIDELINES

     The descriptions of the Moody's and S&P Guidelines contained in this SAI do
not purport to be complete and are subject to and qualified in their entireties
by reference to the Certificate. A copy of the Certificate is filed as an
exhibit to the registration statement of which the Prospectus and this SAI are a
part and may be inspected, and copies thereof may be obtained, as described
under "Further Information" in the Prospectus.

GENERAL

     The composition of the Trust's portfolio reflects Rating Agency Guidelines
established by Moody's and S&P in connection with the Trust's receipt of a
rating of "aaa" and "AAA" from Moody's and S&P, respectively, for the Preferred
Shares. These Rating Agency Guidelines relate, among other things, to industry
and credit quality characteristics of issuers and specify various Advance Rates
for debt securities.

     The Rating Agency Guidelines require that the Trust maintain assets having
an aggregate Discounted Value greater than the aggregate liquidation preference
of the Preferred Shares plus specified liabilities, payment obligations and
other amounts, as of periodic Valuation Dates. The Rating Agency Guidelines also
require the Trust to maintain asset coverage for the Preferred Shares on a
non-discounted basis of at least 200% as of the end of each month, and the 1940
Act requires such asset coverage as a condition to paying dividends or other
distributions on Common Stock. See "Description of Preferred Shares -- Asset
Maintenance." The Rating Agency Guidelines also impose certain diversification
requirements on the Trust's overall portfolio.

     The Trust intends to maintain, at specified times, a Discounted Value for
its portfolio at least equal to the Preferred Shares Basic Maintenance Amount,
the determination of which is as set forth under "Description of Preferred
Shares -- Asset Maintenance." Moody's and S&P have each established separate
guidelines for determining Discounted Value. To the extent any particular
portfolio holding does not satisfy the applicable Rating Agency's Guidelines,
all or a portion of such holding's value will not be included in the calculation
of Discounted Value (as defined by such Rating Agency.).

                                      B-33
<PAGE>

     For purposes of calculating the Discounted Value of the Trust's portfolio
under current Rating Agency Guidelines, the fair market value of portfolio
securities eligible for consideration under such guidelines ("Moody's Eligible
Assets" or "S&P Eligible Assets") must be discounted by certain advance rates
set forth below ("Moody's Advance Rates" or "S&P Advance Rates"). The Discounted
Value of a portfolio security under the Rating Agency Guidelines is the Market
Value thereof, determined as specified by Moody's or S&P, multiplied by the
Moody's Advance Rate or the S&P Advance Rate.

     As described by Moody's, an issue of preferred stock which is rated "aaa"
is considered to be top-quality preferred stock with good asset protection and
the least risk of dividend impairment within the universe of preferred stocks.
As described by S&P, a preferred stock rating of "AAA" indicates strong asset
protection, conservative balance sheet ratios and positive indications of
continued protection of preferred dividend requirements. An Moody's or S&P
credit rating of preferred stock does not address the likelihood that a resale
mechanism (E.G., the Auction) will be successful.

     Ratings are not recommendations to purchase, hold or sell Preferred Shares,
inasmuch as the rating does not comment as to market price or suitability for a
particular investor. The rating is based on current information furnished to
Moody's and S&P by the Trust and obtained by Moody's and S&P from other sources.
The rating may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information.

MOODY'S GUIDELINES

     The Trust's portfolio must meet the following diversification requirements
("Moody's General Portfolio Requirements"):

     (a) no more than 25% by par value of the Trust's total assets can be
invested in the securities of borrowers and other issuers having their principal
business activities in the same Moody's Industry Classification; provided, that
this limitation shall not apply with respect to U.S. Government Securities and
provided further that for purposes of this subsection (a), the term "issuer"
shall not include a lender selling a participation to the Trust or any other
person interpositioned between such lender and the Trust with respect to a
participation and

     (b) no more than 10% by par value of the Trust's total assets can be
invested in securities of a single issuer, and provided further that for
purposes of this subsection (b), the term "issuer" includes both the borrower
under a loan agreement and the lender selling a participation to the Trust
together with any other persons interpositioned between such lender and the
Trust with respect to such participation.

     So long as the Trust's portfolio complies with the Moody's General
Portfolio Requirements, the Moody's Advance Rate is the percentage determined
below:

     (i) Loans: for each Moody's Asset Category, the percentage specified in the
table below opposite such Moody's Asset Category.

               Moody's Asset Category              Advance Rate
               ----------------------              ------------
                         A                            84.5%
                         B                              73%
                         C                              62%
                         D                              45%
                         E                              45%

     (ii) Short Term Money Market Instruments: (A) 97%, so long as such
investments mature or have a demand feature at par exercisable within 30 days,
(B) 90%, so long as such investments mature or have a demand feature at par not

                                      B-34
<PAGE>

exercisable within 30 days, and (C) 83%, if such securities are not rated by
Moody's, so long as such investments are rated at least A-2/AA or SP-2/AA by S&P
and mature or have a demand feature at par exercisable within 30 days.

     Moody's Asset Category means the following five categories (and, for
purposes of this categorization, the Market Value Price of a Moody's Eligible
Asset trading at par is equal to $ 1.00).

     (a) Moody's Asset Category A means Performing Senior Loans which have a
Market Value Price or an Approved Price greater than or equal to $.90.

     (b) Moody's Asset Category B means:

          (i) Performing Senior Loans which have a Market Value Price or an
     Approved Price of greater than or equal to $.80 but less than $.90; and

          (ii) non-Performing Senior Loans which have a Market Value Price or an
     Approved Price greater than or equal to $.85.

     (c) Moody's Asset Category C means:

          (i) Performing Senior Loans which have a Market Value Price or an
     Approved Price greater than or equal to $.70 but less than $.80; and

          (ii) non-Performing Senior Loans which have a Market Value Price or an
     Approved Price greater than or equal to $.75 but less than $.85.

     (d) Moody's Asset Category D means Senior Loans which have a Market Value
Price or an Approved price less than $.75.

     (e) Moody's Asset Category E means Non-Senior Loans which have a Market
Value Price or an Approved Price.

     Notwithstanding any other provision contained above, for purposes of
determining whether a Moody's Eligible Asset falls within a specific Moody's
Asset Category, to the extent that any Moody's Eligible Asset would fall in more
than one of the Moody's Asset Categories, such Moody's Eligible Asset shall be
deemed to fall into the Moody's Asset Category with the highest applicable
Moody's Advance Rate.

     Moody's Eligible Assets include the following:

     (i) Senior Loans; provided, however, that (a) Senior Loans with an Approved
Price will qualify as Moody's Eligible Assets only up to a maximum of 10% of the
Trust's total assets; and (b) Senior Loans under Moody's Asset Category D will
qualify as Moody's Eligible Assets only up to a maximum of 20% of the Trust's
total assets.

     (ii) Non-Senior Loans; provided, however, that Non-Senior Loans will
qualify as Moody's Eligible Assets only up to a maximum of 10% of the Trust's
total assets.

     (iii) Short-Term Money Market Instruments so long as (a) such securities
are rated at least P-2, (b) in the case of demand deposits, time deposits,
banker's acceptances and certificate of deposit and overnight funds, the
supporting entity is rated at least A2, (c) such securities are U.S. Government
Securities, or (d) in all other cases, the supporting entity (1) is rated A2 and
the security matures within one month, (2) is rated A2 and the security matures
within three months or (3) is rated at least Aa3 and the security matures within
six months.

                                      B-35
<PAGE>

     (iv) Cash.

S&P GUIDELINES

     The Trust's portfolio must meet one of the following requirements ("S&P
Diversity I" or "S&P Diversity II"):

     S&P Diversity I means that the Trust's portfolio meets the following
requirements:

     (1) the Trust's total assets must be invested in the securities of
borrowers and other issuers having their principal business activities in at
least four S&P Industry Classifications (the electric, gas, water and telephone
utility industries, commercial banks, thrift institutions and finance companies
being treated as separate industries for purposes of this restriction);
provided, that this limitation shall not apply with respect to U.S. Government
Securities and provided further that for purposes of this subsection (1), the
term "issuer" shall not include a lender selling a participation to the Trust or
any other person interpositioned between such lender and the Trust with respect
to a participation; and (2) the Trust's total assets must be invested in
securities of at least 20 different issuers, provided that for purposes of this
subsection (2), the term "issuer" includes both the borrower under a loan
agreement and the lender selling a participation to the Trust together with any
other persons interpositioned between such lender and the Trust with respect to
a participation.

     S&P Diversity II means that the Trust's portfolio meets the following
requirements:

     (1) the Trust's total assets must be invested in the securities of
borrowers and other issuers having their principal business activities in at
least 10 S&P Industry Classifications (the electric, gas, water and telephone
utility industries, commercial banks, thrift institutions and finance companies
being treated as separate industries for purposes of this restriction);
provided, that this limitation shall not apply with respect to U.S. Government
Securities and provided further that for purposes of this subsection (1), the
term "issuer" shall not include a lender selling a participation to the Trust or
any other person interpositioned between such lender and the Trust with respect
to a participation; and (2) the Trust's total assets must be invested in
securities of at least 30 different issuers, provided that for purposes of this
subsection (2), the term "issuer" includes both the borrower under a loan
agreement and the lender selling a participation to the Trust together with any
other persons interpositioned between such lender and the Trust with respect to
a participation.

     S&P Advance Rate means the rate set forth below for each type of S&P
Eligible Asset:

     (i) Loans: depending upon whether the Trust's portfolio meets the
requirements of either S&P Diversity I or S&P Diversity II, for each S&P Asset
Category, the applicable percentage specified in the table below opposite such
S&P Asset Category.

                                  S&P Diversity I          S&P Diversity II
     S&P Asset Category            Advance Rate              Advance Rate
     ------------------            ------------              ------------
             A                         80%                       86%
             B                         74%                       82%
             C                         57%                       68%
             D                         47%                       60%
             E                         47%                       49%

     (ii) Short Term Money Market Instruments: (A) 97%, so long as such
investments mature or have a demand feature at par exercisable within 30 days,
and (B) 90%, so long as such investments mature or have a demand feature at par
not exercisable within the 30 days but exercisable within one year.

     (iii) Cash; 100%.

                                      B-36
<PAGE>

     S&P Asset Category means the following five categories (and, for purposes
of this categorization, the Market Value Price of an S&P Eligible Asset trading
at par is equal to $ 1.00).

     (a) S&P Asset Category A means Performing Senior Loans which have a Market
Value Price or an Approved Price greater than $.90.

     (b) S&P Asset Category B means Performing Senior Loans which have a Market
Value Price or an Approved Price greater than or equal to $.85 but equal to or
less than $.90.

     (c) S&P Asset Category C means non-Performing Senior Loans which have a
Market Value Price or an Approved Price greater than $.85.

     (d) S&P Asset Category D means:

          (i) Performing Senior Loans which have a Market Value Price or an
     Approved Price less than $.85; and

          (ii) Non-Performing Senior Loans which have a Market Value Price or an
     Approved Price less than or equal to $.85.

     (e) S&P Asset Category E means:

          (i) Senior Loans whose total syndication is less than $150 million (to
     the extent such loans exceed 15% of the Trust's total assets),

          (ii) Senior Loans which are rated below B- by S&P or are unrated(to
     the extent such loans exceed 15% of the Trust's total assets) and

          (iii) Non-Senior Loans.

     Notwithstanding any other provision contained above, for purposes of
determining whether an S&P Eligible Asset falls within a specific S&P Asset
Category, to the extent that any S&P Eligible Asset would fall in more than one
of the five S&P Asset Categories, such S&P Eligible Asset shall be deemed to
fall into the S&P Asset Category with the highest applicable S&P Advance Rate.

     S&P Eligible Assets include the following:

     (i) Senior Loans; provided, however, that (a) Senior Loan Participations
and Non-Senior Loans will qualify as S&P Eligible Assets only up to an aggregate
maximum of 15% of the Trust's total assets, (b) Senior Loans whose total
syndication is less than $150 million will qualify as S&P Eligible Assets only
up to a maximum of 35% of the Trust's total assets, (c) Senior Loans and
Non-Senior Loans rated below B- by S&P or unrated will qualify as S&P Eligible
Assets only up to an aggregate maximum of 50% of the Trust's total assets, (d)
Senior Loans and Non-Senior Loans with an Approved Price will qualify as S&P
Eligible Assets only up to an aggregate maximum of 5% of the Trust's total
assets, (e) a Senior Loan or a Non-Senior Loan to a single issuer, plus any
other investment in the securities of such issuer, will qualify as an S&P
Eligible Asset only up to an aggregate maximum of 5% (for the S&P Diversity I
Advance Rate) or 3.33% (for the S&P Diversity II Advance Rate) of the Trust's
total assets, provided that, for purposes of this subsection (e), the term
"issuer" includes both the borrower under a loan agreement and the lender
selling a participation to the Trust together with any other persons
interpositioned between such lender and the Trust with respect to a
participation, (f) Senior Loans and Non-Senior Loans to borrowers and other
issuers having their principal business activities in the same S&P Industry
Classification will qualify as S&P Eligible Assets only up to an aggregate
maximum of 25% (for the S&P Diversity I Advance Rate) or 10% (for the S&P
Diversity II Advance Rate) of the Trust's total assets, provided that this
limitation shall not apply with respect to U.S. Government Securities and

                                      B-37
<PAGE>

provided further that, for purposes of this subsection (f), the term "issuer"
shall not include a lender selling a participation to the Trust or any other
person interpositioned between such lender and the Trust with respect to a
participation.

     (ii) Non-Senior Loans; provided, however, that (a) unsecured Non-Senior
Loans will qualify as S&P Eligible Assets only up to a maximum of 3% of the
Trust's total assets, (b) Senior Loan Participations and Non-Senior Loans will
qualify as S&P Eligible Assets only up to an aggregate maximum of 15% of the
Trust's total assets, (c) Senior Loans and Non-Senior Loans rated below B- by
S&P or unrated will qualify as S&P Eligible Assets only up to an aggregate
maximum of 50% of the Trust's total assets, (d) Senior Loans and Non-Senior
Loans with an Approved Price will qualify as S&P Eligible Assets only up to an
aggregate maximum of 5% of the Trust's total assets, (e) a Senior Loan or a
Non-Senior Loan to a single issuer, plus any other investment in the securities
of such issuer, will qualify as an S&P Eligible Asset only up to an aggregate
maximum of 5% (for the S&P Diversity I Advance Rate) or 3.33% (for the S&P
Diversity I Advance Rate) of the Trust's total assets, provided that, for
purposes of this subsection (e), the term "issuer" includes both the borrower
under a loan agreement and the lender selling a participation to the Trust
together with any other persons interpositioned between such lender and the
Trust with respect to a participation, (f) Senior Loans and Non-Senior Loans to
borrowers and other issuers having their principal business activities in the
same S&P Industry Classification will qualify as S&P Eligible Assets only up to
an aggregate maximum of 25% (for the S&P Diversity I Advance Rate) or 10% (for
the S&P Diversity I Advance Rate) of the Trust's total assets, provided that
this limitation shall not apply with respect to U.S. Government Securities and
provided further that, for purposes of this subsection (f), the term "issuer"
shall not include a lender selling a participation to the Trust or any other
person interpositioned between such lender and the Trust with respect to a
participation.

     (iii) Short-Term Money Market Instruments provided that (a) such securities
are rated at least A-1 and mature within 30 days or are rated at least A-1+ and
mature within one year, and provided further that such securities rated A-1 will
qualify as S&P Eligible Assets only up to a maximum of 20% of the Trust's total
assets (b) in the case of demand deposits, time deposits, banker's acceptances,
certificates of deposit and overnight funds, the supporting entity is rated at
least A+, (c) such securities are U.S. Government Securities or (d) in all other
cases, the supporting entity is rated at least A+.

     (iv) Cash.

CERTAIN OTHER RATING AGENCY RESTRICTIONS

     For so long as any of the Preferred Shares are Outstanding and

     (a) any Rating Agency so requires, the Trust will not, unless it has
received written confirmation from such Rating Agency that any such action would
not impair the rating then assigned by such Rating Agency to the Preferred
Shares, engage in any one or more of the following transactions:

          (i) purchase or sell futures contracts or options thereon with respect
     to portfolio securities or write put or call options on portfolio
     securities;

          (ii) except in connection with a refinancing of the Preferred Shares,
     issue additional shares of any series of preferred shares, including any
     Series or reissue any preferred shares, including any Series previously
     purchased or redeemed by the Trust;

          (iii) engage in any short sales of securities;

          (iv) lend portfolio securities;

          (v) merge or consolidate into or with any other corporation;

                                      B-38
<PAGE>

          (vi) engage in any reverse repurchase agreement; or

          (vii) change the Pricing Service to a service other than an Approved
     Pricing Service.

     (b) are rated by S&P

          (i) the rating on each S&P Eligible Asset must be updated no less
     frequently than monthly;

          (ii) the prices for S&P Eligible Assets which have a Market Value
     Price shall be updated as of each Valuation Date;

          (iii) the prices for S&P Eligible Assets which have an Approved Price
     shall be updated no less frequently than monthly;

          (iv) no less frequently than semi-annually, the Trust's independent
     auditors shall verify the pricing of at least 25% of the S&P Eligible
     Assets and provide to S&P a letter describing the results of such
     verification. For the purposes of this item (iv), "verify" shall mean that
     the independent auditors agreed the prices reported by the Trust to the
     prices received by the Trust from an Approved Pricing Service; and

          (v) the Trust shall notify S&P if, on any Valuation Date, the
     aggregate Discounted Value of the S&P Eligible Assets is less than 125% of
     the Preferred Shares Basic Maintenance Amount.

                                FEDERAL TAXATION


     The following is only a summary of certain U.S. federal income tax
considerations generally affecting the Trust and its shareholders. No attempt is
made to present a detailed explanation of the tax treatment of the Trust or its
shareholders, and the following discussion is not intended as a substitute for
careful tax planning. Shareholders should consult with their own tax advisers
regarding the specific federal, state, local, foreign and other tax consequences
of investing in the Trust.

QUALIFICATION AS A REGULATED INVESTMENT COMPANY


     The Trust has elected each year to be taxed as a regulated investment
company under Subchapter M of the Code. As a regulated investment company, the
Trust generally is not subject to federal income tax on the portion of its
investment company taxable income (I.E., taxable interest, dividends and other
taxable ordinary income, net of expenses, and net short-term capital gains in
excess of long-term capital losses) and net capital gain (I.E., the excess of
net long-term capital gains over the sum of net short-term capital losses and
capital loss carryovers from prior years) that it distributes to shareholders,
provided that it distributes at least 90% of its investment company taxable
income for the taxable year (the "Distribution Requirement"), and satisfies
certain other requirements of the Code that are described below.


     In addition to satisfying the Distribution Requirement and an asset
diversification requirement discussed below, a regulated investment company must
derive at least 90% of its gross income for each taxable year from dividends,
interest, certain payments with respect to securities loans, gains from the sale
or other disposition of stock or securities or foreign currencies and other
income (including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies.

     In general, gain or loss recognized by the Trust on the disposition of an
asset will be a capital gain or loss. However, gain recognized on the
disposition of a debt obligation purchased by the Trust at a market discount
(generally at a price less than its principal amount) other than at the original
issue will be treated as ordinary income to the extent of the portion of the
market discount which accrued during the period of time the Trust held the debt
obligation.


     In general, investments by the Trust in zero coupon or other original issue
discount securities will result in income to the Trust equal to a portion of the
excess of the face value of the securities over their issue price (the "original

                                      B-39
<PAGE>

issue discount") each year that the Trust holds the securities, even though the
Trust receives no cash interest payments. This income is included in determining
the amount of income which the Trust must distribute to maintain its status as a
regulated investment company and to avoid federal income and excise taxes.

     In addition to satisfying the requirements described above, the Trust must
satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of the Trust's
taxable year, at least 50% of the value of the Trust's assets must consist of
cash and cash items (including receivables), U.S. government securities,
securities of other regulated investment companies, and securities of other
issuers (as to which the Trust has not invested more than 5% of the value of the
Trust's total assets in securities of any such issuer and as to which the Trust
does not hold more than 10% of the outstanding voting securities of any such
issuer), and no more than 25% of the value of its total assets may be invested
in the securities of any one issuer (other than U.S. government securities and
securities of other regulated investment companies), or in two or more issuers
which the Trust controls and which are engaged in the same or similar trades or
businesses.

     If for any taxable year the Trust does not qualify as a regulated
investment company, all of its taxable income (including its net capital gain)
will be subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable as
ordinary dividends to the extent of the Trust's current and accumulated earnings
and profits. Such distributions generally will be eligible for the
dividends-received deduction in the case of corporate shareholders.


EXCISE TAX ON REGULATED INVESTMENT COMPANIES

     A 4% non-deductible excise tax is imposed on a regulated investment company
that fails to distribute in each calendar year an amount equal to the sum of (1)
98% of its ordinary taxable income for the calendar year, (2) 98% of its capital
gain net income (I.E., capital gains in excess of capital losses) for the
one-year period ended on October 31 of such calendar year, and (3) any ordinary
taxable income and capital gain net income for previous years that was not
distributed or taxed to the regulated investment company during those years. A
distribution will be treated as paid on December 31 of the current calendar year
if it is declared by the Trust in October, November or December with a record
date in such a month and paid by the Trust during January of the following
calendar year. Such distributions will be taxed to shareholders in the calendar
year in which the distributions are declared, rather than the calendar year in
which the distributions are received.

     The Trust intends to make sufficient distributions or deemed distributions
(discussed below) of its ordinary taxable income and capital gain net income to
avoid liability for the excise tax.

HEDGING TRANSACTIONS

     The Trust has the ability, pursuant to its investment objectives and
policies, to hedge its investments in a variety of transactions, including
interest rate swaps and the purchase or sale of interest rate caps and floors.
The treatment of these transactions for federal income tax purposes may in some
instances be unclear, and the regulated investment company qualification
requirements may limit the extent to which the Trust can engage in hedging
transactions.


     Under certain circumstances, the Trust may recognize gain from a
constructive sale of an appreciated financial position. If the Trust enters into
certain transactions in property while holding substantially identical property,
the Trust would be treated as if it had sold and immediately repurchased the
property and would be taxed on any gain (but not loss) from the constructive
sale. The character of a gain from a constructive sale would depend upon the
Trust's holding period in the property. Loss from a constructive sale would be
recognized when the property was subsequently disposed of, and its character
would depend on the Trust's holding period and the application of various loss
deferral provisions in the Code. Constructive sale treatment does not apply to
transactions closed before the end of the 30th day after the close of the
taxable year, if certain conditions are met.

                                      B-40
<PAGE>
DISTRIBUTIONS


     The Trust anticipates distributing substantially all of its investment
company taxable income for the taxable year. Such distributions will be taxable
to shareholders as ordinary income. If a portion of the Trust's income consists
of dividends paid by U.S. corporations, a portion of the dividends paid by the
Trust may be eligible for the corporate dividends received deduction.


     The Trust may either retain or distribute to shareholders its net capital
gain for each taxable year. The Trust currently intends to distribute any such
amounts. If net capital gain is distributed and designated as a capital gain
dividend, it will generally be taxable to shareholders at a maximum federal tax
rate of 20%. Distributions are subject to these capital gains rates regardless
of the length of time the shareholder has held his shares. Conversely, if the
Trust elects to retain its net capital gain, the Trust will be taxed thereon
(except to the extent of any available capital loss carryovers) at the
applicable corporate tax rate. In such event, it is expected that the Trust also
will elect to treat such gain as having been distributed to shareholders. As a
result, each shareholder will be required to report his pro rata share of such
gain on his tax return as long-term capital gain, will be entitled to claim a
tax credit for his pro rata share of tax paid by the Trust on the gain, and will
increase the tax basis for his shares by an amount equal to the deemed
distribution less the tax credit.


     Distributions by the Trust in excess of the Trust's earnings and profits
will be treated as a return of capital to the extent of (and in reduction of)
the shareholder's tax basis in his shares; any such return of capital
distributions in excess of the shareholder's tax basis will be treated as gain
from the sale of his shares, as discussed below.


     Distributions by the Trust will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the Trust. If the NAV at the time a shareholder purchases
shares of the Trust reflects undistributed income or gain, distributions of such
amounts will be taxable to the shareholder in the manner described above, even
though such distributions economically constitute a return of capital to the
shareholder.


     The Trust will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of all dividends and redemption proceeds payable to any
shareholder (1) who fails to provide the Trust with a certified, correct
identification number or other required certifications, or (2) if the Internal
Revenue Service notifies the Trust that the shareholder is subject to backup
withholding. Corporate shareholders and other shareholders specified in the Code
are exempt from such backup withholding. Backup withholding is not an additional
tax. Any amounts withheld may be credited against the shareholder's U.S. federal
income tax liability if the appropriate information is provided to the IRS.

SALE OF SHARES

     A shareholder will recognize gain or loss on the sale or exchange of shares
of the Trust in an amount generally equal to the difference between the proceeds
of the sale and the shareholder's adjusted tax basis in the shares. In general,
any such gain or loss will be considered capital gain or loss if the shares are
held as capital assets, and gain or loss will be long-term or short-term,
depending upon the shareholder's holding period for the shares. Generally, a
shareholder's gain or loss will be a long-term gain or loss if the shares have
been held for more than one year. However, any capital loss arising from the
sale of shares held for six months or less will be treated as a long-term
capital loss to the extent of any capital gain dividends received by the
shareholder (or credited to the shareholder as an undistributed capital gain)
with respect to such shares. Also, any loss realized on a sale or exchange of
shares will be disallowed to the extent the shares disposed of are replaced
(including shares acquired through the Shareholder Investment Program) within a
period of 61 days beginning 30 days before and ending 30 days after the shares
are disposed of. In such case, the tax basis of the acquired shares will be
adjusted to reflect the disallowed loss.

                                      B-41
<PAGE>
FOREIGN SHAREHOLDERS


     U.S. taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder") depends, in part, on whether the
shareholder's income from the Trust is "effectively connected" with a U.S. trade
or business carried on by such shareholder.


     If the income from the Trust is not effectively connected with a U.S. trade
or business carried on by a foreign shareholder, distributions of investment
company taxable income will be subject to U.S. withholding tax at the rate of
30% (or lower treaty rate). Such a foreign shareholder would generally be exempt
from U.S. federal income tax on gains realized on the sale or exchange of shares
of the Trust, capital gain dividends, and amounts retained by the Trust that are
designated as undistributed capital gains.

     If the income from the Trust is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then distributions of investment
company taxable income, capital gain dividends, amounts retained by the Trust
that are designated as undistributed capital gains and any gains realized upon
the sale or exchange of shares of the Trust will be subject to U.S. federal
income tax at the rates applicable to U.S. citizens or domestic corporations.
Such shareholders that are classified as corporations for U.S. tax purposes also
may be subject to a branch profits tax.


     In the case of foreign noncorporate shareholders, the Trust may be required
to withhold U.S. federal income tax at a rate of 31% on distributions that are
otherwise exempt from withholding tax (or taxable at a reduced treaty rate)
unless such shareholders furnish the Trust with proper notification of their
foreign status. See "Distributions."


     The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the
Trust, including the applicability of foreign taxes.

EFFECT OF FUTURE LEGISLATION; OTHER TAX CONSIDERATIONS

     The foregoing general discussion of U.S. federal income tax consequences is
based on the Code and the Treasury Regulations issued thereunder as in effect on
the date of this SAI. Future legislative or administrative changes or court
decisions may significantly change the conclusions expressed herein, and any
such changes or decisions may have a retroactive effect with respect to the
transactions contemplated herein.


     Income received by the Trust from foreign sources may be subject to
withholding and other taxes imposed by such foreign jurisdictions, absent treaty
relief. Distributions to shareholders also may be subject to state, local and
foreign taxes, depending upon each shareholder's particular situation.
Shareholders are urged to consult their tax advisers as to the particular
consequences to them of an investment in the Trust.


                        ADVERTISING AND PERFORMANCE DATA

ADVERTISING


     From time to time, advertisements and other sales materials for the Trust
may include information concerning the historical performance of the Trust. Any
such information may include trading volume of the Trust's shares, the number of
Senior Loan investments, annual total return, aggregate total return,
distribution rate, average compounded distribution rates and yields of the Trust
for specified periods of time, and diversification statistics. Such information
may also include rankings, ratings and other information from independent
organizations such as Lipper Analytical Services, Inc. ("Lipper"), Morningstar,
Value Line, Inc., CDA Technology, Inc. or other industry publications. These
rankings will typically compare the Trust to all closed-end funds, to other
Senior Loan funds, and/or also to taxable closed-end fixed income funds. Any
such use of rankings and ratings in advertisements and sales literature will

                                      B-42
<PAGE>

conform with the guidelines of the NASD approved by the Commission on July 13,
1994. Ranking comparisons and ratings should not be considered representative of
the Trust's relative performance for any future period.

     Reports and promotional literature may also contain the following
information: (i) number of shareholders; (ii) average account size; (iii)
identification of street and registered account holdings; (iv) lists or
statistics of certain of the Trust's holdings including, but not limited to,
portfolio composition, sector weightings, portfolio turnover rates, number of
holdings, average market capitalization and modern portfolio theory statistics
alone or in comparison with itself (over time) and with its peers and industry
group; (v) public information about the assets class; and (vi) discussions
concerning coverage of the Trust by analysts.

     In addition, reports and promotional literature may contain information
concerning the Adviser, ING Pilgrim Capital, the Portfolio Managers, ING Pilgrim
Group or affiliates of the Trust including (i) performance rankings of other
funds managed by the Adviser, or the individuals employed by the Adviser who
exercise responsibility for the day-to-day management of the Trust, including
rankings and ratings of investment companies published by Lipper, Morningstar,
Inc., Value Line, Inc., CDA Technologies, Inc., or other rating services,
companies, publications or other persons who rank or rate investment companies
or other investment products on overall performance or other criteria; (ii)
lists of clients, the number of clients, or assets under management; (iii)
information regarding the acquisition of the Pilgrim Funds by ING Pilgrim
Capital; (iv) the past performance of ING Pilgrim Capital and ING Pilgrim Group;
(v) the past performance of other funds managed by the Adviser; (vi) quotes from
a portfolio manager of the Trust or industry specialists; and (vii) information
regarding rights offerings conducted by closed-end funds managed by the Adviser.

     The Trust may compare the frequency of its reset period to the frequency
which LIBOR changes. Further, the Trust may compare its yield to (i) LIBOR, (ii)
the federal funds rate, (iii) the prime rate, quoted daily in the Wall Street
Journal as the base rate on corporate loans at large U.S. money center
commercial banks, (iv) one or more averages compiled by Donoghue's Money Fund
Report, a widely recognized independent publication that monitors the
performance of money market mutual funds, (v) the average yield reported by the
Bank Rate Monitor National Index for money market deposit accounts offered by
the 100 leading banks and thrift institutions in the ten largest standard
metropolitan statistical areas, (vi) yield data published by Lipper, or (vii)
the yield on an investment in 90-day Treasury bills on a rolling basis, assuming
quarterly compounding. Further, the Trust may compare such other yield data
described above to each other. The Trust may also compare its total return, NAV
stability and yield to other fixed income investments (such as Certificates of
Deposit), open-end mutual funds and Unit Investment Trusts. As with yield and
total return calculations, yield comparisons should not be considered
representative of the Trust's yield or relative performance for any future
period.


     The Trust may provide information designed to help individuals understand
their investment goals and explore various financial strategies. Such
information may include information about current economic, market and political
conditions; materials that describe general principles of investing, such as
asset allocation, diversification, risk tolerance, and goal setting; worksheets
used to project savings needs based on assumed rates of inflation and
hypothetical rates of return; and action plans offering investment alternatives.
Materials may also include discussion of other investment companies in the
Pilgrim Funds, products and services, and descriptions of the benefits of
working with investment professionals in selecting investments.

PERFORMANCE DATA

     The Trust may quote annual total return and aggregate total return
performance data. Total return quotations for the specified periods will be
computed by finding the rate of return (based on net investment income and any
capital gains or losses on portfolio investments over such periods) that would
equate the initial amount invested to the value of such investment at the end of
the period. On occasion, the Trust may quote total return calculations published
by Lipper, a widely recognized independent publication that monitors the
performance of both open-end and closed-end investment companies.

                                      B-43
<PAGE>

     The Trust's distribution rate is calculated on a monthly basis by
annualizing the dividend declared in the month and dividing the resulting
annualized dividend amount by the Trust's corresponding month-end NAV (in the
case of NAV) or the last reported market price (in the case of Market). The
distribution rate is based solely on the actual dividends and distributions,
which are made at the discretion of management. The distribution rate may or may
not include all investment income, and ordinarily will not include capital gains
or losses, if any.

     Total return and distribution rate and compounded distribution rate figures
utilized by the Trust are based on historical performance and are not intended
to indicate future performance. Distribution rate, compounded distribution rate
and NAV per share can be expected to fluctuate over time. Total return will vary
depending on market conditions, the Senior Loans, and other securities
comprising the Trust's portfolio, the Trust's operating expenses and the amount
of net realized and unrealized capital gains or losses during the period.


                              FINANCIAL STATEMENTS


     The audited financial statements included in the Annual Report of the Trust
for the fiscal year ended February 29, 2000 together with the report of KPMG LLP
thereon, and the unaudited financial statements included in the Semi-Annual
Report of the Trust for the six-month period ended August 31, 2000, are hereby
incorporated by reference in this SAI. No other part of the Annual Report or
Semi-Annual Report of the Trust is incorporated herein.

                                      B-44
<PAGE>

                                    GLOSSARY

          "'AA' Financial Composite Commercial Paper Rate" on any date means (i)
the interest equivalent of the 7-day rate, in the case of a Dividend Period
which is a Standard Rate Period or shorter; for Dividend Periods greater than 7
days but fewer than or equal to 31 days, the 30-day rate; for Dividend Periods
greater than 31 days but fewer than or equal to 61 days, the 60-day rate; for
Dividend Periods greater than 61 days but fewer than or equal to 91 days, the 90
day rate; for Dividend Periods greater than 91 days but fewer than or equal to
270 days, the rate described in (ii); for Dividend Periods greater than 270
days, the Treasury Index Rate; on commercial paper on behalf of issuers whose
corporate bonds are rated "AA" by S&P, or the equivalent of such rating by
another nationally recognized rating agency, as announced by the Federal Reserve
Bank of New York for the close of business on the Business Day immediately
preceding such date; or (ii) if the Federal Reserve Bank of New York does not
make available such a rate, then the arithmetic average of the interest
equivalent of such rates on commercial paper placed on behalf of such issuers,
as quoted on a discount basis or otherwise by the Commercial Paper Dealers to
the Auction Agent for the close of business on the Business Day immediately
preceding such date (rounded to the next highest .001 of 1%). If any Commercial
Paper Dealer does not quote a rate required to determine the "AA" Financial
Composite Commercial Paper Rate, such rate shall be determined on the basis of
the quotations (or quotation) furnished by the remaining Commercial Paper
Dealers (or Dealer), if any, or, if there are no such Commercial Paper Dealers,
by the Auction Agent. For Dividend Periods greater than 360 days, the Treasury
Index Rate. For purposes of this definition, (A) "Commercial Paper Dealers"
shall mean (1) Salomon Smith Barney Inc., Lehman Brothers Inc., Merrill Lynch,
Pierce, Fenner & Smith Incorporated and Goldman Sachs & Co.; (2) in lieu of any
thereof, its respective Affiliate or successor; and (3) in the event that any of
the foregoing shall cease to quote rates for commercial paper of issuers of the
sort described above, in substitution therefor, a nationally recognized dealer
in commercial paper of such issuers then making such quotations selected by the
Trust, and (B) "interest equivalent" of a rate stated on a discount basis for
commercial paper of a given number of days' maturity shall mean a number equal
to the quotient (rounded upward to the next higher one-thousandth of 1%) of (1)
such rate expressed as a decimal, divided by (2) the difference between (x) 1.00
and (y) a fraction, the numerator of which shall be the product of such rate
expressed as a decimal, multiplied by the number of days in which such
commercial paper shall mature and the denominator of which shall be 360.

          "Advance Rate" means the Moody's Advance Rate (if Moody's is then
rating the Preferred Shares) and the S&P Advance Rate (if S&P is then rating the
Preferred Shares), whichever is applicable.

          "Affiliate" means any person known to the Auction Agent to be
controlled by, in control of or under common control with the Trust; provided
that ING Pilgrim Investments, Inc. shall not be deemed to be an Affiliate nor
shall any corporation or any person controlled by, in control of or under common
control with such corporation, one of the trustees, directors or executive
officers of which is also a trustee, director or executive officer of the Trust,
be deemed to be an Affiliate.

          "Agent Member" means a member of or a participant in the Securities
Depository that will act on behalf of a Bidder.

          "All Hold Rate" means 80% of the "AA" Financial Composite Commercial
Paper Rate.

          "Applicable Rate" means, with respect to each Series for each Dividend
Period (i) if Sufficient Clearing Orders exist for the Auction in respect
thereof, the Winning Bid Rate, (ii) if Sufficient Clearing Orders do not exist
for the Auction in respect thereof, the Maximum Rate.

                                      B-45
<PAGE>

          "Approved Price" means the "fair value" as determined by the Trust in
accordance with the valuation procedures adopted from time to time by the Board
of Trustees and for which the Trust receives a mark-to-market price (which, for
the purpose of clarity, shall not mean a Market Value Price) from an independent
source at least semi-annually.

          "Asset Coverage Cure Date" has the meaning set forth in "Description
of Preferred Shares -- Redemption."

          "Auction" means each periodic operation of the Auction Procedures.


          "Auction Agent" means Bankers Trust Company unless and until another
commercial bank, trust company, or other financial institution appointed by a
resolution of the Board of Trustees enters into an agreement with the Trust to
follow the Auction Procedures for the purpose of determining the Applicable
Rate.


          "Auction Date" means the first Business Day next preceding the first
day of a Dividend Period for each Series.

          "Auction Procedures" means the procedures described in "Additional
Information Concerning the Auction for Preferred Shares" and the procedures
described in Part II of the Certificate.

          "Auditor's Certificate" has the meaning set forth in "Description of
Preferred Shares -- Asset Maintenance."

          "Available Preferred Shares" has the meaning set forth in Additional
Information Concerning the Auction For Preferred Shares -- Determination of
Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate.


          "Beneficial Owner," with respect to shares of each Series, means a
customer of a Broker-Dealer who is listed on the records of that Broker-Dealer
(or, if applicable, the Auction Agent) as a holder of shares of such series.


          "Bid" has the meaning set forth Additional Information Concerning the
Auction for Preferred Shares -- Submission of Orders by Broker-Dealers to
Auction Agents."

          "Bidder" has the meaning set forth in Additional Information
Concerning the Auction for Preferred Shares -- Submission of Orders by
Broker-Dealers to Auction Agents."


          "Board of Trustees" means the Board of Trustees of the Trust or any
duly authorized committee thereof as permitted by applicable law.

          "Broker-Dealer" means any broker-dealer or broker-dealers, or other
entity permitted by law to perform the functions required of a Broker-Dealer by
the Auction Procedures, that has been selected by the Trust and has entered into
a Broker-Dealer Agreement that remains effective.


          "Broker-Dealer Agreement" means an agreement between the Auction Agent
and a Broker-Dealer, pursuant to which such Broker-Dealer agrees to follow the
Auction Procedures.

          "Business Day" means a day on which the New York Stock Exchange is
open for trading and which is not a Saturday, Sunday or other day on which banks
in The City of New York, New York are authorized or obligated by law to close.

          "Certificate" means the Certificate of Designation for Preferred
Shares of the Trust, dated October 20, 2000, specifying the powers, preferences
and rights of Preferred Shares.

                                      B-46
<PAGE>
          "Code" means the Internal Revenue Code of 1986, as amended.


          "Commission" means the Securities and Exchange Commission.

          "Common Share" means the shares of beneficial interest, par value $.01
per share, of the Trust.

          "Date of Original Issue" means the date on which a Series is
originally issued by the Trust.

          "Declaration of Trust" means the Agreement and Declaration of Trust,
dated August 25, 2000, as amended.

          "Default Period" has the meaning set forth in "Description of
Preferred Shares -- Dividends and Dividend Period."

          "Default Rate" means the Reference Rate multiplied by three (3).

          "Deposit Securities" means cash and any obligations or securities,
including Short Term Money Market Instruments that are Eligible Assets, rated at
least AAA, A-1+ or SP-1+ by S&P, except that, for purposes of optional
redemption such obligations or securities shall be considered "Deposit
Securities" only if they are also rated at least P-1 by Moody's.

          "Discounted Value" means the product of the Market Value (plus accrued
interest) of an Eligible Asset multiplied by the applicable Advance Rate.

          "Dividend Default" has the meaning set forth in "Description of
Preferred Shares -- Dividends and Dividend Period."

          "Dividend Payment Date" means (i) with respect to any Dividend Period
of one year or less, the Business Day next succeeding the last day thereof and,
if any, the 91st, 181st and 271st days thereof, and (ii) with respect to any
Dividend Period of more than one year, on a quarterly basis on each January 1,
April 1, July 1 and October 1 and on the Business Day following the last day of
such Dividend Period.

          "Dividend Period" means, with respect to each Series, the period
commencing on the Date of Original Issue thereof and ending on the date
specified for such series on the Date of Original Issue thereof and thereafter,
as to such Series, the period commencing on the day following each Dividend
Period for such Series and ending on the day established for such Series by the
Trust.

          "Eligible Assets" means Moody's Eligible Assets (if Moody's is then
rating the Preferred Shares) and S&P Eligible Assets (if S&P is then rating the
Preferred Shares) , whichever is applicable.

          "Existing Holder" means (a) a person who has signed a Master
Purchaser's Letter and beneficially owns those Preferred Shares listed in that
person's name in the records of the Auction Agent or (b) the beneficial owner of
those Preferred Shares which are listed under such person's Broker-Dealer's name
in the records of the Auction Agent, which Broker-Dealer shall have signed a
Master Purchaser's Letter.

          "Hold Order" has the meaning set forth in "Additional Information
Concerning the Auction for Preferred Shares -- Orders By Existing Holders and
Potential Holders."

          "Holder" means, with respect to Preferred Shares, the registered
holder of shares of each Series as the same appears on the share ledger or share
records of the Trust.

                                      B-47
<PAGE>

          "Loan" means any assignment of or participation in any bank loan
denominated in U.S. dollars including term loans, the funded and unfunded
portions of revolving credit lines (provided that the Trust shall place in
reserve an amount equal to any unfunded portion of any revolving credit line)
and debtor-in possession financings; provided that such loan (a) is not extended
for the purpose of purchasing or carrying any margin stock and (b) is similar to
those typically made, syndicated, purchased or participated by a commercial bank
in the ordinary course of business.

          "Mandatory Redemption Date" has the meaning set forth in "Description
of Preferred Shares -- Redemption."

          "Mandatory Redemption Price" has the meaning set forth in set forth in
"Description of Preferred Shares -- Redemption."

          "Market Value" means the Market Value Price or, if a Market Value
Price is not readily available, the Approved Price of each Eligible Asset held
by the Trust.

          "Market Value Price" means the price of an Eligible Asset which is the
price obtained from an Approved Pricing Service or, if such price is not
available, the lower of the bid prices quoted by two Approved Dealers.

          "Maximum Rate" means, on any date on which the Applicable Rate is
determined, the applicable percentage of the "AA" Financial Composite Commercial
Paper Rate on the date of such Auction determined as set forth below based on
the lower of the credit ratings assigned to the Preferred Shares by Moody's and
S&P subject to upward but not downward adjustment in the discretion of the Board
of Trustees after consultation with the Broker-Dealers; provided that
immediately following any such increase the Trust would be in compliance with
the Preferred Shares Basic Maintenance Amount.

       Moody's                         S&P                      Applicable
    Credit Rating                 Credit Rating                 Percentage
    -------------                 -------------                 ----------
     aa3 or Above                 AA- or Above                     150%
       a3 or a1                     A- to A+                       160%
     baa3 to baa1                 BBB- to BBB+                     250%
      Below baa3                   Below BBB-                      275%




          "Moody's" means Moody's Investors Service, Inc. and its successors at
law.


          "Moody's Advance Rate" has the meaning set forth in "Moody's & S&P
Guidelines -- Moody's Guidelines."

          "Moody's Asset Category" has the meaning set forth in "Moody's & S&P
Guidelines -- Moody's Guidelines."

          "Moody's Asset Category A" has the meaning set forth in "Moody's & S&P
Guidelines -- Moody's Guidelines."

          "Moody's Asset Category B" has the meaning set forth in "Moody's & S&P
Guidelines -- Moody's Guidelines."

          "Moody's Asset Category C" has the meaning set forth in "Moody's & S&P
Guidelines -- Moody's Guidelines."

                                      B-48
<PAGE>

          "Moody's Asset Category D" has the meaning set forth in "Moody's & S&P
Guidelines -- Moody's Guidelines."

          "Moody's Asset Category E" has the meaning set forth in "Moody's & S&P
Guidelines -- Moody's Guidelines."

          "Moody's Eligible Assets" has the meaning set forth in "Moody's & S&P
Guidelines -- Moody's Guidelines."

          "Moody's General Portfolio Requirements" has the meaning set forth in
"Moody's & S&P Guidelines -- Moody's Guidelines."

          "Moody's Industry Classification" means, for the purposes of
determining Moody's Eligible Assets, each of the following industry
classifications (or such other classifications as Moody's may from time to time
approve for application to the Preferred Shares):

     1.   Aerospace and Defense: Major Contractor, Subsystems, Research,
          Aircraft Manufacturing, Arms, Ammunition

     2.   Automobile: Automobile Equipment, Auto-Manufacturing, Auto Parts
          Manufacturing, Personal Use Trailers, Motor Homes, Dealers

     3.   Banking: Bank Holding, Savings and Loans, Consumer Credit, Small Loan,
          Agency, Factoring, Receivables

     4.   Beverage, Food and Tobacco: Beer and Ale, Distillers, Wines and
          Liquors, Distributors, Soft Drink Syrup, Bottlers, Bakery, Mill Sugar,
          Canned Foods, Corn Refiners, Dairy Products, Meat Products, Poultry
          Products, Snacks, Packaged Foods, Distributors, Candy, Gum, Seafood,
          Frozen Food, Cigarettes, Cigars, Leaf/Snuff, Vegetable Oil

     5.   Buildings and Real Estate: Brick, Cement, Climate Controls,
          Contracting, Engineering, Construction, Hardware, Forest Products
          (building-related only), Plumbing, Roofing, Wallboard, Real Estate,
          Real Estate Development, REITs, Land Development

     6.   Chemicals, Plastics and Rubber: Chemicals (non-agriculture),
          Industrial Gases, Sulphur, Plastics, Plastic Products, Abrasives,
          Coatings, Paints, Varnish, Fabricating

     7.   Containers, Packaging and Glass: Glass, Fiberglass, Containers made
          of: Glass, Metal, Paper, Plastic, Wood or Fiberglass

     8.   Personal and Non-Durable Consumer Products (Manufacturing Only):
          Soaps, Perfumes, Cosmetics, Toiletries, Cleaning Supplies, School
          Supplies

     9.   Diversified/Conglomerate Manufacturing

     10.  Diversified/Conglomerate Service

     11.  Diversified Natural Resources, Precious Metals and Minerals:
          Fabricating, Distribution, Mining and Sales

     12.  Ecological: Pollution Control, Waste Removal, Waste Treatment and
          Waste Disposal

                                      B-49
<PAGE>

     13.  Electronics: Computer Hardware, Electric Equipment, Components,
          Controllers, Motors, Household Appliances, Information Service
          Communicating Systems, Radios, TVs, Tape Machines, Speakers, Printers,
          Drivers, Technology

     14.  Finance: Investment Brokerage, Leasing, Syndication, Securities

     15.  Farming and Agriculture: Livestock, Grains, Produce, Agriculture
          Chemicals, Agricultural Equipment, Fertilizers

     16.  Grocery: Grocery Stores, Convenience Food Stores

     17.  Healthcare, Education and Childcare: Ethical Drugs, Proprietary Drugs,
          Research, Health Care Centers, Nursing Homes, HMOs, Hospitals,
          Hospital Supplies, Medical Equipment

     18.  Home and Office Furnishings, Housewares, and Durable Consumer
          Products: Carpets, Floor Coverings, Furniture, Cooking, Ranges

     19.  Hotels, Motels, Inns and Gaming

     20.  Insurance: Life, Property and Casualty, Broker, Agent, Surety

     21.  Leisure, Amusement, Entertainment: Boating, Bowling, Billiards,
          Musical Instruments, Fishing, Photo Equipment, Records, Tapes, Sports,
          Outdoor Equipment (Camping), Tourism, Resorts, Games, Toy
          Manufacturing

     22.  Machinery (Non-Agriculture, Non-Construction, Non-Electronic):
          Industrial, Machine Tools, Steam Generators

     23.  Mining, Steel, Iron and Non-Precious Metals: Coal, Copper, Lead,
          Uranium, Zinc, Aluminum, Stainless Steel, Integrated Steel, Ore
          Production, Refractories, Steel Mill Machinery, Mini-Mills,
          Fabricating, Distribution and Sales

     24.  Oil and Gas: Crude Producer, Retailer, Well Supply, Service and
          Drilling

     25.  Personal, Food and Miscellaneous

     26.  Printing and Publishing: Graphic Arts, Paper, Paper Products, Business
          Forms, Magazines, Books, Periodicals, Newspapers, Textbooks

     27.  Cargo Transport: Rail, Shipping, Railroads, Rail-car Builders, Ship
          Builders, Containers, Container Builders, Parts, Overnight Mail,
          Trucking, Truck Manufacturing, Trailer Manufacturing, Air Cargo,
          Transport

     28.  Retail Stores: Apparel, Toy, Variety, Drugs, Department, Mail Order
          Catalog, Showroom

     29.  North American Cellular and North American Cable

     30.  Data and Internet Services

     31.  Satellite

     32.  Telecommunications Equipment

                                      B-50
<PAGE>

     33.  Other Telecommunications

     34.  Textiles and Leather: Producer, Synthetic Fiber, Apparel Manufacturer,
          Leather Shoes

     35.  Utilities: Electric, Water, Hydro Power, Gas, Diversified

     36.  Radio and TV Broadcasting

     37.  Foreign Cellular, Foreign Cable, Foreign TV, Foreign Radio and
          Equipment

     38.  Other Broadcasting and Entertainment

          "1940 Act" means the Investment Company Act of 1940, as amended.

          "1940 Act Preferred Shares Asset Coverage" means asset coverage, as
determined in accordance with Section 18(h) of the 1940 Act, of at least 200%
with respect to all outstanding senior securities of the Trust which are stock,
including all Outstanding Preferred Shares (or such other asset coverage as may
in the future be specified in or under the 1940 Act as the minimum asset
coverage for senior securities which are stock of a closed-end investment
company as a condition of declaring dividends on its common shares), determined
on the basis of values calculated as of a time within 48 hours (not including
Sundays or holidays) next preceding the time of such determination.

          "1940 Act Preferred Shares Asset Coverage Certificate" has the meaning
set forth in "Description of Preferred Shares -- Asset Maintenance."

          "Non-Senior Loan" means a Loan that is a hybrid loan, a subordinated
loan or an unsecured loan.

          "Notice of Redemption" has the meaning set forth in "Description of
Preferred Shares -- Redemption."

          "Order" has the meaning set forth in "Additional Information
Concerning the Auction for Preferred Shares -- Orders By Existing Holders and
Potential Holders."

          "Outstanding" means, as of any date, Preferred Shares theretofore
issued by the Trust except, without duplication, (i) Preferred Shares
theretofore canceled, redeemed or repurchased by the Trust, or delivered to the
Auction Agent for cancellation or with respect to which the Trust has given
notice of redemption and irrevocably deposited with the Paying Agent sufficient
funds to redeem such Preferred Shares and (ii) any Preferred Shares represented
by any certificate in lieu of which a new certificate has been executed and
delivered by the Trust. Notwithstanding the foregoing, (A) for purposes of
voting rights (including the determination of the number of shares required to
constitute a quorum), any Preferred Shares as to which the Trust or any
Affiliate shall be the Existing Holder shall be disregarded and not deemed
Outstanding; (B) in connection with any Auction, any Preferred Shares as to
which the Trust or any person known to the Auction Agent to be an Affiliate
shall be the Existing Holder shall be disregarded and not deemed Outstanding;
and (C) for purposes of determining the Preferred Shares Basic Maintenance
Amount, Preferred Shares held by the Trust shall be disregarded and not deemed
Outstanding, but shares held by any Affiliate shall be deemed Outstanding.


          "Paying Agent" means Bankers Trust Company unless and until another
entity appointed by a resolution of the Board of Trustees enters into an
agreement with the Trust to serve as paying agent, which paying agent may be the
same as the Auction Agent.


          "Performing" means that no default as to the payment of principal or
interest has occurred and is continuing.

                                      B-51
<PAGE>

          "Potential Beneficial Owner or Holder," means (1) any Existing Holder
who may be interested in acquiring additional Preferred Shares or (ii) any other
person who may be interested in acquiring Preferred Shares and who has signed a
Master Purchaser's letter or whose shares will be listed under such person's
Broker-Dealer's name on the records of the Auction Agent which Broker-Dealer
shall have executed a Master Purchaser's letter.

          "Preferred Shares" has the meaning set forth on page 1 of this SAI.


          "Preferred Shares Basic Maintenance Amount" as of any Valuation Date
means the dollar amount equal to the sum of


               (i) (A) the sum of the products resulting from multiplying the
     number of Outstanding shares of each Series of Preferred Shares on such
     date by the Liquidation Preference (and redemption premium, if any) per
     share of such Series; (B) the aggregate amount of dividends that will have
     accumulated at the Applicable Rate (whether or not earned or declared) to
     and including the first Dividend Payment Date for each Outstanding
     Preferred Share that follows such Valuation Date (or to the 30th day after
     such Valuation Date, if such 30th day occurs before the first following
     Dividend Payment Date); (C) the amount of anticipated Trust non-interest
     expenses for the 90 days subsequent to such Valuation Date; (D) the amount
     of the current outstanding balances of any indebtedness which is senior to
     the Preferred Shares plus interest actually accrued together with 30 days
     additional interest on the current outstanding balances calculated at the
     current rate multiplied by 1.93 and (E) any other current liabilities
     payable during the 30 days subsequent to such Valuation Date, including,
     without limitation, any indebtedness service to the Preferred Shares and
     indebtedness due within one year and any redemption premium due with
     respect to Preferred Shares for which a Notice of Redemption has been
     given, as of such Valuation Date to the extent not reflected in any of
     (i)(A) through (i)(D): less

               (ii) the sum of any cash plus the value of any Trust assets
     irrevocably deposited by the Trust for the payment of any (i)(B) through
     (i)(E) (except that if the security matures prior to the relevant
     redemption payment date and is either fully guaranteed by the U.S.
     Government or is rated P2 by Moody's and A2 by S&P, it will be valued at
     its face value).

          "Preferred Shares Basic Maintenance Amount Test" means a test which is
met if the lower of the aggregate Discounted Values of the Moody's Eligible
Assets or the S&P Eligible Assets meets or exceeds the Preferred Shares Basic
Maintenance Amount.

          "Preferred Shares Basic Maintenance Certificate" has the meaning set
forth in "Description of Preferred Shares -- Asset Maintenance."

          "Rate Period" means either a Standard Rate Period or a Special Rate
Period.

          "Rating Agency" means Moody's and S&P as long as such rating agency is
then rating the Preferred Shares.

          "Redemption Date" has the meaning set forth in "Description of
Preferred Shares -- Dividends and Dividend Period."

          "Redemption Default" has the meaning set forth in "Description of
Preferred Shares -- Dividends and Dividend Period."

          "Redemption Price" has the meaning set forth in "Description of
Preferred Shares -- Dividends and Dividend Period."

                                      B-52
<PAGE>

          "Reference Rate" means, with respect to the determination of the
Default Rate, the applicable "AA" Financial Composite Commercial Paper Rate (for
a Dividend Period of fewer than 184 days) or the applicable Treasury Index Rate
(for a Dividend Period of 184 days or more).

          "S&P" means Standard & Poor's and its successors at law.

          "S&P Advance Rate" has the meaning set forth in "Moody's & S&P
Guidelines -- S&P Guidelines."

          "S&P Asset Category" has the meaning set forth in "Moody's & S&P
Guidelines -- S&P Guidelines."

          "S&P Asset Category A" has the meaning set forth in "Moody's & S&P
Guidelines -- S&P Guidelines."

          "S&P Asset Category B" has the meaning set forth in "Moody's & S&P
Guidelines -- S&P Guidelines."

          "S&P Asset Category C" has the meaning set forth in "Moody's & S&P
Guidelines -- S&P Guidelines."

          "S&P Asset Category D" has the meaning set forth in "Moody's & S&P
Guidelines -- S&P Guidelines."

          "S&P Asset Category E" has the meaning set forth in "Moody's & S&P
Guidelines -- S&P Guidelines."

          "S&P Diversity I" has the meaning set forth in "Moody's & S&P
Guidelines -- S&P Guidelines."

          "S&P Diversity II" has the meaning set forth in "Moody's & S&P
Guidelines -- S&P Guidelines."

          "S&P Eligible Assets" has the meaning set forth in "Moody's & S&P
Guidelines -- S&P Guidelines."

          "S&P Industry Classification" means, for the purposes of determining
S&P Eligible Assets, each of the following industry classifications (or such
other classifications as S&P may from time to time approve for application to
the Preferred Shares):

     1.   Aerospace and Defense: Aircraft manufacturer/components, Arms and
          ammunition

     2.   Air transport

     3.   Automotive: Manufacturers, Parts and Equipment, Tire and Rubber

     4.   Beverage and Tobacco

     5.   Broadcast Radio and Television

     6.   Brokers/Dealers/Investment Houses

     7.   Building and Development: Builders, Land Development/Real Estate,
          REITs

                                      B-53
<PAGE>

     8.   Business Equipment and Services: Graphic Arts, Office
          Equipment/Computers, Data Processing Service Bureaus, Computer
          Software

     9.   Cable and Satellite Television

     10.  Chemical/Plastics: Coatings/Paints/Varnishes

     11.  Clothing/Textiles

     12.  Conglomerates

     13.  Containers and Glass Products

     14.  Cosmetic/Toiletries

     15.  Drugs

     16.  Ecological Services and Equipment: Waste Disposal Services and
          Equipment

     17.  Electronics/Electric

     18.  Equipment Leasing: Auto Leasing/Rentals, Commercial Equipment Leasing,
          Data Processing Equipment Service/Leasing

     19.  Farming/Agriculture: Agricultural Products and Equipment, Fertilizers

     20.  Financial Intermediaries: Bank/Thrifts, Finance Companies

     21.  Food/Drug Retailers

     22.  Food Products

     23.  Food Service: Food Service/Restaurants, Vending

     24.  Forest Products: Building Materials, Paper Products/Containers

     25.  Health Care

     26.  Home Furnishings: Appliances, Furniture and Fixtures, Housewares

     27.  Lodging and Casinos

     28.  Industrial Equipment: Machinery, Manufacturing/Industrial, Specialty
          Instruments

     29.  Insurance

     30.  Leisure Goods/Activities/Movies

     31.  Nonferrous Metals/Minerals: Aluminum Producers, Mining (including
          coal), Other Metal/Mineral Producers

     32.  Oil and Gas: Producers/Refiners, Gas Pipelines

                                      B-54
<PAGE>

     33.  Publishing

     34.  Rail Industries: Railroads, Rail Equipment

     35.  Retailers (except food and drug)

     36.  Steel

     37.  Surface Transport: Shipping/Shipbuilding, Trucking

     38.  Telecommunications/Cellular Communications

     39.  Utilities: Electric, Local Gas, Water

          The Trust shall use its discretion in determining which industry
classification is applicable to a particular investment.


          "Securities Depository" means The Depository Trust Company and its
successors and assigns or any successor securities depository selected by the
Trust that agrees to follow the procedures required to be followed by such
securities depository in connection with the shares of each Series.


          "Sell Order" has the meaning set forth in "Additional Information
Concerning the Auction for Preferred Shares -- Submission of Orders by
Broker-Dealers to Auction Agents."

          "Senior Loan" means any secured Loan that is not subordinated by its
terms to any other indebtedness of the borrower.

          "Series" means any of the series of Preferred Shares issued by the
Trust.

          "Short-Term Money Market Instrument" means the following types of
instruments if, on the date of purchase or other acquisition thereof by the
Trust, the remaining term to maturity thereof is not in excess of 180 days :

               (i) commercial paper rated A-1 if such commercial paper matures
     in 30 days or A-1+ if such commercial paper matures in over 30 days;

               (ii) demand or time deposits in, and banker's acceptances and
     certificates of deposit of (A) a depository institution or trust company
     incorporated under the laws of the United States of America or any state
     thereof or the District of Columbia or (B) a United States branch office or
     agency of a foreign depository institution (provided that such branch
     office or agency is subject to banking regulation under the laws of the
     United States, any state thereof or the District of Columbia) ;

               (iii) overnight funds; and

               (iv) U.S. Government Securities.

          "Special Rate Period" means a Dividend Period that is not a Standard
Rate Period.

          "Specific Redemption Provisions" means, with respect to any Special
Rate Period of more than one year, either, or any combination of (i) a period (a
"Non-Call Period") determined by the Board of Trustees after consultation with
the Broker-Dealers, during which the shares subject to such Special Rate Period
are not subject to redemption at the option of the Trust and (ii) a period (a
"Premium Call Period"), consisting of a number of whole years as determined by

                                      B-55
<PAGE>

the Board of Trustees after consultation with the Broker-Dealers, during each
year of which the shares subject to such Special Rate Period shall be redeemable
at the Trust's option at a price per share equal to the Liquidation Value plus
accumulated but unpaid dividends (whether or not earned or declared) plus a
premium expressed as a percentage or percentages of the Liquidation Value or
expressed as a formula using specified variables as determined by the Board of
Trustees after consultation with the Broker-Dealers.

          "Standard Rate Period" means a Dividend Period of 7 days, unless such
7th day is not a Business Day, then the number of days ending on the Business
Day next preceding such 7th day.

          "Submission Deadline" means 1:00 P.M., New York City time, on any
Auction Date or such other time on any Auction Date by which Broker-Dealers are
required to submit Orders to the Auction Agent as specified by the Auction Agent
from time to time.

          "Submitted Bid Order" has the meaning set forth in "Additional
Information Concerning the Auction for Preferred Shares -- Submission of Orders
by Broker-Dealers to Auction Agents."

          "Submitted Hold Order" has the meaning set forth in "Additional
Information Concerning the Auction for Preferred Shares -- Submission of Orders
by Broker-Dealers to Auction Agents."

          "Submitted Order" has the meaning set forth in "Additional Information
Concerning the Auction for Preferred Shares -- Submission of Orders by
Broker-Dealers to Auction Agents."

          "Submitted Sell Order" has the meaning set forth in "Additional
Information Concerning the Auction for Preferred Shares -- Submission of Orders
by Broker-Dealers to Auction Agents."

          "Treasury Index Rate" means the average yield to maturity for actively
traded marketable U.S. Treasury fixed interest rate securities having the same
number of 30-day periods to maturity as the length of the applicable Dividend
Period, determined, to the extent necessary, by linear interpolation based upon
the yield for such securities having the next shorter and next longer number of
30-day periods to maturity treating all Dividend Periods with a length greater
than the longest maturity for such securities as having a length equal to such
longest maturity, in all cases based upon data set forth in the most recent
weekly statistical release published by the Board of Governors of the Federal
Reserve System (currently in H.15 (519)); provided, however, if the most recent
such statistical release shall not have been published during the 15 days
preceding the date of computation, the foregoing computations shall be based
upon the average of comparable data as quoted to the Trust by at least three
recognized dealers in U.S. Government securities selected by the Trust.

          "U.S. Government Securities" means direct obligations of the United
States or by its agencies or instrumentalities that are entitled to the full
faith and credit of the United States and that, other than United States
Treasury Bills, provide for the periodic payment of interest and the full
payment of principal at maturity or call for redemption.

          "Valuation Date" means each Business Day of each week.

          "Winning Bid Rate" means the lowest rate specified in the Submitted
Orders which, if (A) each Submitted Hold/Sell Order from Existing Holders
specifying such lowest rate and all other Submitted Hold/Sell Orders from
Existing Holders specifying lower rates were accepted and (B) each Submitted Buy
Order from Potential Holders specifying such lowest rate and all other Submitted
Buy Orders from Potential Holders specifying lower rates were accepted, would
result in the Existing Holders described in clause (A) above continuing to hold
an aggregate number of Preferred Shares which, when added to the number of
Preferred Shares to be purchased by the Potential Holders described in clause
(B) above and the number of Preferred Shares subject to Submitted Hold Orders,
would be equal to the number of Preferred Shares.

                                      B-56
<PAGE>

                                   Appendix A

                             RATINGS OF INVESTMENTS

                       DESCRIPTION OF MOODY'S DEBT RATINGS

     Aaa -- Bonds which are rated "Aaa" are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.

     Aa -- Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.

     A -- Bonds which are rated "A" possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.

     Baa -- Bonds which are rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payment and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.

     Ba -- Bonds which are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.

     B -- Bonds which are rated "B" generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.

     Caa -- Bonds which are rated "Caa" are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.

     Ca -- Bonds which are rated "Ca" represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.

     C -- Bonds which are rated "C" are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.

     Note -- Those bonds in the "Aa", "A," "Baa," "Ba" and "B" categories which
Moody's believes possess the strongest credit attributes within those categories
are designated by the symbols "Aa1," "A1," "Baa1," "Ba1" and "B1."

     Short-term Notes -- The four ratings of Moody's for short-term notes are
"MIG 1/VMIG1," "MIG 2/ VMIG2," "MIG 3/VMIG3" and "MIG 4/VMIG4." "MIG 1/VMIG1"
denotes "best quality . . . strong protection by established cash flows." "MIG
2/VMIG2" denotes "high quality" with ample margins of protection. "MIG3/VMIG3"
notes are of "favorable quality . . . but . . . lacking the undeniable strength
of the preceding grades." "MIG 4/VMIG4" notes are of "adequate quality . . .
[p]rotection commonly regarded as required of an investment security is present
 . . . there is specific risk."

                                      B-57
<PAGE>

                 DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS

     Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment ability of
rated issuers:

     Issuers rated Prime-1 (or related supporting institutions) have a superior
ability for repayment of short-term promissory obligations. Prime-1 repayment
ability will often be evidenced by the following characteristics: leading market
positions in well established industries; high rates of return on funds
employed; conservative capitalization structure with moderate reliance on debt
and ample asset protection; broad margins in earning coverage of fixed financial
charges and high internal cash generation; and well established access to a
range of financial markets and assured sources of alternate liquidity.

     Issuers rated Prime-2 (or related supporting institutions) have a strong
ability for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.

     Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of short-term promissory obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.

     Issuers rated Not Prime do not fall within any of the Prime rating
categories.

                  DESCRIPTION OF STANDARD & POOR'S DEBT RATINGS

     A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations, or a specific financial program
(including ratings on medium term note programs and commercial paper programs).
It takes into consideration the creditworthiness of guarantors, insurers or
other forms of credit enhancement on the obligation and takes into account the
currency in which the obligation is denominated. The issue credit rating is not
a recommendation to purchase, sell or hold a financial obligation, inasmuch as
it does not comment as to market price or suitability for a particular investor.

     Issue credit ratings are based on current information furnished by the
obligors or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. Credit
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.

     Issue credit ratings can be either long term or short term. Short-term
ratings are generally assigned to those obligations considered short term in the
relevant market. In the U.S., for example, that means obligations with an
original maturity of no more than 365 days - including commercial paper.
Short-term ratings are also used to indicate the creditworthiness of an obligor
with respect to put features on long-term obligations. The result is a dual
rating, in which the short-term ratings address the put features, in addition to
the usual long-term rating. Medium-term notes are assigned long-term ratings.

                                      B-58
<PAGE>

LONG-TERM ISSUE CREDIT RATINGS

     Issue ratings are based, in varying degrees, on the following
considerations:

     1. Likelihood of payment-capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms of
obligation;

     2. Nature of and provisions of the obligation; and

     3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.

     The issue ratings definitions are expressed in terms of default risk. As
such, they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority in
bankruptcy, as noted above. (Such differentiation applies when an entity has
both senior and subordinated obligations, secured and unsecured obligations, or
operating company and holding company obligations.) Accordingly, in the case of
junior debt, the rating may not conform exactly with the category definition.

     AAA -- An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.

     AA -- An obligation rated "AA" differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.

     A -- An obligation rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.

     BBB -- An obligation rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
to the obligation.

     BB, B, CCC, CC and C -- Obligations rated "BB", "B", "CCC", "CC" and "C" is
regarded as having significant speculative characteristics. "BB" indicates the
least degree of speculation and "C" the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
may be outweighed by large uncertainties or major exposures to adverse
conditions.

     BB -- An obligation rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions, which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.

     B -- An obligation rated "B" is more vulnerable to nonpayment than
obligations rated "BB", but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.

     CCC -- An obligation rated "CCC" is currently vulnerable to nonpayment and
is dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation. In the
event of adverse business, financial, or economic conditions, the obligor is not
likely to have the capacity to meet its financial commitment on the obligation.

                                      B-59
<PAGE>

     CC -- An obligation rated "CC" is currently highly vulnerable to
nonpayment.

     C -- A subordinated debt or preferred stock obligation rated "C" is
currently highly vulnerable to nonpayment. The "C" rating may be used to cover a
situation where a bankruptcy petition has been filed or similar action has been
taken, but payments on this obligation are being continued. A "C" rating will
also be assigned to a preferred stock issue in arrears on dividends or sinking
fund payments, but that is currently paying.

     D -- An obligation rated "D" is in payment default. The "D" rating category
is used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The "D" rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.

     Plus (+) or Minus (-) -- The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.

     r -- This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit ratings. Examples include:
obligations linked or indexed to equities, currencies or commodities;
obligations exposed to severe prepayment risk - such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.

     NR -- This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular obligation as a matter of policy.

           DESCRIPTION OF STANDARD & POOR'S SHORT-TERM CREDIT RATINGS

     A-1-- A short-term obligation rated "A-1" is rated in the highest category
by Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet financial commitment on these obligations is extremely strong.

     A-2 -- A short-term obligation rated "A-2" is somewhat more susceptible to
the adverse effects of chanages in circumstances and economic conditions than
the obligations in higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is satisfactory.

     A-3 -- A short-term obligation rated "A-3" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.

     B -- A short-term obligation rated "B" is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.

     C -- A short-term obligation rated "C" is currently vulnerable to
nonpayment and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the obligation.

     D -- A short-term obligation rated "D" is in payment default. The "D"
rating category is used when interest payments or principal payments are not
made on the date due, even if the applicable grace period has not expired,
unless Standard & Poor's believes that such payments will be made during such
grace period. The "D" rating also will be used upon the filing of a bankruptcy
petition or the taking of a similar action if payments on an obligation are
jeopardized.

                                      B-60
<PAGE>
                                     PART C

                                OTHER INFORMATION


ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS

     1.   Financial Statements

          Contained in Part A:

          Financial Highlights for the six-month period ended August 31, 2000
          and for the years ended February 29, 2000; February 28, 1999, 1998,
          1997; February 29, 1996; February 28, 1995, 1994, 1993; February 29,
          1992; and February 28, 1991.

          Financial Statements are incorporated in Part B by reference to
          Registrant's February 29, 2000 Annual Report (audited) and August 31,
          2000 Semi-Annual Report (unaudited).

     2.   Exhibits

          (a)  (i)   Agreement and Declaration of Trust(1)
               (ii)  Amendment to the Agreement and Declaration of Trust dated
                     March 26, 1996 and effective April 12, 1996(1)
               (iii) Amendment to the Agreement and Declaration of Trust dated
                     October 23, 1998 and effective November 16, 1998(7)
               (iv)  Amendment to the Agreement and Declaration of Trust dated
                     October 20, 2000 and effective October 20, 2000 is filed
                     herewith

          (b)  (i)   By-Laws(2)
               (ii)  Amendment to By-Laws(2)
               (iii) Amendment to By-Laws(8)
               (iv)  Amendment to By-Laws is filed herewith

          (c)  Not Applicable


          (d)  (i)   Certificate of Designation for Preferred Shares is filed
                     herewith
               (ii)  Form of Share Certificate

          (e)  Form of Shareholder Investment Program(5)

          (f)  Not Applicable

                                       C-1
<PAGE>

          (g)  (i)   Form of Amended and Restated Investment Management
                     Agreement(3)
               (ii)  Form of Amendment to Investment Management Agreement(6)
               (iii) Amended and Restated Investment Management Agreement(8)
               (iii) Form of Amendment to the Amended and Restated Investment
                     Management Agreement(8)
               (iv)  Investment Management Agreement is filed herewith

          (h)  (i)   Form of Distribution Agreement(5)
               (ii)  Form of Underwriting Agreement for the Preferred Shares is
                     filed herewith

          (i)  Not Applicable

          (j)  Form of Custody Agreement(3)

          (k)  (i)   Form of Amended and Restated Administration Agreement(8)
               (ii)  Form of Recordkeeping Agreement(3)
               (iii) Form of Revolving Loan Agreement(6)
               (iv)  Form of Credit Agreement(7)
               (v)   Form of Auction Agency Agreement is filed herewith
               (vi)  Form of Broker-Dealer Agreement is filed herewith
               (vii) Form of DTC Letter of Representations as to Preferred
                     Shares

          (l)  Opinion of Dechert is filed herewith

          (m)  Not Applicable


          (n)  Consent of KPMG LLP is filed herewith

          (o)  Not Applicable

          (p)  Certificate of Initial Capital4

          (q)  Not Applicable

          (r)  Pilgrim Group Funds Code of Ethics(8)

                                       C-2
<PAGE>
- ----------
(1)  Incorporated herein by reference to Amendment No. 20 to Registrant's
     Registration Statement under the Investment Company Act of 1940 (the "1940
     Act") on Form N-2 (File No. 811-5410), filed on September 16, 1996.
(2)  Incorporated herein by reference to Amendment No. 24 to Registrant's
     Registration Statement under the 1940 Act on Form N-2 (File No. 811-5410),
     filed on November 7, 1997.
(3)  Incorporated herein by reference to Amendment No. 22 to Registrant's
     Registration Statement under the 1940 Act on Form N-2 (File No. 811-5410),
     filed on June 23, 1997.
(4)  Incorporated herein by reference to Pre-Effective Amendment No. 1 to
     Registrant's initial registration statement on form N-2 (File No.
     33-18886), filed on January 22, 1988.
(5)  Incorporated herein by reference to Amendment No. 27 to Registrant's
     Registration Statement under the 1940 Act on Form N-2 (File No. 811-5410),
     filed on May 15, 1998.
(6)  Incorporated herein by reference to Amendment No. 28 to Registrant's
     Registration Statement under the 1940 Act on Form N-2 (File No. 811-5410),
     filed on August 19, 1998.
(7)  Incorporated herein by reference to Amendment No. 29 to Registrant's
     Registration Statement under the 1940 Act on Form N-2 (File No. 811-5410),
     filed on December 2, 1998.
(8)  Incorporated herein by reference to Amendment No. 33 to Registrant's
     Registration Statement under the 1940 Act on Form N-2 (File No. 811-5410),
     filed on May 9, 2000.

ITEM 25. MARKETING AGREEMENTS


     See Form of Underwriting Agreement for the Preferred Shares filed as
Exhibit (h)(ii) of Item 24 to this Registration Statement.

ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION


     The following table sets forth expenses incurred or estimated to be
incurred in connection with the offering described in the Registration
Statement.


      Registration Fees..........................................  $ 81,818
      Rating Agency Fees.........................................  $202,500
      Printing Expenses..........................................  $ 30,000
      Legal Fees.................................................  $ 90,000
      Accounting Fees and Expenses...............................  $ 24,000
      Miscellaneous Expenses.....................................  $ 18,000
                                                                   --------
                  Total..........................................  $446,318
                                                                   ========


ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL

     Not Applicable.

ITEM 28. NUMBER OF HOLDERS OF SECURITIES




     (1) Title of Class                         (2) Number of Record Holders
     ------------------                         ----------------------------
     Auction Rate Cumulative Preferred          0 as of  September 30, 2000
     Shares of beneficial interest,
     par value $0.01 per share

     Common Shares of beneficial interest,      53,989 as of  September 30, 2000
     par value $0.01 per share

                                       C-3
<PAGE>
ITEM 29. INDEMNIFICATION

     Registrant's Agreement and Declaration of Trust generally provides that the
Trust shall indemnify each of its Trustees and officers (including persons who
serve at the Trust's request as directors, officers or trustees of another
organization in which the Trust has any interest as a shareholder, creditor or
otherwise) ("Covered Persons") against all liabilities and expenses, including
amounts paid in satisfaction of judgments, in compromise or as fines and
penalties, and counsel fees reasonably incurred in connection with the defense
or disposition of any action, suit or other proceeding, whether civil or
criminal, by reason of being or having been such a Covered Person except with
respect to any matter as to which such Covered Person shall have been finally
adjudicated (a) not to have acted in good faith in the reasonable belief that
such Covered Person's action was in the best interest of the Trust or (b) to be
liable to the Trust or its shareholders by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of duties involved in the conduct
of such Covered Person's office.

     Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to Trustees, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Commission, such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment of the Registrant of expenses incurred or
paid by a Trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person in connection with the securities being
registered, the Registrant will submit, unless in the opinion of its counsel the
matter has been settled by controlling precedent, to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER

     Certain of the officers and directors of the Registrant's Investment
Adviser also serve as officers and/or directors for other registered investment
companies in the Pilgrim family of funds and with ReliaStar Financial Corp., the
indirect parent of the Investment Adviser, and its subsidiaries. Information as
to the directors and officers of the Adviser is included in the Investment
Adviser's Form ADV and amendments thereto filed with the Commission and is
incorporated herein by reference thereto. For additional information, see
"Management of the Trust" in the Prospectus.

ITEM 31. LOCATION OF ACCOUNTS AND RECORDS


     The amounts and records of the Registrant will be maintained at its office
at 7337 E. Doubletree Ranch Road, Scottsdale, Arizona 85258 and at the office of
its custodian, State Street Bank & Trust - Kansas City, 801 Pennsylvania, Kansas
City, Missouri 64105.

                                       C-4
<PAGE>
ITEM 32. MANAGEMENT SERVICES

     Not Applicable.

ITEM 33. UNDERTAKINGS

     1. The Registrant undertakes to suspend the Offer until the prospectus is
amended if (1) subsequent to the effective date of this registration statement,
the net asset value declines more than ten percent from its net asset value as
of the effective date of this registration statement or (2) the net asset value
increases to an amount greater than the net proceeds as stated in the prospectus
included in this registration statement.

     2. Not Applicable.

     3. Not Applicable.

     4. Not Applicable.

     5.   a. The Registrant undertakes that for the purpose of determining any
     liability under the 1933 Act, the information omitted from the form of
     prospectus filed as part of this Registration Statement in reliance upon
     Rule 430A and contained in a form of prospectus filed by the Registrant
     under Rule 497(h) under the 1933 Act [17 CFR 230.497(h)] shall be deemed to
     be part of this Registration Statement as of the time it was declared
     effective; and

          b. that for the purpose of determining any liability under the 1933
     Act, each post-effective amendment that contains a form of prospectus shall
     be deemed to be a new registration statement relating to the securities
     offered therein, and the offering of the securities at that time shall be
     deemed to be the initial bona fide offering thereof.

     6. The Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of receipt
of a written or oral request, any Statement of Additional Information.

                                       C-5
<PAGE>
                                   SIGNATURES


     Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, as amended, the Registrant has duly caused this
Pre-Effective Amendment No. 1 to the Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Phoenix in
the State of Arizona this 20th day of October, 2000.

                                        PILGRIM PRIME RATE TRUST


                                        By: /s/ James M. Hennessy
                                            ------------------------------------
                                            James M. Hennessy
                                            Senior Executive Vice President
                                            and Secretary

Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the date indicated:

       Signature                      Title                          Date
       ---------                      -----                          ----

                              Trustee and Chairman              October 20, 2000
- ------------------------
John G. Turner*

                              Trustee and President             October 20, 2000
- ------------------------      (Chief Executive Officer)
Robert W. Stallings*


                              Senior Vice President and         October 20, 2000
- ------------------------      Principal Financial Officer
Michael J. Roland*            (Principal Financial Officer)


                              Trustee                           October 20, 2000
- ------------------------
Al Burton*

                              Trustee                           October 20, 2000
- ------------------------
Paul S. Doherty*

                              Trustee                           October 20, 2000
- ------------------------
Robert B. Goode, Jr.*

                              Trustee                           October 20, 2000
- ------------------------
Alan L. Gosule*

                              Trustee                           October 20, 2000
- ------------------------
Walter H. May*

                              Trustee                           October 20, 2000
- ------------------------
Jock Patton*

                                       C-6
<PAGE>

                              Trustee                           October 20, 2000
- ------------------------
David W.C. Putnam*

                              Trustee                           October 20, 2000
- ------------------------
John R. Smith*

                              Trustee                           October 20, 2000
- ------------------------
David W. Wallace*


*By: /s/ James M. Hennessy
     -------------------------------------
     James M. Hennessy, Attorney-in-Fact**

- ----------
**   Powers of Attorney for the Trustees and Michael J. Roland were previously
     filed.

                                       C-7
<PAGE>

                            PILGRIM PRIME RATE TRUST

                EXHIBITS FILED WITH PRE-EFFECTIVE AMENDMENT NO. 1


EXHIBIT NO.         EXHIBIT
- -----------         -------
2(a)(iv)            Amendment to the Agreement and Declaration of Trust
2(b)(iv)            Amendment to the By-Laws
2(d)(i)             Form of Certificate of Designation for Preferred Shares
2(d)(ii)            Form of Share Certificate
2(g)(iv)            Investment Management Agreement
2(h)(ii)            Form of Underwriting Agreement for Preferred Shares
2(k)(v)             Form of Auction Agency Agreement
2(k)(vi)            Form of Broker-Dealer Agreement
2(k)(vii)           Form of DTC Letter of Representations as to Preferred Shares
2(l)                Opinion of Dechert
2(n)                Consent of KPMG LLP

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.2.A.IV
<SEQUENCE>2
<FILENAME>0002.txt
<DESCRIPTION>AMENDED AGREMENT & DECLARATION OF TRUST
<TEXT>

                           WRITTEN INSTRUMENT AMENDING
                       AGREEMENT AND DECLARATION OF TRUST
                                       OF
                            PILGRIM PRIME RATE TRUST

     This Amendment to the Agreement and Declaration of Trust ("Declaration") of
Pilgrim Prime Rate Trust (the "Trust") is made this 20th day of October, 2000 by
the parties signatory hereto, as Trustees of the Trust (the "Trustees").

                                   WITNESSETH

     WHEREAS, the Declaration of Trust was made on December 2, 1987 and the
Trustees now desire to amend the Declaration; and

     WHEREAS, Article IX, Section 7 of the Declaration provides that the
Trustees may amend the Declaration by an instrument signed by a majority of the
Trustees when authorized to do so by vote of Shareholders holding a majority of
the Shares of each series entitled to vote; and

     WHEREAS, Shareholders of the Trust approved these amendments at a meeting
held on August 25, 2000;

     NOW, THEREFORE, the Trustees hereby declare that the Declaration is amended
as follows:

     1. Subsection (c) of Section 2 of Article I of the Agreement and
Declaration of Trust is amended to read in its entirety as follows:

          (c) "Shares" means the equal proportionate transferable units of
     interest into which the beneficial interest in the Trust shall be divided
     from time to time or, if more than one class or series of Shares is
     authorized by the Trustees, the equal proportionate transferable units into
     which each class or series of Shares shall be divided from time to time;

     2. Subsections (g) and (h) of Section 2 of Article I of the Agreement and
Declaration of Trust are amended to read in their entirety, and new subsections
(i), (j), (k) and (l) are added immediately thereafter, as follows:

          (g) "Declaration of Trust" shall mean this Agreement and Declaration
     of Trust as amended or restated from time to time;

          (h) "By-laws" shall mean the By-laws of the Trust as amended from time
     to time;

          (i) "Certificate" shall mean the Certificate of Designation for the
     Preferred Shares;
<PAGE>
          (j) The term "class" or "class of Shares" refers to the division of
     Shares into two or more classes as provided in Article III, Section 1
     hereof;

          (k) The term "series" or "series of Shares" refers to the division of
     Shares representing any class into two or more series as provided in
     Article III, Section 1 hereof; and

          (l) The "1940 Act" shall mean the Investment Company Act of 1940.

     3. Sections 1 and 2 of Article III of the Agreement and Declaration of
Trust are amended to read in their entirety as follows:

          SECTION 1. DIVISION OF BENEFICIAL INTEREST. The Shares of the Trust
     shall be issued in one or more classes of Shares (which classes may be
     divided into two or more series) as the Trustees may, without shareholder
     approval, authorize. Subject to the foregoing, Shares of each such class or
     series shall have such preferences, voting powers, terms of redemption, if
     any, and special or relative rights or privileges (including conversion
     rights, if any) as the Trustees may determine and as shall be set forth in
     the By-laws or the Certificate establishing the terms of any such class or
     series which may be filed with the Secretary of the Commonwealth,
     Corporations Division; provided, however, that to the extent required by
     the 1940 Act no such series shall have a preference or priority over any
     other series within its class upon the distribution of assets or in respect
     of payment of dividends; and provided, further, the By-laws or the
     Certificate shall set forth such other terms and conditions as may be
     required by the 1940 Act with respect to stock which is a senior security.
     The beneficial interest in each class or series shall at all times be
     divided into Shares, without par value, each of which shall represent an
     equal proportionate interest in that class or series with each other Share
     of the same class or series, none having priority or preference over
     another. The number of Shares of each class or series authorized shall be
     unlimited, except as the By-laws may otherwise provide, and the Shares so
     authorized may be represented in part by fractional Shares. The Trustees
     may from time to time divide or combine the Shares of any class or series
     into a greater or lesser number without thereby changing the proportionate
     beneficial interests in the class or series.

          SECTION 2. OWNERSHIP OF SHARES. The ownership of Shares shall be
     recorded on the books of the Trust or a transfer or similar agent. No
     certificates certifying the ownership of Shares shall be issued except as
     the Trustees may otherwise determine from time to time. The Trustees may
     make such rules as they consider appropriate for the issuance of Share
     certificates, the transfer of Shares and similar matters. The record books
     of the Trust as kept by the Trust or any transfer or similar agent, as the
     case may be, shall be conclusive as to who are the Shareholders of each
     class or series and as to the number of Shares of each class or series held
     from time to time by each Shareholder.

                                       2
<PAGE>
     4. The second paragraph of Section 3 of Article III of the Agreement and
Declaration of Trust is deleted.

     5. Section 1 of Article IV of the Agreement and Declaration of Trust is
amended to read in its entirety as follows:

          SECTION 1. ELECTION. The persons who shall act as Trustees until the
     first annual meeting or until their successors are duly chosen and qualify
     are the initial Trustees executing this Agreement and Declaration of Trust
     or any counterpart thereof. The number of Trustees shall be as provided in
     the By-laws or as fixed from time to time by the Trustees. The Shareholders
     may elect Trustees at any meeting of Shareholders called by the Trustees
     for that purpose by a vote, and in accordance with the procedures, as set
     forth in the By-laws and in compliance with the provisions of the 1940 Act
     with respect to a class of senior securities which are stock to the extent
     it requires that a specified number of Trustees be elected by the holders
     of the class of senior securities. Each Trustee shall serve during the
     continued lifetime of the Trust until he dies, resigns or is removed, or,
     if sooner, until the next meeting of Shareholders called for the purpose of
     electing Trustees and the election and qualification of his successor. Any
     Trustee may resign at any time by written instrument signed by him and
     delivered to any officer of the Trust, to each other Trustee or to a
     meeting of the Trustees. Such resignation shall be effective upon receipt
     unless specified to be effective at some other time. Except to the extent
     expressly provided in a written agreement with the Trust, no Trustee
     resigning and no Trustee removed shall have any right to any compensation
     for any period following his resignation or removal, or any right to
     damages on account of such removal.

     6. The first paragraph of Section 3 of Article IV of the Agreement and
Declaration of Trust is amended to read in its entirety as follows:

          SECTION 3. POWERS. Subject to the provisions of this Declaration of
     Trust, the business of the Trust shall be managed by the Trustees, and they
     shall have all powers necessary or convenient to carry out that
     responsibility. Without limiting the foregoing, the Trustees may adopt
     By-laws not inconsistent with this Declaration of Trust providing for the
     conduct of the business of the Trust and may amend and repeal them to the
     extent that such By-laws do not reserve that right to the Shareholders of
     one or more classes or series. The Trustees may enlarge or reduce their
     number and, subject to the voting power of one or more classes or series of
     Shares as set forth in the By-laws, the Trustees may fill vacancies in
     their number, including vacancies caused by enlargement of their number,
     and may remove Trustees with or without cause; they may elect and remove,
     with or without cause, such officers and appoint and terminate such agents
     as they consider appropriate; they may appoint from their own number, and
     terminate, any one or more committees consisting of two or more Trustees,
     including an executive committee which may, when the Trustees are not in
     session, exercise some or all of the power and authority of the Trustees as
     the Trustees may determine; they may employ one or more custodians of the
     assets of the Trust and may authorize such custodians to employ
     subcustodians and to deposit all or any part of such assets in a system or
     systems for the central handling of securities, retain a transfer agent or
     a Shareholder servicing agent, or both, provide for the distribution of
     Shares by the Trust, through one or more principal underwriters or
     otherwise, set record dates for the determination of Shareholders with

                                       3
<PAGE>
     respect to various matters,  and in general delegate such authority as they
     consider  desirable  to any officer of the Trust,  to any  committee of the
     Trustees and to any agent or employee of the Trust or to any such custodian
     or underwriter.

     7. Subsection (g) of Section 3 of Article IV of the Agreement and
Declaration of Trust is amended to read in its entirety as follows:

          (g) To allocate assets, liabilities and expenses of the Trust to a
     particular class or series of Shares or to apportion the same among two or
     more classes or series;

     8. Sections 4 and 5 of Article IV of the Agreement and Declaration of Trust
are amended to read in their entirety as follows:

          SECTION 4. PAYMENT OF EXPENSES BY TRUST. The Trustees are authorized
     to pay or to cause to be paid out of the principal or income of the Trust,
     or partly out of principal and partly out of income, as they deem fair, all
     expenses, fees, charges, taxes and liabilities incurred arising in
     connection with the Trust, in connection with the management thereof, or in
     connection with the financing of the sale of Shares, including, but not
     limited to, the Trustees compensation and such expenses and charges for the
     services of the Trust's officers, employees, any investment adviser,
     manager, or sub-adviser, principal underwriter, auditor, counsel,
     custodian, transfer agent, shareholder servicing agent, and such other
     agents or independent contractors and such other expenses and charges as
     the Trustees may deem necessary or proper to incur.

          SECTION 5. OWNERSHIP OF ASSETS OF THE TRUST. Title to all of the
     assets of the Trust shall at all times be considered as vested in the
     Trustees.

     9. Section 1 of Article VI of the Agreement and Declaration of Trust is
amended to read in its entirety as follows:

          SECTION 1. DISTRIBUTIONS. The Trustees may each year, or more
     frequently if they so determine, distribute to the Shareholders such income
     and capital gains, accrued or realized, as the Trustees may determine,
     after providing for actual and accrued expenses and liabilities (including
     such reserves as the Trustees may establish) determined in accordance with
     good accounting practices and subject to the preferences, special or
     relative rights and privileges of the various classes or series of Shares,
     as permitted by the 1940 Act. The Trustees shall have full discretion to
     determine which items shall be treated as income and which items as capital
     and their determination shall be binding upon the Shareholders.
     Distributions of each year's income shall be distributed pro rata to
     Shareholders of a class or series in proportion to the number of Shares of
     such class or series held by each of them. Such distributions shall be made
     in cash or Shares or a combination thereof as determined by the Trustees.
     Any such distribution paid in Shares of a class or series will be paid at
     the net asset value thereof as determined in accordance with the By-laws.

     10. Section 3 of Article VI of the Agreement and Declaration of Trust is
deleted.

     11. Section 4 of Article VIII of the Agreement and Declaration of Trust is
amended to read in its entirety as follows:

                                       4
<PAGE>
          SECTION 4. SHAREHOLDERS. In case any Shareholder or former Shareholder
     shall be held to be personally liable solely by reason of his or her being
     or having been a Shareholder and not because of his or her acts or
     omissions or for some other reason, the Shareholder or former Shareholder
     (or his or her heirs, executors, administrators or other legal
     representatives or in the case of a corporation or other entity, its
     corporate or other general successor) shall be entitled to be held harmless
     from and indemnified against all loss and expense arising from such
     liability out of the assets of the Trust.

     12. The first paragraph of Section 1 of Article IX of the Agreement and
Declaration of Trust is amended to read in its entirety as follows:

          SECTION 1. TRUSTEES, SHAREHOLDERS, ETC. Not Personally Liable; Notice.
     All persons extending credit to, contracting with or having any claim
     against the Trust or a particular class or series of Shares shall look only
     to the assets of the Trust for payment under such credit, contract or
     claim; and neither the Shareholders nor the Trustees, nor any of the
     Trust's officers, employees or agents, whether past, present or future,
     shall be personally liable therefor. Nothing in this Declaration of Trust
     shall protect any Trustee against any liability to which such Trustee would
     otherwise be subject by reason of willful misfeasance, bad faith, gross
     negligence or reckless disregard of the duties involved in the conduct of
     the office of Trustee.

     13. Section 4 of Article IX of the Agreement and Declaration of Trust is
amended to read in its entirety as follows:

          SECTION 4. DURATION AND TERMINATION OF TRUST. Unless terminated as
     provided herein, the Trust shall continue without limitation of time.
     Except to the extent that the By-laws or applicable law, including the 1940
     Act, may require a higher vote or the separate vote of one or more classes
     or series of Shares, the Trust may be terminated at any time by the vote of
     Shareholders holding a majority of the Shares of all classes entitled to
     vote, voting together as one class, or by the vote of a majority of the
     Trustees and by written notice to the Shareholders.

          Upon termination of the Trust, after paying or otherwise providing for
     all charges, taxes, expenses and liabilities, whether due or accrued or
     anticipated, of the Trust or of the particular class or series as may be
     determined by the Trustees, the Trust shall in accordance with such
     procedures as the Trustees consider appropriate reduce the remaining assets
     to distributable form in cash or shares or other securities, or any
     combination thereof, and distribute the proceeds to the Shareholders of
     each class or series, ratably according to the number of Shares of such
     class or series held by the several Shareholders of such class or series on
     the date of termination.

     14. Section 7 of Article IX of the Agreement and Declaration of Trust is
amended to read in its entirety as follows:

          SECTION 7. AMENDMENTS. Except to the extent that the By-laws or
     applicable law, including the 1940 Act, may require a higher vote or the
     separate vote of one or more classes or series of Shares, this Declaration
     of Trust may be amended at any time by an instrument in writing signed by a
     majority of the Trustees when authorized to do so by the vote of

                                       5
<PAGE>
     Shareholders holding a majority of the Shares of all classes entitled to
     vote, voting together as one class. Amendments having the purpose of
     changing the name of the Trust or of supplying any omission, curing any
     ambiguity or curing, correcting or supplementing any defective or
     inconsistent provision contained herein shall not require the authorization
     by Shareholder vote.

          The Trustees hereby agree that this document may be signed in
     counterparts but treated as one document.
<PAGE>
     IN WITNESS WHEREOF, the undersigned have executed this instrument this 20th
day of October, 2000.


- -----------------------------------          -----------------------------------
Al Burton                                    Robert W. Stallings


- -----------------------------------          -----------------------------------
Paul S. Doherty                              John G. Turner


- -----------------------------------          -----------------------------------
Robert B. Goode                              David W. Wallace


- -----------------------------------
Alan L. Gosule


- -----------------------------------
Walter H. May


- -----------------------------------
Jock Patton


- -----------------------------------
David W.C. Putnam


- -----------------------------------
John R. Smith
                                       6
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.2.B.IV
<SEQUENCE>3
<FILENAME>0003.txt
<DESCRIPTION>AMENDMENT TO BY-LAWS
<TEXT>

                                    AMENDMENT

                                TO THE BY-LAWS OF

                            PILGRIM PRIME RATE TRUST


         On July 26, 2000 the Board of Trustees adopted the following amendments
to the By-laws of Pilgrim Prime Rate Trust. The amendments contemplate the Trust
issuing a class of preferred shares, with one or more series, of the Trust.
Accordingly, the By-laws of Pilgrim Prime Rate Trust are hereby amended to
revise Sections 11.1 and 11.3 of ARTICLE 11, to read as follows:

         11.1 VOTING POWERS. The Shareholders shall have power to vote only (i)
for the election of Trustees as provided in Article IV, Section 1 of the
Declaration of Trust and Section 11.3 of these By-laws, PROVIDED, HOWEVER, that
no meeting of Shareholders is required to be called for the purpose of electing
Trustees unless and until such time as less than a majority of the Trustees have
been elected by the shareholders, or as otherwise required by the terms of the
Investment Company Act of 1940 and the rules and regulations thereunder,
including in this regard, in the event any preferred class of shares is
outstanding, as required by Section 18(a)(2) of the Investment Company Act of
1940, as amended, (ii) with respect to any Manager or Sub-Manager as provided in
Article IV, Section 6 of the Declaration of Trust to the extent required by the
Investment Company Act of 1940 and the rules and regulations thereunder (iii)
with respect to a termination of this Trust to the extent and as provided in
Article IX, Section 4 of the Declaration of Trust, (iv) with respect to any
amendment of the Declaration of Trust to the extent and as provided in Article
IX, Section 7 of the Declaration of Trust, (v) to the same extent as the
stockholders of a Massachusetts business corporation as to whether or not a
court action, proceeding or claim should or should not be brought or maintained
derivatively or as a class action on behalf of the Trust or the Shareholders,
and (vi) with respect to such additional matters relating to the Trust as may be
required by laws the Declaration of Trusts these By-laws or any registration of
the Trust with the Commission (or any successor agency) or any State, or as the
Trustee may consider necessary or desirable. Each whole share shall be entitled
to one vote as to any matter on which it is entitled to vote and each fractional
Share shall be entitled to a proportionate fractional vote. On any matter
submitted to a vote of Shareholders all Shares of the Trust then entitled to
vote shall be voted as one class, except (i) when required by the Investment
Company Act of 1940 and (ii) when the Trustees have determined that the matter
either affects only the interest of one class or one or more series within a
class or affects such class or shares adversely, then either Shareholders of
such class or series shall be the only class or series entitled to vote thereon
or they should be entitled to vote separately as a class or series. Consistent
with the forgoing, holders of any preferred class of shares shall vote
separately as a class (i) on the adoption of any plan of reorganization that
would adversely affect the preferred shares, (ii) with respect to any action
requiring a vote of security holders pursuant to Section 13(a) of the Investment
Company Act of 1940, as amended, and (iii) on any other matter as required by
law or as provided by the Trustees. There shall be no cumulative voting in the
election of Trustees. Shares held in the name of two or more persons shall be
valid if executed by any one of them unless at or prior to exercise of the proxy
the Trust receives a specific written notice to the contrary from any one of
<PAGE>
them. A proxy purporting to be executed by or on behalf of a Shareholder shall
be deemed valid unless challenged at or prior to its exercise and the burden of
proving invalidity shall rest on the challenger. Until Shares are issued, the
Trustees may exercise all rights of Shareholders and may take any action
required by law, the Declaration of Trust or those By-laws to be taken by
Shareholders.

         11.2 QUORUM AND REQUIRED VOTE. A majority of Shares entitled to vote
shall be a quorum for the transaction of business at a Shareholders meeting,
except that where any provision of law or of the Declaration of Trust or these
By-laws permits or requires that holders of any class or series shall vote as a
class or series, then a majority of the aggregate number of Shares of that
respective class or series entitled to vote shall be necessary to constitute a
quorum for the transaction of business by that class or series. Any lesser
number shall be sufficient for adjournments. Any adjourned session or sessions
may be held, within a reasonable time after the date set for the original
meeting, without the necessity of further notice. Except when a larger vote is
required by any provision of law or the Declaration of Trust or these By-laws, a
majority of the Shares voted shall decide any questions and a plurality shall
elect a Trustee, provided that where any provision of law or of the Declaration
of Trust or these By-laws permits or requires that the holders of any class or
series shall vote as a class or series, then, except as otherwise required by
the terms of the Investment Company Act of 1940 and the rules and regulations
thereunder, a majority of the Shares of that respective class or series voted on
the matter (or a plurality with respect to the election of a Trustee) shall
decide that matter insofar as that class or series is concerned. Consistent with
the foregoing, holders of a preferred class of shares, if any, shall be entitled
to elect (i) at least two Trustees at all times and (ii) a majority of the
Trustees at any time two years' dividends on such preferred class of shares are
unpaid.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.2.D.I
<SEQUENCE>4
<FILENAME>0004.txt
<DESCRIPTION>FORM OF CERTIFICATE OF DESIGNATION
<TEXT>

                            PILGRIM PRIME RATE TRUST

   FORM OF CERTIFICATE OF DESIGNATION FOR PREFERRED SHARES (THE "CERTIFICATE")

     Pilgrim Prime Rate Trust, a Massachusetts business trust (the "Trust"),
certifies that:

     FIRST: Section I of Article III of the Trust's Declaration of Trust (which,
as hereafter restated or amended from time to time, is together with this
Certificate herein called the "Declaration") empowers the Board of Trustees of
the Trust to authorize the issuance of one or more series of a class of
preferred shares, provided that to the extent required by the Investment Company
Act of 1940, no such series shall have priority over any other series within its
class upon the distribution of assets or in respect of the payment of dividends.

     SECOND: Pursuant to the authority so vested in the Board of Trustees of the
Trust, the Board of Trustees has, by resolution, authorized the creation of
18,000 Auction Rate Cumulative Preferred Shares, $.01 par value, liquidation
preference of $25,000 per share, classified as Series M, T, W, Th and F Auction
Rate Cumulative Preferred Shares (the "Preferred Shares").

     THIRD: The preferences, rights, voting powers, restrictions, limitations as
to dividends, qualifications and terms and conditions of redemption of the
shares of each series of Preferred Shares are as follows:

                                   DESIGNATION

     SERIES M: A series of 3,600 Preferred Shares, liquidation preference
$25,000 per share, is hereby designated "Series M Auction Rate Cumulative
Preferred Shares" ("Series M"). Each share of Series M may be issued on a date
to be determined by the Board of Trustees of the Trust or pursuant to their
delegated authority; have an initial Dividend Rate and an initial Dividend
Payment Date as shall be determined in advance of the issuance thereof by the
Board of Trustees of the Trust or pursuant to their delegated authority; and
have such other preferences, rights, voting powers, restrictions, limitations as
to dividends, qualifications and terms and conditions of redemption, in addition
to those required by applicable law or set forth in the Declaration applicable
to preferred shares of the Trust, as are set forth in Part I and Part II of this
Certificate. The Series M shall constitute a separate series of Preferred Shares
of the Trust.

     SERIES T: A series of 3,600 Preferred Shares, liquidation preference
$25,000 per share, is hereby designated "Series T Auction Rate Cumulative
Preferred Shares" ("Series T"). Each share of Series T may be issued on a date
to be determined by the Board of Trustees of the Trust or pursuant to their
delegated authority; have an initial Dividend Rate and an initial Dividend
Payment Date as shall be determined in advance of the issuance thereof by the
Board of Trustees of the Trust or pursuant to their delegated authority; and
have such other preferences, rights, voting powers, restrictions, limitations as
to dividends, qualifications and terms and conditions of redemption, in addition
to those required by applicable law or set forth in the Declaration applicable
to preferred shares of the Trust, as are set forth in Part I and Part II of this
Certificate. The Series T shall constitute a separate series of Preferred Shares
of the Trust.

     SERIES W: A series of 3,600 Preferred Shares, liquidation preference
$25,000 per share, is hereby designated "Series W Auction Rate Cumulative
Preferred Shares" ("Series W"). Each share of Series W may be issued on a date
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

to be determined by the Board of Trustees of the Trust or pursuant to their
delegated authority; have an initial Dividend Rate and an initial Dividend
Payment Date as shall be determined in advance of the issuance thereof by the
Board of Trustees of the Trust or pursuant to their delegated authority; and
have such other preferences, rights, voting powers, restrictions, limitations as
to dividends, qualifications and terms and conditions of redemption, in addition
to those required by applicable law or set forth in the Declaration applicable
to preferred shares of the Trust, as are set forth in Part I and Part II of this
Certificate. The Series W shall constitute a separate series of Preferred Shares
of the Trust.

     SERIES TH: A series of 3,600 Preferred Shares, liquidation preference
$25,000 per share, is hereby designated "Series Th Auction Rate Cumulative
Preferred Shares" ("Series Th"). Each share of Series Th may be issued on a date
to be determined by the Board of Trustees of the Trust or pursuant to their
delegated authority; have an initial Dividend Rate and an initial Dividend
Payment Date as shall be determined in advance of the issuance thereof by the
Board of Trustees of the Trust or pursuant to their delegated authority; and
have such other preferences, rights, voting powers, restrictions, limitations as
to dividends, qualifications and terms and conditions of redemption, in addition
to those required by applicable law or set forth in the Declaration applicable
to preferred shares of the Trust, as are set forth in Part I and Part II of this
Certificate. The Series Th shall constitute a separate series of Preferred
Shares of the Trust.

     SERIES F: A series of 3,600 Preferred Shares, liquidation preference
$25,000 per share, is hereby designated "Series F Auction Rate Cumulative
Preferred Shares" ("Series F"). Each share of Series F may be issued on a date
to be determined by the Board of Trustees of the Trust or pursuant to their
delegated authority; have an initial Dividend Rate and an initial Dividend
Payment Date as shall be determined in advance of the issuance thereof by the
Board of Trustees of the Trust or pursuant to their delegated authority; and
have such other preferences, rights, voting powers, restrictions, limitations as
to dividends, qualifications and terms and conditions of redemption, in addition
to those required by applicable law or set forth in the Declaration applicable
to preferred shares of the Trust, as are set forth in Part I and Part II of this
Certificate. The Series F shall constitute a separate series of Preferred Shares
of the Trust.

     Subject to the provisions of Section 3(j) of Part I of this Certificate,
the Board of Trustees of the Trust may, in the future, authorize the issuance of
additional series of the Trust's preferred shares, including additional Series
of Preferred Shares as long as any additional series of Preferred Shares has the
same preferences, rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of redemption and other terms
of each of the respective series herein described, except that the Applicable
Rate for its initial Dividend Period, its initial Dividend Payment Date and any
other changes in the terms herein set forth shall be as set forth in an
amendment to this Certificate.

     As used in Part I and Part II of this Certificate, capitalized terms shall
have the meanings provided in Section 19 of Part I of this Certificate.

                                        2
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION


                         PART I: PREFERRED SHARES TERMS

     1. NUMBER OF SHARES; RANKING.

          (a) The initial number of authorized shares constituting Series M is
3,600 shares. The initial number of authorized shares constituting Series T is
3,600 shares. The initial number of authorized shares constituting Series W is
3,600 shares. The initial number of authorized shares constituting Series Th is
3,600 shares. The initial number of authorized shares constituting Series F is
3,600 shares. No fractional shares of any Series shall be issued.

          (b) Shares of each Series which at any time have been redeemed or
purchased by the Trust shall, after such redemption or purchase, have the status
of authorized but unissued preferred shares.

          (c) Shares of each Series shall rank on a parity with shares of any
other series of preferred shares (including any other shares of Preferred
Shares) as to the payment of dividends to which such shares are entitled and the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Trust.

          (d) No Holder of shares of any Series shall have, solely by reason of
being such a holder, any preemptive or other right to acquire, purchase or
subscribe for any shares of any Series, shares of Common Shares of the Trust or
other securities of the Trust which it may hereafter issue or sell.

     2. DIVIDENDS.

          (a) The Holders of shares of each Series shall be entitled to receive,
when, as and if declared by the Board of Trustees, out of funds legally
available therefor, cumulative cash dividends on their shares at the Applicable
Rate, determined as set forth in paragraph (c) of this Section 2, and no more,
payable on the respective dates determined as set forth in paragraph (b) of this
Section 2. Dividends on the Outstanding shares of each Series issued on the Date
of Original Issue shall accumulate from the Date of Original Issue.

          (b) (i) Dividends shall be payable when, as and if declared by the
Board of Trustees following the initial Dividend Payment Date, subject to
subparagraph (b)(ii) of this Section 2, on the shares of each Series, as
follows:

                    (A) with respect to any Dividend Period of one year or less,
on the Business Day following the last day of such Dividend Period; provided
however, if the Dividend Period is more than 91 days then on the 91st, 181st and
271st days within such period, if applicable, and on the Business Day following
the last day of such Dividend Period; and

                                       3
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

                    (B) with respect to any Dividend Period of more than one
year, on a quarterly basis on each January 1, April 1, July 1 and October 1
within such Dividend Period and on the Business Day following the last day of
such Dividend Period.

               (ii) If a day for payment of dividends resulting from the
application of subparagraph (b)(i) above is not a Business Day, then the
Dividend Payment Date shall be the first Business Day following such day for
payment of dividends.

               (iii) The Trust shall pay to the Paying Agent not later than
12:00 p.m., New York City time, on the Business Day next preceding each Dividend
Payment Date for a Series, an aggregate amount of funds available on the next
Business Day in The City of New York, New York, equal to the dividends to be
paid to all Holders of such Series on such Dividend Payment Date. The Trust
shall not be required to establish any reserves for the payment of dividends.

               (iv) All moneys paid to the Paying Agent for the payment of
dividends shall be held in trust for the payment of such dividends by the Paying
Agent for the benefit of the Holders specified in subparagraph (b)(v) of this
Section 2. Any moneys paid to the Paying Agent in accordance with the foregoing
but not applied by the Paying Agent to the payment of dividends, including
interest earned on such moneys, will, to the extent permitted by law, be repaid
to the Trust at the end of 90 days from the date on which such moneys were to
have been so applied.

               (v) Each dividend on each Series shall be paid on the Dividend
Payment Date therefor to the Holders of that Series as their names appear on the
share ledger or share records of the Trust on the Business Day next preceding
such Dividend Payment Date, to the Holders as their names appear on the share
ledger or share records of the Trust on such date; provided, however, if
dividends are in arrears, they may be declared and paid at any time to Holders
as their names appear on the share ledger or share records of the Trust on such
date not exceeding 15 days preceding the payment date thereof, as may be fixed
by the Board of Trustees. No interest will be payable in respect of any dividend
payment or payments which may be in arrears.

          (c) (i) The dividend rate on Outstanding shares of each Series during
the period from and after the Date of Original Issue to and including the last
day of the initial Dividend Period therefor shall be equal to the rate per annum
set forth under "Designation" above. For each subsequent Dividend Period, the
dividend rate shall be equal to the rate per annum that results from an Auction;
provided, however, that if an Auction for any subsequent Dividend Period of a
Series is not held for any reason or if Sufficient Clearing Orders have not been
made in an Auction (other than as a result of all shares of any Series being the
subject of Submitted Hold Orders), then the dividend rate on the shares of that
Series for any such Dividend Period shall be the Maximum Rate (except (i) during
a Default Period when the dividend rate shall be the Default Rate, as set forth
in Section 2(c)(ii) below) or (ii) after a Default Period and prior to the
beginning of the next Dividend Period when the dividend rate shall be the

                                       4
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

Maximum Rate at the close of business on the last day of such Default Period).
The rate per annum at which dividends are payable on shares of each Series as
determined pursuant to this Section 2(c)(i) shall be the "Applicable Rate."

               (ii) Subject to the cure provisions in Section 2(c)(iii) below, a
"Default Period" with respect to a particular Series will commence on any date
the Trust fails to deposit irrevocably in trust in same-day funds, with the
Paying Agent by 12:00 noon, New York City time, (A) the full amount of any
declared dividend on that Series payable on the Dividend Payment Date (a
"Dividend Default") or (B) the full amount of any redemption price (the
"Redemption Price") payable on the date fixed for redemption (the "Redemption
Date") (a "Redemption Default") and together with a Dividend Default and a
Redemption Default, hereinafter referred to as "Default").

               Subject to the cure provisions of Section 2(c)(iii) below, a
Default Period with respect to a Dividend Default or a Redemption Default shall
end on the Business Day on which, by 12:00 noon, New York City time, all unpaid
dividends and any unpaid Redemption Price shall have been deposited irrevocably
in trust in same-day funds with the Paying Agent. In the case of a Dividend
Default, no Auction shall be held during a Default Period applicable to that
Series and the Applicable Rate for each Dividend Period commencing during a
Default Period will be equal to the Default Rate, and each subsequent Dividend
Period commencing after the beginning of a Default Period shall be a Standard
Rate Period; provided, however, that the commencement of a Default Period will
not by itself cause the commencement of a new Dividend Period. No Auction shall
be held during a Default Period applicable to that Series.

               (iii) No Default Period with respect to a Dividend Default or
Redemption Default shall be deemed to commence if the amount of any dividend or
any Redemption Price due (if such default is not solely due to the willful
failure of the Trust) is deposited irrevocably in trust, in same-day funds with
the Paying Agent by 12:00 noon, New York City time within three Business Days
after the applicable Dividend Payment Date or Redemption Date, together with an
amount equal to the Default Rate applied to the amount of such non-payment based
on the actual number of days comprising such period divided by 360. The Default
Rate shall be equal to the Reference Rate multiplied by three (3).

               (iv) The amount of dividends per share payable (if declared) on
each Dividend Payment Date of each Dividend Period of less than one (1) year (or
in respect of dividends on another date in connection with a redemption during
such Dividend Period) shall be computed by multiplying the Applicable Rate (or
the Default Rate) for such Dividend Period (or a portion thereof) by a fraction,
the numerator of which will be the number of days in such Dividend Period (or
portion thereof) that such share was Outstanding and for which the Applicable
Rate or the Default Rate was applicable and the denominator of which will be
360, multiplying the amount so obtained by $25,000, and rounding the amount so
obtained to the nearest

                                       5
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

cent. During any Dividend Period of one (1) year or more, the amount of
dividends per share payable on any Dividend Payment Date (or in respect of
dividends on another date in connection with a redemption during such Dividend
Period) shall be computed as described in the preceding sentence, except that it
will be determined on the basis of a year consisting of twelve 30-day months.

          (d) Any dividend payment made on shares of any Series shall first be
credited against the earliest accumulated but unpaid dividends due with respect
to such Series.

          (e) For so long as the Preferred Shares are Outstanding, except as
otherwise contemplated by Part I of this Certificate, the Trust will not
declare, pay or set apart for payment any dividend or other distribution (other
than a dividend or distribution paid in shares of, or options, warrants or
rights to subscribe for or purchase, Common Shares or other shares, ranking
junior to the Preferred Shares as to dividends or upon liquidation) with respect
to Common Shares or any other shares of the Trust ranking junior to the
Preferred Shares as to dividends or upon liquidation, or call for redemption,
redeem, purchase or otherwise acquire for consideration any Common Shares or
other shares ranking junior to the Preferred Shares (except by conversion into
or exchange for shares of the Trust ranking junior to the Preferred Shares as to
dividends and upon liquidation), unless (i) immediately after such transaction,
the Trust would have Eligible Assets with an aggregate Discounted Value at least
equal to the Preferred Shares Basic Maintenance Amount and the 1940 Act
Preferred Shares Asset Coverage would be achieved, (ii) all cumulative and
unpaid dividends due on or prior to the date of the transaction have been
declared and paid in full with respect to the Trust's preferred shares,
including the Preferred Shares, and (iii) the Trust has redeemed the full number
of preferred shares required to be redeemed by any mandatory provision for
redemption including shares of the Preferred Shares required to be redeemed by
any provision for mandatory redemption contained in Section 3(a)(ii) of Part I
of this Certificate.

          (f) For so long as the Preferred Shares are Outstanding, except as set
forth in the next sentence, the Trust will not declare, pay or set apart for
payment on any series of shares of the Trust ranking, as to the payment of
dividends, on a parity with the Preferred Shares for any period unless full
cumulative dividends have been or contemporaneously are declared and paid on the
Preferred Shares through their most recent Dividend Payment Date. When dividends
are not paid in full upon the Preferred Shares through their most recent
Dividend Payment Date or upon any other series of shares ranking on a parity as
to the payment of dividends with Preferred Shares through their most recent
respective Dividend Payment Dates, all dividends declared upon Preferred Shares
and any other such series of shares ranking on a parity as to the payment of
dividends with Preferred Shares shall be declared pro rata so that the amount of
dividends declared per share on Preferred Shares and such other series of
preferred shares shall in all cases bear to each other the same ratio that
accumulated dividends per share on the Preferred Shares and such other series of
preferred shares bear to each other.

                                       6
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

          (g) The Trust will not declare, pay or set apart for payment any
dividend or other distribution in respect to any Series (i) if there is any
event of payment default which has occurred and is continuing under indebtedness
senior to such Series (such senior indebtedness including but not limited to
indebtedness under the Bank of America Credit Agreement and the GE Loan
Agreement) or (ii) unless immediately after such transaction, the Trust would
have Eligible Assets with an aggregate Discounted Value at least equal to the
asset coverage requirements under the indebtedness senior to such Series.

     3. REDEMPTION.

          (a) (i) After the initial Dividend Period, subject to the provisions
of this Section 3 and to the extent permitted under the 1940 Act and
Massachusetts law, the Trust may, at its option, redeem in whole or in part out
of funds legally available therefor shares of any Series herein designated as
(A) having a Dividend Period of one year or less, on the Business Day after the
last day of such Dividend Period by delivering a notice of redemption not less
than 15 calendar days and not more than 40 calendar days prior to the Redemption
Date, at a redemption price per share equal to $25,000, plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or declared) to
the Redemption Date ("Redemption Price"), or (B) having a Dividend Period of
more than one year, on any Business Day prior to the end of the relevant
Dividend Period by delivering a notice of redemption not less than 15 calendar
days and not more than 40 calendar days prior to the Redemption Date, at the
Redemption Price, plus a redemption premium, if any, determined by the Board of
Trustees after consultation with the Broker-Dealers and set forth in any
applicable Specific Redemption Provisions at the time of the designation of such
Dividend Period as set forth in Section 4 of Part I of this Certificate;
provided, however, that during a Dividend Period of more than one year no shares
of any Series will be subject to optional redemption except in accordance with
any Specific Redemption Provisions approved by the Board of Trustees after
consultation with the Broker-Dealers at the time of the designation of such
Dividend Period. Notwithstanding the foregoing, the Trust shall not give a
notice of or effect any redemption pursuant to this Section 3(a)(i) unless, on
the date on which the Trust gives such notice and on the Redemption Date (a) the
Trust has available Deposit Securities with maturity or tender dates not later
than the day preceding the applicable Redemption Date and having a value not
less than the amount (including any applicable premium) due to Holders of each
Series by reason of the redemption of each Series on the Redemption Date and (b)
the Trust would have Eligible Assets with an aggregate Discounted Value at least
equal the Preferred Shares Basic Maintenance Amount immediately subsequent to
such redemption, if such redemption were to occur on such date, it being
understood that the provisions of paragraph (d) of this Section 3 shall be
applicable in such circumstances in the event the Trust makes the deposit and
takes the other action required thereby.

               (ii) If the Trust fails as of any Valuation Date to meet the
Preferred Shares Basic Maintenance Amount Test or, as of the last Business Day
of any month, the 1940 Act Preferred Shares Asset Coverage, and such failure is
not cured within five Business Days following the relevant Valuation Date in the
case of a failure to meet the Preferred Shares Basic Maintenance Amount Test or

                                       7
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

the last Business Day of the following month in the case of a failure to meet
the 1940 Act Preferred Shares Asset Coverage (each an "Asset Coverage Cure
Date"), the Preferred Shares will be subject to mandatory redemption out of
funds legally available therefor. The number of Preferred Shares to be redeemed
in such circumstances will be equal to the lesser of (A) the minimum number of
Preferred Shares the redemption of which, if deemed to have occurred immediately
prior to the opening of business on the relevant Asset Coverage Cure Date, would
result in the Trust meeting the Preferred Shares Basic Maintenance Amount Test,
and the 1940 Act Preferred Shares Asset Coverage, as the case may be, in either
case as of the relevant Asset Coverage Cure Date (provided that, if there is no
such minimum number of shares the redemption of which would have such result,
all Preferred Shares then Outstanding will be redeemed), and (B) the maximum
number of shares of Preferred Shares that can be redeemed out of funds expected
to be available therefor on the Mandatory Redemption Date at the Mandatory
Redemption Price set forth in subparagraph (a)(iv) of this Section 3.

               (iii) [Reserved]

               (iv) In determining the Preferred Shares required to be redeemed
in accordance with the foregoing Section 3(a)(ii), the Trust shall allocate the
number of shares required to be redeemed to satisfy the Preferred Shares Basic
Maintenance Amount Test or the 1940 Act Preferred Shares Asset Coverage, as the
case may be, pro rata among the Holders of the Preferred Shares in proportion to
the number of shares they hold and shares of other preferred shares subject to
mandatory redemption provisions similar to those contained in this Section 3,
subject to the further provisions of this subparagraph (iv). The Trust shall
effect any required mandatory redemption pursuant to: (A) the Preferred Shares
Basic Maintenance Amount Test, as described in subparagraph (a)(ii) of this
Section 3, no later than 30 days after the Trust last met the Preferred Shares
Basic Maintenance Amount Test, or (B) the 1940 Act Preferred Shares Asset
Coverage, as described in subparagraph (a)(ii) of this Section 3, no later than
30 days after the Asset Coverage Cure Date (the "Mandatory Redemption Date"),
except that if the Trust does not have funds legally available for the
redemption of, or is not otherwise legally permitted to redeem, the number of
Preferred Shares which would be required to be redeemed by the Trust under
clause (A) of subparagraph (a)(ii) of this Section 3 if sufficient funds were
available, together with shares of other preferred shares which are subject to
mandatory redemption under provisions similar to those contained in this Section
3, or the Trust otherwise is unable to effect such redemption on or prior to
such Mandatory Redemption Date, the Trust shall redeem those Preferred Shares,
and shares of other preferred shares which it was unable to redeem, on the
earliest practicable date on which the Trust will have such funds available,
upon notice pursuant to Section 3(b) to record owners of shares of the Preferred
Shares to be redeemed and the Paying Agent. The Trust will deposit with the
Paying Agent funds sufficient to redeem the specified number of Preferred Shares
with respect to a redemption required under subparagraph (a)(ii) of this Section
3, by 1:00 p.m., New York City time, of the Business Day immediately preceding

                                       8
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

the Mandatory Redemption Date. If fewer than all of the Outstanding Preferred
Shares are to be redeemed pursuant to this Section 3(a)(iv), the number of
shares to be redeemed shall be redeemed pro rata from the Holders of such shares
in proportion to the number of such shares held by such Holders, by lot or by
such other method as the Trust shall deem fair and equitable, subject, however,
to the terms of any applicable Specific Redemption Provisions. "Mandatory
Redemption Price" means the Redemption Price plus (in the case of a Dividend
Period of one year or more only) a redemption premium, if any, determined by the
Board of Trustees after consultation with the Broker-Dealers and set forth in
any applicable Specific Redemption Provisions.

          (b) In the event of a redemption pursuant to the foregoing Section
3(a), the Trust will file a notice of its intention to redeem with the
Securities and Exchange Commission so as to provide at least the minimum notice
required under Rule 23c-2 under the 1940 Act or any successor provision. In
addition, the Trust shall deliver a notice of redemption to the Auction Agent
(the "Notice of Redemption") containing the information set forth below (i) in
the case of an optional redemption pursuant to Section 3(a)(i) above, one
Business Day prior to the giving of notice to the Holders, (ii) in the case of a
mandatory redemption pursuant to Section 3(a)(ii) above, on or prior to the 10th
day preceding the Mandatory Redemption Date. The Auction Agent will use its
reasonable efforts to provide telephonic notice to each Holder of shares of any
Series called for redemption not later than the close of business on the
Business Day immediately following the day on which the Auction Agent determines
the shares to be redeemed (or, during a Default Period with respect to such
shares, not later than the close of business on the Business Day immediately
following the day on which the Auction Agent receives Notice of Redemption from
the Trust). The Auction Agent shall confirm such telephonic notice in writing
not later than the close of business on the third Business Day preceding the
date fixed for redemption by providing the Notice of Redemption to each Holder
of shares called for redemption, the Paying Agent (if different from the Auction
Agent) and the Securities Depository. Notice of Redemption will be addressed to
the registered owners of shares of any Series at their addresses appearing on
the share records of the Trust. Such Notice of Redemption will set forth (i) the
date fixed for redemption, (ii) the number and identity of shares of each Series
to be redeemed, (iii) the redemption price (specifying the amount of accumulated
dividends to be included therein), (iv) that dividends on the shares to be
redeemed will cease to accumulate on such date fixed for redemption, and (v) the
provision under which redemption shall be made. No defect in the Notice of
Redemption or in the transmittal or mailing thereof will affect the validity of
the redemption proceedings, except as required by applicable law. If fewer than
all shares held by any Holder are to be redeemed, the Notice of Redemption
mailed to such Holder shall also specify the number of shares to be redeemed
from such Holder.

          (c) Notwithstanding the provisions of paragraph (a) of this Section 3,
no preferred shares, including the Preferred Shares, may be redeemed at the
option of the Trust unless all dividends in arrears on the Outstanding Preferred
Shares and any other preferred shares have been or are being contemporaneously
paid or set aside for payment; provided, however, that the foregoing shall not
prevent the purchase or acquisition of outstanding preferred shares pursuant to
the successful completion of an otherwise lawful purchase or exchange offer made
on the same terms to Holders of all outstanding preferred shares.

                                       9
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

          (d) Upon the deposit of funds sufficient to redeem shares of any
Series with the Paying Agent and the giving of the Notice of Redemption to the
Auction Agent under paragraph (b) of this Section 3, dividends on such shares
shall cease to accumulate and such shares shall no longer be deemed to be
Outstanding for any purpose (including, without limitation, for purposes of
calculating whether the Trust has met the Preferred Shares Basic Maintenance
Amount Test or the 1940 Act Preferred Shares Asset Coverage), and all rights of
the Holders of the shares so called for redemption shall cease and terminate,
except the right of such Holder to receive the redemption price specified
herein, but without any interest or other additional amount. Such redemption
price shall be paid by the Paying Agent to the nominee of the Securities
Depository. The Trust shall be entitled to receive from the Paying Agent,
promptly after the date fixed for redemption, any cash deposited with the Paying
Agent in excess of (i) the aggregate redemption price of the shares of any
Series called for redemption on such date and (ii) such other amounts, if any,
to which Holders of shares of any Series called for redemption may be entitled.
Any funds so deposited that are unclaimed at the end of two years from such
redemption date shall, to the extent permitted by law, be paid to the Trust,
after which time the Holders of shares of each Series so called for redemption
may look only to the Trust for payment of the redemption price and all other
amounts, if any, to which they may be entitled; provided, however, that the
Paying Agent shall notify all Holders whose funds are unclaimed by placing a
notice in the Wall Street Journal concerning the availability of such funds for
three consecutive weeks. The Trust shall be entitled to receive, from time to
time after the date fixed for redemption, any interest earned on the funds so
deposited.

          (e) To the extent that any redemption for which Notice of Redemption
has been given is not made by reason of the absence of legally available funds
therefor, or is otherwise prohibited, such redemption shall be made as soon as
practicable to the extent such funds become legally available or such redemption
is no longer otherwise prohibited. Failure to redeem shares of any Series shall
be deemed to exist at any time after the date specified for redemption in a
Notice of Redemption when the Trust shall have failed, for any reason
whatsoever, to deposit in trust with the Paying Agent the redemption price with
respect to any shares for which such Notice of Redemption has been given.
Notwithstanding the fact that the Trust may not have redeemed shares of each
Series for which a Notice of Redemption has been given, dividends may be
declared and paid on shares of any Series and shall include those shares of any
Series for which Notice of Redemption has been given but for which deposit of
funds has not been made.

          (f) All moneys paid to the Paying Agent for payment of the redemption
price of shares of any Series called for redemption shall be held in trust by
the Paying Agent for the benefit of holders of shares so to be redeemed.

          (g) So long as any shares of any Series are held of record by the
nominee of the Securities Depository, the redemption price for such shares will
be paid on the date fixed for redemption to the nominee of the Securities
Depository for distribution to Agent Members for distribution to the persons for
whom they are acting as agent.

                                       10
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

          (h) Except for the provisions described above, nothing contained in
this Certificate limits any right of the Trust to purchase or otherwise acquire
any shares of each Series outside of an Auction at any price, whether higher or
lower than the price that would be paid in connection with an optional or
mandatory redemption, so long as, at the time of any such purchase, there is no
arrearage in the payment of dividends on, or the mandatory or optional
redemption price with respect to, any shares of each Series for which Notice of
Redemption has been given and the Trust meets the 1940 Act Preferred Shares
Asset Coverage and the Preferred Shares Basic Maintenance Amount Test after
giving effect to such purchase or acquisition on the date thereof. Any shares
which are purchased, redeemed or otherwise acquired by the Trust shall have no
voting rights. If fewer than all the Outstanding shares of any Series are
redeemed or otherwise acquired by the Trust, the Trust shall give notice of such
transaction to the Auction Agent, in accordance with the procedures agreed upon
by the Board of Trustees.

          (i) In the case of any redemption pursuant to this Section 3, only
whole shares of each Series shall be redeemed, and in the event that any
provision of the Declaration would require redemption of a fractional share, the
Auction Agent shall be authorized to round up so that only whole shares are
redeemed.

          (j) Notwithstanding anything herein to the contrary, including,
without limitation, Section 6(i) of Part I of this Certificate, the Board of
Trustees may authorize, create or issue other series of preferred shares,
including other series of Preferred Shares, series of stock ranking on a parity
with the Preferred Shares with respect to the payment of dividends or the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Trust, to the extent permitted by the 1940 Act, as amended, if
upon issuance, the net proceeds from the sale of such stock (or such portion
thereof needed to redeem or repurchase the Outstanding Preferred Shares) are
deposited with the Auction Agent in accordance with Section 3(d) of Part I of
this Certificate, Notice of Redemption as contemplated by Section 3(b) of Part I
of this Certificate has been delivered prior thereto or is sent promptly
thereafter, and such proceeds are used to redeem all Outstanding Preferred
Shares or if upon the issuance of any such series, the Trust would meet the 1940
Act Preferred Shares Asset Coverage, the Preferred Shares Basic Maintenance
Amount Test and the requirements of Section 12(b) of Part I of this Certificate.

          (k) Notwithstanding anything herein to the contrary, redemptions of
preferred shares pursuant to this Section 3 shall comply with the terms and
covenants of the Bank of America Credit Agreement and the GE Loan Agreement and
no such redemptions shall be permitted to the extent they will cause an event of
default under such agreements.

     4. DESIGNATION OF DIVIDEND PERIOD.

          (a) The initial Dividend Period for each Series is as set forth under
"Designation" above. The Trust will designate the duration of subsequent
Dividend Periods of each Series; provided, however, that no such designation is
necessary for a Standard Rate Period and, provided further, that any designation

                                       11
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

of a Special Rate Period shall be effective only if (i) notice thereof shall
have been given as provided herein, (ii) any failure to pay in a timely manner
to the Auction Agent the full amount of any dividend on, or the redemption price
of, each Series shall have been cured as provided above, (iii) Sufficient
Clearing Orders shall have existed in an Auction held on the Auction Date
immediately preceding the first day of such proposed Special Rate Period, (iv)
if the Trust shall have mailed a Notice of Redemption with respect to any
shares, the redemption price with respect to such shares shall have been
deposited with the Paying Agent, and (v) in the case of the designation of a
Special Rate Period, the Trust has confirmed that as of the Auction Date next
preceding the first day of such Special Rate Period, it has Eligible Assets with
an aggregate Discounted Value at least equal to the Preferred Shares Basic
Maintenance Amount, and the Trust has consulted with the Broker-Dealers and has
provided notice of such designation and a Preferred Shares Basic Maintenance
Certificate to each Rating Agency.

          (b) If the Trust proposes to designate any Special Rate Period, not
fewer than 7 Business Days (or two Business Days in the event the duration of
the Dividend Period prior to such Special Rate Period is fewer than 8 days) nor
more than 30 Business Days prior to the first day of such Special Rate Period,
notice shall be (i) made by press release and (ii) communicated by the Trust by
telephonic or other means to the Auction Agent and confirmed in writing promptly
thereafter. Each such notice shall state (A) that the Trust proposes to exercise
its option to designate a succeeding Special Rate Period, specifying the first
and last days thereof and (B) that the Trust will by 3:00 p.m., New York City
time, on the second Business Day next preceding the first day of such Special
Rate Period, notify the Auction Agent, who will promptly notify the
Broker-Dealers, of either (x) its determination, subject to certain conditions,
to proceed with such Special Rate Period, subject to the terms of any Specific
Redemption Provisions, or (y) its determination not to proceed with such Special
Rate Period, in which latter event the succeeding Dividend Period shall be a
Standard Rate Period. No later than 3:00 p.m., New York City time, on the second
Business Day next preceding the first day of any proposed Special Rate Period,
the Trust shall deliver to the Auction Agent, who will promptly deliver to the
Broker- Dealers and Existing Holders, either:

               (i) a notice stating (A) that the Trust has determined to
designate the next succeeding Dividend Period as an Special Rate Period,
specifying the first and last days thereof and (B) the terms of any Specific
Redemption Provisions; or

               (ii) a notice stating that the Trust has determined not to
exercise its option to designate a Special Rate Period.

If the Trust fails to deliver either such notice with respect to any designation
of any proposed Special Rate Period to the Auction Agent or is unable to make
the confirmation provided in clause (v) of Paragraph (a) of this Section 4 by
3:00 p.m., New York City time, on the second Business Day next preceding the
first day of such proposed Special Rate Period, the Trust shall be deemed to
have delivered a notice to the Auction Agent with respect to such Dividend
Period to the effect set forth in clause (ii) above, thereby resulting in a
Standard Rate Period.

                                       12
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

     5. RESTRICTIONS ON TRANSFER. Shares of each Series may be transferred only
(a) pursuant to an order placed in an Auction, (b) to or through a Broker-Dealer
or (c) to the Trust or any Affiliate. Notwithstanding the foregoing, a transfer
other than pursuant to an Auction will not be effective unless the selling
Existing Holder or the Agent Member of such Existing Holder, in the case of an
Existing Holder whose shares are listed in its own name on the books of the
Auction Agent, or the Broker-Dealer or Agent Member of such Broker-Dealer, in
the case of a transfer between persons holding shares of any Series through
different Broker-Dealers, advises the Auction Agent of such transfer. The
certificates representing the shares of each Series issued to the Securities
Depository will bear legends with respect to the restrictions described above
and stop-transfer instructions will be issued to the Transfer Agent and/or
Registrar.

     6. VOTING RIGHTS.

          (a) Except as otherwise provided in the Declaration or as otherwise
required by applicable law, (i) each Holder of shares of any Series shall be
entitled to one vote for each share of any Series held on each matter submitted
to a vote of shareholders of the Trust, and (ii) the holders of outstanding
shares of preferred shares, including each Series, and shares of Common Shares
shall vote together as a single class on all matters submitted to stockholders;
provided, however, that, at any meeting of the shareholders of the Trust held
for the election of trustees, the holders of outstanding shares of preferred
shares, including each Series, represented in person or by proxy at said
meeting, shall be entitled, as a class, to the exclusion of the holders of all
other securities and classes of capital stock of the Trust, to elect two
trustees of the Trust, each share of preferred shares, including each Series,
entitling the holder thereof to one vote. Except as set forth in paragraph (b)
of this Section 6, the class of outstanding preferred shares, including each
Series, shall not be entitled to participate in the election of any other
trustees of the Trust.

          (b) During any period in which any one or more of the conditions
described below shall exist (such period being referred to herein as a "Voting
Period"), the number of trustees constituting the Board of Trustees shall be
automatically increased by the smallest number that, when added to the two
trustees elected exclusively by the holders of shares of preferred shares,
including each Series, would constitute a majority of the Board of Trustees as
so increased by such smallest number; and the holders of shares of preferred
shares, including each Series, shall be entitled, voting as a class on a
one-vote-per-share basis (to the exclusion of the holders of all other
securities and classes of capital stock of the Trust), to elect such smallest
number of additional trustees, together with the two trustees that such holders
are in any event entitled to elect. A Voting Period shall commence:

               (i) if at the close of business on any Dividend Payment Date
accumulated dividends (whether or not earned or declared) on preferred shares,
including each Series, equal to at least two full years' dividends shall be due
and unpaid; or

                                       13
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

               (ii) if at any time holders of any other shares of preferred
shares are entitled under the 1940 Act to elect a majority of the trustees of
the Trust.

Upon the termination of a Voting Period, the voting rights described in this
paragraph (b) of Section 6 shall cease, subject always, however, to the
revesting of such voting rights in the holders of preferred shares, including
each Series, upon the further occurrence of any of the events described in this
paragraph (b) of Section 6.

          (c) As soon as practicable after the accrual of any right of the
holders of shares of preferred shares, including each Series, to elect
additional trustees as described in paragraph (b) of this Section 6, the Trust
shall notify the Auction Agent, and the Auction Agent shall call a special
meeting of such holders, by mailing a notice of such special meeting to such
holders, such meeting to be held not less than 10 nor more than 90 days after
the date of mailing of such notice. If the Trust fails to send such notice to
the Auction Agent or if the Auction Agent does not call such a special meeting,
it may be called by any such holder on like notice. The record date for
determining the holders entitled to notice of and to vote at such special
meeting shall be the close of business on the fifth Business Day preceding the
day on which such notice is mailed. At any such special meeting and at each
meeting of holders of preferred shares, including each Series, held during a
Voting Period at which trustees are to be elected, such holders, voting together
as a class (to the exclusion of the holders of all other securities and classes
of capital stock of the Trust), shall be entitled to elect the number of
trustees prescribed in paragraph (b) of this Section 6 on a one-vote-per-share
basis.

          (d) The holders of preferred shares, including each Series, may also
have such other voting rights as are contemplated by Article III of the Trust's
Declaration.

          (e) For purposes of determining any rights of the holders of preferred
shares, including each Series, to vote on any matter, whether such right is
created by the Certificate, by statute or otherwise, if redemption of some or
all of the preferred shares, including each Series, is required, no holder of
preferred shares, including each Series, shall be entitled to vote and no share
of preferred shares, including each Series, shall be deemed to be "outstanding"
for the purpose of voting or determining the number of shares required to
constitute a quorum, if prior to or concurrently with the time of determination,
sufficient Deposit Securities for the redemption of such shares have been
deposited in the case of Preferred Shares in trust with the Paying Agent for
that purpose and the requisite Notice of Redemption with respect to such shares
shall have been given as provided in Section 3(b) of Part I of this Certificate
and in the case of other preferred shares the Trust has otherwise met the
conditions for redemption applicable to such preferred shares.

          (f) The terms of office of all persons who are trustees of the Trust
at the time of a special meeting of Holders of the Preferred Shares and holders
of other preferred shares to elect trustees pursuant to paragraph (b) of this
Section 6 shall continue, notwithstanding the election at such meeting by the
holders of the number of trustees that they are entitled to elect.

                                       14
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

          (g) Simultaneously with the termination of a Voting Period, the terms
of office of the additional trustees elected by the Holders of the Preferred
Shares and holders of other preferred shares pursuant to paragraph (b) of this
Section 6 shall terminate, the remaining trustees shall constitute the trustees
of the Trust and the voting rights of such holders to elect additional trustees
pursuant to paragraph (b) of this Section 6 shall cease, subject to the
provisions of the last sentence of paragraph (b) of this Section 6.

          (h) Unless otherwise required by law or in the Trust's charter
documents, the Holders of Preferred Shares shall not have any relative rights or
preferences or other special rights other than those specifically set forth
herein. In the event that the Trust fails to pay any dividends on the Preferred
Shares of the Trust or fails to redeem any Preferred Shares which it is required
to redeem, or any other event occurs which requires the mandatory redemption of
Preferred Shares and the required Notice of Redemption has not been given, other
than the rights set forth in paragraph (a) of Section 3 of Part I of this
Certificate, the exclusive remedy of the Holders of Preferred Shares shall be
the right to vote for trustees pursuant to the provisions of paragraph (b) of
this Section 6. In no event shall the Holders of Preferred Shares have any right
to sue for, or bring a proceeding with respect to, such dividends or redemptions
or damages for the failure to receive the same.

          (i) So long as any of the preferred shares, are outstanding, the Trust
will not, without the affirmative vote of the holders of a majority of the
outstanding preferred shares, (i) institute any proceedings to be adjudicated
bankrupt or insolvent, or consent to the institution of bankruptcy or insolvency
proceedings against it, or file a petition seeking or consenting to
reorganization or relief under any applicable federal or state law relating to
bankruptcy or insolvency, or consent to the appointment of a receiver,
liquidator, assignee, trustee, sequestrator (or other similar official) of the
Trust or a substantial part of its property, or make any assignment for the
benefit of creditors, or, except as may be required by applicable law, admit in
writing its inability to pay its debts generally as they become due or take any
corporate action in furtherance of any such action; (ii) create, incur or suffer
to exist, or agree to create, incur or suffer to exist, or consent to cause or
permit in the future (upon the happening of a contingency or otherwise) the
creation, incurrence or existence of any material lien, mortgage, pledge,
charge, security interest, security agreement, conditional sale or trust receipt
or other material encumbrance of any kind upon any of the Trust's assets as a
whole, except (A) liens the validity of which are being contested in good faith
by appropriate proceedings, (B) liens for taxes that are not then due and
payable or that can be paid thereafter without penalty, (C) liens, pledges,
charges, security interests, security agreements or other encumbrances arising
in connection with any indebtedness senior to the Preferred Shares, (D) liens,
pledges, charges, security interests, security agreements or other encumbrances
arising in connection with any indebtedness permitted under clause (iii) below
and (E) liens to secure payment for services rendered including, without
limitation, services rendered by the Trust's Paying Agent and the Auction Agent;
or (iii) create, authorize, issue, incur or suffer to exist any indebtedness for
borrowed money or any direct or indirect guarantee of such indebtedness for
borrowed money or any direct or indirect guarantee of such indebtedness, except
the Trust may borrow as may be permitted by the Trust's investment restrictions;
provided, however, that transfers of assets by the Trust subject to an

                                       15
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

obligation to repurchase shall not be deemed to be indebtedness for purposes of
this provision to the extent that after any such transaction the Trust has
Eligible Assets with an aggregate Discounted Value at least equal to the
Preferred Shares Basic Maintenance Amount as of the immediately preceding
Valuation Date.

          (j) The affirmative vote of the holders of a majority of the
outstanding preferred shares, including each Series, voting as a separate class,
shall be required to approve any plan of reorganization (as such term is used in
the 1940 Act) adversely affecting such shares or any action requiring a vote of
security holders of the Trust under Section 13(a) of the 1940 Act. In the event
a vote of holders of preferred shares is required pursuant to the provisions of
Section 13(a) of the 1940 Act, the Trust shall, not later than ten Business Days
prior to the date on which such vote is to be taken, notify each Rating Agency
that such vote is to be taken and the nature of the action with respect to which
such vote is to be taken and shall, not later than ten Business Days after the
date on which such vote is taken, notify each Rating Agency of the results of
such vote.

          (k) The affirmative vote of the holders of a majority of the
outstanding preferred shares of any series, voting separately from any other
series, shall be required with respect to any matter that materially and
adversely affects the rights, preferences, or powers of that series in a manner
different from that of other series or classes of the Trust's shares of capital
stock. For purposes of the foregoing, no matter shall be deemed to adversely
affect any right, preference or power unless such matter (i) alters or abolishes
any preferential right of such series; (ii) creates, alters or abolishes any
right in respect of redemption of such series; or (iii) creates or alters (other
than to abolish) any restriction on transfer applicable to such series. The vote
of holders of any series described in this Section 6(k) will in each case be in
addition to a separate vote of the requisite percentage of Common Shares and/or
preferred shares necessary to authorize the action in question.

          (l) The Board of Trustees, without the vote or consent of any holder
of the preferred shares or any other shareholder of the Trust, may from time to
time amend, alter or repeal any or all of the definitions contained herein, add
covenants and other obligations of the Trust, or confirm the applicability of
covenants and other obligations set forth herein, all in connection with
obtaining or maintaining the rating of any Rating Agency with respect to each
Series, and any such amendment, alteration or repeal will not be deemed to
affect the preferences, rights or powers of Preferred Shares or the Holders
thereof, provided that the Board of Trustees receives written confirmation from
each relevant Rating Agency (with such confirmation in no event being required
to be obtained from a particular Rating Agency with respect to definitions or
other provisions relevant only to and adopted in connection with another Rating
Agency's rating of any Series) that any such amendment, alteration or repeal
would not adversely affect the rating then assigned by such Rating Agency.

     In addition, subject to compliance with applicable law, the Board of
Trustees may amend the definition of Maximum Rate to increase the percentage
amount by which the Reference Rate is multiplied to determine the Maximum Rate
shown therein without the vote or consent of the holders of preferred shares,

                                       16
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

including each Series, or any other shareholder of the Trust, and without
receiving any confirmation from any Rating Agency, after consultation with the
Broker-Dealers, provided that immediately following any such increase the Trust
would meet the Preferred Shares Basic Maintenance Amount Test.

          (m) Unless otherwise required by law, Holders of shares of each Series
shall not have any relative rights or preferences or other special rights other
than those specifically set forth herein. The Holders of shares of each Series
shall have no rights to cumulative voting. In the event that the Trust fails to
pay any dividends on the shares of any Series, the exclusive remedy of the
Holders shall be the right to vote for trustees pursuant to the provisions of
this Section 6.

          (n) The foregoing voting provisions will not apply with respect to any
series if, at or prior to the time when a vote is required, such shares have
been (i) redeemed or (ii) called for redemption and sufficient funds shall have
been deposited in trust to effect such redemption.

     7. LIQUIDATION RIGHTS.

          (a) In the event of any liquidation, dissolution or winding up of the
affairs of the Trust, whether voluntary or involuntary, the Holders of Preferred
Shares, including each Series, shall be entitled to receive out of the assets of
the Trust available for distribution to stockholders, after claims of creditors
but before distribution to stockholders, after claims of creditors but before
any distribution or payment shall be made in respect of the Common Stock or any
other stock of the Trust ranking junior to the preferred shares, as to
liquidation payments, a liquidation distribution in the amount of $25,000 per
share (the "Liquidation Preference"), plus an amount equal to all unpaid
dividends accrued to and including the date fixed for such distribution or
payment (whether or not declared by the Trust, but excluding interest thereon),
but such Holders shall be entitled to no further participation in any
distribution or payment in connection with any such liquidation, dissolution or
winding up.

          (b) If, upon any such liquidation, dissolution or winding up of the
affairs of the Trust, whether voluntary or involuntary, the assets of the Trust
available for distribution among the holders of all outstanding preferred
shares, including each Series, shall be insufficient to permit the payment in
full to such holders of the amounts to which they are entitled, then such
available assets shall be distributed among the holders of preferred shares,
including each Series, ratably in any such distribution of assets according to
the respective amounts which would be payable on all such shares if all amounts
thereon were paid in full. Unless and until payment in full has been made to the
holders of preferred shares, including each Series, of the liquidation
distributions to which they are entitled, no dividends or distributions will be
made to holders of Common Stock or any stock of the Trust ranking junior to the
preferred shares as to liquidation.

          (c) Neither the consolidation nor merger of the Trust with or into any
other corporation or corporations, nor the sale, lease, exchange or transfer by
the Trust of all or substantially all of its property and assets, shall be
deemed to be a liquidation, dissolution or winding up of the Trust for purposes
of this Section 7.

                                       17
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

          (d) After the payment to Holders of Preferred Shares of the full
preferential amounts provided for in this Section 7, the Holders of the
Preferred Shares as such shall have no right or claim to any of the remaining
assets of the Trust.

          (e) In the event the assets of the Trust or proceeds thereof available
for distribution to the Holders of Preferred Shares, upon dissolution,
liquidation or winding up of the affairs of the Trust, whether voluntary or
involuntary, shall be insufficient to pay in full all amounts to which such
Holders are entitled pursuant to paragraph (a) of this Section 7, no such
distribution shall be made on account of any shares of any other series of
preferred shares unless proportionate distributive amounts shall be paid on
account of the Preferred Shares, ratably, in proportion to the full
distributable amounts to which holders of all preferred shares are entitled upon
such dissolution, liquidation or winding up.

          (f) Subject to the rights of the holders of other preferred shares or
after payment shall have been made in full to the Holders of Preferred Shares as
provided in paragraph (a) of this Section 7, but not prior thereto, any other
series or class of stock ranking junior to the Preferred Shares with respect to
the distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Trust shall, subject to any respective terms and provisions (if
any) applying thereto, be entitled to receive any and all assets remaining to be
paid or distributed, and the Holders of the Preferred Shares shall not be
entitled to share therein.

     8. AUCTION AGENT. For so long as any shares of Preferred Shares are
Outstanding, the Auction Agent, duly appointed by the Trust to so act, shall be
in each case a commercial bank, trust company or other financial institution
independent of the Trust and its Affiliates (which, however, may engage or have
engaged in business transactions with the Trust or its Affiliates) and at no
time shall the Trust or any of its Affiliates act as the Auction Agent in
connection with the Auction Procedures. If the Auction Agent resigns or for any
reason its appointment is terminated during any period that any shares of any
Series are Outstanding, the Trust shall use its best efforts promptly thereafter
to appoint another qualified commercial bank, trust company or financial
institution to act as the Auction Agent.

     9. 1940 ACT PREFERRED SHARES ASSET COVERAGE. The Trust shall maintain, as
of the last Business Day of each month in which any Preferred Shares are
Outstanding, the 1940 Act Preferred Shares Asset Coverage; provided, however,
that Section 3(a)(ii) shall be the sole remedy in the event the Trust fails to
do so.

     10. PREFERRED SHARES BASIC MAINTENANCE AMOUNT. So long as any Preferred
Shares are Outstanding and any Rating Agency so requires, the Trust shall
maintain, as of each Valuation Date, Moody's Eligible Assets and S&P Eligible
Assets, as applicable, having an aggregate Discounted Value equal to or greater
than the Preferred Shares Basic Maintenance Amount; provided, however, that
Section 3(a)(ii) shall be the sole remedy in the event the Trust fails to do so.

     11. [Reserved]

                                       18
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

     12. CERTAIN OTHER RESTRICTIONS. (a) So long as any Preferred Shares are
Outstanding and any Rating Agency so requires, the Trust will not, unless it has
received written confirmation from such Rating Agency that any such action would
not impair the rating then assigned by such Rating Agency to the Preferred
Shares, engage in any one or more of the following transactions:

               (i) purchase or sell futures contracts or options thereon with
respect to portfolio securities or write put or call options on portfolio
securities;

               (ii) except in connection with a refinancing of the Preferred
Shares, issue additional shares of any series of preferred shares, including any
Series or reissue any shares of preferred shares, including any Series
previously purchased or redeemed by the Trust;

               (iii) engage in any short sales of securities;

               (iv) lend portfolio securities;

               (v) merge or consolidate into or with any other corporation;

               (vi) engage in any reverse repurchase agreement; or

               (vii) change the Pricing Service to a service other than an
Approved Pricing Service.

          (b) So long as any Preferred Shares are Outstanding and are rated by
S&P:

               (i) the rating on each S&P Eligible Asset must be updated no less
frequently than monthly;

               (ii) the prices for S&P Eligible Assets which have a Market Value
Price shall be updated as of each Valuation Date;

               (iii) the prices for S&P Eligible Assets which have an Approved
Price shall be updated no less frequently than monthly;

               (iv) no less frequently than semi-annually, the Trust's
independent auditors shall verify the pricing of at least 25% of the S&P
Eligible Assets and provide to S&P a letter describing the results of such
verification. For the purposes of this item (iv), "verify" shall mean that the
independent auditors agreed the prices reported by the Trust to the prices
received by the Trust from an Approved Pricing Service; and

               (v) the Trust shall notify S&P if, on any Valuation Date, the
aggregate Discounted Value of the S&P Eligible Assets is less than 125% of the
Preferred Shares Basic Maintenance Amount.

     13. COMPLIANCE PROCEDURES FOR ASSET MAINTENANCE TESTS. For so long as any
Preferred Shares are Outstanding and any Rating Agency so requires:

          (a) As of each Valuation Date, the Trust shall determine (i) the
Market Value of each Eligible Asset owned by the Trust on that date, (ii) the
Discounted Value of each such Eligible Asset, (iii) whether the Preferred Shares
Basic Maintenance Amount Test is met as of that date, (iv) the value (as used in
the 1940 Act) of the total assets of the Trust, less all liabilities, and (v)
whether the 1940 Act Preferred Shares Asset Coverage is met as of that date.

                                       19
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

          (b) Upon any failure to meet the Preferred Shares Basic Maintenance
Amount Test or 1940 Act Preferred Shares Asset Coverage on any Valuation Date,
the Trust may use reasonable commercial efforts (including, without limitation,
altering the composition of its portfolio, purchasing shares of the Preferred
Shares outside of an Auction or, in the event of a failure to file a certificate
on a timely basis, submitting the requisite certificate), to meet (or certify in
the case of a failure to file a certificate on a timely basis, as the case may
be) the Preferred Shares Basic Maintenance Amount Test or 1940 Act Preferred
Shares Asset Coverage on or prior to the Asset Coverage Cure Date.

          (c) [Reserved]

          (d) The Trust shall deliver to the Auction Agent and each Rating
Agency a certificate which sets forth a determination of items (i)-(iii) of
paragraph (a) of this Section 13 (a "Preferred Shares Basic Maintenance
Certificate") as of (A) the Date of Original Issue, (B) the last Valuation Date
of each month, (C) any date requested by any Rating Agency, (D) a Business Day
on or before any Asset Coverage Cure Date relating to the Trust's cure of a
failure to meet the Preferred Shares Basic Maintenance Amount Test, and (E) any
day that Common or Preferred Shares are redeemed. Such Preferred Shares Basic
Maintenance Certificate shall be delivered in the case of clause (i)(A) on the
Date of Original Issue and in the case of all other clauses above on or before
the seventh Business Day after the relevant Valuation Date or Asset Coverage
Cure Date.

          (e) The Trust shall deliver to the Auction Agent and each Rating
Agency a certificate which sets forth a determination of items (iv) and (v) of
paragraph (a) of this Section 13 (a "1940 Act Preferred Shares Asset Coverage
Certificate") (i) as of the Date of Original Issue, and (ii) as of (A) the last
Valuation Date of each quarter thereafter, and (B) as of a Business Day on or
before any Asset Coverage Cure Date relating to the failure to meet the 1940 Act
Preferred Shares Asset Coverage. Such 1940 Act Preferred Shares Asset Coverage
Certificate shall be delivered in the case of clause (i) on the Date of Original
Issue and in the case of clause (ii) on or before the seventh Business Day after
the relevant Valuation Date or the Asset Coverage Cure Date. The certificates
required by paragraphs (d) and (e) of this Section 13 may be combined into a
single certificate.

          (f) [Reserved]

          (g) Within ten Business Days of the Date of Original Issue, the Trust
shall deliver to the Auction Agent and each Rating Agency a letter prepared by
the Trust's independent auditors (an "Auditor's Certificate") regarding the
accuracy of the calculations made by the Trust in the Preferred Shares Basic
Maintenance Certificate and the 1940 Act Preferred Shares Asset Coverage
Certificate required to be delivered by the Trust on the Date of Original Issue.
Within ten Business Days after delivery of the Preferred Shares Basic
Maintenance Certificate and the 1940 Act Preferred Shares Asset Coverage
Certificate relating to the last Valuation Date of each fiscal quarter of the

                                       20
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

Trust, the Trust will deliver to the Auction Agent and each Rating Agency an
Auditor's Certificate regarding the accuracy of the calculations made by the
Trust in such Certificates and in one other Preferred Shares Basic Maintenance
Certificate randomly selected by the Trust's independent auditors during such
fiscal quarter. In addition, the Trust will deliver to the persons specified in
the preceding sentence an Auditor's Certificate regarding the accuracy of the
calculations made by the Trust on each Preferred Shares Basic Maintenance
Certificate and 1940 Act Preferred Shares Asset Coverage Certificate delivered
in relation to an Asset Coverage Cure Date within ten days after the relevant
Asset Coverage Cure Date. If an Auditor's Certificate shows that an error was
made in any such report, the calculation or determination made by the Trust's
independent auditors will be conclusive and binding on the Trust.

          (h) The Auditor's Certificates referred to in paragraph (g) above will
confirm, based upon the independent auditors review of portfolio data provided
by the Trust, (i) the mathematical accuracy of the calculations reflected in the
related Preferred Shares Basic Maintenance Amount Certificates and 1940 Act
Preferred Shares Asset Coverage Certificates, (ii) that, based upon such
calculations, the Trust had, at such Valuation Date, met the Preferred Shares
Basic Maintenance Amount Test, and (iii) that the Trust met the Moody's General
Portfolio Requirements and the S&P Diversity I or S&P Diversity II requirements,
as applicable.

          (i) In the event that a Preferred Shares Basic Maintenance Certificate
or 1940 Act Preferred Shares Asset Coverage Certificate with respect to an
applicable Valuation Date is not delivered within the time periods specified in
this Section 13, the Trust shall be deemed to have failed to meet the Preferred
Shares Basic Maintenance Amount Test or the 1940 Act Preferred Shares Asset
Coverage, as the case may be, on such Valuation Date for purposes of Section
13(b) of Part I of this Certificate. In the event that a Preferred Shares Basic
Maintenance Certificate, a 1940 Act Preferred Shares Asset Coverage Certificate
or an applicable Auditor's Certificate with respect to an Asset Coverage Cure
Date is not delivered within the time periods specified herein, the Trust shall
be deemed to have failed to meet the Preferred Shares Basic Maintenance Amount
Test or the 1940 Preferred Shares Asset Coverage, as the case may be, as of the
related Valuation Date.

     14. [Reserved]

     15. NOTICE. All notices or communications hereunder, unless otherwise
specified in this Certificate, shall be sufficiently given if in writing and
delivered in person, by telecopier or mailed by first-class mail, postage
prepaid. Notices delivered pursuant to this Section 15 shall be deemed given on
the earlier of the date received or the date five days after which such notice
is mailed.

     16. WAIVER. To the extent permitted by Massachusetts Law, holders of at
least two-thirds of the Outstanding Preferred Shares, acting collectively, or
each Series, acting as a separate series, may waive any provision hereof
intended for their respective benefit in accordance with such procedures as may
from time to time be established by the Board of Trustees.

                                       21
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

     17. TERMINATION. In the event that no shares of the Preferred Shares are
Outstanding, all rights and preferences of such shares established and
designated hereunder shall cease and terminate, and all obligations of the Trust
under this Certificate shall terminate.

     18. AMENDMENT. Subject to the provisions of this Certificate, the Board of
Trustees may, by resolution duly adopted without shareholder approval (except as
otherwise provided by this Certificate or required by applicable law), amend
this Certificate to (1) reflect any amendments hereto which the Board of
Trustees is entitled to adopt pursuant to the terms of Section 6(l) of Part I of
this Certificate without shareholder approval or (2) add additional shares of
each Series (and terms relating thereto). All such additional shares shall be
governed by the terms of this Certificate. To the extent permitted by applicable
law, the Board of Trustees may interpret, amend or adjust the provisions of this
Certificate to resolve any inconsistency or ambiguity or to remedy any patent
defect.

     19. DEFINITIONS. As used in Part I and Part II of this Certificate, the
following terms shall have the following meanings (with terms defined in the
singular having comparable meanings when used in the plural and vice versa),
unless the context otherwise requires:

          "'AA' Financial Composite Commercial Paper Rate" on any date means (i)
the interest equivalent of the 7-day rate, in the case of a Dividend Period
which is a Standard Rate Period or shorter; for Dividend Periods greater than 7
days but fewer than or equal to 31 days, the 30-day rate; for Dividend Periods
greater than 31 days but fewer than or equal to 61 days, the 60-day rate; for
Dividend Periods greater than 61 days but fewer than or equal to 91 days, the 90
day rate; for Dividend Periods greater than 91 days but fewer than or equal to
270 days, the rate described in (ii); for Dividend Periods greater than 270
days, the Treasury Index Rate; on commercial paper on behalf of issuers whose
corporate bonds are rated "AA" by S&P, or the equivalent of such rating by
another nationally recognized rating agency, as announced by the Federal Reserve
Bank of New York for the close of business on the Business Day immediately
preceding such date; or (ii) if the Federal Reserve Bank of New York does not
make available such a rate, then the arithmetic average of the interest
equivalent of such rates on commercial paper placed on behalf of such issuers,
as quoted on a discount basis or otherwise by the Commercial Paper Dealers to
the Auction Agent for the close of business on the Business Day immediately
preceding such date (rounded to the next highest .001 of 1%). If any Commercial
Paper Dealer does not quote a rate required to determine the "AA" Financial
Composite Commercial Paper Rate, such rate shall be determined on the basis of
the quotations (or quotation) furnished by the remaining Commercial Paper
Dealers (or Dealer), if any, or, if there are no such Commercial Paper Dealers,
by the Auction Agent. For Dividend Periods greater than 360 days, the Treasury
Index Rate. For

                                       22
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

purposes of this definition, (A) "Commercial Paper Dealers" shall mean (1)
Salomon Smith Barney Inc., Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner &
Smith Incorporated and Goldman Sachs & Co.; (2) in lieu of any thereof, its
respective Affiliate or successor; and (3) in the event that any of the
foregoing shall cease to quote rates for commercial paper of issuers of the sort
described above, in substitution therefor, a nationally recognized dealer in
commercial paper of such issuers then making such quotations selected by the
Trust, and (B) "interest equivalent" of a rate stated on a discount basis for
commercial paper of a given number of days' maturity shall mean a number equal
to the quotient (rounded upward to the next higher one-thousandth of 1%) of (1)
such rate expressed as a decimal, divided by (2) the difference between (x) 1.00
and (y) a fraction, the numerator of which shall be the product of such rate
expressed as a decimal, multiplied by the number of days in which such
commercial paper shall mature and the denominator of which shall be 360.

          "Advance Rate" means the Moody's Advance Rate (if Moody's is then
rating the Preferred Shares) and the S&P Advance Rate (if S&P is then rating the
Preferred Shares), whichever is applicable.

          "Affiliate" means any person known to the Auction Agent to be
controlled by, in control of or under common control with the Trust; provided
that ING Pilgrim Investments, Inc. shall not be deemed to be an Affiliate nor
shall any corporation or any person controlled by, in control of or under common
control with such corporation, one of the trustees, directors or executive
officers of which is also a trustee, director or executive officer of the Trust,
be deemed to be an Affiliate.

          "Agent Member" means a member of or a participant in the Securities
Depository that will act on behalf of a Bidder.

          "All Hold Rate" means 80% of the "AA" Financial Composite Commercial
Paper Rate.

          "Applicable Rate" means, with respect to each Series for each Dividend
Period (i) if Sufficient Clearing Orders exist for the Auction in respect
thereof, the Winning Bid Rate, (ii) if Sufficient Clearing Orders do not exist
for the Auction in respect thereof, the Maximum Rate.

          "Approved Dealer" means any Broker-Dealer listed in Exhibit A to this
Certificate or any other broker-dealer designated in writing by the Trust
provided that no Rating Agency, in its reasonable discretion, has objected to
such designated broker-dealer in writing to the Trust within ten business days
of receipt of the Trust's written notice of such designation.

          "Approved Price" means the "fair value" as determined by the Trust in
accordance with the valuation procedures adopted from time to time by the Board
of Trustees and for which the Trust receives a mark-to-market price (which, for
the purpose of clarity, shall not mean a Market Value Price) from an independent
source at least semi-annually.

                                       23
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

          "Approved Pricing Service" means Loan Pricing Corporation or any other
quotation service designated in writing by the Trust provided that no Rating
Agency has objected, in its reasonable discretion, in writing to the Trust
within ten business days of receipt of the Trust's written notice of the
designation of such quotation service.

          "Asset Coverage Cure Date" has the meaning set forth in Section
3(a)(ii) of this Certificate.

          "Auction" means each periodic operation of the procedures set forth
under "Auction Procedures."

          "Auction Agent" means Bankers Trust Company unless and until another
commercial bank, trust company, or other financial institution appointed by a
resolution of the Board of Trustees enters into an agreement with the Trust to
follow the Auction Procedures for the purpose of determining the Applicable
Rate.

          "Auction Date" means the first Business Day next preceding the first
day of a Dividend Period for each Series.

          "Auction Procedures" means the procedures for conducting Auctions set
forth in Part II hereof.

          "Auditor's Certificate" has the meaning set forth in Section 13(g) of
Part I of this Certificate.

          "Bank of America Credit Agreement" means that certain Second Amended
and Restated Credit Agreement dated as of September 2, 1998 (as amended or
supplemented thereafter) among Pilgrim Prime Rate Trust, a Massachusetts
business trust, various financial institutions party to the Credit Agreement,
Bank of America, N.A., a national banking association, State Street Bank and
Trust Company, Deutsche Bank AG, and Commerzbank AG.

          "Beneficial Owner," with respect to shares of each Series, means a
customer of a Broker-Dealer who is listed on the records of that Broker-Dealer
(or, if applicable, the Auction Agent) as a holder of shares of such series.

          "Bid" has the meaning set forth in Section 2(a)(ii) of Part II of this
Certificate.

          "Bidder" has the meaning set forth in Section 2(a)(ii) of Part II of
this Certificate; provided, however, that neither the Trust nor any Affiliate
shall be permitted to be a Bidder in an Auction.

          "Board of Trustees" means the Board of Trustees of the Trust or any
duly authorized committee thereof as permitted by applicable law.

                                       24
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

          "Broker-Dealer" means any broker-dealer or broker-dealers, or other
entity permitted by law to perform the functions required of a Broker-Dealer by
the Auction Procedures, that has been selected by the Trust and has entered into
a Broker-Dealer Agreement that remains effective.

          "Broker-Dealer Agreement" means an agreement between the Auction Agent
and a Broker-Dealer, pursuant to which such Broker-Dealer agrees to follow the
Auction Procedures.

          "Business Day" means a day on which the New York Stock Exchange is
open for trading and which is not a Saturday, Sunday or other day on which banks
in The City of New York, New York are authorized or obligated by law to close.

          "Code" means the Internal Revenue Code of 1986, as amended.

          "Commercial Paper Dealers" has the meaning set forth in the definition
of "AA" Financial Composite Commercial Paper Rate.

          "Commission" means the Securities and Exchange Commission.

          "Common Share" means the shares of beneficial interest, par value $.01
per share, of the Trust.

          "Date of Original Issue" means the date on which a Series is
originally issued by the Trust.

          "Default Period" has the meaning set forth in Sections 2(c) (ii) or
(iii) of Part I of this Certificate.

          "Default Rate" means the Reference Rate multiplied by three (3).

          "Deposit Securities" means cash and any obligations or securities,
including Short Term Money Market Instruments that are Eligible Assets, rated at
least AAA, A-1+ or SP-1+ by S&P, except that, for purposes of optional
redemption such obligations or securities shall be considered "Deposit
Securities" only if they are also rated at least P-1 by Moody's.

          "Discounted Value" means the product of the Market Value (plus accrued
interest) of an Eligible Asset multiplied by the applicable Advance Rate.

          "Dividend Default" has the meaning set forth in Section 2(c)(iii) of
Part I of this Certificate.

          "Dividend Payment Date" means (i) with respect to any Dividend Period
of one year or less, the Business Day next succeeding the last day thereof and,
if any, the 91st, 181st and 271st days thereof, and (ii) with respect to any
Dividend Period of more than one year, on a quarterly basis on each January 1,
April 1, July 1 and October 1 and on the Business Day following the last day of
such Dividend Period.

                                       25
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

          "Dividend Period" means, with respect to each Series, the period
commencing on the Date of Original Issue thereof and ending on the date
specified for such series on the Date of Original Issue thereof and thereafter,
as to such Series, the period commencing on the day following each Dividend
Period for such Series and ending on the day established for such Series by the
Trust.

          "Eligible Assets" means Moody's Eligible Assets (if Moody's is then
rating the Preferred Shares) and S&P Eligible Assets (if S&P is then rating the
Preferred Shares), whichever is applicable.

          "Existing Holder," has the meaning set forth in Section 1(d) of Part
II of this Certificate.

          "GE Loan Agreement" means that certain Revolving Loan Agreement dated
as of July 16, 1998 (as the same may be amended, supplemented, restated or
otherwise modified from time to time) and is entered into among Pilgrim Prime
Rate Trust (f/k/a Pilgrim America Prime Rate Trust), a Delaware corporation, ING
Pilgrim Investments, Inc. (f/k/a Pilgrim America Investments, Inc.), a Delaware
corporation, Edison Asset Securitization, L.L.C., a Delaware limited liability
company and General Electric Capital Corporation, a New York Corporation.

          "Hold Order" has the meaning set forth in Section 2(a)(ii) of Part II
of this Certificate.

          "Holder" means, with respect to Preferred Shares, the registered
holder of shares of each Series as the same appears on the share ledger or share
records of the Trust.

          "Loan" means any assignment of or participation in any bank loan
denominated in U.S. dollars including term loans, the funded and unfunded
portions of revolving credit lines (provided that the Trust shall place in
reserve an amount equal to any unfunded portion of any revolving credit line)
and debtor-in possession financings; provided that such loan (a) is not extended
for the purpose of purchasing or carrying any margin stock and (b) is similar to
those typically made, syndicated, purchased or participated by a commercial bank
in the ordinary course of business.

          "Mandatory Redemption Date" has the meaning set forth in Section
3(a)(iv) of Part I of this Certificate.

          "Mandatory Redemption Price" has the meaning set forth in Section
3(a)(iv) of Part I of this Certificate.

          "Market Value" means the Market Value Price or, if a Market Value
Price is not readily available, the Approved Price of each Eligible Asset held
by the Trust.

                                       26
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

          "Market Value Price" means the price of an Eligible Asset which is the
price obtained from an Approved Pricing Service or, if such price is not
available, the lower of the bid prices quoted by two Approved Dealers.

          "Maximum Rate" means, on any date on which the Applicable Rate is
determined, the applicable percentage of the "AA" Financial Composite Commercial
Paper Rate on the date of such Auction determined as set forth below based on
the lower of the credit ratings assigned to the Preferred Shares by Moody's and
S&P subject to upward but not downward adjustment in the discretion of the Board
of Trustees after consultation with the Broker-Dealers; provided that
immediately following any such increase the Trust would be in compliance with
the Preferred Shares Basic Maintenance Amount.

        Moody's                        S&P                     Applicable
     Credit Rating                Credit Rating                Percentage
     -------------                -------------                ----------
     aa3 or Above                 AA- or Above                    150%
       a3 or a1                     A- to A+                      160%
     baa3 to baa1                 BBB- to BBB+                    250%
      Below baa3                   Below BBB-                     275%


          "Moody's" means Moody's Investors Service, Inc. and its successors at
law.

          "Moody's Advance Rate" means, so long as the Trust's portfolio
complies with the Moody's General Portfolio Requirements, the percentage
determined below:

               (i) Loans: for each Moody's Asset Category, the percentage
specified in the table below opposite such Moody's Asset Category.

           Moody's Asset Category                      Advance Rate
           ----------------------                      ------------
                      A                                    84.5%
                      B                                      73%
                      C                                      62%
                      D                                      45%
                      E                                      45%

               (ii) Short Term Money Market Instruments: (A) 97%, so long as
such investments mature or have a demand feature at par exercisable within 30
days, (B) 90%, so long as such investments mature or have a demand feature at
par not exercisable within 30 days, and (C) 83%, if such securities are not
rated by Moody's, so long as such investments are rated at least A-2/AA or
SP-2/AA by S&P and mature or have a demand feature at par exercisable within 30
days.

               (iii) Cash; 100%.

                                       27
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

          "Moody's Asset Category" means the following five categories (and, for
purposes of this categorization, the Market Value Price of a Moody's Eligible
Asset trading at par is equal to $ 1.00).

          "Moody's Asset Category A" means Performing Senior Loans which have a
Market Value Price or an Approved Price greater than or equal to $.90.

          "Moody's Asset Category B" means:

               (i) Performing Senior Loans which have a Market Value Price or an
Approved Price of greater than or equal to $.80 but less than $.90; and

               (ii) non-Performing Senior Loans which have a Market Value Price
or an Approved Price greater than or equal to $.85.

          "Moody's Asset Category C" means:

               (i) Performing Senior Loans which have a Market Value Price or an
Approved Price greater than or equal to $.70 but less than $.80; and

               (ii) non-Performing Senior Loans which have a Market Value Price
or an Approved Price greater than or equal to $.75 but less than $.85.

          "Moody's Asset Category D" means Senior Loans which have a Market
Value Price or an Approved price less than $.75.

          "Moody's Asset Category E" means Non-Senior Loans which have a Market
Value Price or an Approved Price.

     Notwithstanding any other provision contained above, for purposes of
determining whether a Moody's Eligible Asset falls within a specific Moody's
Asset Category, to the extent that any Moody's Eligible Asset would fall in more
than one of the Moody's Asset Categories, such Moody's Eligible Asset shall be
deemed to fall into the Moody's Asset Category with the highest applicable
Moody's Advance Rate.

          "Moody's Eligible Assets" means:

               (i) Senior Loans; provided, however, that (a) Senior Loans with
an Approved Price will qualify as Moody's Eligible Assets only up to a maximum
of 10% of the Trust's total assets; and (b) Senior Loans under Moody's Asset
Category D will qualify as Moody's Eligible Assets only up to a maximum of 20%
of the Trust's total assets.

               (ii) Non-Senior Loans; provided, however, that Non-Senior Loans
will qualify as Moody's Eligible Assets only up to a maximum of 10% of the
Trust's total assets.

                                       28
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

               (iii) Short-Term Money Market Instruments so long as (a) such
securities are rated at least P-2, (b) in the case of demand deposits, time
deposits, banker's acceptances and certificate of deposit and overnight funds,
the supporting entity is rated at least A2, (c) such securities are U.S.
Government Securities, or (d) in all other cases, the supporting entity (1) is
rated A2 and the security matures within one month, (2) is rated A2 and the
security matures within three months or (3) is rated at least Aa3 and the
security matures within six months.

               (iv) Cash.

               ( ) "Moody's General Portfolio Requirements" means that the
Trust's portfolio must meet the following diversification requirements: (a) no
more than 25% by par value of the Trust's total assets can be invested in the
securities of borrowers and other issuers having their principal business
activities in the same Moody's Industry Classification; provided, that this
limitation shall not apply with respect to U.S. Government Securities and
provided further that for purposes of this subsection (a), the term "issuer"
shall not include a lender selling a participation to the Trust or any other
person interpositioned between such lender and the Trust with respect to a
participation and (b) no more than 10% by par value of the Trust's total assets
can be invested in securities of a single issuer, and provided further that for
purposes of this subsection (b), the term "issuer" includes both the borrower
under a loan agreement and the lender selling a participation to the Trust
together with any other persons interpositioned between such lender and the
Trust with respect to such participation.

          "Moody's Industry Classification" means, for the purposes of
determining Moody's Eligible Assets, each of the following industry
classifications (or such other classifications as Moody's may from time to time
approve for application to the Preferred Shares:

1. Aerospace and Defense: Major Contractor, Subsystems, Research, Aircraft
Manufacturing, Arms, Ammunition

2. Automobile: Automobile Equipment, Auto-Manufacturing, Auto Parts
Manufacturing, Personal Use Trailers, Motor Homes, Dealers

3. Banking: Bank Holding, Savings and Loans, Consumer Credit, Small Loan,
Agency, Factoring, Receivables

4. Beverage, Food and Tobacco: Beer and Ale, Distillers, Wines and Liquors,
Distributors, Soft Drink Syrup, Bottlers, Bakery, Mill Sugar, Canned Foods, Corn
Refiners, Dairy Products, Meat Products, Poultry Products, Snacks, Packaged
Foods, Distributors, Candy, Gum, Seafood, Frozen Food, Cigarettes, Cigars,
Leaf/Snuff, Vegetable Oil

                                       29
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

5. Buildings and Real Estate: Brick, Cement, Climate Controls, Contracting,
Engineering, Construction, Hardware, Forest Products (building-related only),
Plumbing, Roofing, Wallboard, Real Estate, Real Estate Development, REITs, Land
Development

6. Chemicals, Plastics and Rubber: Chemicals (non-agriculture), Industrial
Gases, Sulphur, Plastics, Plastic Products, Abrasives, Coatings, Paints,
Varnish, Fabricating

7. Containers, Packaging and Glass: Glass, Fiberglass, Containers made of:
Glass, Metal, Paper, Plastic, Wood or Fiberglass

8. Personal and Non-Durable Consumer Products (Manufacturing Only): Soaps,
Perfumes, Cosmetics, Toiletries, Cleaning Supplies, School Supplies

9. Diversified/Conglomerate Manufacturing

10. Diversified/Conglomerate Service

11. Diversified Natural Resources, Precious Metals and Minerals: Fabricating,
Distribution, Mining and Sales

12. Ecological: Pollution Control, Waste Removal, Waste Treatment and Waste
Disposal

13. Electronics: Computer Hardware, Electric Equipment, Components, Controllers,
Motors, Household Appliances, Information Service Communicating Systems, Radios,
TVs, Tape Machines, Speakers, Printers, Drivers, Technology

14. Finance: Investment Brokerage, Leasing, Syndication, Securities

15. Farming and Agriculture: Livestock, Grains, Produce, Agriculture Chemicals,
Agricultural Equipment, Fertilizers

16. Grocery: Grocery Stores, Convenience Food Stores

17. Healthcare, Education and Childcare: Ethical Drugs, Proprietary Drugs,
Research, Health Care Centers, Nursing Homes, HMOs, Hospitals, Hospital
Supplies, Medical Equipment

18. Home and Office Furnishings, Housewares, and Durable Consumer Products:
Carpets, Floor Coverings, Furniture, Cooking, Ranges

19. Hotels, Motels, Inns and Gaming

20. Insurance: Life, Property and Casualty, Broker, Agent, Surety

                                       30
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

21. Leisure, Amusement, Entertainment: Boating, Bowling, Billiards, Musical
Instruments, Fishing, Photo Equipment, Records, Tapes, Sports, Outdoor Equipment
(Camping), Tourism, Resorts, Games, Toy Manufacturing

22. Machinery (Non-Agriculture, Non-Construction, Non-Electronic): Industrial,
Machine Tools, Steam Generators

23. Mining, Steel, Iron and Non-Precious Metals: Coal, Copper, Lead, Uranium,
Zinc, Aluminum, Stainless Steel, Integrated Steel, Ore Production, Refractories,
Steel Mill Machinery, Mini-Mills, Fabricating, Distribution and Sales

24. Oil and Gas: Crude Producer, Retailer, Well Supply, Service and Drilling

25. Personal, Food and Miscellaneous

26. Printing and Publishing: Graphic Arts, Paper, Paper Products, Business
Forms, Magazines, Books, Periodicals, Newspapers, Textbooks

27. Cargo Transport: Rail, Shipping, Railroads, Rail-car Builders, Ship
Builders, Containers, Container Builders, Parts, Overnight Mail, Trucking, Truck
Manufacturing, Trailer Manufacturing, Air Cargo, Transport

28. Retail Stores: Apparel, Toy, Variety, Drugs, Department, Mail Order Catalog,
Showroom

29. North American Cellular and North American Cable

30. Data and Internet Services

31. Satellite

32. Telecommunications Equipment

33. Other Telecommunications

34. Textiles and Leather: Producer, Synthetic Fiber, Apparel Manufacturer,
Leather Shoes

35. Utilities: Electric, Water, Hydro Power, Gas, Diversified

36. Radio and TV Broadcasting

37. Foreign Cellular, Foreign Cable, Foreign TV, Foreign Radio and Equipment

38. Other Broadcasting and Entertainment

                                       31
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

          "1940 Act" means the Investment Company Act of 1940, as amended.

          "1940 Act Preferred Shares Asset Coverage" means asset coverage, as
determined in accordance with Section 18(h) of the 1940 Act, of at least 200%
with respect to all outstanding senior securities of the Trust which are stock,
including all Outstanding Preferred Shares (or such other asset coverage as may
in the future be specified in or under the 1940 Act as the minimum asset
coverage for senior securities which are stock of a closed-end investment
company as a condition of declaring dividends on its common shares), determined
on the basis of values calculated as of a time within 48 hours (not including
Sundays or holidays) next preceding the time of such determination.

          "1940 Act Preferred Shares Asset Coverage Certificate" means the
certificate required to be delivered by the Trust pursuant to Section 13(e) of
Part I of this Certificate.

          "Non-Senior Loan" means a Loan that is a hybrid loan, a subordinated
loan or an unsecured loan.

          "Notice of Redemption" means any notice with respect to the redemption
of Preferred Shares pursuant to Section 3 of Part I of this Certificate.

          "Order" has the meaning set forth in Section 2(a)(ii) of Part II of
this Certificate.

          "Outstanding" means, as of any date, Preferred Shares theretofore
issued by the Trust except, without duplication, (i) Preferred Shares
theretofore canceled, redeemed or repurchased by the Trust, or delivered to the
Auction Agent for cancellation or with respect to which the Trust has given
notice of redemption and irrevocably deposited with the Paying Agent sufficient
funds to redeem such Preferred Shares and (ii) any Preferred Shares represented
by any certificate in lieu of which a new certificate has been executed and
delivered by the Trust. Notwithstanding the foregoing, (A) for purposes of
voting rights (including the determination of the number of shares required to
constitute a quorum), any Preferred Shares as to which the Trust or any
Affiliate shall be the Existing Holder shall be disregarded and not deemed
Outstanding; (B) in connection with any Auction, any Preferred Shares as to
which the Trust or any person known to the Auction Agent to be an Affiliate
shall be the Existing Holder shall be disregarded and not deemed Outstanding;
and (C) for purposes of determining the Preferred Shares Basic Maintenance
Amount, Preferred Shares held by the Trust shall be disregarded and not deemed
Outstanding, but shares held by any Affiliate shall be deemed Outstanding.

          "Paying Agent" means Bankers Trust Company unless and until another
entity appointed by a resolution of the Board of Trustees enters into an
agreement with the Trust to serve as paying agent, which paying agent may be the
same as the Auction Agent.

          "Performing" means that no default as to the payment of principal or
interest has occurred and is continuing.

                                       32
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

          "Person" or "person" means and includes an individual, a partnership,
the Trust, a trust, a corporation, a limited liability company, an
unincorporated association, a joint venture or other entity or a government or
any agency or political subdivision thereof.

          "Potential Beneficial Owner," has the meaning set forth in Section 1
of Part II of this Certificate.

          "Preferred Shares" has the meaning set forth in paragraph SECOND of
this Certificate.

          "Preferred Shares Basic Maintenance Amount" as of any Valuation Date
means the dollar amount equal to the sum of

               (i) (A) the sum of the products resulting from multiplying the
number of Outstanding shares of each Series of Preferred Shares on such date by
the Liquidation Preference (and redemption premium, if any) per share of such
Series; (B) the aggregate amount of dividends that will have accumulated at the
Applicable Rate (whether or not earned or declared) to and including the first
Dividend Payment Date for each Outstanding Preferred Share that follows such
Valuation Date (or to the 30th day after such Valuation Date, if such 30th day
occurs before the first following Dividend Payment Date); (C) the amount of
anticipated Trust non-interest expenses for the 90 days subsequent to such
Valuation Date; (D) the amount of the current outstanding balances of any
indebtedness which is senior to the Preferred Shares plus interest actually
accrued together with 30 days additional interest on the current outstanding
balances calculated at the current rate multiplied by 1.93 and (E) any other
current liabilities payable during the 30 days subsequent to such Valuation
Date, including, without limitation, any indebtedness service to the Preferred
Shares and indebtedness due within one year and any redemption premium due with
respect to Preferred Shares for which a Notice of Redemption has been given, as
of such Valuation Date to the extent not reflected in any of (i)(A) through
(i)(D): less

               (ii) the sum of any cash plus the value of any Trust assets
irrevocably deposited by the Trust for the payment of any (i)(B) through (i)(E)
(except that if the security matures prior to the relevant redemption payment
date and is either fully guaranteed by the U.S. Government or is rated P2 by
Moody's and A2 by S&P, it will be valued at its face value).

          "Preferred Shares Basic Maintenance Amount Test" means a test which is
met if the lower of the aggregate Discounted Values of the Moody's Eligible
Assets or the S&P Eligible Assets meets or exceeds the Preferred Shares Basic
Maintenance Amount.

          "Preferred Shares Basic Maintenance Certificate" has the meaning set
forth in Section 13(d) of Part I of this Certificate.

          "Rate Period" means either a Standard Rate Period or a Special Rate
Period.

                                       33
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

          "Rating Agency" means Moody's and S&P as long as such rating agency is
then rating the Preferred Shares.

          "Redemption Date" has the meaning set forth in Section 2(c)(ii) of
Part I of this Certificate.

          "Redemption Default" has the meaning set forth in Section 2(c)(ii) of
Part I of this Certificate.

          "Redemption Price" has the meaning set forth in Section 3(a)(i) of
Part I of this Certificate.

          "Reference Rate" means, with respect to the determination of the
Default Rate, the applicable "AA" Financial Composite Commercial Paper Rate (for
a Dividend Period of fewer than 184 days) or the applicable Treasury Index Rate
(for a Dividend Period of 184 days or more).

          "Registrar" means Bankers Trust Company unless and until another
entity appointed by a resolution of the Board of Trustees enters into an
agreement with the Trust to serve as transfer agent.

          "S&P" means Standard & Poor's and its successors at law.

          "S&P Advance Rate" means the rate set forth below for each type of S&P
Eligible Asset:

               (i) Loans: depending upon whether the Trust's portfolio meets the
requirements of either S&P Diversity I or S&P Diversity II, for each S&P Asset
Category, the applicable percentage specified in the table below opposite such
S&P Asset Category.

                                  S&P Diversity I        S&P Diversity II
       S&P Asset Category          Advance Rate            Advance Rate
       ------------------          ------------            ------------
                A                       80%                     86%
                B                       74%                     82%
                C                       57%                     68%
                D                       47%                     60%
                E                       47%                     49%

               (ii) Short Term Money Market Instruments: (A) 97%, so long as
such investments mature or have a demand feature at par exercisable within 30
days, and (B) 90%, so long as such investments mature or have a demand feature
at par not exercisable within the 30 days but exercisable within one year.

                                       34
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

               (iii) Cash; 100%.

          "S&P Asset Category" means the following five categories (and, for
purposes of this categorization, the Market Value Price of an S&P Eligible Asset
trading at par is equal to $ 1.00).

          "S&P Asset Category A" means Performing Senior Loans which have a
Market Value Price or an Approved Price greater than $.90.

          "S&P Asset Category B" means Performing Senior Loans which have a
Market Value Price or an Approved Price greater than or equal to $.85 but equal
to or less than $.90.

          "S&P Asset Category C" means non-Performing Senior Loans which have a
Market Value Price or an Approved Price greater than $.85.

          "S&P Asset Category D" means:

               (i) Performing Senior Loans which have a Market Value Price or an
Approved Price less than $.85; and

               (ii) Non-Performing Senior Loans which have a Market Value Price
or an Approved Price less than or equal to $.85.

          "S&P Asset Category E" means (i) Senior Loans whose total syndication
is less than $150 million (to the extent such loans exceed 15% of the Trust's
total assets), (ii) Senior Loans which are rated below B- by S&P or are unrated
(to the extent such loans exceed 15% of the Trust's total assets), and (iii)
Non-Senior Loans.

     Notwithstanding any other provision contained above, for purposes of
determining whether an S&P Eligible Asset falls within a specific S&P Asset
Category, to the extent that any S&P Eligible Asset would fall in more than one
of the five S&P Asset Categories, such S&P Eligible Asset shall be deemed to
fall into the S&P Asset Category with the highest applicable S&P Advance Rate.

          "S&P Diversity I" means that the Trust's portfolio meets the following
requirements:

               (1) the Trust's total assets must be invested in the securities
of borrowers and other issuers having their principal business activities in at
least four S&P Industry Classifications (the electric, gas, water and telephone
utility industries, commercial banks, thrift institutions and finance companies
being treated as separate industries for purposes of this restriction);
provided, that this limitation shall not apply with respect to U.S. Government
Securities and provided further that for purposes of this subsection (1), the
term "issuer" shall not include a lender selling a participation to the Trust or
any other person interpositioned between such lender and the Trust with respect
to a participation; and (2) the Trust's total assets must be invested in

                                       35
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

securities of at least 20 different issuers, provided that for purposes of this
subsection (2), the term "issuer" includes both the borrower under a loan
agreement and the lender selling a participation to the Trust together with any
other persons interpositioned between such lender and the Trust with respect to
a participation.

          "S&P Diversity II" means that the Trust's portfolio meets the
following requirements:

               (1) the Trust's total assets must be invested in the securities
of borrowers and other issuers having their principal business activities in at
least 10 S&P Industry Classifications (the electric, gas, water and telephone
utility industries, commercial banks, thrift institutions and finance companies
being treated as separate industries for purposes of this restriction);
provided, that this limitation shall not apply with respect to U.S. Government
Securities and provided further that for purposes of this subsection (1), the
term "issuer" shall not include a lender selling a participation to the Trust or
any other person interpositioned between such lender and the Trust with respect
to a participation; and (2) the Trust's total assets must be invested in
securities of at least 30 different issuers, provided that for purposes of this
subsection (2), the term "issuer" includes both the borrower under a loan
agreement and the lender selling a participation to the Trust together with any
other persons interpositioned between such lender and the Trust with respect to
a participation.

          "S&P Eligible Assets" means:

               (i) Senior Loans; provided, however, that (a) Senior Loan
Participations and Non-Senior Loans will qualify as S&P Eligible Assets only up
to an aggregate maximum of 15% of the Trust's total assets, (b) Senior Loans
whose total syndication is less than $150 million will qualify as S&P Eligible
Assets only up to a maximum of 35% of the Trust's total assets, (c) Senior Loans
and Non-Senior Loans rated below B- by S&P or unrated will qualify as S&P
Eligible Assets only up to an aggregate maximum of 50% of the Trust's total
assets, (d) Senior Loans and Non-Senior Loans with an Approved Price will
qualify as S&P Eligible Assets only up to an aggregate maximum of 5% of the
Trust's total assets, (e) a Senior Loan or a Non-Senior Loan to a single issuer,
plus any other investment in the securities of such issuer, will qualify as an
S&P Eligible Asset only up to an aggregate maximum of 5% (for the S&P Diversity
I Advance Rate) or 3.33% (for the S&P Diversity II Advance Rate) of the Trust's
total assets, provided that, for purposes of this subsection (e), the term
"issuer" includes both the borrower under a loan agreement and the lender
selling a participation to the Trust together with any other persons
interpositioned between such lender and the Trust with respect to a
participation, (f) Senior Loans and Non-Senior Loans to borrowers and other
issuers having their principal business activities in the same S&P Industry
Classification will qualify as S&P Eligible Assets only up to an aggregate
maximum of 25% (for the S&P Diversity I Advance Rate) or 10% (for the S&P
Diversity II Advance Rate) of the Trust's total assets, provided that this

                                       36
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

limitation shall not apply with respect to U.S. Government Securities and
provided further that, for purposes of this subsection (f), the term "issuer"
shall not include a lender selling a participation to the Trust or any other
person interpositioned between such lender and the Trust with respect to a
participation.

               (ii) Non-Senior Loans; provided, however, that (a) unsecured
Non-Senior Loans will qualify as S&P Eligible Assets only up to a maximum of 3%
of the Trust's total assets, (b) Senior Loan Participations and Non-Senior Loans
will qualify as S&P Eligible Assets only up to an aggregate maximum of 15% of
the Trust's total assets, (c) Senior Loans and Non-Senior Loans rated below B-
by S&P or unrated will qualify as S&P Eligible Assets only up to an aggregate
maximum of 50% of the Trust's total assets, (d) Senior Loans and Non-Senior
Loans with an Approved Price will qualify as S&P Eligible Assets only up to an
aggregate maximum of 5% of the Trust's total assets, (e) a Senior Loan or a
Non-Senior Loan to a single issuer, plus any other investment in the securities
of such issuer, will qualify as an S&P Eligible Asset only up to an aggregate
maximum of 5% (for the S&P Diversity I Advance Rate) or 3.33% (for the S&P
Diversity I Advance Rate) of the Trust's total assets, provided that, for
purposes of this subsection (e), the term "issuer" includes both the borrower
under a loan agreement and the lender selling a participation to the Trust
together with any other persons interpositioned between such lender and the
Trust with respect to a participation, (f) Senior Loans and Non-Senior Loans to
borrowers and other issuers having their principal business activities in the
same S&P Industry Classification will qualify as S&P Eligible Assets only up to
an aggregate maximum of 25% (for the S&P Diversity I Advance Rate) or 10% (for
the S&P Diversity I Advance Rate) of the Trust's total assets, provided that
this limitation shall not apply with respect to U.S. Government Securities and
provided further that, for purposes of this subsection (f), the term "issuer"
shall not include a lender selling a participation to the Trust or any other
person interpositioned between such lender and the Trust with respect to a
participation.

               (iii) Short-Term Money Market Instruments provided that (a) such
securities are rated at least A-1 and mature within 30 days or are rated at
least A-1+ and mature within one year, and provided further that such securities
rated A-1 will qualify as S&P Eligible Assets only up to a maximum of 20% of the
Trust's total assets, (b) in the case of demand deposits, time deposits,
banker's acceptances, certificates of deposit and overnight funds, the
supporting entity is rated at least A+, (c) such securities are U.S. Government
Securities or (d) in all other cases, the supporting entity is rated at least
A+.

               (iv) Cash.

          "S&P Industry Classification" means, for the purposes of determining
S&P Eligible Assets, each of the following industry classifications (or such
other classifications as S&P may from time to time approve for application to
the Preferred Shares:

                                       37
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

     1.   Aerospace and Defense: Aircraft manufacturer/components, Arms and
          ammunition

     2.   Air transport

     3.   Automotive: Manufacturers, Parts and Equipment, Tire and Rubber

     4.   Beverage and Tobacco

     5.   Broadcast Radio and Television

     6.   Brokers/Dealers/Investment Houses

     7.   Building and Development: Builders, Land Development/Real Estate,
          REITs

     8.   Business Equipment and Services: Graphic Arts, Office
          Equipment/Computers, Data Processing Service Bureaus, Computer
          Software

     9.   Cable and Satellite Television

     10.  Chemical/Plastics: Coatings/Paints/Varnishes

     11.  Clothing/Textiles

     12.  Conglomerates

     13.  Containers and Glass Products

     14.  Cosmetic/Toiletries

     15.  Drugs

     16.  Ecological Services and Equipment: Waste Disposal Services and
          Equipment

     17.  Electronics/Electric

     18.  Equipment Leasing: Auto Leasing/Rentals, Commercial Equipment Leasing,
          Data Processing Equipment Service/Leasing

     19.  Farming/Agriculture: Agricultural Products and Equipment, Fertilizers

     20.  Financial Intermediaries: Bank/Thrifts, Finance Companies

     21.  Food/Drug Retailers

     22.  Food Products

                                       38
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

     23.  Food Service: Food Service/Restaurants, Vending

     24.  Forest Products: Building Materials, Paper Products/Containers

     25.  Health Care

     26.  Home Furnishings: Appliances, Furniture and Fixtures, Housewares

     27.  Lodging and Casinos

     28.  Industrial Equipment: Machinery, Manufacturing/Industrial, Specialty
          Instruments

     29.  Insurance

     30.  Leisure Goods/Activities/Movies

     31.  Nonferrous Metals/Minerals: Aluminum Producers, Mining (including
          coal), Other Metal/Mineral Producers

     32.  Oil and Gas: Producers/Refiners, Gas Pipelines

     33.  Publishing

     34.  Rail Industries: Railroads, Rail Equipment

     35.  Retailers (except food and drug)

     36.  Steel

     37.  Surface Transport: Shipping/Shipbuilding, Trucking

     38.  Telecommunications/Cellular Communications

     39.  Utilities: Electric, Local Gas, Water

          The Trust shall use its discretion in determining which industry
classification is applicable to a particular investment.

          "Securities Act" means the Securities Act of 1933, as amended.

          "Securities Depository" means The Depository Trust Company and its
successors and assigns or any successor securities depository selected by the
Trust that agrees to follow the procedures required to be followed by such
securities depository in connection with the shares of each Series.

                                       39
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

          "Sell Order" has the meaning set forth in Section 2(b) of Part II of
this Certificate.

          "Senior Loan" means any secured Loan that is not subordinated by its
terms to any other indebtedness of the borrower.

          "Senior Loan Participations" means participations by the Trust in a
lender's portion of a Senior Loan where the Trust has a contractual relationship
with such lender and not the borrower, and such lender is rated at least A-1/A-.

          "Series" means any of the series of Preferred Shares issued by the
Trust.

          "Series F" means the shares of Series F of the Preferred Shares or any
other shares of preferred stock hereinafter designated as shares of Series F of
the Preferred Shares.

          "Series M" means the shares of Series M of the Preferred Shares or any
other shares of preferred stock hereinafter designated as shares of Series M of
the Preferred Shares.

          "Series T" means the shares of Series T of the Preferred Shares or any
other shares of preferred stock hereinafter designated as shares of Series T of
the Preferred Shares.

          "Series Th" means the shares of Series Th of the Preferred Shares or
any other shares of preferred stock hereinafter designated as shares of Series
Th of the Preferred Shares.

          "Series W" means the shares of Series W of the Preferred Shares or any
other shares of preferred stock hereinafter designated as shares of Series W of
the Preferred Shares.

          "Short-Term Money Market Instrument" means the following types of
instruments if, on the date of purchase or other acquisition thereof by the
Trust, the remaining term to maturity thereof is not in excess of 180 days:

               (i) commercial paper rated A-1 if such commercial paper matures
in 30 days or A-1+ if such commercial paper matures in over 30 days;

               (ii) demand or time deposits in, and banker's acceptances and
certificates of deposit of (A) a depository institution or trust company
incorporated under the laws of the United States of America or any state thereof
or the District of Columbia or (B) a United States branch office or agency of a
foreign depository institution (provided that such branch office or agency is
subject to banking regulation under the laws of the United States, any state
thereof or the District of Columbia);

               (iii) overnight funds; and

               (iv) U.S. Government Securities.

          "Special Rate Period" means a Dividend Period that is not a Standard
Rate Period.

                                       40
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                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

          "Specific Redemption Provisions" means, with respect to any Special
Rate Period of more than one year, either, or any combination of (i) a period (a
"Non-Call Period") determined by the Board of Trustees after consultation with
the Broker-Dealers, during which the shares subject to such Special Rate Period
are not subject to redemption at the option of the Trust pursuant to Section
3(a)(i) and/or Section 3(a)(ii) and/or 3(a)(iii) of Part I of this Certificate
and (ii) a period (a "Premium Call Period"), consisting of a number of whole
years as determined by the Board of Trustees after consultation with the
Broker-Dealers, during each year of which the shares subject to such Special
Rate Period shall be redeemable at the Trust's option pursuant to Section
3(a)(i) and/or in connection with any mandatory redemption pursuant to Section
3(a)(ii) and/or 3(a)(iii) at a price per share equal to the Liquidation Value
plus accumulated but unpaid dividends (whether or not earned or declared) plus a
premium expressed as a percentage or percentages of the Liquidation Value or
expressed as a formula using specified variables as determined by the Board of
Trustees after consultation with the Broker-Dealers.

          "Standard Rate Period" means a Dividend Period of 7 days, unless such
7th day is not a Business Day, then the number of days ending on the Business
Day next preceding such 7th day.

          "Submission Deadline" means 1:00 P.M., New York City time, on any
Auction Date or such other time on any Auction Date by which Broker-Dealers are
required to submit Orders to the Auction Agent as specified by the Auction Agent
from time to time.

          "Transfer Agent" means Bankers Trust Company, unless and until another
entity appointed by a resolution of the Board of Trustees enters into an
agreement with the Trust to serve as Transfer Agent.

          "Treasury Index Rate" means the average yield to maturity for actively
traded marketable U.S. Treasury fixed interest rate securities having the same
number of 30-day periods to maturity as the length of the applicable Dividend
Period, determined, to the extent necessary, by linear interpolation based upon
the yield for such securities having the next shorter and next longer number of
30-day periods to maturity treating all Dividend Periods with a length greater
than the longest maturity for such securities as having a length equal to such
longest maturity, in all cases based upon data set forth in the most recent
weekly statistical release published by the Board of Governors of the Federal
Reserve System (currently in H.15 (519)); provided, however, if the most recent
such statistical release shall not have been published during the 15 days
preceding the date of computation, the foregoing computations shall be based
upon the average of comparable data as quoted to the Trust by at least three
recognized dealers in U.S. Government securities selected by the Trust.

          "U.S. Government Securities" means direct obligations of the United
States or by its agencies or instrumentalities that are entitled to the full
faith and credit of the United States and that, other than United States
Treasury Bills, provide for the periodic payment of interest and the full
payment of principal at maturity or call for redemption.

          "Valuation Date" means each Business Day of each week.

                                       41
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                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

          " Voting Period" has the meaning set forth in Section 6(b) of Part I
of this Certificate.

          "Winning Bid Rate" has the meaning set forth in Section 4(a)(iii) of
Part II of this Certificate.

     20. INTERPRETATION. References to sections, subsections, clauses,
sub-clauses, paragraphs and subparagraphs are to such sections, subsections,
clauses, sub-clauses, paragraphs and subparagraphs contained in this Part I or
Part II hereof, as the case may be, unless specifically identified otherwise.

                                       42
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                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION


                           PART II: AUCTION PROCEDURES

1.   Certain Definitions. As used in Part II of this Certificate, the following
     terms shall have the following meanings, unless the context otherwise
     requires and all section references below are to Part II of this
     Certificate except as otherwise indicated: Capitalized terms not defined in
     Section 1 of Part II of this Certificate shall have the respective meanings
     specified in Part I of this Certificate.

          "Agent Member" means a member of or participant in the Securities
          Depository that will act on behalf of a Bidder.

          "Available Preferred Shares" has the meaning set forth in Section
          4(a)(i) of Part II of this Certificate.

          "Existing Holder" means (a) a person who has signed a Master
          Purchaser's Letter and beneficially owns those Preferred Shares listed
          in that person's name in the records of the Auction Agent or (b) the
          beneficial owner of those Preferred Shares which are listed under such
          person's Broker-Dealer's name in the records of the Auction Agent,
          which Broker-Dealer shall have signed a Master Purchaser's Letter.

          "Hold Order" has the meaning set forth in Section 2(a)(ii) of Part II
          of this Certificate.

          "Master Purchaser's Letter" means a letter which is required to be
          executed by each prospective purchaser of Preferred Shares or the
          Broker-Dealer through whom such shares will be held.

          "Order" has the meaning set forth in Section 2(a)(ii) of Part II of
          this Certificate.

          "Potential Holder," means (1) any Existing Holder who may be
          interested in acquiring additional Preferred Shares or (ii) any other
          person who may be interested in acquiring Preferred Shares and who has
          signed a Master Purchaser's letter or whose shares will be listed
          under such person's Broker-Dealer's name on the records of the Auction
          Agent which Broker-Dealer shall have executed a Master Purchaser's
          letter.

          "Sell Order" has the meaning set forth in Section 2(b) of Part II of
          this Certificate.

          "Submitted Bid Order" has the meaning set forth in Section 4(a) of
          Part II of this Certificate.

                                       43
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                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

          "Submitted Hold Order" has the meaning set forth in Section 4(a) of
          Part II of this Certificate.

          "Submitted Order" has the meaning set forth in Section 4(a) of Part II
          of this Certificate.

          "Submitted Sell Order" has the meaning set forth in Section 4(a) of
          Part II of this Certificate.

          "Sufficient Clearing Orders" means that all Preferred Shares are the
          subject of Submitted Hold Orders or that the number of Preferred
          Shares that are the subject of Submitted Buy Orders by Potential
          Holders specifying one or more rates equal to or less than the Maximum
          Rate exceeds or equals the sum of (A) the number of Preferred Shares
          that are subject of Submitted Hold/Sell Orders by Existing Holders
          specifying one or more rates higher than the Maximum Applicable Rate
          and (B) the number of Preferred Shares that are subject to Submitted
          Sell Orders.

          "Winning Bid Rate" means the lowest rate specified in the Submitted
          Orders which, if (A) each Submitted Hold/Sell Order from Existing
          Holders specifying such lowest rate and all other Submitted Hold/Sell
          Orders from Existing Holders specifying lower rates were accepted and
          (B) each Submitted Buy Order from Potential Holders specifying such
          lowest rate and all other Submitted Buy Orders from Potential Holders
          specifying lower rates were accepted, would result in the Existing
          Holders described in clause (A) above continuing to hold an aggregate
          number of Preferred Shares which, when added to the number of
          Preferred Shares to be purchased by the Potential Holders described in
          clause (B) above and the number of Preferred Shares subject to
          Submitted Hold Orders, would be equal to the number of Preferred
          Shares.

     2. ORDERS

     (a) On or prior to the Submission Deadline on each Auction Date for shares
of a series of Preferred Shares:

          (i) each Beneficial Owner of shares of such series may submit to its
Broker-Dealer by telephone or otherwise information as to:

               (A) the number of Outstanding shares, if any, of such series held
by such Beneficial Owner which such Beneficial Owner desires to continue to hold
without regard to the Applicable Rate for shares of such series for the next
succeeding Rate Period of such shares;

               (B) the number of Outstanding shares, if any, of such series held
by such Beneficial Owner which such Beneficial Owner offers to sell if the
Applicable Rate for shares of such series for the next succeeding Rate Period of
shares of such series shall be less than the rate per annum specified by such
Beneficial Owner; and/or

                                       44
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                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

               (C) the number of Outstanding shares, if any, of such series held
by such Beneficial Owner which such Beneficial Owner offers to sell without
regard to the Applicable Rate for shares of such series for the next succeeding
Rate Period of shares of such series; and

          (ii) each Broker-Dealer, using lists of Potential Beneficial Owners
shall in good faith for the purpose of conducting a competitive Auction in a
commercially reasonable manner, contact Potential Beneficial Owners (by
telephone or otherwise), including Persons that are not Beneficial Owners, on
such lists to determine the number of shares, if any, of such series which each
such Potential Beneficial Owner offers to purchase if the Applicable Rate for
shares of such series for the next succeeding Rate Period of shares of such
series shall not be less than the rate per annum specified by such Potential
Beneficial Owner.

     For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or by a Broker-Dealer to the
Auction Agent, of information referred to in clause (i)(A), (i)(B), (i)(C) or
(ii) of this paragraph (a) is hereinafter referred to as an "Order" and
collectively as "Orders" and each Beneficial Owner and each Potential Beneficial
Owner placing an Order with a Broker-Dealer, and such Broker-Dealer placing an
Order with the Auction Agent, is hereinafter referred to as a "Bidder" and
collectively as "Bidders"; an Order containing the information referred to in
clause (i)(A) of this paragraph (a) is hereinafter referred to as a "Hold Order"
and collectively as "Hold Orders"; an Order containing the information referred
to in clause (i)(B) or (ii) of this paragraph (a) is hereinafter referred to as
a "Bid" and collectively as "Bids"; and an Order containing the information
referred to in clause (i)(C) of this paragraph (a) is hereinafter referred to as
a "Sell Order" and collectively as "Sell Orders."

          (b) (i) A Bid by a Beneficial Owner or an Existing Holder of shares of
a series of Preferred Shares subject to an Auction on any Auction Date shall
constitute an irrevocable offer to sell:

                    (A) the number of Outstanding shares of such series
specified in such Bid if the Applicable Rate for shares of such series
determined on such Auction Date shall be less than the rate specified therein;

                    (B) such number or a lesser number of Outstanding shares of
such series to be determined as set forth in clause (iv) of paragraph (a) of
Section 5 of this Part II if the Applicable Rate for shares of such series
determined on such Auction Date shall be equal to the rate specified therein; or

                    (C) the number of Outstanding shares of such series
specified in such Bid if the rate specified therein shall be higher than the
Maximum Rate for shares of such series, or such number or a lesser number of
Outstanding shares of such series to be determined as set forth in clause (iii)
of paragraph (b) of Section 5 of this Part II if the rate specified therein
shall be higher than the Maximum Rate for shares of such series and Sufficient
Clearing Bids for shares of such series do not exist.

                                       45
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                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

               (ii) A Sell Order by a Beneficial Owner or an Existing Holder of
shares of a series of Preferred Shares subject to an Auction on any Auction Date
shall constitute an irrevocable offer to sell:

                    (A) the number of Outstanding shares of such series
specified in such Sell Order; or

                    (B) such number or a lesser number of Outstanding shares of
such series as set forth in clause (iii) of paragraph (b) of Section 5 of this
Part II if Sufficient Clearing Bids for shares of such series do not exist;

provided however, that a Broker-Dealer that is an Existing Holder with respect
to shares of a series of Preferred Shares shall not be liable to any Person for
failing to sell such shares pursuant to a Sell Order described in the proviso to
paragraph (c) of Section 3 of this Part II if (1) such shares were transferred
by the Beneficial Owner thereof without compliance by such Beneficial Owner or
its transferee Broker-Dealer (or other transferee person, if permitted by the
Trust) with the provisions of Section 6 of this Part II or (2) such
Broker-Dealer has informed the Auction Agent pursuant to the terms of its
Broker-Dealer Agreement that, according to such Broker-Dealer's records, such
Broker-Dealer believes it is not the Existing Holder of such shares.

               (iii) A Bid by a Potential Holder of shares of a series of
Preferred Shares subject to an Auction on any Auction Date shall constitute an
irrevocable offer to purchase:

                    (A) the number of Outstanding shares of such series
specified in such Bid if the Applicable Rate for shares of such series
determined on such Auction Date shall be higher than the rate specified therein;
or

                    (B) such number or a lesser number of Outstanding shares of
such series as set forth in clause (v) of paragraph (a) of Section 5 of this
Part II if the Applicable Rate for shares of such series determined on such
Auction Date shall be equal to the rate specified therein.

          (c) No Order for any number of Preferred Shares other than whole
shares shall be valid.

     3. SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT

         (a) Each Broker-Dealer shall submit in writing to the Auction Agent
prior to the Submission Deadline on each Auction Date all Orders for Preferred
Shares of a series subject to an Auction on such Auction Date obtained by such
Broker-Dealer, designating itself (unless otherwise permitted by the Trust) as
an Existing Holder in respect of shares subject to Orders submitted or deemed
submitted to it by Beneficial Owners and as a Potential Holder in respect of
shares subject to Orders submitted to it by Potential Beneficial Owners, and
shall specify with respect to each Order for such shares:

                                       46
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

               (i) the name of the Bidder placing such Order (which shall be the
Broker-Dealer unless otherwise permitted by the Trust);

               (ii) the aggregate number of shares of such series that are the
subject of such Order;

               (iii) to the extent that such Bidder is an Existing Holder of
shares of such series:

                    (A) the number of shares, if any, of such series subject to
any Hold Order of such Existing Holder;

                    (B) the number of shares, if any, of such series subject to
any Bid of such Existing Holder and the rate specified in such Bid; and

                    (C) the number of shares, if any, of such series subject to
any Sell Order of such Existing Holder; and

               (iv) to the extent such Bidder is a Potential Holder of shares of
such series, the rate and number of shares of such series specified in such
Potential Holder's Bid.

          (b) If any rate specified in any Bid contains more than three figures
to the right of the decimal point, the Auction Agent shall round such rate up to
the next highest one thousandth (.001) of 1%.

          (c) If an Order or Orders covering all of the Outstanding Preferred
Shares of a series held by any Existing Holder is not submitted to the Auction
Agent prior to the Submission Deadline, the Auction Agent shall deem a Hold
Order to have been submitted by or on behalf of such Existing Holder covering
the number of Outstanding shares of such series held by such Existing Holder and
not subject to Orders submitted to the Auction Agent; provided, however, that if
an Order or Orders covering all of the Outstanding shares of such series held by
any Existing Holder is not submitted to the Auction Agent prior to the
Submission Deadline for an Auction relating to a Special Rate Period consisting
of more than 7 Rate Period days, the Auction Agent shall deem a Sell Order to
have been submitted by or on behalf of such Existing Holder covering the number
of outstanding shares of such series held by such Existing Holder and not
subject to Orders submitted to the Auction Agent.

          (d) If one or more Orders of an Existing Holder is submitted to the
Auction Agent covering in the aggregate more than the number of Outstanding
Preferred Shares of a series subject to an Auction held by such Existing Holder,
such Orders shall be considered valid in the following order of priority:

               (i) all Hold Orders for shares of such series shall be considered
valid, but only up to and including in the aggregate the number of Outstanding
shares of such series held by such Existing Holder, and if the number of shares

                                       47
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

of such series subject to such Hold Orders exceeds the number of Outstanding
shares of such series held by such Existing Holder, the number of shares subject
to each such Hold Order shall be reduced pro rata to cover the number of
Outstanding shares of such series held by such Existing Holder;

               (ii) (A) any Bid for shares of such series shall be considered
valid up to and including the excess of the number of Outstanding shares of such
series held by such Existing Holder over the number of shares of such series
subject to any Hold Orders referred to in clause (i) above;

                    (B) subject to subclause (A), if more than one Bid of an
Existing Holder for shares of such series is submitted to the Auction Agent with
the same rate and the number of Outstanding shares of such series subject to
such Bids is greater than such excess, such Bids shall be considered valid up to
and including the amount of such excess, and the number of shares of such series
subject to each Bid with the same rate shall be reduced pro rata to cover the
number of shares of such series equal to such excess;

                    (C) subject to subclauses (A) and (B), if more than one Bid
of an Existing Holder for shares of such series is submitted to the Auction
Agent with different rates, such Bids shall be considered valid in the ascending
order of their respective rates up to and including the amount of such excess;
and

                    (D) in any such event, the number, if any, of such
Outstanding shares of such series subject to any portion of Bids considered not
valid in whole or in part under this clause (ii) shall be treated as the subject
of a Bid for shares of such series by or on behalf of a Potential Holder at the
rate therein specified; and

               (iii) all Sell Orders for shares of such series shall be
considered valid up to and including the excess of the number of Outstanding
shares of such series held by such Existing Holder over the sum of shares of
such series subject to valid Hold Orders referred to in clause (i) above and
valid Bids referred to in clause (ii) above.

          (e) If more than one Bid for one or more shares of a series of
Preferred Shares is submitted to the Auction Agent by or on behalf of any
Potential Holder, each such Bid submitted shall be a separate Bid with the rate
and number of shares therein specified.

          (f) Any Order submitted by a Beneficial Owner or a Potential
Beneficial Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction
Agent, prior to the Submission Deadline on any Auction Date, shall be
irrevocable.

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                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

     4. DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND &
        APPLICABLE RATE

          (a) Not earlier than the Submission Deadline on each Auction Date for
shares of a series of Preferred Shares, the Auction Agent shall assemble all
valid Orders submitted or deemed submitted to it by the Broker-Dealers in
respect of shares of such series (each such Order as submitted or deemed
submitted by a Broker-Dealer being hereinafter referred to individually as a
"Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the
case may be, or as a "Submitted Order" and collectively as "Submitted Hold
Orders," "Submitted Bids" or "Submitted Sell Orders," as the case may be, or as
"Submitted Orders") and shall determine for such series:

               (i) the excess of the number of Outstanding shares of such series
over the number of Outstanding shares of such series subject to Submitted Hold
Orders (such excess being hereinafter referred to as the "Available Preferred
Shares" of such series);

               (ii) from the Submitted Orders for shares of such series whether:

                    (A) the number of Outstanding shares of such series subject
to Submitted Bids of Potential Holders specifying one or more rates equal to or
lower than the Maximum Rate (for all Rate Periods) for shares of such series;
exceeds or is equal to the sum of

                    (B) the number of Outstanding shares of such series subject
to Submitted Bids of Existing Holders specifying one or more rates higher than
the Maximum Rate (for all Rate Periods) for shares of such series; and

                    (C) the number of Outstanding shares of such series subject
to Submitted Sell Orders (in the event such excess or such equality exists
(other than because the number of shares of such series in subclauses (B) and
(C) above is zero because all of the Outstanding shares of such series are
subject to Submitted Hold Orders), such Submitted Bids in subclause (A) above
being hereinafter referred to collectively as "Sufficient Clearing Bids" for
shares of such series); and

               (iii) if Sufficient Clearing Bids for shares of such series
exist, the lowest rate specified in such Submitted Bids (the "Winning Bid Rate"
for shares of such series) which if: (A) (I) each such Submitted Bid of Existing
Holders specifying such lowest rate and (II) all other such Submitted Bids of
Existing Holders specifying lower rates were rejected, thus entitling such
Existing Holders to continue to hold the shares of such series that are subject
to such Submitted Bids; and

                    (B) (I) each such Submitted Bid of Potential Holders
specifying such lowest rate and (II) all other such Submitted Bids of Potential
Holders specifying lower rates were accepted; would result in such Existing
Holders described in subclause (A) above continuing to hold an aggregate number

                                       49
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

of Outstanding shares of such series which, when added to the number of
Outstanding shares of such series to be purchased by such Potential Holders
described in subclause (B) above, would equal not less than the Available
Preferred Shares of such series.

          (b) Promptly after the Auction Agent has made the determinations
pursuant to paragraph (a) of this Section 4, the Auction Agent shall advise the
Trust of the Maximum Rate for shares of the series of Preferred Shares for which
an Auction is being held on the Auction Date and, based on such determination,
the Applicable Rate for shares of such series for the next succeeding Rate
Period thereof as follows:

               (i) if Sufficient Clearing Bids for shares of such series exist,
that the Applicable Rate for all shares of such series for the next succeeding
Rate Period thereof shall be equal to the Winning Bid Rate for shares of such
series so determined;

               (ii) if Sufficient Clearing Bids for shares of such series do not
exist (other than because all of the Outstanding shares of such series are
subject to Submitted Hold Orders), that the Applicable Rate for all shares of
such series for the next succeeding Rate Period thereof shall be equal to the
Maximum Rate for shares of such series; or

               (iii) if all of the Outstanding shares of such series are subject
to Submitted Hold Orders, that the Applicable Rate for all shares of such series
for the next succeeding Rate Period thereof shall be All Hold Rate.

     5. ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS AND
        ALLOCATION

     Existing Holders shall continue to hold the Preferred Shares that are
subject to Submitted Hold Orders, and, based on the determinations made pursuant
to paragraph (a) of Section 4 of this Part II, the Submitted Bids and Submitted
Sell Orders shall be accepted or rejected by the Auction Agent and the Auction
Agent shall take such other action as set forth below:

          (a) If Sufficient Clearing Bids for shares of a series of Preferred
Shares have been made, all Submitted Sell Orders with respect to shares of such
series shall be accepted and, subject to the provisions of paragraphs (d) and
(e) of this Section 5, Submitted Bids with respect to shares of such series
shall be accepted or rejected as follows in the following order of priority and
all other Submitted Bids with respect to shares of such series shall be
rejected:

               (i) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is higher than the Winning Bid Rate for shares of such
series shall be accepted, thus requiring each such Existing Holder to sell the
Preferred Shares subject to such Submitted Bids;

               (ii) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is lower than the Winning Bid Rate for shares of such
series shall be rejected, thus entitling each such Existing Holder to continue
to hold the Preferred Shares subject to such Submitted Bids;

                                       50
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

               (iii) Potential Holders' Submitted Bids for shares of such series
specifying any rate that is lower than the Winning Bid Rate for shares of such
series shall be accepted;

               (iv) each Existing Holder's Submitted Bid for shares of such
series specifying a rate that is equal to the Winning Bid Rate for shares of
such series shall be rejected, thus entitling such Existing Holder to continue
to hold the Preferred Shares subject to such Submitted Bid, unless the number of
Outstanding Preferred Shares subject to all such Submitted Bids shall be greater
than the number of Preferred Shares ("remaining shares") in the excess of the
Available Preferred Shares of such series over the number of Preferred Shares
subject to Submitted Bids described in clauses (ii) and (iii) of this paragraph
(a), in which event such Submitted Bid of such Existing Holder shall be rejected
in part, and such Existing Holder shall be entitled to continue to hold
Preferred Shares subject to such Submitted Bid, but only in an amount equal to
the Preferred Shares of such series obtained by multiplying the number of
remaining shares by a fraction, the numerator of which shall be the number of
Outstanding Preferred Shares held by such Existing Holder subject to such
Submitted Bid and the denominator of which shall be the aggregate number of
Outstanding Preferred Shares subject to such Submitted Bids made by all such
Existing Holders that specified a rate equal to the Winning Bid Rate for shares
of such series; and

               (v) each Potential Holder's Submitted Bid for shares of such
series specifying a rate that is equal to the Winning Bid Rate for shares of
such series shall be accepted but only in an amount equal to the number of
shares of such series obtained by multiplying the number of shares in the excess
of the Available Preferred Shares of such series over the number of Preferred
Shares subject to Submitted Bids described in clauses (ii) through (iv) of this
paragraph (a) by a fraction, the numerator of which shall be the number of
Outstanding Preferred Shares subject to such Submitted Bid and the denominator
of which shall be the aggregate number of Outstanding Preferred Shares subject
to such Submitted Bids made by all such Potential Holders that specified a rate
equal to the Winning Bid Rate for shares of such series.

          (b) If Sufficient Clearing Bids for shares of a series of Preferred
Shares have not been made (other than because all of the Outstanding shares of
such series are subject to Submitted Hold Orders), subject to the provisions of
paragraph (d) of this Section 5, Submitted Orders for shares of such series
shall be accepted or rejected as follows in the following order of priority and
all other Submitted Bids for shares of such series shall be rejected:

               (i) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is equal to or lower than the Maximum Rate for shares
of such series shall be rejected, thus entitling such Existing Holders to
continue to hold the Preferred Shares subject to such Submitted Bids;

                                       51
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                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

               (ii) Potential Holders' Submitted Bids for shares of such series
specifying any rate that is equal to or lower than the Maximum Rate for shares
of such series shall be accepted; and

               (iii) Each Existing Holder's Submitted Bid for shares of such
series specifying any rate that is higher than the Maximum Rate for shares of
such series and the Submitted Sell Orders for shares of such series of each
Existing Holder shall be accepted, thus entitling each Existing Holder that
submitted or on whose behalf was submitted any such Submitted Bid or Submitted
Sell Order to sell the shares of such series subject to such Submitted Bid or
Submitted Sell Order, but in both cases only in an amount equal to the number of
shares of such series obtained by multiplying the number of shares of such
series subject to Submitted Bids described in clause (ii) of this paragraph (b)
by a fraction, the numerator of which shall be the number of Outstanding shares
of such series held by such Existing Holder subject to such Submitted Bid or
Submitted Sell Order and the denominator of which shall be the aggregate number
of Outstanding shares of such series subject to all such Submitted Bids and
Submitted Sell Orders.

          (c) If all of the Outstanding shares of a series of Preferred Shares
are subject to Submitted Hold Orders, all Submitted Bids for shares of such
series shall be rejected.

          (d) If, as a result of the procedures described in clause (iv) or (v)
of paragraph (a) or clause (iii) of paragraph (b) of this Section 5, any
Existing Holder would be entitled or required to sell, or any Potential Holder
would be entitled or required to purchase, a fraction of a share of a series of
Preferred Shares on any Auction Date, the Auction Agent shall, in such manner as
it shall determine in its sole discretion, round up or down the number of
Preferred Shares of such series to be purchased or sold by any Existing Holder
or Potential Holder on such Auction Date as a result of such procedures so that
the number of shares so purchased or sold by each Existing Holder or Potential
Holder on such Auction Date shall be whole shares of a series of Preferred
Shares.

          (e) If, as a result of the procedures described in clause (v) of
paragraph (a) of this Section 5 any Potential Holder would be entitled or
required to purchase less than a whole share of a series of Preferred Shares on
any Auction Date, the Auction Agent shall, in such manner as it shall determine
in its sole discretion, allocate Preferred Shares of such series for purchase
among Potential Holders so that only whole shares of Preferred Shares of such
series are purchased on such Auction Date as a result of such procedures by any
Potential Holder, even if such allocation results in one or more Potential
Holders not purchasing Preferred Shares of such series on such Auction Date.

          (f) Based on the results of each Auction for shares of a series of
Preferred Shares, the Auction Agent shall determine the aggregate number of
shares of such series to be purchased and the aggregate number of shares of such
series to be sold by Potential Holders and Existing Holders and, with respect to
each Potential Holder and Existing Holder, to the extent that such aggregate

                                       52
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

number of shares to be purchased and such aggregate number of shares to be sold
differ, determine to which other Potential Holder(s) or Existing Holder(s) they
shall deliver, or from which other Potential Holder(s) or Existing Holder(s)
they shall receive, as the case may be, Preferred Shares of such series.
Notwithstanding any provision of the Auction Procedures or the Settlement
Procedures to the contrary, in the event an Existing Holder or Beneficial Owner
of shares of a series of Preferred Shares with respect to whom a Broker-Dealer
submitted a Bid to the Auction Agent for such shares that was accepted in whole
or in part, or submitted or is deemed to have submitted a Sell Order for such
shares that was accepted in whole or in part, fails to instruct its Agent Member
to deliver such shares against payment therefor, partial deliveries of Preferred
Shares that have been made in respect of Potential Holders' or Potential
Beneficial Owners' Submitted Bids for shares of such series that have been
accepted in whole or in part shall constitute good delivery to such Potential
Holders and Potential Beneficial Owners.

          (g) Neither the Trust nor the Auction Agent nor any affiliate of
either shall have any responsibility or liability with respect to the failure of
an Existing Holder, a Potential Holder, a Beneficial Owner, a Potential
Beneficial Owner or its respective Agent Member to deliver Preferred Shares of
any series or to pay for Preferred Shares of any series sold or purchased
pursuant to the Auction Procedures or otherwise.

     6. TRANSFER OF PREFERRED SHARES

     Unless otherwise permitted by the Trust, a Beneficial Owner or an Existing
Holder may sell, transfer or otherwise dispose of Preferred Shares only in whole
shares and only pursuant to a Bid or Sell Order placed with the Auction Agent in
accordance with the procedures described in this Part II or to a Broker-Dealer;
provided, however, that (a) a sale, transfer or other disposition of Preferred
Shares from a customer of a Broker-Dealer who is listed on the records of that
Broker-Dealer as the holder of such shares to that Broker-Dealer or another
customer of that Broker-Dealer shall not be deemed to be a sale, transfer or
other disposition for purposes of this Section 6 if such Broker-Dealer remains
the Existing Holder of the shares so sold, transferred or disposed of
immediately after such sale, transfer or disposition and (b) in the case of all
transfers other than pursuant to Auctions, the Broker-Dealer (or other Person,
if permitted by the Trust) to whom such transfer is made shall advise the
Auction Agent of such transfer.

                                       53
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION


                                    EXHIBIT A

                             APPROVED BROKER-DEALERS

                            Salomon Smith Barney Inc.
                            PaineWebber Incorporated
                              Lehman Brothers Inc.
                              Gruntal & Co., L.L.C.

                                       54
<PAGE>
                                PRIME RATE TRUST
                   PREFERRED SHARES CERTIFICATE OF DESIGNATION

IN WITNESS WHEREOF, the Trust has caused these representations to be signed in
its name and on its behalf by its Senior Executive Vice-President and attested
by its Assistant Secretary this ___ day of October, 2000. The Trust's
Declaration of Trust, as amended, is on file with the Secretary of State of the
Commonwealth of Massachusetts, and the said officers of the Trust have executed
this Certificate as officers and not individually, and the obligations and
rights set forth in this Certificate are not binding upon any such officers, or
the Trustees or shareholders of the Trust, individually, but are binding only
upon the assets and property of the Trust.

                                        PILGRIM PRIME RATE TRUST

                                        By:
                                           -------------------------------------
                                           Senior Executive Vice President

ATTEST:

By:
   --------------------------------------
   Assistant Secretary

                                       55
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.2.D.II
<SEQUENCE>5
<FILENAME>0005.txt
<DESCRIPTION>FORM OF SHARE CERTIFICATE
<TEXT>

SHARE CERTIFICATE                                           CUSIP No. __________
     NUMBER 1


                            PILGRIM PRIME RATE TRUST
          Organized Under the Laws of the Commonwealth of Massachusetts
               Preferred Shares of Beneficial Interest, Series ___
                            $.01 Par Value Per Share
                    $25,000 Liquidation Preference Per Share


                            FORM OF SHARE CERTIFICATE

         This certifies that Cede & Co. is the owner of Three Thousand Six
Hundred (3,600) fully paid and non-assessable shares of Auction Rate Cumulative
Preferred Shares, Series ___, $.01 par value per share, $25,000 liquidation
preference per share, of Pilgrim Prime Rate Trust (the "Trust"), the said shares
being issued, received and held under and subject to the terms and provisions of
the Agreement and Declaration of Trust dated as of December 2, 1987, and all
amendments thereto, and to the terms and provisions of the Certificate of
Designation of the Preferred Shares of the Trust, copies of which are on file
with the Secretary of the Commonwealth of Massachusetts. The said owner by
accepting this certificate agrees to and is bound by all of the said terms and
provisions. The shares represented hereby are only transferable in writing by
the owner thereof in person or by attorney upon surrender of this certificate to
the Trustees properly endorsed for transfer. This certificate is executed on
behalf of the Trustees of the Trust as Trustees and not individually and the
obligations hereof are not binding upon any of the Trustees, officers or
shareholders of the Trust individually but are binding only upon the assets and
property of the Trust. This certificate is not valid until countersigned and
registered by the Transfer Agent and Registrar.

         IN WITNESS WHEREOF, the Trust has caused this Share Certificate to be
signed by its duly authorized officers this ___ day of October, 2000.


BANKERS TRUST COMPANY                  PILGRIM PRIME RATE TRUST
As Transfer Agent and Registrar

By:                                    By:
    ---------------------------------      -------------------------------------
        Authorized Signature                  Senior Executive Vice President

                                       Attest:


                                       By:
                                           -------------------------------------
                                                    Assistant Secretary
<PAGE>
                                 TRANSFER FORM

         FOR VALUE RECEIVED, __________ hereby sells, assigns and transfers unto
_________ Shares represented by this Certificate, and do hereby irrevocably
constitute and appoint _________ Attorney, to transfer said shares on the books
of the within named Trust with full power of substitution in the premises.

Dated:  _________________, ______



Signature(s):  ______________________________
(The signature to this assignment must correspond with the name as written upon
the face of this Share Certificate in every particular, without alteration or
enlargement or any change whatsoever. If more than one owner, all must sign.)

Signature Guaranteed By:  __________________________________________________
(Signature(s) must be guaranteed by a commercial bank or trust company or member
firm of any national stock exchange.)


Shares of Preferred Shares evidenced by this Share Certificate may be sold,
transferred, or otherwise disposed of only pursuant to the provisions of the
Trust's Certificate of Designation for Preferred Shares, copies of which will be
furnished by the Trust to any shareholders upon request and without charge.

The Trust will furnish to any shareholder, upon request and without charge, a
full statement of the designations, preferences, limitations and relative rights
of the shares of each class or series of the Trust authorized to be issued, so
far as they have been determined, and the authority of the Board of Trustees to
determine the relative rights and preferences of subsequent classes or series.
Any such request should be addressed to the Secretary of the Trust.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.2.G.IV
<SEQUENCE>6
<FILENAME>0006.txt
<DESCRIPTION>INVESTMENT MANAGEMENT AGREEMENT
<TEXT>

                         INVESTMENT MANAGEMENT AGREEMENT

     THIS INVESTMENT MANAGEMENT AGREEMENT made as of the 1st day of September
2000, by and between PILGRIM PRIME RATE TRUST, a Massachusetts Business Trust
(hereinafter called the "Trust"), and PILGRIM INVESTMENTS, INC., a corporation
organized and existing under the laws of the State of Delaware (hereinafter
called the "Manager").

                                   WITNESSETH:

     WHEREAS, the Trust is a closed-end management investment company,
registered as such under the Investment Company Act of 1940; and

     WHEREAS, the Manager is registered as an investment adviser under the
Investment Advisers Act of 1940, and is engaged in the business of supplying
investment advice and investment management services, as an independent
contractor; and

     WHEREAS, the Trust desires to retain the Manager to render investment
advice and investment management services to the Trust pursuant to the terms and
provisions of this Agreement, and the Manager is interested in furnishing said
advice and services.

     NOW, THEREFORE, in consideration of the covenants and the mutual promises
hereinafter set forth, the parties hereto, intending to be legally bound hereby,
mutually agree as follows:

          1. The Trust hereby employs the Manager and the Manager hereby accepts
     such employment, to render investment advice and investment management
     services with respect to the assets of the Trust, subject to the
     supervision and direction of the Trust's Board of Trustees. The Manager
     shall, as part of its duties hereunder (i) furnish the Trust with advice
     and recommendations with respect to the investment of the Trust's assets
     and the purchase and sale of its portfolio securities, including the taking
     of such other steps as may be necessary to implement such advice and
     recommendations, (ii) furnish the Trust with reports, statements and other
     data on securities, economic conditions and other pertinent subjects which
     the Trust's Board of Trustees may request, (iii) permit its officers and
     employees to serve without compensation as Trustees of the Trust if elected
     to such positions and (iv) in general superintend and manage the investment
     of the Trust, subject to the ultimate supervision and direction to the
     Trust's Board of Trustees.

          2. The Manager shall use its best judgment and efforts in rendering
     the advice and services to the Trust as contemplated by this Agreement.

          3. The Manager shall, for all purposes herein, be deemed to be an
     independent contractor, and shall, unless otherwise expressly provided and
     authorized, have no authority to act for or represent the Trust in any way,
     or in any way be deemed an agent for the Trust. It is expressly understood
     and agreed that the services to be rendered by the Manager to the Trust
     under the provisions of this Agreement are not to be deemed exclusive, and
     the Manager shall be free to render similar or different services to others
     so long as its ability to render the services provided for in this
     Agreement shall not be impaired thereby.
<PAGE>
          4. The Manager agrees to use its best efforts in the furnishing of
     such advice and recommendations to the Trust, in the preparation of reports
     and information, and in the management of the Trust's assets, all pursuant
     to this Agreement, and for this purpose the Manager shall, at its own
     expense, maintain such staff and employ or retain such personnel and
     consult with such other persons as it shall from time to time determine to
     be necessary to the performance of its obligations under this Agreement.
     Without limiting the generality of the foregoing, the staff and personnel
     of the Manager shall be deemed to include persons employed or retained by
     the Manager to furnish statistical, research, and other factual
     information, advice regarding economic factors and trends, information with
     respect to technical and scientific developments, and such other
     information, advice and assistance as the Manager may desire and request.

          5. The Trust will from time to time furnish to the Manager detailed
     statements of the investments and assets of the Trust and information as to
     its investment objectives and needs, and will make available to the Manager
     such financial reports, proxy statements, legal and other information
     relating to its investments as may be in the possession of the Trust or
     available to it and such information as the Manager may reasonably request.

          6. Whenever the Manager has determined that the Trust should tender
     securities pursuant to a "tender offer solicitation" the Manager shall
     designate an affiliate as the "tendering dealer" so long as it is legally
     permitted to act in such capacity under the Federal securities laws and
     rules thereunder and the rules of any securities exchange or association of
     which such affiliate may be a member. Such affiliated dealer shall not be
     obligated to make any additional commitments of capital, expenses or
     personnel beyond that already committed (other than normal periodic fees or
     payments necessary to maintain its corporate existence and membership in
     the National Associations of Securities Dealers, Inc.) as of the date of
     this Agreement. This Agreement shall not obligate the Manager or such
     affiliate (i) to act pursuant to the foregoing requirement under any
     circumstances in which they might reasonably believe that liability might
     be imposed upon them as a result of so acting, or (ii) to institute legal
     or other proceedings to collect fees which may be considered to be due from
     others to it as a result of such a tender, unless the Trust shall enter
     into an Agreement with such affiliate to reimburse it for all expenses
     connected with attempting to collect such fees, including legal fees and
     expenses and that portion of the compensation due to their employees which
     is attributable to the time involved in attempting to collect such fees.

          7. The Manager shall bear and pay the costs of rendering the services
     to be performed by it under this Agreement. The Trust shall be responsible
     for all other expenses of its operation, including, but not limited to,
     expenses incurred in connection with the sale, issuance, registration, and
     transfer of its shares; fees of its custodian, transfer and shareholder
     servicing agent; salaries of officers and fees and expenses of trustees or
     members of any advisory board or committee of the Trust who are not members
     of, affiliated with or interested persons of the Manager; the cost of
     preparing and printing reports, proxy statements and prospectuses of the
     Trust or other communications for distribution to its shareholders; legal,
     auditing and accounts fees; the fees of any trade associations of which the
     Trust is a member; fees and expenses of registering and maintaining
     registration of its shares for sale under Federal and applicable State
     securities laws; and all other charges and costs of its operation plus any
     extraordinary and non-recurring expenses, except as herein otherwise
     prescribed. To the extent the Manager incurs any costs or performs any
     services which are an obligation of the Trust, as set forth herein, the
     Trust shall promptly reimburse the Manager for such costs and expenses. To
     the extent the services for which the Trust is obligated to pay are
     performed by the Manager, the Manager shall be entitled to recover from the
     Trust only to the extent of its costs for such services.

                                        2
<PAGE>
          8.(a) The Trust agrees to pay to the Manager, and the Manager agrees
     to accept, as full compensation for all administrative and investment
     management services furnished or provided to the Trust and as full
     reimbursement for all expenses assumed by the Manager, a management fee
     computed at an annual percentage rate of .80% of the Managed Assets of the
     Trust. For purposes of this Agreement, "Managed Assets" shall mean the
     Trust's average daily gross asset value, minus the sum of the Trust's
     accrued and unpaid dividends on any outstanding preferred shares and
     accrued liabilities (other than liabilities for the principal amount of any
     borrowings incurred, commercial paper or notes issued by the Trust and the
     liquidation preference of any outstanding preferred shares).

          (b) The management fee shall be accrued daily by the Trust and paid to
     the Manager at the end of each calendar month.

          (c) If, for any fiscal year, the expenses borne by the Trust,
     including the investment advisory fee, but excluding brokerage commissions
     and fees, taxes, interest and to the extent permitted, any extraordinary
     expenses such as litigation and non-recurring expenses, would exceed the
     expense limitations applicable to the Trust imposed by the securities laws
     or regulations thereunder of any state in which the Trust's shares are
     qualified for sale, the Manager agrees to reduce its fee or reimburse the
     Trust for all such excess expenses exceeding such limitation no later than
     the last day of the first month of the next succeeding fiscal year. For the
     purposes of this paragraph, the term "fiscal year" shall exclude the
     portion of the current fiscal year which shall have elapsed prior to the
     date hereof and shall include the portion of the then current fiscal year
     which shall have elapsed at the date of termination of this Agreement.

          (d) The management fee payable by the Trust hereunder shall be reduced
     to the extent that an affiliate of the Manager has actually received cash
     payments of tender offer solicitation fees less certain costs and expenses
     incurred in connection therewith, as referred to in Paragraph 6 herein.

          9. The Manager agrees that neither it nor any of its officers or
     employees shall take any short position in the capital stock of the Trust.
     This prohibition shall not prevent the purchase of such shares by any of
     the officers and directors or bona fide employees of the Manager or any
     trust, pension, profit-sharing or other benefit plan for such persons or
     affiliates thereof.

          10. Nothing herein contained shall be deemed to require the Trust to
     take any action contrary to its Trust Indenture or applicable statute or
     regulation, or to relieve or deprive the Board of Trustees of the Trust of
     its responsibility for and control of the conduct of the affairs of the
     Trust.

          11.(a) In the absence of willful misfeasance, bad faith, gross
     negligence, or reckless disregard of obligations or duties hereunder on the
     part of the Manager, the Manager shall not be subject to liability to the
     Trust or to any shareholder of the Trust for any act or omission in the
     course of, or connected with, rendering services hereunder or for any
     losses that may be sustained in the purchase, holding or sale of any
     investment by the Trust.

                                        3
<PAGE>
          (b) Notwithstanding the foregoing, the Manager agrees to reimburse the
     Trust for any and all costs, expenses, and counsel and trustees' fees
     reasonably incurred by the Trust in the preparation, printing and
     distribution of proxy statements, amendments to its Registration Statement,
     holding of meetings of its shareholders or trustees, the conduct of factual
     investigations, any legal or administrative proceedings including any
     applications for exemptions or determinations by the Securities and
     Exchange Commission which the Trust incurs as the result of action or
     inaction of the Manager or any of its shareholders where the action or
     inaction necessitating such expenditures (i) is directly or indirectly
     related to any transaction or proposed transaction in the shares or control
     of the Manager or its affiliates (or litigation related to any pending or
     proposed future transaction in such shares or control) which shall have
     been undertaken without the prior express approval of the Trust's Board of
     Trustees; or (ii) is within the sole control of the Manager or any of its
     affiliates or any of their officers, directors, employees or shareholders.
     The Manager shall not be obligated pursuant to the provisions of this
     Subparagraph 11(b), to reimburse the Trust for any expenditures related to
     the institution of an administrative proceeding or civil litigation by the
     Trust or a Trust shareholder seeking to recover all or a portion of the
     proceeds derived by any shareholder of the Manager or any of its affiliates
     from the sale of his shares of the Manager, or similar matters. So long as
     this Agreement is in effect, the Manager shall pay to the Trust the amount
     due for expenses subject to this Subparagraph 11(b) within thirty (30) days
     after a bill or statement has been received by the Trust therefor. This
     provision shall not be deemed to be a waiver of any claim the Trust may
     have or may assert against the Manager or others or costs, expenses, or
     damages heretofore incurred by the Trust for costs, expenses, or damages
     the Trust may hereinafter incur which are not reimbursable to it hereunder.

          (c) No provision of this Agreement shall be construed to protect any
     trustee or officer of the Trust, or the Manager, from liability in
     violation of Section 17(h) and (i) of the Investment Company Act of 1940,
     as amended.

          12. This Agreement shall become effective on the date first written
     above, subject to the condition that the Trust's Board of Trustees,
     including a majority of those Trustees who are not interested persons (as
     such term is defined in the Investment Company Act of 1940) of the Manager,
     and the shareholders of the Trust, shall have approved this Agreement.
     Unless terminated as provided herein, the Agreement shall continue in full
     force and effect for two (2) years from the effective date of this
     Agreement, and shall continue in effect from year to year thereafter so
     long as such continuation is specifically approved at least annually by (i)
     the Board of Trustees of the Trust or by the vote of a majority of the
     outstanding voting securities of the Trust, and (ii) the vote of a majority
     of the Trustees of the Trust who are not parties to this Agreement or
     interested persons thereof, cast in person at a meeting called for the
     purpose of voting on such approval.

          13. This Agreement may be terminated at any time, without payment of
     any penalty, by the Board of Trustees of the Trust or by vote of a majority
     of the outstanding voting securities of the Trust, upon sixty (60) days
     written notice to the Manager, and by the Manager upon sixty (60) days
     written notice to the Trust.

          14. This Agreement shall terminate automatically in the event of any
     transfer or assignment thereof, as defined in the Investment Company Act of
     1940, as amended.

                                        4
<PAGE>
          15. If any provision of this Agreement shall be held or made invalid
     by a court decision, statute, rule, or otherwise, the remainder of this
     Agreement shall not be affected thereby.

          16. The term "majority of the outstanding voting securities" of the
     Trust shall have the meaning as set forth in the Investment Company Act of
     1940, as amended.

          17. In consideration of the execution of this Agreement the Manager,
     on behalf of its sole shareholder, Pilgrim Group, Inc. hereby grants to the
     Trust the right to use the name "Pilgrim" as part of its name. The Manager,
     on behalf of its sole shareholder, Pilgrim Group, Inc. reserves the right
     to grant to others the right to use the name "Pilgrim" including to any
     other investment company. The Trust agrees that in the event this Agreement
     is terminated, the Trust shall immediately take such steps as are necessary
     to amend its name and remove the reference to "Pilgrim."

                                        5
<PAGE>
     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers on the day and year first above written.


                                        PILGRIM PRIME RATE TRUST


Attest:                                 By:
       ------------------------------      -------------------------------------

Title:                                  Title:
      -------------------------------         ----------------------------------


                                        PILGRIM INVESTMENTS, INC.


Attest:                                 By:
       ------------------------------      -------------------------------------

Title:                                  Title:
      -------------------------------         ----------------------------------

                                        6
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.2.H.II
<SEQUENCE>7
<FILENAME>0007.txt
<DESCRIPTION>FORM OF UNDERWRITING AGREEMENT
<TEXT>

                    Auction Rate Cumulative Preferred Shares

                            PILGRIM PRIME RATE TRUST

                           _________ Shares, Series M

                           _________ Shares, Series T

                           _________ Shares, Series W

                           _________ Shares, Series Th

                           _________ Shares, Series F

                    Liquidation Preference $25,000 Per Share

                         FORM OF UNDERWRITING AGREEMENT

                                                               ________ __, 2000

SALOMON SMITH BARNEY INC.
PAINEWEBBER INCORPORATED
LEHMAN BROTHERS INC.
GRUNTAL & CO., L.L.C.

c/o SALOMON SMITH BARNEY INC.
    388 Greenwich Street
    New York, New York 10013

Ladies and Gentlemen:

     Pilgrim Prime Rate Trust, a Massachusetts business trust (the "Trust"),
proposes, upon the terms and conditions set forth herein, to issue and sell an
aggregate of ______ shares of its Auction Rate Cumulative Preferred Shares,
Series M, ______ shares of its Auction Rate Cumulative Preferred Shares, Series
T, ______ shares of its Auction Rate Cumulative Preferred Shares, Series W,
______ shares of its Auction Rate Cumulative Preferred Shares, Series Th and
______ shares of its Auction Rate Cumulative Preferred Shares, Series F, each
with a liquidation preference of $25,000 per share (the shares of Auction Rate
Cumulative Preferred Shares to be sold hereby are referred to herein,
collectively, as the "Shares"). The Shares will be authorized by, and subject to
the terms and conditions of, the Certificate of Designation for Preferred Shares
<PAGE>
                                                                               2

of the Trust (the "Certificate") in the form filed as an exhibit to the
Registration Statement referred to in Section 1 of this agreement. The Trust and
its investment adviser, ING Pilgrim Investments, Inc. (the "Adviser"), wish to
confirm as follows their agreement with Salomon Smith Barney Inc., PaineWebber
Incorporated, Lehman Brothers Inc. and Gruntal & Co., L.L.C. (the
"Underwriters"), in connection with the purchase of the Shares by the
Underwriters.

     Collectively, the Amended and Restated Investment Management Agreement
dated as of _____, 2000 between the Trust and the Adviser ("the "Investment
Management Agreement"), the Custodian Agreement dated as of _____ between the
Trust and State Street Bank and Trust - Kansas City, the [Transfer Agency,
Registrar and Dividend Paying Agency Agreement] dated as of _____ between the
Trust and ______ and the Auction Agency Agreement dated as of _____, 2000
between the Trust and Bankers Trust Company are hereinafter referred to as the
"Trust Agreements." This Underwriting Agreement is hereinafter referred to as
the "Agreement."

     1. REGISTRATION STATEMENT AND PROSPECTUS. The Trust has prepared in
conformity with the provisions of the Securities Act of 1933, as amended (the
"1933 Act"), the Investment Company Act of 1940, as amended (the "1940 Act"),
and the rules and regulations of the Securities and Exchange Commission (the
"Commission") promulgated under the 1933 Act (the "1933 Act Rules and
Regulations") and the 1940 Act (the "1940 Act Rules and Regulations" and,
together with the 1933 Act Rules and Regulations, the "Rules and Regulations") a
registration statement on Form N-2, as amended by _____________ (File Nos.
333-44918 and 811-05410), under the 1933 Act and the 1940 Act (the "registration
statement"), including a prospectus relating to the Shares, and has filed the
registration statement and prospectus in accordance with the 1933 Act and the
1940 Act. The Trust also has filed a notification of registration of the Trust
as an investment company under the 1940 Act on Form N-8A (the "1940 Act
Notification"). The term "Registration Statement" as used in this Agreement
means the registration statement (including all financial schedules and
exhibits), as amended at the time it becomes effective under the 1933 Act or, if
the registration statement became effective under the 1933 Act prior to the
execution of this Agreement, as amended or supplemented at the time it became
effective, prior to the execution of this Agreement. If it is contemplated, at
the time this Agreement is executed, that a post-effective amendment to the
registration statement will be filed under the 1933 Act and must be declared
effective before the offering of the Shares may commence, the term "Registration
Statement" as used in this Agreement means the registration statement as amended
by said post-effective amendment. If the Trust has filed an abbreviated
registration statement to register an additional amount of Shares pursuant to
Rule 462(b) under the 1933 Act (the "Rule 462 Registration Statement"), then any
reference herein to the term "Registration Statement" shall include such Rule
462 Registration Statement. The term "Prospectus" as used in this Agreement
means the prospectus and statement of additional information in the forms
included in the Registration Statement or, if the prospectus and statement of
additional information included in the Registration Statement omit information
in reliance on Rule 430A under the 1933 Act Rules and Regulations and such
information is included in a prospectus and statement of additional information
filed with the Commission pursuant to Rule 497(h) under the 1933 Act, the term
"Prospectus" as used in this Agreement means the prospectus and statement of
additional information in the forms included in the Registration Statement as
supplemented by the addition of the information contained in the prospectus
<PAGE>
                                                                               3

filed with the Commission pursuant to Rule 497(h). The term "Prepricing
Prospectus" as used in this Agreement means the prospectus and statement of
additional information subject to completion in the forms included in the
registration statement at the time of filing of amendment no. ___ to the
registration statement with the Commission on ________ __, 2000, and as such
prospectus and statement of additional information shall have been amended from
time to time prior to the date of the Prospectus, together with any other
prospectus and statement of additional information relating to the Trust other
than the Prospectus approved in writing by or directly or indirectly prepared by
the Trust or the Adviser; it being understood that the definition of Prepricing
Prospectus above shall not include any Prepricing Prospectus prepared by the
Underwriters unless approved in writing by the Trust or Adviser. The terms
"Registration Statement," "Prospectus" and "Prepricing Prospectus" shall also
include any financial statements incorporated by reference therein.

     The Trust has furnished Salomon Smith Barney Inc. with copies of such
registration statement, each amendment to such registration statement filed with
the Commission and each Prepricing Prospectus, and Salomon Smith Barney Inc. has
provided the same to the other Underwriters.

     2. AGREEMENTS TO SELL AND PURCHASE. The Trust hereby agrees, subject to all
the terms and conditions set forth herein, to issue and sell to the Underwriters
and, upon the basis of the representations, warranties and agreements of the
Trust and the Adviser herein contained and subject to all the terms and
conditions set forth herein, the Underwriters agree to purchase from the Trust,
at a purchase price of $_______ per Share, the number of shares of each series
of Auction Rate Cumulative Preferred Shares set forth opposite the name of each
Underwriter in Schedule I hereto.

     3. TERMS OF PUBLIC OFFERING. The Trust and the Adviser have been advised by
the Underwriters that they propose to make a public offering of the Shares as
soon after the Registration Statement and this Agreement have become effective
as in the Underwriters' judgment is advisable and initially to offer the Shares
upon the terms set forth in the Prospectus.

     4. DELIVERY OF THE SHARES AND PAYMENT THEREFOR. Delivery to the
Underwriters of and payment for the Shares shall be made at the office of
Simpson Thacher & Bartlett, 425 Lexington Avenue, New York, NY 10017, or through
the facilities of The Depository Trust Company or another mutually agreeable
facility, at 9:30 A.M., New York City time, on ________ __, 2000 (the "Closing
Date"). The place of closing for the Shares and the Closing Date may be varied
by agreement between you and the Trust.

     Certificates for the Shares shall be registered in such names and in such
denominations as the Underwriters shall request prior to 9:30 A.M., New York
City time, on the second business day preceding the Closing Date. Such
certificates shall be made available to the Underwriters in New York City for
inspection not later than 9:30 A.M., New York City time, on the business day
next preceding the Closing Date. The certificates evidencing the Shares shall be
delivered to the Underwriters on the Closing Date, through the facilities of The
Depository Trust Company or another mutually agreeable facility, against payment
of the purchase price therefor in immediately available funds.
<PAGE>
                                                                               4

     5. AGREEMENTS OF THE TRUST AND THE ADVISER. The Trust and the Adviser,
jointly and severally, agree with the Underwriters as follows:

     (a) If, at the time this Agreement is executed and delivered, it is
necessary for the Registration Statement or a post-effective amendment thereto
to be declared effective under the 1933 Act before the offering of the Shares
may commence, the Trust will endeavor to cause the Registration Statement or
such post-effective amendment to become effective under the 1933 Act as soon as
possible and will advise the Underwriters promptly and, if requested by the
Underwriters, will confirm such advice in writing when the Registration
Statement or such post-effective amendment has become effective.

     (b) The Trust will advise the Underwriters promptly and, if requested by
the Underwriters, will confirm such advice in writing: (i) of any request made
by the Commission for amendment of or a supplement to the Registration
Statement, any Prepricing Prospectus or the Prospectus (or any amendment or
supplement to any of the foregoing) or for additional information, (ii) of the
issuance by the Commission, the National Association of Securities Dealers, Inc.
(the "NASD"), any state securities commission, any national securities exchange,
any arbitrator, any court or any other governmental, regulatory, self-regulatory
or administrative agency or any official of any order suspending the
effectiveness of the Registration Statement, prohibiting or suspending the use
of the Prospectus or any Prepricing Prospectus, or any sales material (as
hereinafter defined), of any notice pursuant to Section 8(e) of the 1940 Act, of
the suspension of qualification of the Shares for offering or sale in any
jurisdiction, or the initiation of any proceeding for any such purposes, (iii)
of receipt by the Trust, the Adviser, any affiliate of the Trust or the Adviser
or any representative or attorney of the Trust or the Adviser of any other
material communication from the Commission, the NASD, any state securities
commission, any national securities exchange, any arbitrator, any court or any
other governmental, regulatory, self-regulatory or administrative agency or any
official relating to the Trust (if such communication relating to the Trust is
received by such person within three years after the date of this Agreement),
the Registration Statement, the 1940 Act Notification, the Prospectus, any
Prepricing Prospectus, any sales material (as herein defined) (or any amendment
or supplement to any of the foregoing) or this Agreement or any of the Trust
Agreements and (iv) within the period of time referred to in paragraph (f)
below, of any material adverse change in the condition (financial or other),
business, prospects, properties, net assets or results of operations of the
Trust or the Adviser or of the happening of any other event which makes any
statement of a material fact made in the Registration Statement or the
Prospectus, or any Prepricing Prospectus or any sales materials (as herein
defined) (or any amendment or supplement to any of the foregoing) untrue or
which requires the making of any additions to or changes in the Registration
Statement or the Prospectus, or any Prepricing Prospectus or any sales materials
(as herein defined) (or any amendment or supplement to any of the foregoing) in
order to state a material fact required by the 1933 Act, the 1940 Act or the
Rules and Regulations to be stated therein or necessary in order to make the
statements therein (in the case of the Prospectus, in light of the circumstances
under which they were made), not misleading or of the necessity to amend or
supplement the Registration Statement, the Prospectus, or any Prepricing
Prospectus or any sales material (as herein defined) (or any amendment or
supplement to any of the foregoing) to comply with the 1933 Act, the 1940 Act,
the Rules and Regulations or any other law or order of any court or regulatory
<PAGE>
                                                                               5

body. If at any time the Commission, the NASD, any state securities commission,
any national securities exchange, any arbitrator, any court or any other
governmental, regulatory, self-regulatory or administrative agency or any
official shall issue any order suspending the effectiveness of the Registration
Statement, prohibiting or suspending the use of the Prospectus or any sales
material (as herein defined) (or any amendment or supplement to any of the
foregoing) or suspending the qualification of the Shares for offering or sale in
any jurisdiction, the Trust will make every reasonable effort to obtain the
withdrawal of such order at the earliest possible time.

     (c) The Trust will furnish to you, without charge, three signed copies of
the Registration Statement as originally filed with the Commission and of each
amendment thereto, including financial statements and all exhibits thereto, and
will also furnish to you, without charge, such number of conformed copies of the
Registration Statement as originally filed and of each amendment thereto, but
without exhibits, as you may reasonably request.

     (d) The Trust will not (i) file any amendment to the Registration Statement
or make any amendment or supplement to the Prospectus, or any sales material (as
herein defined), of which you shall not previously have been advised or to which
you shall reasonably object after being so advised or (ii) so long as, in the
opinion of counsel for the Underwriters, a Prospectus is required by the 1933
Act to be delivered in connection with sales by the Underwriters or any dealer,
file any information, documents or reports pursuant to the Securities Exchange
Act of 1934, as amended (the "1934 Act"), without delivering a copy of such
information, documents or reports to you prior to or concurrently with such
filing.

     (e) Prior to the execution and delivery of this Agreement, the Trust has
delivered to you, without charge, in such quantities as you have requested,
copies of each form of the Prepricing Prospectus. The Trust consents to the use,
in accordance with the provisions of the 1933 Act and with the state securities
or blue sky laws of the jurisdictions in which the Shares are offered by the
Underwriters and by dealers, prior to the date of the Prospectus, of each
Prepricing Prospectus so furnished by the Trust.

     (f) As soon after the execution and delivery of this Agreement as possible
and thereafter from time to time for such period as in the opinion of counsel
for the Underwriters a prospectus is required by the 1933 Act to be delivered in
connection with sales by the Underwriters or any dealer, the Trust will
expeditiously deliver to the Underwriters and each dealer, without charge, as
many copies of the Prospectus (and of any amendment or supplement thereto) as
the Underwriters may reasonably request. The Trust consents to the use of the
Prospectus (and of any amendment or supplement thereto) in accordance with the
provisions of the 1933 Act and with the state securities or blue sky laws of the
jurisdictions in which the Shares are offered by the Underwriters and by all
dealers to whom Shares may be sold, both in connection with the offering and
sale of the Shares and for such period of time thereafter as the Prospectus is
required by the 1933 Act to be delivered in connection with sales by the
Underwriters or any dealer. If during such period of time any event shall occur
that in the judgment of the Trust or in the opinion of counsel for the
Underwriters is required to be set forth in the Registration Statement or the
Prospectus (as then amended or supplemented) or should be set forth therein in
order to make the statements therein (in the case of the Prospectus, in the
light of the circumstances under which they were made) not misleading, or if it
<PAGE>
                                                                               6

is necessary to supplement or amend the Registration Statement or the Prospectus
to comply with the 1933 Act, the 1940 Act, the Rules and Regulations or any
other federal law, rule or regulation, or any state securities or blue sky
disclosure laws, rules or regulations, the Trust will forthwith prepare and,
subject to the provisions of paragraph (d) above, promptly file with the
Commission an appropriate supplement or amendment thereto, and will
expeditiously furnish to the Underwriters and dealers, without charge, a
reasonable number of copies thereof. In the event that the Trust and the
Underwriters agree that the Registration Statement or the Prospectus should be
amended or supplemented, the Trust, if requested by the Underwriters, will
promptly issue a press release announcing or disclosing the matters to be
covered by the proposed amendment or supplement.

     (g) The Trust will make generally available to its security holders an
earnings statement, which need not be audited, covering a twelve-month period
ending not later than 15 months after the effective date of the Registration
Statement as soon as practicable after the end of such period, which earnings
statement shall satisfy the provisions of Section 11(a) of the 1933 Act and Rule
158 of the 1933 Act Rules and Regulations.

     (h) During the period of five years after the date of this Agreement, the
Trust will furnish to you (i) as soon as available, a copy of each report of the
Trust mailed to stockholders or filed with the Commission or furnished to the
New York Stock Exchange (the "NYSE") other than reports on Form N-SAR, and (ii)
from time to time such other information concerning the Trust as the
Underwriters may reasonably request.

     (i) If this Agreement shall terminate or shall be terminated after
execution pursuant to any provisions hereof (otherwise than by notice given by
the Underwriters terminating this Agreement pursuant to Section 12 hereof) or if
this Agreement shall be terminated by the Underwriters because of any failure or
refusal on the part of the Trust or the Adviser to comply with the terms or
fulfill any of the conditions of this Agreement, the Trust and the Adviser,
jointly and severally, agree to reimburse the Underwriters for all out-of-pocket
expenses (including reasonable fees and expenses of counsel for the
Underwriters) incurred by the Underwriters in connection herewith.

     (j) The Trust will apply the net proceeds from the sale of the Shares
substantially in accordance with the description set forth in the Prospectus and
in such a manner as to comply with the investment objectives, policies and
restrictions of the Trust as described in the Prospectus.

     (k) The Trust will timely file the Prospectus with the Commission pursuant
to Rule 497(c) or Rule 497(h) of the 1933 Act Rules and Regulations, whichever
is applicable or, if applicable, will timely file the certification permitted by
Rule 497(j) of the 1933 Act Rules and Regulations and will advise the
Underwriters of the time and manner of such filing.

     (l) Except as provided in this Agreement, the Trust will not sell, contract
to sell, or otherwise dispose of any senior securities (as defined in the 1940
Act) (other than senior securities sold in an underwriting lead-managed by
Salomon Smith Barney Inc.) of the Trust, or grant any options or warrants to
purchase senior securities of the Trust, for a period of 180 days after the date
of the Prospectus, without the prior written consent of the Underwriters.
<PAGE>
                                                                               7

     (m) Except as stated in this Agreement and in the Prepricing Prospectus and
the Prospectus, neither the Trust nor the Adviser has taken, nor will it take,
directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the price of any
securities issued by the Trust to facilitate the sale or resale of the Shares.

     (n) The Trust will use commercially reasonable efforts to cause the Shares,
prior to the Closing Date, to be assigned a rating of `aaa' by Moody's Investors
Service, Inc. ("Moody's") and `AAA' by Standard & Poor's, a division of
McGraw-Hill Companies, Inc. ("S&P" and, together with Moody's, the "Rating
Agencies").

     (o) The Trust and the Adviser will use commercially reasonable efforts to
perform all of the agreements required of them and discharge all conditions to
closing as set forth in this Agreement.

     6. REPRESENTATIONS AND WARRANTIES OF THE TRUST AND THE ADVISER. The Trust
and the Adviser, jointly and severally, represent and warrant to the
Underwriters that:

     (a) Each Prepricing Prospectus included as part of the registration
statement as originally filed or as part of any amendment or supplement thereto,
or filed pursuant to Rule 497 of the 1933 Act Rules and Regulations, complied
when so filed in all material respects with the provisions of the 1933 Act, the
1940 Act and the Rules and Regulations. The Commission has not issued any order
preventing or suspending the use of any Prepricing Prospectus.

     (b) The registration statement in the form in which it became or becomes
effective and also in such form as it may be when any post-effective amendment
thereto shall become effective and the Prospectus and any supplement or
amendment thereto when filed with the Commission under Rule 497 of the 1933 Act
Rules and Regulations and the 1940 Act Notification when originally filed with
the Commission and any amendment or supplement thereto when filed with the
Commission, complied or will comply in all material respects with the provisions
of the 1933 Act, the 1940 Act and the Rules and Regulations and did not or will
not at any such times contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein (in the case of the Prospectus, in light of the circumstances
under which they were made) not misleading, except that this representation and
warranty does not apply to statements in or omissions from the registration
statement or the Prospectus made in reliance upon and in conformity with
information relating to the Underwriters furnished to the Trust in writing by or
on behalf of the Underwriters expressly for use therein.

     (c) All the outstanding common shares of beneficial interest of the Trust
have been duly authorized and validly issued by the Trust, are fully paid and
nonassessable and are free of any preemptive or similar rights; the Shares have
been duly authorized and, when issued and delivered to the Underwriters against
payment therefor in accordance with the terms hereof, will be validly issued by
<PAGE>
                                                                               8

the Trust, fully paid and nonassessable and free of any preemptive or similar
rights and will conform to the description thereof in the Registration Statement
and the Prospectus (and any amendment or supplement to either of them); and the
capitalization of the Trust conforms to the description thereof in the
Registration Statement and the Prospectus (and any amendment or supplement to
either of them).

     (d) The Trust is a business trust duly organized and validly existing under
the laws of the State of Massachusetts with full business trust power and
authority to own, lease and operate its properties and to conduct its business
as described in the Registration Statement and the Prospectus (and any amendment
or supplement to either of them), and is duly registered and qualified to
conduct its business and is in good standing in each jurisdiction or place where
the nature of its properties or the conduct of its business requires such
registration or qualification, except where the failure so to register or
qualify does not have a material adverse effect on the condition (financial or
other), business, prospects, properties, net assets or results of operations of
the Trust; and the Trust has no subsidiaries.

     (e) There are no legal or governmental proceedings pending or, to the
knowledge of the Trust, threatened, against the Trust, or to which the Trust or
any of its properties is subject, that are required to be described in the
Registration Statement or the Prospectus (and any amendment or supplement to
either of them) but are not described as required, and there are no agreements,
contracts, indentures, leases or other instruments that are required to be
described in the Registration Statement or the Prospectus (and any amendment or
supplement to either of them) or to be filed as an exhibit to the Registration
Statement that are not described or filed as required by the 1933 Act, the 1940
Act or the Rules and Regulations.

     (f) The Trust is not in violation of its Agreement and Declaration of Trust
(the "Declaration"), or bylaws (the "Bylaws"), or other organizational documents
or of any law, ordinance, administrative or governmental rule or regulation
applicable to the Trust or of any decree of the Commission, the NASD, any state
securities commission, any national securities exchange, any arbitrator, any
court or governmental agency, body or official having jurisdiction over the
Trust, or in default in any material respect in the performance of any
obligation, agreement or condition contained in any bond, debenture, note or any
other evidence of indebtedness or in any material agreement, indenture, lease or
other instrument to which the Trust is a party or by which it or any of its
properties may be bound.

     (g) Neither the issuance and sale of the Shares, the execution, delivery or
performance of this Agreement or any of the Trust Agreements by the Trust, nor
the consummation by the Trust of the transactions contemplated hereby or thereby
(A) requires the Trust to obtain any consent, approval, authorization or other
order of or registration or filing with, the Commission, the NASD, any state
securities commission, any national securities exchange, any arbitrator, any
court, regulatory body, administrative agency or other governmental body, agency
or official (except such as may have been obtained prior to the date hereof and
such as may be required for compliance with the state securities or blue sky
laws of various jurisdictions which have been or will be effected in accordance
with this Agreement) or conflicts or will conflict with or constitutes or will
constitute a breach of, or a default under, the Declaration, the Bylaws or other
organizational documents of the Trust or (B) conflicts or will conflict with or
<PAGE>
                                                                               9

constitutes or will constitute a breach of, or a default under, any agreement,
indenture, lease or other instrument to which the Trust is a party or by which
it or any of its properties may be bound, or violates or will violate any
statute, law, regulation or judgment, injunction, order or decree applicable to
the Trust or any of its properties, or will result in the creation or imposition
of any lien, charge or encumbrance upon any property or assets of the Trust
pursuant to the terms of any agreement or instrument to which it is a party or
by which it may be bound or to which any of its property or assets is subject.
The Trust is not subject to any order of any court or of any arbitrator,
governmental authority or administrative agency.

     (h) The accountants, KPMG LLP, who have certified or shall certify the
financial statements included or incorporated by reference in the Registration
Statement and the Prospectus (or any amendment or supplement to either of them)
have represented to the Trust that they are independent public accountants as
required by the 1933 Act, the 1940 Act and the Rules and Regulations.

     (i) The financial statements, together with related schedules and notes,
included or incorporated by reference in the Registration Statement and the
Prospectus (and any amendment or supplement to either of them), present fairly
the financial position, results of operations and changes in financial position
of the Trust on the basis stated or incorporated by reference in the
Registration Statement at the respective dates or for the respective periods to
which they apply; such statements and related schedules and notes have been
prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved, except as disclosed
therein; and the other financial and statistical information and data included
in the Registration Statement and the Prospectus (and any amendment or
supplement to either of them) are accurately presented and prepared on a basis
consistent with such financial statements and the books and records of the
Trust.

     (j) The execution and delivery of, and the performance by the Trust of its
obligations under, this Agreement and the Trust Agreements have been duly and
validly authorized by the Trust, and this Agreement and the Trust Agreements
have been duly executed and delivered by the Trust and constitute the valid and
legally binding agreements of the Trust, enforceable against the Trust in
accordance with their terms, except as rights to indemnity and contribution
hereunder and thereunder may be limited by federal or state securities laws or
principles of public policy and subject to the qualification that the
enforceability of the Trust's obligations thereunder may be limited by
bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium and
other laws relating to or affecting creditors' rights generally and by general
equitable principles.

     (k) Except as disclosed in the Registration Statement and the Prospectus
(or any amendment or supplement to either of them), subsequent to the respective
dates as of which such information is given in the Registration Statement and
the Prospectus (or any amendment or supplement to either of them), the Trust has
not incurred any liability or obligation, direct or contingent, or entered into
any transaction, not in the ordinary course of business, that is material to the
Trust, and there has not been any change in the capital stock, or material
increase in the short-term debt or long-term debt, of the Trust, or any material
adverse change, or any development involving or which may reasonably be expected
to involve, a prospective material adverse change, in the condition (financial
or other), business, prospects, properties, net assets or results of operations
of the Trust, whether or not arising in the ordinary course of business.
<PAGE>
                                                                              10

     (l) The Trust has not distributed and, prior to the later to occur of (i)
the Closing Date and (ii) completion of the distribution of the Shares, will not
distribute any offering material in connection with the offering and sale of the
Shares other than the Registration Statement, the Prepricing Prospectus, the
Prospectus or other materials, if any, permitted by the 1933 Act, the 1940 Act
or the Rules and Regulations.

     (m) The Trust has such permits, licenses, franchises and authorizations of
governmental or regulatory authorities ("permits") as are necessary to own its
properties and to conduct its business in the manner described in the Prospectus
(and any amendment or supplement thereto), subject to such qualifications as may
be set forth in the Prospectus; the Trust has fulfilled and performed all its
material obligations with respect to such permits and no event has occurred
which allows, or after notice or lapse of time would allow, revocation or
termination thereof or results in any other material impairment of the rights of
the Trust under any such permit, subject in each case to such qualification as
may be set forth in the Prospectus (and any amendment or supplement thereto);
and, except as described in the Prospectus (and any amendment or supplement
thereto), none of such permits contains any restriction that is materially
burdensome to the Trust.

     (n) The Trust maintains a system of internal accounting controls sufficient
to provide reasonable assurances that (i) transactions in portfolio securities
are executed in accordance with management's general or specific authorization
and with the applicable requirements of the 1940 Act, the 1940 Act Rules and
Regulations and the Internal Revenue Code of 1986, as amended (the "Code"); (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets and to maintain compliance with the books and
records requirements under the 1940 Act and the 1940 Act Rules and Regulations;
(iii) access to assets is permitted only in accordance with management's general
or specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.

     (o) To the Trust's knowledge, neither the Trust nor any employee or agent
of the Trust has made any payment of funds of the Trust or received or retained
any funds, which payment, receipt or retention of funds is of a character
required to be disclosed in the Prospectus and that is not so disclosed.

     (p) The Trust has filed all tax returns required to be filed, which returns
are complete and correct in all material respects, and the Trust is not in
material default in the payment of any taxes which were payable pursuant to said
returns or any assessments with respect thereto.

     (q) No holder of any security of the Trust has any right to require
registration of common shares of beneficial interest or any other security of
the Trust because of the filing of the registration statement or consummation of
the transactions contemplated by this Agreement.
<PAGE>
                                                                              11

     (r) The Trust, subject to the registration statement having been declared
effective and the filing of the Prospectus under Rule 497 under the 1933 Act
Rules and Regulations, has taken all required action under the 1933 Act, the
1940 Act and the Rules and Regulations to make the public offering and
consummate the sale of the Shares as contemplated by this Agreement.

     (s) The conduct by the Trust of its business (as described in the
Prospectus) does not, to the knowledge of the Trust or the Adviser after
reasonable inquiry, require the Trust to be the owner, possessor or licensee of
any patents, patent licenses, trademarks, service marks or trade names which it
does not own, possess or license.

     (t) The Trust is registered under the 1940 Act as a closed-end, diversified
management investment company and the 1940 Act Notification has been duly filed
with the Commission and, at the time of filing thereof and any amendment or
supplement thereto, conformed in all material respects with all applicable
provisions of the 1940 Act and the Rules and Regulations. The Trust is, and at
all times through the completion of the transactions contemplated hereby, will
be, in compliance in all material respects with the terms and conditions of the
1933 Act and the 1940 Act. No person is serving or acting as an officer, trustee
or investment adviser of the Trust except in accordance with the provisions of
the 1940 Act and the 1940 Act Rules and Regulations and the Investment Advisers
Act of 1940, as amended (the "Advisers Act"), and the rules and regulations of
the Commission promulgated under the Advisers Act (the "Advisers Act Rules and
Regulations").

     (u) Except as stated in this Agreement and in the Prospectus (and any
amendment or supplement thereto), the Trust has not taken, nor will it take,
directly or indirectly, any action designed to or which might reasonably be
expected to cause or result in stabilization or manipulation of the price of any
securities issued by the Trust to facilitate the sale or resale of the Shares,
and the Trust is not aware of any such action taken or to be taken by any
affiliates of the Trust.

     (v) The Trust has filed in a timely manner each document or report required
to be filed by it pursuant to the 1934 Act and the rules and regulations of the
Commission promulgated thereunder (the "1934 Act Rules and Regulations"); each
such document or report at the time it was filed conformed to the requirements
of the 1934 Act and the 1934 Act Rules and Regulations; and none of such
documents or reports contained an untrue statement of any material fact or
omitted to state any material fact required to be stated therein or necessary to
make the statements therein not misleading.

     (w) All advertising, sales literature or other promotional material
(including "prospectus wrappers," "broker kits," "road show slides" and "road
show scripts") authorized in writing by or prepared by the Trust or the Adviser
for use in connection with the offering and sale of the Shares (collectively,
"sales material") complied and comply in all material respects with the
applicable requirements of the 1933 Act, the 1940 Act, the Rules and Regulations
and the rules and interpretations of the NASD and no such sales material
contained or contains an untrue statement of a material fact or omitted or omits
to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
<PAGE>
                                                                              12

     (x) Each of the Trust Agreements complies in all material respects with all
applicable provisions of the 1940 Act, the 1940 Act Rules and Regulations, the
Advisers Act and the Advisers Act Rules and Regulations, except as to rights of
indemnity and contribution hereunder.

     (y) The Shares have been, or prior to the Closing Date will be, assigned a
rating of `aaa' by Moody's and `AAA' by S&P.

     (z) As required by Subchapter M of the Code, the Trust is currently in
compliance with the requirements to qualify as a regulated investment company
under the Code.

     (aa) Except as disclosed in the Registration Statement and the Prospectus
(or any amendment or supplement to either of them), no trustee of the Trust is
an "interested person" (as defined in the 1940 Act) of the Trust or an
"affiliated person" (as defined in the 1940 Act) of any Underwriter listed in
Schedule I hereto.

     7. REPRESENTATIONS AND WARRANTIES OF THE ADVISER. The Adviser represents
and warrants to the Underwriters as follows:

     (a) The Adviser is a corporation duly incorporated and validly existing in
good standing under the laws of the State of Delaware, with full corporate power
and authority to own, lease and operate its properties and to conduct its
business as described in the Registration Statement and the Prospectus (and any
amendment or supplement to either of them), and is duly registered and qualified
to conduct its business and is in good standing in each jurisdiction or place
where the nature of its properties or the conduct of its business requires such
registration or qualification, except where the failure so to register or to
qualify does not have a material adverse effect on the condition (financial or
other), business, prospects, properties, net assets or results of operations of
the Adviser or on the ability of the Adviser to perform its obligations under
this Agreement and the Investment Management Agreement.

     (b) The Adviser is duly registered with the Commission as an investment
adviser under the Advisers Act and is not prohibited by the Advisers Act, the
Advisers Act Rules and Regulations, the 1940 Act or the 1940 Act Rules and
Regulations from acting under the Investment Management Agreement for the Trust
as contemplated by the Prospectus (or any amendment or supplement thereto).
There does not exist any proceeding or any facts or circumstances the existence
of which could lead to any proceeding which might adversely affect the
registration of the Adviser with the Commission.

     (c) There are no legal or governmental proceedings pending or, to the
knowledge of the Adviser, threatened against the Adviser, or to which the
Adviser or any of its properties is subject, that are required to be described
in the Registration Statement or the Prospectus (or any amendment or supplement
to either of them) but are not described as required or that may reasonably be
expected to involve a prospective material adverse change in the condition
<PAGE>
                                                                              13

(financial or other), business, prospects, properties, net assets or results of
operations of the Adviser or on the ability of the Adviser to perform its
obligations under this Agreement and the Investment Management Agreement.

     (d) Neither the execution, delivery or performance of this Agreement or the
Investment Management Agreement by the Adviser, nor the consummation by the
Adviser of the transactions contemplated hereby or thereby (A) requires the
Adviser to obtain any consent, approval, authorization or other order of or
registration or filing with, the Commission, the NASD, any state securities
commission, any national securities exchange, any arbitrator, any court,
regulatory body, administrative agency or other governmental body, agency or
official or conflicts or will conflict with or constitutes or will constitute a
breach of or a default under, the certificate of incorporation or by-laws, or
other organizational documents, of the Adviser or (B) conflicts or will conflict
with or constitutes or will constitute a breach of or a default under, any
agreement, indenture, lease or other instrument to which the Adviser is a party
or by which it or any of its properties may be bound, or violates or will
violate any statute, law, regulation or filing or judgment, injunction, order or
decree applicable to the Adviser or any of its properties or will result in the
creation or imposition of any lien, charge or encumbrance upon any property or
assets of the Adviser pursuant to the terms of any agreement or instrument to
which it is a party or by which it may be bound or to which any of the property
or assets of the Adviser is subject. The Adviser is not subject to any order of
any court or of any arbitrator, governmental authority or administrative agency.

     (e) The execution and delivery of, and the performance by the Adviser of
its obligations under, this Agreement and the Investment Management Agreement
have been duly and validly authorized by the Adviser, and this Agreement and the
Investment Management Agreement have been duly executed and delivered by the
Adviser and each constitutes the valid and legally binding agreement of the
Adviser, enforceable against the Adviser in accordance with its terms except as
rights to indemnity and contribution hereunder may be limited by federal or
state securities laws or principles of public policy and subject to the
qualification that the enforceability of the Trust's obligations thereunder may
be limited by bankruptcy, fraudulent conveyance, insolvency, reorganization,
moratorium and other laws relating to or affecting creditors' rights generally
and by general equitable principles.

     (f) The Adviser has the financial resources available to it necessary for
the performance of its services and obligations as contemplated in the
Prospectus (or any amendment or supplement thereto) and under this Agreement and
the Investment Management Agreement.

     (g) The description of the Adviser in the Registration Statement and the
Prospectus (and any amendment or supplement thereto) complied and comply in all
material respects with the provisions of the 1933 Act, the 1940 Act, the
Advisers Act, the Rules and Regulations and the Advisers Act Rules and
Regulations and did not and will not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein (in the case of the Prospectus, in light of the
circumstances under which they were made) not misleading.
<PAGE>
                                                                              14

     (h) Except as disclosed in the Registration Statement and the Prospectus
(or any amendment or supplement to either of them), subsequent to the respective
dates as of which such information is given in the Registration Statement and
the Prospectus (or any amendment or supplement to either of them), the Adviser
has not incurred any liability or obligation, direct or contingent, or entered
into any transaction, not in the ordinary course of business, that is material
to the Adviser or the Trust and that is required to be disclosed in the
Registration Statement or the Prospectus and there has not been any material
adverse change, or any development involving or which may reasonably be expected
to involve, a prospective material adverse change, in the condition (financial
or other), business, prospects, properties, net assets or results of operations
of the Adviser, whether or not arising in the ordinary course of business, or
which, in each case, could have a material adverse effect on the ability of the
Adviser to perform its obligations under this Agreement and the Investment
Management Agreement.

     (i) The Adviser has such permits, licenses, franchises and authorizations
of governmental or regulatory authorities ("permits") as are necessary to own
its properties and to conduct its business in the manner described in the
Prospectus (and any amendment or supplement thereto); the Adviser has fulfilled
and performed all its material obligations with respect to such permits and no
event has occurred which allows, or after notice or lapse of time would allow,
revocation or termination thereof or results in any other material impairment of
the rights of the Adviser under any such permit; and, except as described in the
Prospectus (and any amendment or supplement thereto), none of such permits
contains any restriction that is materially burdensome to the Adviser.

     (j) Except as stated in this Agreement and in the Prospectus (and in any
amendment or supplement thereto), the Adviser has not taken, nor will it take,
directly or indirectly, any action designed to or which might reasonably be
expected to cause or result in, stabilization or manipulation of the price of
any securities issued by the Trust to facilitate the sale or resale of the
Shares, and the Adviser is not aware of any such action taken or to be taken by
any affiliates of the Adviser.

     8. INDEMNIFICATION AND CONTRIBUTION.

     (a) The Trust and the Adviser, jointly and severally, agree to indemnify
and hold harmless each of the Underwriters and each person, if any, who controls
any Underwriter within the meaning of Section 15 of the 1933 Act or Section 20
of the 1934 Act from and against any and all losses, claims, damages,
liabilities and expenses (including reasonable costs of investigation), joint or
several, arising out of or based upon any untrue statement or alleged untrue
statement of a material fact contained in any Prepricing Prospectus or in the
Registration Statement or the Prospectus or in any amendment or supplement
thereto, or arising out of or based upon any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein (in the case of the Prospectus, in light of the
circumstances under which they were made) not misleading, except insofar as such
losses, claims, damages, liabilities or expenses arise out of or are based upon
any untrue statement or omission or alleged untrue statement or omission which
has been made therein or omitted therefrom in reliance upon and in conformity
with the information relating to any Underwriter furnished in writing to the
Trust by or on behalf of any Underwriter through you expressly for use in
<PAGE>
                                       15

connection therewith; provided, however, that the indemnification contained in
this paragraph (a) with respect to any Prepricing Prospectus shall not inure to
the benefit of any Underwriter (or to the benefit of any person controlling such
Underwriter) on account of any such loss, claim, damage, liability or expense
arising from the sale of the Shares by such Underwriter to any person if a copy
of the Prospectus shall not have been delivered or sent to such person within
the time required by the 1933 Act and the 1933 Act Rules and Regulations, and
the untrue statement or alleged untrue statement or omission or alleged omission
of a material fact contained in such Prepricing Prospectus was corrected in the
Prospectus, provided that the Trust has delivered the Prospectus to the several
Underwriters in requisite quantity on a timely basis to permit such delivery or
sending. The foregoing indemnity agreement shall be in addition to any liability
which the Trust or the Adviser may otherwise have.

     (b) If any action, suit or proceeding shall be brought against any
Underwriter or any person controlling any Underwriter in respect of which
indemnity may be sought against the Trust or the Adviser, such Underwriter or
such controlling person shall promptly notify the Trust or the Adviser, and the
Trust or the Adviser shall assume the defense thereof, including the employment
of counsel and payment of all fees and expenses. Such Underwriter or any such
controlling person shall have the right to employ separate counsel in any such
action, suit or proceeding and to participate in the defense thereof, but the
fees and expenses of such counsel shall be at the expense of such Underwriter or
such controlling person unless (i) the Trust or the Adviser has agreed in
writing to pay such fees and expenses, (ii) the Trust and the Adviser have
failed to assume the defense and employ counsel, or (iii) the named parties to
any such action, suit or proceeding (including any impleaded parties) include
both such Underwriter or such controlling person and the Trust or the Adviser
and such Underwriter or such controlling person shall have been advised by its
counsel that representation of such indemnified party and the Trust or the
Adviser by the same counsel would be inappropriate under applicable standards of
professional conduct (whether or not such representation by the same counsel has
been proposed) due to actual or potential differing interests between them (in
which case the Trust and the Adviser shall not have the right to assume the
defense of such action, suit or proceeding on behalf of such Underwriter or such
controlling person). It is understood, however, that the Trust and the Adviser
shall, in connection with any one such action, suit or proceeding or separate
but substantially similar or related actions, suits or proceedings in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the reasonable fees and expenses of only one separate firm of
attorneys (in addition to any local counsel) at any time for all such
Underwriters and controlling persons not having actual or potential differing
interests with you or among themselves, which firm shall be designated in
writing by the Underwriters, and that all such fees and expenses shall be
reimbursed as they are incurred. The Trust and the Adviser shall not be liable
for any settlement of any such action, suit or proceeding effected without their
written consent, but if settled with such written consent, or if there be a
final judgment for the plaintiff in any such action, suit or proceeding, the
Trust and the Adviser agree to indemnify and hold harmless any Underwriter, to
the extent provided in the preceding paragraph, and any such controlling person
from and against any loss, claim, damage, liability or expense by reason of such
settlement or judgment.

     (c) Each Underwriter agrees to indemnify and hold harmless the Trust and
the Adviser, their trustees, directors, any officers who sign the Registration
Statement, and any person who controls the Trust or the Adviser within the
<PAGE>
                                                                              16

meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, to the same
extent as the foregoing indemnity from the Trust and the Adviser to each
Underwriter, but only with respect to information relating to such Underwriter
furnished in writing by or on behalf of such Underwriter expressly for use in
the Registration Statement, the Prospectus or any Prepricing Prospectus, or any
amendment or supplement thereto. If any action, suit or proceeding shall be
brought against the Trust or the Adviser, any of their trustees or directors,
any such officer, or any such controlling person based on the Registration
Statement, the Prospectus or any Prepricing Prospectus, or any amendment or
supplement thereto, and in respect of which indemnity may be sought against any
Underwriter pursuant to this paragraph (c), such Underwriter shall have the
rights and duties given to the Trust and the Adviser by paragraph (b) above
(except that if the Trust or the Adviser shall have assumed the defense thereof
such Underwriter shall not be required to do so, but may employ separate counsel
therein and participate in the defense thereof, but the fees and expenses of
such counsel shall be at such Underwriter's expense), and the Trust and the
Adviser, their trustees or directors, any such officer, and any such controlling
person shall have the rights and duties given to the Underwriters by paragraph
(b) above. The foregoing indemnity agreement shall be in addition to any
liability which the Underwriters may otherwise have.

     (d) If the indemnification provided for in this Section 8 is unavailable to
an indemnified party under paragraphs (a) or (c) hereof in respect of any
losses, claims, damages, liabilities or expenses referred to therein, then an
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities or expenses (i) in such proportion
as is appropriate to reflect the relative benefits received by the Trust and the
Adviser on the one hand (treated jointly for this purpose as one person) and the
Underwriters on the other hand from the offering of the Shares, or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Trust and the
Adviser on the one hand (treated jointly for this purpose as one person) and the
Underwriters on the other in connection with the statements or omissions that
resulted in such losses, claims, damages, liabilities or expenses, as well as
any other relevant equitable considerations. The relative benefits received by
the Trust and the Adviser on the one hand (treated jointly for this purpose as
one person) and the Underwriters on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Trust bear to the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the table
on the cover page of the Prospectus. The relative fault of the Trust and the
Adviser on the one hand (treated jointly for this purpose as one person) and the
Underwriters on the other hand shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Trust and the Adviser on the one hand (treated jointly for this
purpose as one person) or by the Underwriters on the other hand and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.

     (e) The Trust, the Adviser and the Underwriters agree that it would not be
just and equitable if contribution pursuant to this Section 8 were determined by
a pro rata allocation or by any other method of allocation that does not take
<PAGE>
                                                                              17

account of the equitable considerations referred to in paragraph (d) above. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities and expenses referred to in paragraph (d) above
shall be deemed to include, subject to the limitations set forth above, any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating any claim or defending any such action, suit or
proceeding. Notwithstanding the provisions of this Section 8, no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price of the Shares underwritten by it and distributed to the public
exceeds the amount of any damages which such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute pursuant to this Section 8 are several
in proportion to the respective numbers of Shares set forth opposite their names
in Schedule I hereto (or such numbers of Shares increased as set forth in
Section 11 hereof) and not joint.

     (f) No indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened action,
suit or proceeding in respect of which any indemnified party is or could have
been a party and indemnity could have been sought hereunder by such indemnified
party, unless such settlement includes an unconditional release of such
indemnified party from all liability on claims that are the subject matter of
such action, suit or proceeding.

     (g) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 8 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Trust and the Adviser set forth in this
Agreement shall remain operative and in full force and effect, regardless of (i)
any investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter, the Trust, the Adviser, their trustees, directors
or officers, or any person controlling the Trust or the Adviser, (ii) acceptance
of any Shares and payment therefor hereunder, and (iii) any termination of this
Agreement. A successor to any Underwriter or any person controlling any
Underwriter, or to the Trust, the Adviser, their trustees, directors or
officers, or any person controlling the Trust or the Adviser, shall be entitled
to the benefits of the indemnity, contribution, and reimbursement agreements
contained in this Section 8.

     9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several obligations of the
Underwriters to purchase the Shares hereunder are subject to the following
conditions:

     (a) If, at the time this Agreement is executed and delivered, it is
necessary for the registration statement or a post-effective amendment thereto
to be declared effective before the offering of the Shares may commence, the
registration statement or such post-effective amendment shall have become
effective not later than 5:30 P.M., New York City time, on the date hereof, or
at such later date and time as shall be consented to in writing by the
Underwriters, and all filings, if any, required by Rules 497 and 430A under the
1933 Act and the 1933 Act Rules and Regulations shall have been timely made; no
<PAGE>
                                                                              18

stop order suspending the effectiveness of the Registration Statement or order
pursuant to Section 8(e) of the 1940 Act shall have been issued and no
proceeding for those purposes shall have been instituted or, to the knowledge of
the Trust, the Adviser or any Underwriter, threatened by the Commission, and any
request of the Commission for additional information (to be included in the
registration statement or the prospectus or otherwise) shall have been complied
with to the Underwriters' satisfaction.

     (b) Subsequent to the effective date of this Agreement, there shall not
have occurred (i) any change or any development involving a prospective change
in or affecting the condition (financial or other), business, prospects,
properties, net assets, or results of operations of the Trust or the Adviser not
contemplated by the Prospectus, which in the Underwriters' opinion would
materially, adversely affect the market for the Shares, or (ii) any event or
development relating to or involving the Trust or the Adviser or any officer,
trustee or director of the Trust or the Adviser which makes any statement made
in the Prospectus untrue or which, in the opinion of the Trust and its counsel
or the Underwriters and their counsel, requires the making of any addition to or
change in the Prospectus in order to state a material fact required by the 1933
Act, the 1940 Act or the Rules and Regulations or any other law to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, if amending or
supplementing the Prospectus to reflect such event or development would, in the
Underwriters' opinion, materially adversely affect the market for the Shares.

     (c) The Trust shall have furnished to you a report showing compliance with
the asset coverage requirements of the 1940 Act and a Preferred Shares Basic
Maintenance Certificate (as defined in the Certificate), each dated the Closing
Date and in form and substance satisfactory to you. Each such report may use
portfolio holdings and valuations as of the close of business of any day not
more than six business days preceding the Closing Date, provided, however, that
the Trust represents in such report that its total net assets as of the Closing
Date have not declined by 5% or more from such valuation date.

     (d) The Underwriters shall have received on the Closing Date an opinion of
Dechert, counsel for the Trust, dated the Closing Date and addressed to you, in
form and substance satisfactory to you and to the effect that:

          (i) The Trust (A) is a business trust duly organized and validly
     existing under the laws of the State of Massachusetts with full business
     trust power and authority to own, lease and operate its properties and to
     conduct its business as described in the Registration Statement and the
     Prospectus (and any amendment or supplement to either of them), and (B) is
     duly registered and qualified to conduct its business and is in good
     standing in __________;

          (ii) The Trust has no subsidiaries;

          (iii) The authorized and outstanding capital stock of the Trust is as
     set forth under the caption "Capitalization" in the Prospectus; and the
     authorized capital stock of the Trust conforms in all material respects as
     to legal matters to the description thereof contained in the Prospectus
     under the caption "Description of Capital Structure";
<PAGE>
                                                                              19

          (iv) All the shares of beneficial interest of the Trust outstanding
     prior to the issuance of the Shares have been duly authorized and validly
     issued by the Trust, and are fully paid and nonassessable;

          (v) The Shares have been duly authorized and, when issued and
     delivered to the Underwriters against payment therefor in accordance with
     the terms hereof, will be validly issued by the Trust, fully paid and
     nonassessable and free of any preemptive, or to the best knowledge of such
     counsel after reasonable inquiry, similar rights that entitle or will
     entitle any person to acquire any Shares upon the issuance thereof by the
     Trust, and will conform to the description thereof contained in the
     Prospectus under the caption "Description of Preferred Shares";

          (vi) The form of certificates for the Shares conforms to the
     requirements of Massachusetts law;

          (vii) The Registration Statement and all post-effective amendments, if
     any, have become effective under the 1933 Act and the 1933 Act Rules and
     Regulations and, to the best knowledge of such counsel after reasonable
     inquiry, no stop order suspending the effectiveness of the Registration
     Statement or order pursuant to Section 8(e) of the 1940 Act has been issued
     and no proceedings for that purpose are pending before or contemplated by
     the Commission; and any required filing of the Prospectus pursuant to Rule
     497 of the 1933 Act Rules and Regulations has been made in accordance with
     Rule 497;

          (viii) The Trust has business trust power and authority to enter into
     this Agreement and each of the Trust Agreements and to issue, sell and
     deliver the Shares to the Underwriters as provided herein, and this
     Agreement and each of the Trust Agreements have been duly authorized,
     executed and delivered by the Trust and each is a valid, legal and binding
     agreement of the Trust, enforceable against the Trust in accordance with
     its terms, except as enforcement of rights to indemnity and contribution
     hereunder may be limited by Federal or state securities laws or principles
     of public policy and subject to the qualification that the enforceability
     of the Trust's obligations hereunder may be limited by bankruptcy,
     fraudulent conveyance, insolvency, reorganization, moratorium and other
     laws relating to or affecting creditors' rights generally and by general
     equitable principles;

          (ix) (A) The Trust is not in violation of the Declaration, including
     the Certificate, or Bylaws, or other organizational documents, and (B)
     based upon a certificate executed by officers of the Trust delivered to us,
     is not in default in the performance of any material obligation, agreement
     or condition contained in any bond, debenture, note or other evidence of
     indebtedness, except as may be disclosed in the Prospectus;
<PAGE>
                                                                              20

          (x) Neither the offer, sale or delivery of the Shares, the execution,
     delivery or performance of this Agreement and in the Trust Agreements by
     the Trust, compliance by the Trust with the provisions hereof or thereof
     nor consummation by the Trust of the transactions contemplated hereby and
     the Trust Agreements constitutes or will constitute a breach of, or a
     default under, the Declaration, including the Certificate, or Bylaws, or
     other organizational documents, of the Trust or any agreement, indenture,
     lease or other instrument to which the Trust is a party or by which it or
     any of its properties is bound that is an exhibit to the Registration
     Statement, nor will any such action result in any violation of any existing
     law, regulation, ruling (assuming compliance with all applicable state
     securities or blue sky laws), judgment, injunction, order or decree known
     to such counsel after reasonable inquiry, applicable to the Trust or any of
     its properties;

          (xi) No consent, approval, authorization or other order of, or
     registration or filing with, the Commission, the NASD, any national
     securities exchange, or, to counsel's knowledge, any state securities
     commission, any arbitrator, any court, regulatory body, administrative
     agency or other governmental body, agency, or official is required on the
     part of the Trust (except such as may have been obtained prior to the date
     hereof and such as may be required for compliance with the state securities
     or blue sky laws of various jurisdictions) for the valid issuance and sale
     of the Shares to the Underwriters as contemplated by this Agreement, the
     execution, delivery and performance by the Trust of this Agreement and the
     Trust Agreements or the consummation of the transactions contemplated
     hereby and thereby;

          (xii) The 1940 Act Notification, the Registration Statement, the
     Prospectus and any supplements or amendments thereto (except for the
     financial statements and the notes thereto and the schedules and other
     financial and statistical data included therein, as to which such counsel
     need not express any opinion) comply as to form in all material respects
     with the requirements of the 1933 Act, the 1940 Act and the Rules and
     Regulations;

          (xiii) Based upon a certificate executed by officers of the Trust
     delivered to us, (A) other than as described or contemplated in the
     Registration Statement or Prospectus (or any amendment or supplement
     thereto), there are no legal or governmental proceedings pending or
     threatened against the Trust, or to which the Trust or any of its
     properties is subject, which are required to be described in the
     Registration Statement or Prospectus (or any amendment or supplement to
     either of them) and (B) there are no agreements, contracts, indentures,
     leases or other instruments that are required to be described in the
     Registration Statement or the Prospectus (or any amendment or supplement
     thereto) or to be filed as an exhibit to the Registration Statement that
     are not described or filed as required, as the case may be;
<PAGE>
                                                                              21

          (xiv) The statements in the Registration Statement and Prospectus,
     insofar as they (A) are descriptions of contracts, agreements or other
     legal documents, or (B) refer to statements of law or legal conclusions,
     are accurate and present fairly the information required to be shown;

          (xv) Each of the Trust Agreements complies in all material respects
     with all applicable provisions of the 1933 Act, the 1940 Act, the Advisers
     Act, the Rules and Regulations and the Advisers Act Rules and Regulations,
     except as to rights of indemnity and contribution;

          (xvi) The Trust is duly registered with the Commission under the 1940
     Act and the 1940 Act Rules and Regulations as a closed-end, diversified
     management investment company and, to such counsel's best knowledge after
     reasonable inquiry, no order of suspension or revocation of such
     registration under the 1940 Act and the 1940 Act Rules and Regulations has
     been issued or proceedings therefor initiated or threatened by the
     Commission; the provisions of the Declaration, including the Certificate,
     and Bylaws comply as to form in all material respects with the applicable
     provisions of the 1940 Act and the 1940 Act Rules and Regulations, the
     provisions of the Declaration, including the Certificate, and Bylaws and
     the investment policies and restrictions described in the Registration
     Statement and the Prospectus under the captions "Investment Objective and
     Policies", "Risk Factors", "Additional Information About Investments and
     Investment Techniques" and "Investment Restrictions" (in the Prospectus and
     the statement of additional information) comply in all material respects
     with the requirements of the 1940 Act, and all action has been taken by the
     Trust as is required of the Trust by the 1933 Act and the 1940 Act and the
     Rules and Regulations in connection with the issuance and sale of the
     Shares to make the public offering and consummate the sale of the Shares as
     contemplated by this Agreement;

          (xvii) Except as described in the Prospectus, there are no outstanding
     options, warrants or other rights calling for the issuance of, and such
     counsel does not know of any commitment, plan or arrangement to issue, any
     shares of beneficial interest of the Trust or any security convertible into
     or exchangeable or exercisable for shares of beneficial interest of the
     Trust;

          (xviii) Except as described in the Prospectus, such counsel does not
     know of any holder of any security of the Trust or any other person who has
     the right, contractual or otherwise, to cause the Trust to sell or
     otherwise issue to them, or to permit them to underwrite the sale of, the
     Shares or the right to have any securities of the Trust included in the
     registration statement or the right, as a result of the filing of the
     registration statement, to require registration under the 1933 Act of any
     securities of the Trust;

          (xix) If the Trust operates as described in the Prospectus, the Trust
     will qualify as a regulated investment company under the Code; and
<PAGE>
                                                                              22

          (xx) Such counsel shall also state that, while they have not
     themselves checked the accuracy and completeness of or otherwise verified,
     and are not passing upon and assume no responsibility for the accuracy or
     completeness of, the statements contained in the Registration Statement or
     the Prospectus, except to the limited extent stated in paragraphs (iii),
     (xiv) and (xvi) above, in the course of their review and discussion of the
     contents of the Registration Statement and Prospectus with certain officers
     and employees of the Trust and its independent accountants, no facts have
     come to their attention which cause them to believe that the Registration
     Statement or any amendment or supplement thereto (except as to any
     financial statements or other financial data included in the Registration
     Statement or any such amendment or supplement, as to which they express no
     belief), as of its effective date, contained an untrue statement of a
     material fact or omitted to state a material fact required to be stated
     therein or necessary to make the statements contained therein not
     misleading or that the Prospectus or any amendment or supplement thereto
     (except as to any financial statements or other financial data included in
     the Prospectus or any such amendment or supplement, as to which they
     express no belief), as of its issue date and as of the Closing Date,
     contained an untrue statement of a material fact or omitted to state a
     material fact required to be stated therein or necessary to make the
     statements contained therein, in the light of the circumstances under which
     they were made, not misleading.

          Such counsel may state in its opinion letter that "[O]ur opinion is
     limited solely to those laws, rulings and regulations that are normally
     applicable to transactions of the type contemplated by the Underwriting
     Agreement by closed-end management investment companies registered under
     the 1940 Act, and to Massachusetts law with respect to the matters covered
     by paragraphs (i)(A), (iii), (iv), (v), (vi) and (viii). Moreover, the
     opinions given under paragraphs (ix)(B) and (xiii) are based solely upon
     the receipt of a certificate signed by officers of the Trust attesting to
     the statements made therein."

     (e) The Underwriters shall have received on the Closing Date an opinion of
Bryan Cave LLP, counsel for the Adviser, dated the Closing Date and addressed to
you, in form and substance satisfactory to you and to the effect that:

          (i) The Adviser is a corporation duly incorporated and validly
     existing in good standing under the laws of the State of Delaware with full
     corporate power and authority to own, lease and operate its properties and
     to conduct its business as described in the Registration Statement and the
     Prospectus (and any amendment or supplement to either of them), and is duly
     registered and qualified to conduct its business and is in good standing in
     each jurisdiction or place where the nature of its properties or the
     conduct of its business requires such registration or qualification, except
     where the failure to so register or qualify does not have a material
     adverse effect on the condition (financial or other), business, prospects,
     properties, net assets or results of operations of the Adviser and its
     subsidiaries, taken as a whole, or on the ability of the Adviser to perform
     its obligations under this Agreement and the Investment Management
     Agreement;
<PAGE>
                                                                              23

          (ii) The Adviser is duly registered with the Commission as an
     investment adviser under the Advisers Act and is not prohibited by the
     Advisers Act, the Advisers Act Rules and Regulations, the 1940 Act or the
     1940 Act Rules and Regulations from acting under the Investment Management
     Agreement for the Trust as contemplated by the Prospectus (or any amendment
     or supplement thereto); and, to such counsel's best knowledge after
     reasonable inquiry, no order of suspension or revocation of such
     registration under the Advisers Act and the Advisers Act Rules and
     Regulations has been issued or proceedings therefor initiated or threatened
     by the Commission;

          (iii) The Adviser has corporate power and authority to enter into this
     Agreement and the Investment Management Agreement, and this Agreement and
     the Investment Management Agreement have been duly authorized, executed and
     delivered by the Adviser and each is a valid, legal and binding agreement
     of the Adviser, enforceable against the Adviser in accordance with its
     terms except as enforcement of rights to indemnity and contribution
     hereunder may be limited by Federal or state securities laws or principles
     of public policy and subject to the qualification that the enforceability
     of the Adviser's obligations hereunder may be limited by bankruptcy,
     fraudulent conveyance, insolvency, reorganization, moratorium, and other
     laws relating to or affecting creditors' rights generally and by general
     equitable principles;

          (iv) Neither the execution, delivery or performance of this Agreement
     or the Investment Management Agreement by the Adviser, compliance by the
     Adviser with the provisions hereof or thereof nor consummation by the
     Adviser of the transactions contemplated hereby and the Investment
     Management Agreement conflicts or will conflict with, or constitutes or
     will constitute a breach of or default under, the articles of incorporation
     or bylaws, or other organizational documents, of the Adviser or any
     agreement, indenture, lease or other instrument to which the Adviser is a
     party or by which it or any of its properties is bound that is known to
     such counsel after reasonable inquiry, or will result in the creation or
     imposition of any lien, charge or encumbrance upon any property or assets
     of the Adviser, nor will any such action result in any violation of any
     existing law, regulation, ruling, judgment, injunction, order or decree
     known to such counsel after reasonable inquiry, applicable to the Adviser
     or any of its properties;

          (v) No consent, approval, authorization or other order of, or
     registration or filing with, the Commission, the NASD, any state securities
     commission, any national securities exchange, any arbitrator, any court,
     regulatory body, administrative agency or other governmental body, agency,
     or official is required on the part of the Adviser for the execution,
     delivery and performance by it of this Agreement and the Trust Agreements
     to which it is a party or the consummation by it of the transactions
     contemplated hereby and thereby;
<PAGE>
                                                                              24

          (vi) To the best knowledge of such counsel after reasonable inquiry,
     there are no legal or governmental proceedings pending or threatened
     against the Adviser or to which the Adviser or any of its properties is
     subject, which are required to be described in the Registration Statement
     or the Prospectus (or any amendment or supplement to either of them) but
     are not described as required or which may reasonably be expected to
     involve a prospective material adverse change on the ability of the Adviser
     to perform its obligations under this Agreement and the Investment
     Management Agreement;

          (vii) The obligations of the Adviser under this Agreement and the
     Investment Management Agreement comply in all material respects with all
     applicable provisions of the 1940 Act, the 1940 Act Rules and Regulations,
     the Advisers Act and the Advisers Act Rules and Regulations;

          (viii) The Adviser has full corporate power and authority, and all
     necessary governmental authorizations, approvals, orders, licenses,
     certificates, franchises and permits of and from all governmental
     regulatory officials and bodies (except where the failure so to have any
     such authorizations, approvals, orders, licenses, certificates, franchises
     or permits, individually or in the aggregate, would not have a material
     adverse effect on the business, properties, operations or financial
     condition of the Adviser and its subsidiaries, taken as a whole), to own
     its properties and to conduct business as now being conducted, as described
     in the Prospectus, and to perform its obligations under the Investment
     Management Agreement; and

          (ix) Such counsel shall also state that the description of the Adviser
     contained in the Registration Statement (and any amendment or supplement
     thereto), as of its effective date, does not contain an untrue statement of
     a material fact or omit to state a material fact required to be stated
     therein or necessary to make the statements contained therein not
     misleading or that the description of the Adviser contained in the
     Prospectus or any amendment or supplement thereto, as of its issue date and
     as of the Closing Date, does not contain an untrue statement of a material
     fact or omit to state a material fact required to be stated therein or
     necessary to make the statements contained therein, in the light of the
     circumstances under which they were made, not misleading.

     (f) The Underwriters shall have received on the Closing Date an opinion of
Simpson Thacher & Bartlett, counsel for the Underwriters, dated the Closing Date
and addressed to you, with respect to such matters as you may reasonably
request. It is agreed that Simpson Thacher & Bartlett may rely on the opinions
of Dechert contained in Sections 9(d)(i)(A), 9(d)(v), 9(d)(viii) and
9(d)(xiv)(B) of this Agreement to the extent those opinions relate to or are
dependent upon matters governed by the laws of the Commonwealth of
Massachusetts.
<PAGE>
                                                                              25

     (g) The Underwriters shall have received letters addressed to you, dated
the date hereof and the Closing Date, from KPMG LLP, independent certified
public accountants, substantially in the forms heretofore approved by you.

     (h) (i) No order suspending the effectiveness of the registration statement
or the Registration Statement or prohibiting or suspending the use of the
Prospectus (or any amendment or supplement thereto) or any Prepricing Prospectus
or any sales material shall have been issued and no proceedings for such purpose
or for the purpose of commencing an enforcement action against the Trust, the
Adviser or, with respect to the transactions contemplated by the Prospectus (or
any amendment or supplement thereto) and this Agreement, the Underwriters, may
be pending before or, to the knowledge of the Trust, the Adviser or the
Underwriters or in the reasonable view of counsel to the Underwriters, shall be
threatened or contemplated by the Commission at or prior to the Closing Date and
that any request for additional information on the part of the Commission (to be
included in the Registration Statement, the Prospectus or otherwise) be complied
with to the satisfaction of the Underwriters; (ii) there shall not have been any
change in the capital stock of the Trust nor any material increase in the
short-term or long-term debt of the Trust (other than in the ordinary course of
business) from that set forth or contemplated in the Registration Statement or
the Prospectus (or any amendment or supplement thereto); (iii) there shall not
have been, subsequent to the respective dates as of which information is given
in the Registration Statement and the Prospectus (or any amendment or supplement
thereto), except as may otherwise be stated in the Registration Statement and
Prospectus (or any amendment or supplement thereto), any material adverse change
in the condition (financial or other), business, prospects, properties, net
assets or results of operations of the Trust or the Adviser; (iv) the Trust
shall not have any liabilities or obligations, direct or contingent (whether or
not in the ordinary course of business), that are material to the Trust, other
than those reflected in the Registration Statement or the Prospectus (or any
amendment or supplement to either of them); and (v) all the representations and
warranties of the Trust and the Adviser contained in this Agreement shall be
true and correct on and as of the date hereof and on and as of the Closing Date
as if made on and as of the Closing Date, and the Underwriters shall have
received a certificate of the Trust and the Adviser, dated the Closing Date and
signed by the chief executive officer and the chief financial officer of each of
the Trust and the Adviser (or such other officers as are acceptable to the
Underwriters), to the effect set forth in this Section 9(h) and in Section 9(i)
hereof.

     (i) That neither the Trust nor the Adviser shall have failed at or prior to
the Closing Date to have performed or complied in all material respects with any
of its agreements herein contained and required to be performed or complied with
by it hereunder at or prior to the Closing Date.

     (j) The Trust shall have delivered and the Underwriters shall have received
evidence satisfactory to the Underwriters that each series of Shares are rated
`aaa' by Moody's and `AAA' by S&P as of the Closing Date, and there shall not
have been given any notice of any intended or potential downgrading, or of any
review for a potential downgrading, in the rating accorded to the shares of each
series of the Shares by either Rating Agency.
<PAGE>
                                                                              26

     (k) The Trust and the Adviser shall have furnished or caused to be
furnished to you such further certificates and documents as you shall have
reasonably requested.

     All such opinions, certificates, letters and other documents will be in
compliance with the provisions hereof only if they are satisfactory in form and
substance to the Underwriters and the Underwriters' counsel.

     Any certificate or document signed by any officer of the Trust or the
Adviser and delivered to the Underwriters, or to counsel for the Underwriters,
shall be deemed a representation and warranty by the Trust or the Adviser to the
Underwriters as to the statements made therein.

     10. EXPENSES. The Trust agrees to pay the following costs and expenses and
all other costs and expenses incident to the performance by it of its
obligations hereunder: (i) the preparation, printing or reproduction, and filing
with the Commission of the registration statement (including financial
statements and exhibits thereto), each Prepricing Prospectus, the Prospectus and
each amendment or supplement to any of them (including, without limitation, the
filing fees prescribed by the 1933 Act, the 1940 Act and the Rules and
Regulations); (ii) the printing (or reproduction) and delivery (including
postage, air freight charges and charges for counting and packaging) of such
copies of the Registration Statement, each Prepricing Prospectus, the
Prospectus, any sales material and all amendments or supplements to any of them
as may be reasonably requested for use in connection with the offering and sale
of the Shares; (iii) the preparation, printing, authentication, issuance and
delivery of certificates for the Shares, including any stamp taxes in connection
with the original issuance and sale of the Shares; (iv) the reproduction and
delivery of this Agreement, any dealer agreements, the preliminary blue sky
memorandum and all other agreements or documents reproduced and delivered in
connection with the offering of the Shares; (v) the reasonable fees, expenses
and disbursements of counsel for the Underwriters relating to the preparation,
reproduction, and delivery of the preliminary blue sky memorandum; (vi) fees
paid to the Rating Agencies; (vii) the transportation and other expenses
incurred by or on behalf of Trust representatives in connection with
presentations to prospective purchasers of the Shares; and (viii) the fees and
expenses of the Trust's accountants and the fees and expenses of counsel
(including local and special counsel) for the Trust and of the transfer agent.

     11. EFFECTIVE DATE OF AGREEMENT. This Agreement shall become effective: (i)
upon the execution and delivery hereof by the parties hereto; or (ii) if, at the
time this Agreement is executed and delivered, it is necessary for the
registration statement or a post-effective amendment thereto to be declared
effective before the offering of the Shares may commence, when notification of
the effectiveness of the registration statement or such post-effective amendment
has been released by the Commission. Until such time as this Agreement shall
have become effective, it may be terminated by the Trust, by notifying the
Underwriters, or by the Underwriters, by notifying the Trust.

     If any one or more of the Underwriters shall fail or refuse to purchase
Shares which it or they are obligated to purchase hereunder on the Closing Date,
and the aggregate number of Shares which such defaulting Underwriter or
Underwriters are obligated but fail or refuse to purchase is not more than
<PAGE>
                                                                              27

one-tenth of the aggregate number of Shares which the Underwriters are obligated
to purchase on the Closing Date, each non-defaulting Underwriter shall be
obligated, severally, in the proportion which the number of Shares set forth
opposite its name in Schedule I hereto bears to the aggregate number of Shares
set forth opposite the names of all non-defaulting Underwriters or in such other
proportion as you may specify, to purchase the Shares which such defaulting
Underwriter or Underwriters are obligated, but fail or refuse, to purchase. If
any one or more of the Underwriters shall fail or refuse to purchase Shares
which it or they are obligated to purchase on the Closing Date and the aggregate
number of Shares with respect to which such default occurs is more than
one-tenth of the aggregate number of Shares which the Underwriters are obligated
to purchase on the Closing Date and arrangements satisfactory to you and the
Trust for the purchase of such Shares by one or more non-defaulting Underwriters
or other party or parties approved by you and the Trust are not made within 36
hours after such default, this Agreement will terminate without liability on the
part of any non-defaulting Underwriter, the Trust or the Adviser. In any such
case which does not result in termination of this Agreement, either you or the
Trust shall have the right to postpone the Closing Date, but in no event for
longer than seven days, in order that the required changes, if any, in the
Registration Statement and the Prospectus or any other documents or arrangements
may be effected. Any action taken under this paragraph shall not relieve any
defaulting Underwriter from liability in respect of any such default of any such
Underwriter under this Agreement. The term "Underwriter" as used in this
Agreement includes, for all purposes of this Agreement, any party not listed in
Schedule I hereto who, with your approval and the approval of the Trust,
purchases Shares which a defaulting Underwriter is obligated, but fails or
refuses, to purchase.

     Any notice under this Section 11 may be given by telegram, telecopy or
telephone but shall be subsequently confirmed by letter.

     12. TERMINATION OF AGREEMENT. This Agreement shall be subject to
termination in the Underwriters' absolute discretion, without liability on the
part of any Underwriter to the Trust or the Adviser, by notice to the Trust or
the Adviser, if prior to the Closing Date (i) trading in the Shares or the
Trust's common shares of beneficial interest or securities generally on the NYSE
shall have been suspended or materially limited or minimum prices shall have
been established on the NYSE, (ii) a general moratorium on commercial banking
activities in New York shall have been declared by either federal or state
authorities, or (iii) there shall have occurred any outbreak or escalation of
hostilities, declaration by the United States of a national emergency or war, or
other international or domestic calamity, crisis or change in political,
financial or economic conditions, the effect of which on the financial markets
of the United States is to make it, in your judgment, impracticable or
inadvisable to commence or continue the offering of the Shares at the offering
price to the public set forth on the cover page of the Prospectus or to enforce
contracts for the resale of the Shares by the Underwriters. Notice of such
termination may be given to the Trust by telegram, telecopy or telephone and
shall be subsequently confirmed by letter.
<PAGE>
                                                                              28

     13. INFORMATION FURNISHED BY THE UNDERWRITERS. The statements set forth in
the [last paragraph on the cover page and the statements in the ________,
________ and _________ paragraphs under the caption "Underwriting"] in any
Prepricing Prospectus and in the Prospectus, constitute the only information
furnished by or on behalf of the Underwriters through you as such information is
referred to in Sections 6(b) and 8 hereof.

     14. MISCELLANEOUS. Except as otherwise provided in Sections 5, 11 and 12
hereof, notice given pursuant to any provision of this Agreement shall be in
writing and shall be delivered (i) if to the Trust or the Adviser, at the office
of the Trust at 7337 E. Doubletree Ranch Rd., Scottsdale, Arizona 85258-2034,
Attention: Daniel A. Norman, Senior Vice President; or (ii) if to the
Underwriters, to Salomon Smith Barney Inc., 388 Greenwich Street, New York, New
York 10013, Attention: Manager, Investment Banking Division.

     This Agreement has been and is made solely for the benefit of the
Underwriters, the Trust, the Adviser, their trustees, directors and officers,
and the other controlling persons referred to in Section 8 hereof and their
respective successors and assigns, to the extent provided herein, and no other
person shall acquire or have any right under or by virtue of this Agreement.
Neither the term "successor" nor the term "successors and assigns" as used in
this Agreement shall include a purchaser from the Underwriters of any of the
Shares in his status as such purchaser.

     Consistent with the Trust's Declaration, notice is hereby given and the
parties hereto acknowledge and agree that this Agreement is executed on behalf
of the trustees of the Trust as trustees and not individually and that
obligations of this Agreement are not binding upon any of the trustees or
shareholders of the Trust individually but are binding only against the assets
and property of the Trust.

     15. APPLICABLE LAW; COUNTERPARTS. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York.

     This Agreement may be signed in various counterparts, which together
constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
<PAGE>
     Please confirm that the foregoing correctly sets forth the agreement among
the Trust, the Adviser and the several Underwriters.

                                        Very truly yours,

                                        PILGRIM PRIME RATE TRUST


                                        By:
                                           -------------------------------------


                                        ING PILGRIM INVESTMENTS, INC.


                                        By:
                                           -------------------------------------


Confirmed as of the date first above
mentioned on behalf of themselves
and the other several Underwriters
named in Schedule I hereto.

SALOMON SMITH BARNEY INC.
PAINEWEBBER INCORPORATED
LEHMAN BROTHERS INC.
GRUNTAL & CO., L.L.C.


By: SALOMON SMITH BARNEY INC.


By:
   ----------------------------------
<PAGE>
                                   SCHEDULE I

                            PILGRIM PRIME RATE TRUST

                                                                    Number of
                                                                  Shares of Each
                                                                     of Series
                       Underwriter                                  and Series
                       -----------                                  ----------

Salomon Smith Barney Inc. .....................................
                                                                    ----------
PaineWebber Incorporated ......................................
                                                                    ----------
Lehman Brothers Inc. ..........................................
                                                                    ----------
Gruntal & Co., L.L.C. .........................................
                                                                    ----------
Total .........................................................
                                                                    ----------
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.2.K.V
<SEQUENCE>8
<FILENAME>0008.txt
<DESCRIPTION>FORM OF AUCTION AGENCY AGREEMENT
<TEXT>

                        FORM OF AUCTION AGENCY AGREEMENT

     This Auction Agency Agreement (this "Agreement"), dated as of October __,
2000, is between Pilgrim Prime Rate Trust (the "Trust") and Bankers Trust
Company, a New York banking corporation.

     The Trust proposes to issue five series of preferred shares of beneficial
interest (3,600 shares of Series M, 3,600 shares of Series T, 3,600 shares of
Series W, 3,600 shares of Series Th, and 3,600 shares of Series F), par value
$.01 per share, liquidation preference $25,000 per share, designated as Series
M, T, W, Th and F Auction Rate Cumulative Preferred Shares (cumulatively, the
"Preferred Shares"), pursuant to the Trust's Certificate (as defined below).

     The Trust desires that Bankers Trust Company perform certain duties as
agent in connection with each Auction of Preferred Shares (in such capacity, the
"Auction Agent"), and as the transfer agent, registrar, dividend paying agent
and redemption agent with respect to the Preferred Shares (in such capacity, the
"Paying Agent"), upon the terms and conditions of this Agreement, and the Trust
hereby appoints Bankers Trust Company as said Auction Agent and Paying Agent in
accordance with those terms and conditions (hereinafter generally referred to as
the "Auction Agent," except in Sections 3 and 4 below).

     NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein, the Trust and the Auction Agent agree as follows:

I.   DEFINITIONS AND RULES OF CONSTRUCTION.

     1.1. TERMS DEFINED BY REFERENCE TO THE CERTIFICATE.

          Capitalized terms not defined herein shall have the respective
meanings specified in the Certificate.

     1.2. TERMS DEFINED HEREIN.

          As used herein, the following terms shall have the following meanings,
unless the context otherwise requires:

          (a) "Agent Member" of any Person shall mean such Person's agent member
of the Securities Depository that will act on behalf of a Bidder.

          (b) "Auction" shall have the meaning specified in Section 2.1 hereof.

          (c) "Auction Procedures" shall mean the Auction Procedures that are
set forth in Part II of the Certificate.

          (d) "Authorized Officer" shall mean each Managing Director, Vice
President, Assistant Vice President, Assistant Treasurer and Assistant Secretary
of the Auction Agent and every other officer or employee of the Auction Agent
designated as an "Authorized Officer" for purposes hereof in a written
communication from the Auction Agent to the Trust.
<PAGE>
                            PILGRIM PRIME RATE TRUST
                            AUCTION AGENCY AGREEMENT

          (e) "Broker-Dealer Agreement" shall mean each agreement between the
Auction Agent and a Broker-Dealer substantially in the form attached hereto as
Exhibit A.

          (f) "Certificate" shall mean the Certificate of Designation for
Preferred Shares of the Trust dated October __, 2000 specifying the powers,
preferences and rights of the Preferred Shares.

          (g) "Holder" shall be a holder of record of one or more Preferred
Shares, listed as such in the share register maintained by the Paying Agent
pursuant to Section 4.6 hereof.

          (h) "Interest Equivalent" means a yield on a 360-day basis of a
discount basis security which is equal to the yield on an equivalent
interest-bearing security.

          (i) "Trust Officer" shall mean the Chairman, the President, each Vice
President (whether or not designated by a number or word or words added before
or after the title "Vice President"), the Secretary, the Treasurer, each
Assistant Secretary and each Assistant Treasurer of the Trust and every other
officer or employee of the Trust designated as a "Trust Officer" for purposes
hereof in a notice from the Trust to the Auction Agent.

     1.3. RULES OF CONSTRUCTION.

          Unless the context or use indicates another or different meaning or
intent, the following rules shall apply to the construction of this Agreement:

          (a) Words importing the singular number shall include the plural
number and vice versa.

          (b) The captions and headings herein are solely for convenience of
reference and shall not constitute a part of this Agreement nor shall they
affect its meaning, construction or effect.

          (c) The words "hereof," "herein," "hereto," and other words of similar
import refer to this Agreement as a whole.

          (d) All references herein to a particular time of day shall be to New
York City time.

II.  THE AUCTION.

     2.1. PURPOSE; INCORPORATION BY REFERENCE OF AUCTION PROCEDURES.

          (a) The Certificate provides that the Applicable Rate on shares of
each series of Preferred Shares, as the case may be, for each Dividend Period
therefor after the initial Dividend Period shall be the rate per annum that a
commercial bank, trust company or other financial institution appointed by the
Trust advises results from the implementation of the Auction Procedures. The
Board of Trustees of the Trust has adopted a resolution appointing Bankers Trust
Company as Auction Agent for purposes of the Auction Procedures. The Auction

                                        2
<PAGE>
                            PILGRIM PRIME RATE TRUST
                            AUCTION AGENCY AGREEMENT

Agent hereby accepts such appointment and agrees that, on each Auction Date, it
shall follow the procedures set forth in this Section 2 and the Auction
Procedures for the purpose of determining the Applicable Rate for the Preferred
Shares for the next Dividend Period. Each periodic operation of such procedures
is hereinafter referred to as an "Auction."

          (b) All of the provisions contained in the Auction Procedures are
incorporated herein by reference in their entirety and shall be deemed to be a
part hereof to the same extent as if such provisions were set forth fully
herein.

     2.2. PREPARATION FOR EACH AUCTION; MAINTENANCE OF REGISTRY OF EXISTING
          HOLDERS.

          (a) As of the date hereof, the Trust shall provide the Auction Agent
with a list of the Broker-Dealers previously approved by the Auction Agent and
shall cause to be delivered to the Auction Agent for execution by the Auction
Agent a Broker-Dealer Agreement signed by each such Broker-Dealer. The Auction
Agent shall keep such list current and accurate and shall indicate thereon, or
on a separate list, the identity of each Existing Holder, if any, whose most
recent Order was submitted by a Broker-Dealer on such list and resulted in such
Existing Holder continuing to hold or purchase Preferred Shares. Not later than
five Business Days prior to any Auction Date for which any change in such list
of Broker-Dealers is to be effective, the Trust shall notify the Auction Agent
in writing of such change and, if any such change is the addition of a
Broker-Dealer to such list, the Trust shall cause to be delivered to the Auction
Agent for execution by the Auction Agent a Broker-Dealer Agreement signed by
such Broker-Dealer. The Auction Agent shall have entered into a Broker-Dealer
Agreement with each Broker-Dealer prior to the participation of any such
Broker-Dealer in any Auction.

          (b) In the event that the Auction Date for any Auction shall be
changed after the Auction Agent shall have given the notice, the Auction Agent,
by such means as the Auction Agent deems practicable, shall give notice of such
change to the Broker-Dealers not later than the earlier of 9:15 A.M. on the new
Auction Date or 9:15 A.M. on the old Auction Date.

          (c) The provisions contained in Section 4 of Part I of the Certificate
concerning Special Rate Periods and the notification of a Special Rate Period
will be followed by the Trust and, to the extent applicable, the Auction Agent,
and the provisions contained therein are incorporated herein by reference in
their entirety and shall be deemed to be a part of this Agreement to the same
extent as if such provisions were set forth fully herein.

          (d) (i) On each Auction Date, the Auction Agent shall determine the
initial dividend rate and the Maximum Rate. If the initial dividend rate is not
quoted on an interest basis but is quoted on a discount basis, the Auction Agent
shall convert the quoted rate to an Interest Equivalent; or, if the rate
obtained by the Auction Agent is not quoted on an interest or discount basis,
the Auction Agent shall convert the quoted rate to an interest rate after
consultation with the Trust as to the method of such conversion. Not later than
9:30 A.M. on each Auction Date, the Auction Agent shall notify the Trust and the
Broker-Dealers of the initial dividend rate so determined and of the Maximum
Rate.

               (ii) If the initial dividend rate is the applicable "AA"
Financial Composite Commercial Paper Rate and such rate is to be based on rates
supplied by Commercial Paper Dealers and one or more of the Commercial Paper

                                        3
<PAGE>
                            PILGRIM PRIME RATE TRUST
                            AUCTION AGENCY AGREEMENT

Dealers shall not provide a quotation for the determination of the applicable
"AA" Financial Composite Commercial Paper Rate, the Auction Agent immediately
shall notify the Trust so that the Trust can determine whether to select a
substitute Commercial Paper Dealer or substitute Commercial Paper Dealers to
provide the quotation or quotations not being supplied by any Commercial Paper
Dealer or Commercial Paper Dealers. The Trust promptly shall advise the Auction
Agent of any such selection. If the Trust does not select any such substitute
Commercial Paper Dealer or substitute Commercial Paper Dealers, then the rates
shall be supplied by the remaining Commercial Paper Dealer or Commercial Paper
Dealers.

          (e) (i) The Auction Agent shall maintain a current registry of the
Existing Holders of the Preferred Shares for purposes of each individual
Auction. The Trust shall use commercially reasonable efforts to provide or cause
to be provided to the Auction Agent within ten Business Days following the date
of the Closing a list of the initial Existing Holders of Preferred Shares, and
the Broker-Dealer of each such Existing Holder through which such Existing
Holder purchased such shares. The Auction Agent may rely upon, as evidence of
the identities of the Existing Holders, such list, the results of each Auction
and notices from any Existing Holder, the Agent Member of any Existing Holder or
the Broker-Dealer of any Existing Holder with respect to such Existing or
Holder's transfer of any Preferred Shares to another Person.

               (ii) In the event of any partial redemption of Preferred Shares,
upon notice by the Trust to the Auction Agent of such partial redemption, the
Auction Agent promptly shall request the Securities Depository to notify the
Auction Agent of the identities of the Agent Members (and the respective numbers
of shares) from the accounts of which shares have been called for redemption and
the person or department at such Agent Member to contact regarding such
redemption. At least two Business Days prior to the Auction preceding the date
of redemption, the Auction Agent shall request each Agent Member so identified
to disclose to the Auction Agent (upon selection by such Agent Member of the
Existing Holders whose shares are to be redeemed) the number of Preferred Shares
of each such Existing Holder, if any, to be redeemed by the Trust, provided that
the Auction Agent has been furnished with the name and telephone number of a
person or department at such Agent Member from which it is to request such
information. In the absence of receiving any such information with respect to an
Existing Holder, from such Existing Holder's Agent Member or otherwise, the
Auction Agent may continue to treat such Existing Holder as having ownership of
the number of Preferred Shares shown in the Auction Agent's registry of Existing
Holders.

               (iii) The Auction Agent shall register a transfer of the
ownership of Preferred Shares from an Existing Holder to another Existing
Holder, or to another Person if permitted by the Trust, only if (A) such
transfer is made pursuant to an Auction or (B) if such transfer is made other
than pursuant to an Auction, the Auction Agent has been notified of such
transfer in writing, in a notice substantially in the form of Exhibit C to the
Broker-Dealer Agreements, by such Existing Holder or by the Agent Member of such
Existing Holder. The Auction Agent is not required to accept any notice of
transfer delivered for an Auction unless it is received by the Auction Agent by
3:00 P.M. on the Business Day next preceding the applicable Auction Date. The
Auction Agent shall rescind a transfer made on the registry of the Existing

                                        4
<PAGE>
                            PILGRIM PRIME RATE TRUST
                            AUCTION AGENCY AGREEMENT

Holders of any Preferred Shares if the Auction Agent has been notified in
writing, in a notice substantially in the form of Exhibit D to the Broker-Dealer
Agreement, by the Agent Member or the Broker-Dealer of any Person that (i)
purchased any Preferred Shares and the seller failed to deliver such shares or
(ii) sold any Preferred Shares and the purchaser failed to make payment to such
Person upon delivery to the purchaser of such shares.

          (f) The Auction Agent may request that the Broker Dealers, as set
forth in Section 3.2(b) of the Broker-Dealer Agreements, provide the Auction
Agent with a list of their respective customers that such Broker-Dealers believe
are Beneficial Owners of Preferred Shares. The Auction Agent shall keep
confidential any such information and shall not disclose any such information so
provided to any Person other than the relevant Broker-Dealer and the Trust,
provided that the Auction Agent reserves the right to disclose any such
information if it is advised by its counsel that its failure to do so would be
unlawful.

     2.3. AUCTION SCHEDULE.

          The Auction Agent shall conduct Auctions every Monday, Tuesday,
Wednesday, Thursday and Friday in accordance with the schedule set forth below.
Such schedule may be changed by the Auction Agent with the consent of the Trust,
which consent shall not be withheld unreasonably. The Auction Agent shall give
notice of any such change to each Broker-Dealer. Such notice shall be received
prior to the first Auction Date on which any such change shall be effective.

Time                               Event
- ----                               -----
By 9:30 A.M.                       Auction Agent shall advise the Trust and the
                                   Broker-Dealers of the initial dividend rate
                                   and the Maximum Rate as set forth in Section
                                   2.2(e)(i) hereof.

9:30 A.M. - 1:30 P.M.              Auction Agent shall assemble information
                                   communicated to it by Broker-Dealers as
                                   provided in Section 3(a) of Part II of the
                                   Certificate. Submission deadline is 1:00 P.M.

Not earlier than 1:30 P.M.         Auction Agent shall make determinations
                                   pursuant to Section 4(a) of Part II of the
                                   Certificate.

By approximately 3:00 P.M.         Auction Agent shall advise the Trust of the
                                   results of the Auction as provided in Section
                                   4(b) of Part II of the Certificate.

                                   Submitted Bids and Submitted Sell Orders will
                                   be accepted and rejected in whole or in part
                                   and Preferred Shares will be allocated as
                                   provided in Section 5 of Part II of the
                                   Certificate. Auction Agent shall give notice
                                   of the Auction results as set forth in
                                   Section 2.4 hereof.

     2.4. NOTICE OF AUCTION RESULTS.

          On each Auction Date, the Auction Agent shall notify Broker-Dealers of
the results of the Auction held on such date by telephone or through the Auction
Agent's Auction Processing System.

                                        5
<PAGE>
                            PILGRIM PRIME RATE TRUST
                            AUCTION AGENCY AGREEMENT

     2.5. BROKER-DEALERS.

          (a) Not later than 12:00 noon on each Auction Date, the Trust shall
pay to the Auction Agent in Federal Funds or similar same-day funds an amount in
cash equal to (i) in the case of any Auction Date immediately preceding a 7-day
Dividend Period, the product of (A) a fraction the numerator of which is the
number of days in such Dividend Period (calculated by counting the first day of
such Dividend Period but excluding the last day thereof) and the denominator of
which is 360, times (B) 1/4 of 1%, times (C) $25,000 times (D) the sum of the
aggregate number of outstanding Preferred Shares for which the Auction is
conducted and (ii) in the case of any Special Rate Period, the amount determined
by mutual consent of the Trust and the Broker-Dealers pursuant to Section 3.5 of
the Broker-Dealer Agreements. The Auction Agent shall apply such moneys as set
forth in Section 3.5 of the Broker-Dealer Agreements and shall thereafter remit
to the Trust any remaining funds paid to the Auction Agent pursuant to this
Section 2.5(a).

          (b) The Trust shall not designate any Person to act as a
Broker-Dealer, or permit an Existing Holder or a Potential Beneficial Owner to
participate in Auctions through any Person other than a Broker-Dealer, without
the prior written approval of the Auction Agent, which approval shall not be
withheld unreasonably. The Trust may designate an Affiliate or Salomon Smith
Barney Inc. to act as a Broker-Dealer.

          (c) The Auction Agent shall terminate any Broker-Dealer Agreement as
set forth therein if so directed by the Trust.

          (d) Subject to Section 2.5(b) hereof, the Auction Agent from time to
time shall enter into such Broker-Dealer Agreements as the Trust shall request.

          (e) The Auction Agent shall maintain a list of Broker-Dealers.

     2.6. OWNERSHIP OF PREFERRED SHARES AND SUBMISSION OF BIDS BY THE TRUST AND
          ITS AFFILIATES.

          Neither the Trust nor any Affiliate of the Trust may submit any Sell
Order or Bid, directly or indirectly, in any Auction, except that an Affiliate
of the Trust that is a Broker-Dealer may submit a Sell Order or Bid on behalf of
a Beneficial Owner or a Potential Beneficial Owner. The Trust shall notify the
Auction Agent if the Trust or, to the best of the Trust's knowledge, any
Affiliate of the Trust becomes a Beneficial Owner of any Preferred Shares. Any
Preferred Shares redeemed, purchased or otherwise acquired (i) by the Trust
shall not be reissued, except in accordance with the requirements of the
Securities Act of 1933, as amended, or (ii) by its Affiliates shall not be
transferred (other than to the Trust). The Auction Agent shall have no duty or
liability with respect to enforcement of this Section 2.6.

     2.7. ACCESS TO AND MAINTENANCE OF AUCTION RECORDS.

          The Auction Agent shall afford to the Trust, its agents, independent
public accountants and counsel, access at reasonable times during normal
business hours to review and make extracts or copies (at the Trust's sole cost
and expense) of all books, records, documents and other information concerning

                                        6
<PAGE>
                            PILGRIM PRIME RATE TRUST
                            AUCTION AGENCY AGREEMENT

the conduct and results of Auctions, provided that any such agent, accountant or
counsel shall furnish the Auction Agent with a letter from the Trust requesting
that the Auction Agent afford such person access. The Auction Agent shall
maintain records relating to any Auction for a period of at least two years
after such Auction (unless requested by the Trust to maintain such records for
such longer period not in excess of four years, then for such longer period),
and such records, in reasonable detail, shall accurately and fairly reflect the
actions taken by the Auction Agent hereunder. The Trust agrees to keep
confidential any information regarding the customers of any Broker-Dealer
received from the Auction Agent in connection with this Agreement or any
Auction, and shall not disclose such information or permit the disclosure of
such information without the prior written consent of the applicable
Broker-Dealer to anyone except such agent, accountant or counsel engaged to
audit or review the results of Auctions as permitted by this Section 2.7. The
Trust reserves the right to disclose any such information if it is advised by
its counsel that its failure to do so would (i) be unlawful or (ii) expose it to
liability, unless the Broker-Dealer shall have offered indemnification
satisfactory to the Trust. Any such agent, accountant or counsel, before having
access to such information, shall agree to keep such information confidential
and not to disclose such information or permit disclosure of such information
without the prior written consent of the applicable Broker-Dealer, provided that
such agent, accountant or counsel may reserve the right to disclose any such
information if it is advised by its counsel that its failure to do so would (i)
be unlawful or (ii) expose it to liability, unless the Broker-Dealer shall have
offered indemnification satisfactory to such agent, accountant or counsel.

III. THE AUCTION AGENT AS PAYING AGENT.

     3.1. THE PAYING AGENT.

          The Board of Trustees of the Trust has adopted another resolution
appointing Bankers Trust Company as auction agent, transfer agent, dividend
paying agent and registrar for the Trust in connection with any Preferred Shares
(in such capacity, the "Paying Agent"). The Paying Agent hereby accepts such
appointment and agrees to act in accordance with its standard procedures and the
provisions of the Certificate which are specified herein with respect to the
Preferred Shares and as set forth in this Section 3.

     3.2. THE TRUST'S NOTICES TO THE PAYING AGENT.

          Whenever any Preferred Shares are to be redeemed, the Trust promptly
shall deliver to the Paying Agent a Notice of Redemption, which will be mailed
by the Paying Agent to each Holder at least five Business Days prior to the date
such Notice of Redemption is required to be mailed pursuant to the Certificate.
The Paying Agent shall have no responsibility to confirm or verify the accuracy
of any such Notice.

     3.3. THE TRUST TO PROVIDE FUNDS FOR DIVIDENDS AND REDEMPTIONS.

          (a) Not later than noon on each Dividend Payment Date, the Trust shall
deposit with the Paying Agent an aggregate amount of Federal Funds or similar
same-day funds equal to the declared dividends to be paid to Holders on such
Dividend Payment Date, and shall give the Paying Agent irrevocable instructions
to apply such funds to the payment of such dividends on such Dividend Payment
Date.

                                        7
<PAGE>
                            PILGRIM PRIME RATE TRUST
                            AUCTION AGENCY AGREEMENT

          (b) If the Trust shall give a Notice of Redemption, then by noon of
the date fixed for redemption, the Trust shall deposit in trust with the Paying
Agent an aggregate amount of Federal Funds or similar same-day funds sufficient
to redeem such Preferred Shares called for redemption and shall give the Paying
Agent irrevocable instructions and authority to pay the redemption price to the
Holders of Preferred Shares called for redemption upon surrender of the
certificate or certificates therefor.

     3.4. DISBURSING DIVIDENDS AND REDEMPTION PRICE.

          After receipt of the Federal Funds or similar same-day funds and
instructions from the Trust described in Section 3.3 above, the Paying Agent
shall pay to the Holders (or former Holders) entitled thereto (i) on each
corresponding Dividend Payment Date, dividends on the Preferred Shares, and (ii)
on any date fixed for redemption, the redemption price of any Preferred Shares
called for redemption. The amount of dividends for any Dividend Period to be
paid by the Paying Agent to Holders will be determined by the Trust as set forth
in Section 2 of Part I of the Certificate. The redemption price to be paid by
the Paying Agent to the Holders of any Preferred Shares called for redemption
will be determined as set forth in Section 3 of Part I of the Certificate. The
Paying Agent shall have no duty to determine the redemption price and may rely
on the amount thereof set forth in a Notice of Redemption.

IV.  THE PAYING AGENT AS TRANSFER AGENT AND REGISTRAR.

     4.1. ORIGINAL ISSUE OF STOCK CERTIFICATES.

          On the Date of Original Issue for any share of Preferred Shares, one
certificate for each series of Preferred Shares shall be issued by the Trust and
registered in the name of Cede & Co., as nominee of the Securities Depository,
and countersigned by the Paying Agent.

     4.2. REGISTRATION OF TRANSFER OR EXCHANGE OF SHARES.

          Except as provided in this Section 4.2, the shares of each series of
Preferred Shares shall be registered solely in the name of the Securities
Depository or its nominee. If the Securities Depository shall give notice of its
intention to resign as such, and if the Trust shall not have selected a
substitute Securities Depository acceptable to the Paying Agent prior to such
resignation, then upon such resignation the shares of each Series of Preferred
Shares, at the Trust's request, may be registered for transfer or exchange, and
new certificates thereupon shall be issued in the name of the designated
transferee or transferees, upon surrender of the old certificate in form deemed
by the Paying Agent to be properly endorsed for transfer with (a) all necessary
endorsers' signatures guaranteed in such manner and form and by such guarantor
as the Paying Agent may reasonably require, (b) such assurances as the Paying
Agent shall deem necessary or appropriate to evidence the genuineness and
effectiveness of each necessary endorsement and (c) satisfactory evidence of
compliance with all applicable laws relating to the collection of taxes in
connection with any registration of transfer or exchange or funds necessary for
the payment of such taxes. If the certificate or certificates for Preferred
Shares are not held by the Securities Depository or its nominee, payments upon
transfer of shares in an Auction shall be made in Federal Funds or similar
same-day funds to the Auction Agent against delivery of certificates therefor.

                                        8
<PAGE>
                            PILGRIM PRIME RATE TRUST
                            AUCTION AGENCY AGREEMENT

     4.3. REMOVAL OF LEGEND.

          Any request for removal of a legend indicating a restriction on
transfer from a certificate evidencing Preferred Shares shall be accompanied by
an opinion of counsel stating that such legend may be removed and such shares
may be transferred free of the restriction described in such legend, said
opinion to be delivered under cover of a letter from a Trust Officer authorizing
the Paying Agent to remove the legend on the basis of said opinion.

     4.4. LOST, STOLEN OR DESTROYED STOCK CERTIFICATES.

          The Paying Agent shall issue and register replacement certificates for
certificates represented to have been lost, stolen or destroyed, upon the
fulfillment of such requirements as shall be deemed appropriate by the Trust and
by the Paying Agent, subject at all times to provisions of law, the Certificate
governing such matters and resolutions adopted by the Trust with respect to
lost, stolen or destroyed securities. The Paying Agent may issue new
certificates in exchange for and upon the cancellation of mutilated
certificates. Any request by the Trust to the Paying Agent to issue a
replacement or new certificate pursuant to this Section 4.4 shall be deemed to
be a representation and warranty by the Trust to the Paying Agent that such
issuance will comply with provisions of applicable law and the Certificate and
resolutions of the Trust.

     4.5. DISPOSITION OF CANCELED CERTIFICATES; RECORD RETENTION.

          The Paying Agent shall retain stock certificates which have been
canceled in transfer or in exchange and accompanying documentation in accordance
with applicable rules and regulations of the Securities and Exchange Commission
(the "SEC") for at least two calendar years from the date of such cancellation.
The Paying Agent, upon written request by the Trust, shall afford to the Trust,
its agents and counsel access at reasonable times during normal business hours
to review and make extracts or copies (at the Trust's sole cost and expense) of
such certificates and accompanying documentation. Upon request by the Trust at
any time after the expiration of this two-year period, the Paying Agent shall
deliver to the Trust the canceled certificates and accompanying documentation.
The Trust, at its expense, shall retain such records for a minimum additional
period of at least four calendar years from the date of delivery of the records
to the Trust and shall make such records available during this period at any
time, or from time to time, for reasonable periodic, special, or other
examinations by representatives of the SEC. The Trust also shall undertake to
furnish to the SEC, upon demand, either at its principal office or at any
regional office, complete, correct and current hard copies of any and all such
records. Thereafter, such records shall not be destroyed by the Trust without
the approval of the Paying Agent, which approval shall not be withheld
unreasonably, but will be safely stored for possible future reference.

                                        9
<PAGE>
                            PILGRIM PRIME RATE TRUST
                            AUCTION AGENCY AGREEMENT

     4.6. STOCK REGISTER.

          The Paying Agent shall maintain the stock register, which shall
contain a list of the Holders, the number of shares held by each Holder and the
address of each Holder. The Paying Agent shall record in the stock register any
change of address of a Holder upon notice by such Holder. In case of any written
request or demand for the inspection of the stock register or any other books of
the Trust in the possession of the Paying Agent, the Paying Agent will notify
the Trust and secure instructions as to permitting or refusing such inspection.
The Paying Agent reserves the right, however, to exhibit the stock register or
other records to any person in case it is advised by its counsel that its
failure to do so would (i) be unlawful or (ii) expose it to liability, unless
the Trust shall have offered indemnification satisfactory to the Paying Agent.

     4.7. RETURN OF FUNDS.

          Any funds deposited with the Paying Agent by the Trust for any reason
under this Agreement, including for the payment of dividends or the redemption
of Preferred Shares, that remain with the Paying Agent after 12 months shall be
repaid to the Trust upon written request by the Trust.

V.   REPRESENTATIONS AND WARRANTIES.

     5.1. REPRESENTATIONS AND WARRANTIES OF THE TRUST.

          The Trust represents and warrants to the Auction Agent that:

               (i) the Trust is duly organized and is validly existing as a
business trust under the laws of the Commonwealth of Massachusetts, and has full
power to execute and deliver this Agreement and to authorize, create and issue
the Preferred Shares;

               (ii) the Trust is registered with the SEC under the Investment
Company Act of 1940, as amended, as a closed-end, diversified, management
investment company;

               (iii) this Agreement has been duly and validly authorized,
executed and delivered by the Trust and constitutes the legal, valid and binding
obligation of the Trust, enforceable against the Trust in accordance with its
terms, subject as to such enforceability to bankruptcy, insolvency,
reorganization and other laws of general applicability relating to or affecting
creditors' rights and to general equitable principles;

               (iv) the form of the certificates evidencing the Preferred Shares
comply with all applicable laws of the Commonwealth of Massachusetts;

               (v) the Preferred Shares have been duly and validly authorized by
the Trust and, upon completion of the initial sale of the Preferred Shares and
receipt of payment therefor, will be validly issued by the Trust, fully paid and
nonassessable;

               (vi) at the time of the offering of the Preferred Shares, the
shares offered will be registered under the Securities Act of 1933, as amended,
and no further action by or before any governmental body or authority of the
United States or of any state thereof is required in connection with the

                                       10
<PAGE>
                            PILGRIM PRIME RATE TRUST
                            AUCTION AGENCY AGREEMENT

execution and delivery of this Agreement or will be required in connection with
the issuance of the Preferred Shares, except such action as required by
applicable state securities laws;

               (vii) the execution and delivery of this Agreement and the
issuance and delivery of the Preferred Shares do not and will not conflict with,
violate, or result in a breach of the terms, conditions or provisions of, or
constitute a default under, the Trust's Declaration of Trust, as amended, or the
Certificate, any order or decree of any court or public authority having
jurisdiction over the Trust, or any mortgage, indenture, contract, agreement or
undertaking to which the Trust is a party or by which it is bound; and

               (viii) no taxes are payable upon or in respect of the execution
of this Agreement or will be payable upon or in respect of the issuance of the
Preferred Shares.

     5.2. REPRESENTATIONS AND WARRANTIES OF THE AUCTION AGENT.

          The Auction Agent represents and warrants to the Trust that:

               (i) the Auction Agent is duly organized and is validly existing
as a banking corporation in good standing under the laws of the State of New
York, and has the corporate power to enter into and perform its obligations
under this Agreement; and

               (ii) this Agreement has been duly and validly authorized,
executed and delivered by the Auction Agent and constitutes the legal, valid and
binding obligation of the Auction Agent, enforceable against the Auction Agent
in accordance with its terms, subject as to such enforceability to bankruptcy,
insolvency, reorganization and other laws of general applicability relating to
or affecting creditors' rights and to general equitable principles.

VI.  THE AUCTION AGENT.

     6.1. DUTIES AND RESPONSIBILITIES.

          (a) The Auction Agent is acting solely as agent for the Trust
hereunder and owes no fiduciary duties to any Person except as provided by this
Agreement.

          (b) The Auction Agent undertakes to perform such duties and only such
duties as are set forth specifically in this Agreement, and no implied covenants
or obligations shall be read into this Agreement against the Auction Agent.

          (c) In the absence of bad faith or negligence on its part, the Auction
Agent shall not be liable for any action taken, suffered or omitted by it or for
any error of judgment made by it in the performance of its duties under this
Agreement.

     6.2. RIGHTS OF THE AUCTION AGENT.

          (a) The Auction Agent may rely upon, and shall be protected in acting
or refraining from acting upon, any communication authorized hereby and any
written instruction, notice, request, direction, consent, report, certificate,
share certificate or other instrument, paper or document reasonably believed by

                                       11
<PAGE>
                            PILGRIM PRIME RATE TRUST
                            AUCTION AGENCY AGREEMENT

it to be genuine. The Auction Agent shall not be liable for acting upon any
telephone communication authorized hereby which the Auction Agent reasonably
believes in good faith to have been given by the Trust or by a Broker-Dealer.
The Auction Agent may record telephone communications with the Trust or with the
Broker-Dealers or with both.

          (b) The Auction Agent may consult with counsel of its choice, and the
written advice of such counsel shall be full and complete authorization and
protection in respect of any action taken, suffered or omitted by it hereunder
in good faith and in reasonable reliance thereon.

          (c) The Auction Agent shall not be required to advance, expend or risk
its own funds or otherwise incur or become exposed to financial liability in the
performance of its duties hereunder. The Auction Agent shall be under no
liability for interest on any money received by it hereunder except as otherwise
agreed in writing with the Trust.

          (d) The Auction Agent may perform its duties and exercise its rights
hereunder either directly or by or through agents or attorneys.

     6.3. COMPENSATION, EXPENSES AND INDEMNIFICATION.

          (a) The Trust shall pay to the Auction Agent from time to time
reasonable compensation for all services rendered by it under this Agreement and
under the Broker-Dealer Agreements as shall be set forth in a separate writing
signed by the Trust and the Auction Agent, subject to adjustments if the
Preferred Shares no longer are held of record by the Securities Depository or
its nominee or if there shall be such other change as shall increase or decrease
materially the Auction Agent's obligations hereunder or under the Broker-Dealer
Agreements.

          (b) The Trust shall reimburse the Auction Agent upon its request for
all reasonable expenses, disbursements and advances incurred or made by the
Auction Agent in accordance with any provision of this Agreement and of the
Broker-Dealer Agreements (including the reasonable compensation, expenses and
disbursements of its agents and counsel), except any expense, disbursement or
advance attributable to its negligence or bad faith.

          (c) The Trust shall indemnify the Auction Agent for, and hold it
harmless against, any loss, liability or expense incurred without negligence or
bad faith on the part of the Auction Agent arising out of or in connection with
its agency under this Agreement and under the Broker-Dealer Agreements,
including the costs and expenses of defending itself against any claim of
liability in connection with its exercise or performance of any of its duties
hereunder and thereunder, except such as may result from its negligence or bad
faith.

VII. MISCELLANEOUS.

     7.1. TERM OF AGREEMENT.

          (a) The term of this Agreement is unlimited unless it shall be
terminated as provided in this Section 7.1. The Trust may terminate this
Agreement at any time by so notifying the Auction Agent, provided that, if any
Preferred Shares remain outstanding, the Trust shall have entered into an

                                       12
<PAGE>
                            PILGRIM PRIME RATE TRUST
                            AUCTION AGENCY AGREEMENT

agreement with a successor auction agent. The Auction Agent may terminate this
Agreement upon prior notice to the Trust on the date specified in such notice,
which date shall be no earlier than 60 days after delivery of such notice. If
the Auction Agent terminates this Agreement while any Preferred Shares remain
outstanding, the Trust shall use commercially reasonable efforts to enter into
an agreement with a successor auction agent.

          (b) Except as otherwise provided in this Section 7.1(b), the
respective rights and duties of the Trust and the Auction Agent under this
Agreement shall cease upon termination of this Agreement. The Trust's
representations, warranties, covenants and obligations to the Auction Agent
under Sections 5 and 6.3 hereof shall survive the termination hereof. Upon
termination of this Agreement, the Auction Agent shall (i) resign as Auction
Agent under the Broker-Dealer Agreements, (ii) at the Trust's request, deliver
promptly to the Trust copies of all books and records maintained by it in
connection with its duties hereunder, and (iii) at the request of the Trust,
transfer promptly to the Trust or to any successor auction agent any funds
deposited by the Trust with the Auction Agent (whether in its capacity as
Auction Agent or as Paying Agent) pursuant to this Agreement which have not been
distributed previously by the Auction Agent in accordance with this Agreement.

     7.2. COMMUNICATIONS.

          Except for (i) communications authorized to be made by telephone
pursuant to this Agreement or the Auction Procedures and (ii) communications in
connection with Auctions (other than those expressly required to be in writing),
all notices, requests and other communications to any party hereunder shall be
in writing (including telecopy or similar writing) and shall be given to such
party at its address or telecopier number set forth below:

     If to the Trust,                   Pilgrim Prime Rate Trust
     addressed to:                      7337 E. Doubletree Ranch Road
                                        Scottsdale, Arizona  85258
                                        Attention: Daniel A. Norman
                                        Telecopier No.: (480) 477-2708
                                        Telephone No.: (480) 477-2112

     If to the Auction Agent,           Bankers Trust Company
     addressed to:                      Corporate Trust and Agency Group
                                        4 Albany Street
                                        New York, NY 10006
                                        Attention: Auction Rate Securities
                                        Telecopier No.: (212) ___-____
                                        Telephone No.: (212) ___-____

or such other address or telecopier number as such party hereafter may specify
for such purpose by notice to the other party. Each such notice, request or
communication shall be effective when delivered at the address specified herein.
Communications shall be given on behalf of the Trust by a Trust Officer and on
behalf of the Auction Agent by an Authorized Officer.

                                       13
<PAGE>
                            PILGRIM PRIME RATE TRUST
                            AUCTION AGENCY AGREEMENT

     7.3. ENTIRE AGREEMENT.

          This Agreement contains the entire agreement between the parties
relating to the subject matter hereof, and there are no other representations,
endorsements, promises, agreements or understandings, oral, written or implied,
between the parties relating to the subject matter hereof, except for agreements
relating to the compensation of the Auction Agent.

     7.4. BENEFITS.

          Nothing herein, express or implied, shall give to any Person, other
than the Trust, the Auction Agent and their respective successors and assigns,
any benefit of any legal or equitable right, remedy or claim hereunder.

     7.5. AMENDMENT; WAIVER.

          (a) This Agreement shall not be deemed or construed to be modified,
amended, rescinded, canceled or waived, in whole or in part, except by a written
instrument signed by a duly authorized representative of the party to be
charged. The Trust shall notify the Auction Agent of any change in the
Certificate prior to the effective date of any such change. If any such change
in the Certificate materially increases the Auction Agent's obligations
hereunder, the Trust shall obtain the written consent of the Auction Agent prior
to the effective date of such change.

          (b) Failure of either party hereto to exercise any right or remedy
hereunder in the event of a breach hereof by the other party shall not
constitute a waiver of any such right or remedy with respect to any subsequent
breach.

     7.6. SUCCESSORS AND ASSIGNS.

          This Agreement shall be binding upon, inure to the benefit of, and be
enforceable by, the respective successors and permitted assigns of each of the
Trust and the Auction Agent. This Agreement may not be assigned by either party
hereto absent the prior written consent of the other party, which consent shall
not be withheld unreasonably.

     7.7. SEVERABILITY.

          If any clause, provision or section hereof shall be ruled invalid or
unenforceable by any court of competent jurisdiction, the invalidity or
unenforceability of such clause, provision or section shall not affect any of
the remaining clauses, provisions or sections hereof.

     7.8. EXECUTION IN COUNTERPARTS.

          This Agreement may be executed in several counterparts, each of which
shall be an original and all of which shall constitute but one and the same
instrument.

                                       14
<PAGE>
                            PILGRIM PRIME RATE TRUST
                            AUCTION AGENCY AGREEMENT

     7.9. GOVERNING LAW.

          This Agreement shall be governed by and construed in accordance with
the laws of the State of New York applicable to agreements made and to be
performed in said state.

     7.10. LIMITATION OF LIABILITY.

          The name Pilgrim Prime Rate Trust refers to the Trust and the Trustees
of the Trust, as trustees but not individually or personally, acting from time
to time under the Trust's Agreement and Declaration of Trust dated August 25,
2000, as amended, which is hereby referred to and a copy of which is on file at
the office of the Secretary of the Commonwealth of Massachusetts and the
principal office of the Trust. The obligations of the Trust entered into in the
name or on behalf thereof by any of the Trustees, representatives or agents of
the Trust are made not individually, but in such capacities, and are not binding
upon any of the Trustees, officers, holders of shares of beneficial interest of
the Trust or representatives of the Trustees personally, but bind only the Trust
assets, and all persons dealing with the Trust must look solely to the Trust
property for the enforcement of any claims against the Trust.

                                       15
<PAGE>
                            PILGRIM PRIME RATE TRUST
                            AUCTION AGENCY AGREEMENT


          IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered by their proper and duly authorized officers as
of the date first above written.


                                        PILGRIM PRIME RATE TRUST


                                        ----------------------------------------
                                        By:
                                        Title:


                                        BANKERS TRUST COMPANY


                                        ----------------------------------------
                                        By:
                                        Title:

                                       16
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.2.K.VI
<SEQUENCE>9
<FILENAME>0009.txt
<DESCRIPTION>FORM OF BROKER-DEALER AGREEMENT
<TEXT>

                         FORM OF BROKER-DEALER AGREEMENT

     This Broker-Dealer Agreement dated as of October __, 2000, is between
Bankers Trust Company, a New York banking corporation (the "Auction Agent") (not
in its individual capacity, but solely as agent of Pilgrim Prime Rate Trust (the
"Trust"), pursuant to authority granted to it in the Auction Agency Agreement
dated as of October __, 2000, between the Trust and the Auction Agent (the
"Auction Agency Agreement")) and Salomon Smith Barney Inc. (together with its
successors and assigns, "BD").

     The Trust proposes to issue five series of preferred shares of beneficial
interest (3,600 shares of Series M, 3,600 shares of Series T, 3,600 shares of
Series W, 3,600 shares of Series Th, and 3,600 shares of Series F), par value
$.01 per share, liquidation preference $25,000 per share, designated Series M,
T, W, Th and F Auction Rate Cumulative Preferred Shares (cumulatively, the
"Preferred Shares"), pursuant to the Trust's Certificate of Designation for
Preferred Shares (as defined below).

     The Trust's Certificate provides that the Applicable Rate on shares of each
series of Preferred Shares for each Dividend Period after the initial Dividend
Period shall be equal to the rate per annum that results from an Auction for
Outstanding shares of each Series on the respective Auction Date therefor next
preceding the period from and after the Date of Original Issue to and including
the last day of the initial Dividend Period. The Board of Trustees of the Trust
has adopted a resolution appointing Bankers Trust Company as Auction Agent for
purposes of the Auction Procedures, and pursuant to Section 2.5 of the Auction
Agency Agreement, the Trust has requested and directed the Auction Agent to
execute and deliver this Agreement.

     The Auction Procedures require the participation of one or more
Broker-Dealers.

     NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein, the Auction Agent and BD agree as follows:

I.   DEFINITIONS AND RULES OF CONSTRUCTION.

     1.1. TERMS DEFINED BY REFERENCE TO THE CERTIFICATE.

     Capitalized terms not defined herein shall have the respective meanings
specified in the Certificate.

     1.2. TERMS DEFINED HEREIN.

     As used herein, the following terms shall have the following meanings,
unless the context otherwise requires:

          (a) "Auction" shall have the meaning specified in Section 2.1 of the
Auction Agency Agreement.

          (b) "Auction Procedures" shall mean the Auction Procedures that are
set forth in Part II of the Certificate.
<PAGE>
                                PRIME RATE TRUST
                             BROKER-DEALER AGREEMENT

          (c) "Authorized Officer" shall mean each Managing Director, Vice
President, Assistant Vice President, Assistant Treasurer and Assistant Secretary
of the Auction Agent and every other officer or employee of the Auction Agent
designated as an "Authorized Officer" for purposes of this Agreement in a
communication to BD.

          (d) "BD Officer" shall mean each officer or employee of BD designated
as a "BD Officer" for purposes of this Agreement in a communication to the
Auction Agent.

          (e) "Broker-Dealer Agreement" shall mean this Agreement and any
substantially similar agreement between the Auction Agent and a Broker-Dealer.

          (f) "Certificate" shall mean the Certificate of Designation for
Preferred Shares of the Trust dated ______, 2000 specifying the powers,
preferences and rights of the Preferred Shares.

     1.3. RULES OF CONSTRUCTION.

     Unless the context or use indicates another or different meaning or intent,
the following rules shall apply to the construction of this Agreement:

          (a) Words importing the singular number shall include the plural
number and vice versa.

          (b) The captions and headings herein are solely for convenience of
reference and shall not constitute a part of this Agreement, nor shall they
affect its meaning, construction or effect.

          (c) The words "hereof," "herein," "hereto," and other words of similar
import refer to this Agreement as a whole.

          (d) All references herein to a particular time of day shall be to New
York City time.

II.  NOTIFICATION OF DIVIDEND.

     The provisions contained in Section 4 of Part I of the Certificate
concerning the notification of a Special Rate Period will be followed by the
Auction Agent and BD, and the provisions contained therein are incorporated
herein by reference in their entirety and shall be deemed to be a part of this
Agreement to the same extent as if such provisions were set forth fully herein.

III. THE AUCTION.

     3.1  PURPOSE; INCORPORATION BY REFERENCE OF AUCTION PROCEDURES.

                                        2
<PAGE>
                                PRIME RATE TRUST
                             BROKER-DEALER AGREEMENT

          (a) On each Auction Date, the provisions of the Auction Procedures
will be followed by the Auction Agent for the purpose of determining the
Applicable Rate for the Preferred Shares, for each Dividend Period. Each
periodic operation of such procedures is hereinafter referred to as an
"Auction."

          (b) All of the provisions contained in the Auction Procedures are
incorporated herein by reference in their entirety and shall be deemed to be a
part of this Agreement to the same extent as if such provisions were set forth
fully herein.

          (c) BD agrees to act as, and assumes the obligations of and
limitations and restrictions placed upon, a Broker-Dealer under this Agreement.
BD understands that other Persons meeting the requirements specified in the
definition of "Broker-Dealer" contained in Section 19 of Part I of the
Certificate may execute a Broker-Dealer Agreement and participate as
Broker-Dealers in Auctions.

          (d) BD and other Broker-Dealers may participate in Auctions for their
own accounts. However, the Trust, by notice to BD and all other Broker Dealers,
may prohibit all Broker-Dealers from submitting Bids in Auctions for their own
accounts, provided that Broker-Dealers may continue to submit Hold Orders and
Sell Orders.

     3.2. PREPARATION FOR EACH AUCTION.

          (a) Not later than 9:30 A.M. on each Auction Date for the Preferred
Shares, the Auction Agent shall advise BD by telephone of the Reference Rate and
the Maximum Rate in effect on such Auction Date.

          (b) The Auction Agent from time to time may request BD to provide it
with a list of the respective customers BD believes are Beneficial Owners of
Preferred Shares. BD shall comply with any such request, and the Auction Agent
shall keep confidential any such information, including information received as
to the identity of Bidders in any Auction, and shall not disclose any such
information so provided to any Person other than the Trust; and such information
shall not be used by the Auction Agent or its officers, employees, agents or
representatives for any purpose other than such purposes as are described
herein. The Auction Agent shall transmit any list of customers BD believes are
Beneficial Owners of Preferred Shares and information related thereto only to
its officers, employees, agents or representatives who need to know such
information for the purposes of acting in accordance with this Agreement, and
the Auction Agent shall prevent the transmission of such information to others
and shall cause its officers, employees, agents and representatives to abide by
the foregoing confidentiality restrictions; provided, however, that the Auction
Agent shall have no responsibility or liability for the actions of any of its
officers, employees, agents or representatives after they have left the employ
of the Auction Agent.

     3.3. AUCTION SCHEDULE; METHOD OF SUBMISSION OF ORDERS.

          (a) The Trust and the Auction Agent shall conduct Auctions for
Preferred Shares in accordance with the schedule set forth below. Such schedule
may be changed at any time by the Auction Agent with the consent of the Trust,
which consent shall not be withheld unreasonably. The Auction Agent shall give
notice of any such change to BD. Such notice shall be received prior to the
first Auction Date on which any such change shall be effective.

                                        3
<PAGE>
                                PRIME RATE TRUST
                             BROKER-DEALER AGREEMENT

Time                               Event
- ----                               -----
By 9:30 A.M.                       Auction Agent shall advise the Trust and the
                                   Broker-Dealers of the Reference Rate and the
                                   Maximum Rate as set forth in Section 3.2(a)
                                   hereof.

9:30 A.M. - 1:30 P.M.              Auction Agent shall assemble information
                                   communicated to it by Broker-Dealers as
                                   provided in Section 2(a) of Part II of the
                                   Certificate. Submission Deadline is 1:00 P.M.

Not earlier than 1:30 P.M.         Auction Agent shall make determinations
                                   pursuant to Section 4(a) of Part II of the
                                   Certificate.

By approximately 3:00 P.M.         Auction Agent shall advise the Trust of the
                                   results of the Auction as provided in Section
                                   4(b) of Part II of the Certificate.

                                   Submitted Bids and Submitted Sell Orders will
                                   be accepted and rejected in whole or in part
                                   and Preferred Shares will be allocated as
                                   provided in Section 5 of Part II of the
                                   Certificate.

                                   Auction Agent shall give notice of the
                                   Auction results as set forth in Section
                                   3.4(a) hereof.

          (b) BD agrees to maintain a list of Potential Beneficial Owners and to
contact the Potential Beneficial Owners on such list on or prior to each Auction
Date for the purposes set forth in Section 2 of Part II of the Certificate.

          (c) BD shall submit Orders to the Auction Agent in writing in
substantially the form attached hereto as Exhibit A. BD shall submit separate
Orders to the Auction Agent for each Potential Beneficial Owner or Beneficial
Owner on whose behalf BD is submitting an Order and shall not net or aggregate
the Orders of Potential Beneficial Owners or Beneficial Owners on whose behalf
BD is submitting Orders.

          (d) BD shall deliver to the Auction Agent (i) a written notice,
substantially in the form attached hereto as Exhibit B, of transfers of
Preferred Shares, made through BD by an Existing Holder to another Person other
than pursuant to an Auction, and (ii) a written notice, substantially in the
form attached hereto as Exhibit C, of the failure of Preferred Shares to be
transferred to or by any Person that purchased or sold Preferred Shares through
BD pursuant to an Auction. The Auction Agent is not required to accept any
notice delivered pursuant to the terms of the foregoing sentence with respect to
an Auction unless it is received by the Auction Agent by 3:00 P.M. on the
Business Day next succeeding the applicable Auction Date.

                                        4
<PAGE>
                                PRIME RATE TRUST
                             BROKER-DEALER AGREEMENT

     3.4. NOTICE OF AUCTION RESULTS.

          (a) On each Auction Date, the Auction Agent shall notify BD by
telephone. On the Business Day next succeeding such Auction Date, the Auction
Agent shall notify BD in writing of the disposition of all Orders submitted by
BD in the Auction held on such Auction Date.

          (b) BD shall notify each Beneficial Owner, Potential Beneficial Owner,
Existing Holder or Potential Holder on whose behalf BD has submitted an Order,
and take such other action as is required of BD.

     If any Beneficial Owner or Existing Holder selling Preferred Shares in an
Auction fails to deliver such shares, the Broker-Dealer of any Person that was
to have purchased Preferred Shares in such Auction may deliver to such Person a
number of whole shares of Preferred Shares that is less than the number of
shares that otherwise was to be purchased by such Person. In such event, the
number of Preferred Shares to be so delivered shall be determined by such
Broker-Dealer. Delivery of such lesser number of shares shall constitute good
delivery. Upon the occurrence of any such failure to deliver shares, such
Broker-Dealer shall deliver to the Auction Agent the notice required by Section
3.3(d)(ii) hereof. Notwithstanding the foregoing terms of this Section 3.4(b),
any delivery or non-delivery of Preferred Shares which represents any departure
from the results of an Auction, as determined by the Auction Agent, shall be of
no effect unless and until the Auction Agent shall have been notified of such
delivery or non-delivery in accordance with the terms of Section 3.3(d) hereof.
The Auction Agent shall have no duty or liability with respect to enforcement of
this Section 3.4(b).

     3.5. SERVICE CHARGE TO BE PAID TO BD.

     On the Business Day next succeeding each Auction Date, the Auction Agent
shall pay to BD from moneys received from the Trust an amount equal to: (a) in
the case of any Auction Date immediately preceding a Dividend Period of less
than one year, the product of (i) a fraction the numerator of which is the
number of days in such Dividend Period (calculated by counting the first day of
such Dividend Period but excluding the last day thereof) and the denominator of
which is 360, times (ii) 1/4 of 1%, times (iii) $25,000, times (iv) the sum of
(A) the aggregate number of Preferred Shares placed by BD in the applicable
Auction that were (x) the subject of a Submitted Bid of a Beneficial Owner
submitted by BD and continued to be held as a result of such submission and (y)
the subject of a Submitted Bid of a Potential Beneficial Owner submitted by BD
and were purchased as a result of such submission plus (B) the aggregate number
of Preferred Shares subject to valid Hold Orders (determined in accordance with
Section 2 of Part II of the Certificate) submitted to the Auction Agent by BD
plus (C) the number of Preferred Shares deemed to be subject to Hold Orders by
Beneficial Owners pursuant to Section 2 of Part II of the Certificate that were
acquired by BD for its own account or were acquired by such Beneficial Owners
through BD; and (b) in the case of any Auction Date immediately preceding a
Special Rate Period of one year or longer, that amount as mutually agreed upon
by the Trust and BD, based on the selling concession that would be applicable to
an underwriting of fixed or variable rate preferred shares with a similar final
maturity or variable rate dividend period, at the commencement of such Special
Rate Period.

                                        5
<PAGE>
                                PRIME RATE TRUST
                             BROKER-DEALER AGREEMENT

     For purposes of subclause (a)(iv)(C) of the foregoing sentence, if any
Beneficial Owner who acquired Preferred Shares through BD transfers those shares
to another Person other than pursuant to an Auction, then the Broker-Dealer for
the shares so transferred shall continue to be BD, provided, however, that if
the transfer was effected by, or if the transferee is, a Broker-Dealer other
than BD, then such Broker-Dealer shall be the Broker-Dealer for such shares.

IV.  THE AUCTION AGENT.

     4.1. DUTIES AND RESPONSIBILITIES.

          (a) The Auction Agent is acting solely as agent for the Trust
hereunder and owes no fiduciary duties to any other Person by reason of this
Agreement.

          (b) The Auction Agent undertakes to perform such duties and only such
duties as are set forth specifically in this Agreement, and no implied covenants
or obligations shall be read into this Agreement against the Auction Agent.

          (c) In the absence of bad faith or negligence on its part, the Auction
Agent shall not be liable for any action taken, suffered or, omitted by it, or
for any error of judgment made by it in the performance of its duties under this
Agreement. The Auction Agent shall not be liable for any error of judgment made
in good faith unless the Auction Agent shall have been negligent in ascertaining
(or failing to ascertain) the pertinent facts.

     4.2. RIGHTS OF THE AUCTION AGENT.

          (a) The Auction Agent may rely upon, and shall be protected in acting
or refraining from acting upon, any communication authorized by this Agreement
and any written instruction, notice, request, direction, consent, report,
certificate, share certificate or other instrument, paper or document reasonably
believed by it to be genuine. The Auction Agent shall not be liable for acting
upon any telephone communication authorized by this Agreement which the Auction
Agent reasonably believes in good faith to have been given by the Trust or by
BD. The Auction Agent may record telephone communications with BD.

          (b) The Auction Agent may consult with counsel of its own choice, and
the advice of such counsel shall be full and complete authorization and
protection in respect of any action taken, suffered or omitted by it hereunder
in good faith and in reliance thereon.

          (c) The Auction Agent shall not be required to advance, expend or risk
its own funds or otherwise incur or become exposed to financial liability in the
performance of its duties hereunder.

          (d) The Auction Agent may perform its duties and exercise its rights
hereunder either directly or by or through agents or attorneys.

                                        6
<PAGE>
                                PRIME RATE TRUST
                             BROKER-DEALER AGREEMENT

     4.3. AUCTION AGENT'S DISCLAIMER.

     The Auction Agent makes no representation as to the validity or adequacy of
this Agreement or the Preferred Shares.

V.   MISCELLANEOUS.

     5.1. TERMINATION.

     Any party may terminate this Agreement at any time upon five days' prior
written notice to the other party; provided, however, that if the Broker-Dealer
is Salomon Smith Barney Inc. neither Salomon Smith Barney Inc. nor the Auction
Agent may terminate this Agreement without first obtaining the prior written
consent of the Trust to such termination, which consent shall not be withheld
unreasonably.

     5.2. PARTICIPANT IN SECURITIES DEPOSITORY; PAYMENT OF DIVIDENDS IN SAME-DAY
          FUNDS.

          (a) BD is, and shall remain for the term of this Agreement, a member
of, or a participant in, the Securities Depository (or an affiliate of such a
member or participant).

          (b) BD represents that it (or if BD does not act as Agent Member, one
of its affiliates) shall make all dividend payments on the Preferred Shares
available in same-day funds on each Dividend Payment Date to customers that use
BD (or its affiliate) as Agent Member.

     5.3. AGENT MEMBER.

     At the date hereof, BD is a participant of the Securities Depository.

     5.4. COMMUNICATIONS.

     Except for (i) communications authorized to be made by telephone pursuant
to this Agreement or the Auction Procedures and (ii) communications in
connection with the Auctions (other than those expressly required to be in
writing), all notices, requests and other communications to any party hereunder
shall be in writing (including telecopy or similar writing) and shall be given
to such party at its address or telecopier number set forth below:

     If to the Auction Agent,
     addressed to:                      Bankers Trust Company
                                        Corporate Trust and Agency Group
                                        Four Albany Street
                                        New, York, NY  10006
                                        Attention: Auction Rate Securities
                                        Telecopier No.:  (212) ___-____
                                        Telephone No.:  (212) ___-____

     If to the BD,
     addressed to:                      Salomon Smith Barney Inc.
                                        388 Greenwich Street
                                        New, York, NY  10013
                                        Attention: __________________
                                        Telecopier No.:  (212) ___-____
                                        Telephone No.:  (212) ___-____

                                        7
<PAGE>
                                PRIME RATE TRUST
                             BROKER-DEALER AGREEMENT

or such other address or telecopier number as such party hereafter may specify
for such purpose by notice to the other party. Each such notice, request or
communication shall be effective when delivered at the address specified herein.
Communications shall be given on behalf of BD by a BD Officer and on behalf of
the Auction Agent by an Authorized Officer. BD may record telephone
communications with the Auction Agent.

     5.5. ENTIRE AGREEMENT.

     This Agreement contains the entire agreement between the parties relating
to the subject matter hereof, and there are no other representations,
endorsements, promises, agreements or understandings, oral, written or implied,
between the parties relating to the subject matter hereof.

     5.6. BENEFITS.

     Nothing in this Agreement, express or implied, shall give to any person,
other than the Trust, the Auction Agent and BD and their respective successors
and assigns, any benefit of any legal or equitable right, remedy or claim under
this Agreement.

     5.7. AMENDMENT; WAIVER.

          (a) This Agreement shall not be deemed or construed to be modified,
amended, rescinded, canceled or waived, in whole or in part, except by a written
instrument signed by a duly authorized representative of the party to be
charged.

          (b) Failure of either party to this Agreement to exercise any right or
remedy hereunder in the event of a breach of this Agreement by the other party
shall not constitute a waiver of any such right or remedy with respect to any
subsequent breach.

     5.8. SUCCESSORS AND ASSIGNS.

          (a) This Agreement shall be binding upon, inure to the benefit of, and
be enforceable by, the respective successors and permitted assigns of each of BD
and the Auction Agent. This Agreement may not be assigned by either party hereto
absent the prior written consent of the other party; provided, however, that
this Agreement may be assigned by the Auction Agent to a successor Auction Agent
selected by the Trust without the consent of BD.

     5.9. SEVERABILITY.

     If any clause, provision or section of this Agreement shall be ruled
invalid or unenforceable by any court of competent jurisdiction, the invalidity
or unenforceability of such clause, provision or section shall not affect any
remaining clause, provision or section hereof.

                                        8
<PAGE>
                                PRIME RATE TRUST
                             BROKER-DEALER AGREEMENT

     5.10. EXECUTION IN COUNTERPARTS.

     This Agreement may be executed in several counterparts, each of which shall
be an original and all of which shall constitute but one and the same
instrument.

     5.11. GOVERNING LAW.

     This Agreement shall be governed by and construed in accordance with the
laws of the State of New York applicable to agreements made and to be performed
in said state.

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their proper and duly authorized officers as of
the date first above written.


                                        BANKERS TRUST COMPANY


                                        ----------------------------------------
                                        By:
                                        Title:


                                        SALOMON SMITH BARNEY INC.


                                        ----------------------------------------
                                        By:
                                        Title:

                                        9
<PAGE>
                                PRIME RATE TRUST
                             BROKER-DEALER AGREEMENT


                                    EXHIBIT A

                              BANKERS TRUST COMPANY
                                AUCTION BID FORM

Submit To:                              Issue:
- ---------                               -----
Bankers Trust Company                   Pilgrim Prime Rate Trust
Corporate Trust and Agency Group        Auction Rate Cumulative Preferred Shares
Four Albany Street                        ("Preferred Shares")
New York, NY 10006
Attention: Auction Rate Securities
Telecopier No.: (212) ___-____
Telephone No.: (212) ___-____

The undersigned Broker-Dealer submits the following Order on behalf of the
Bidder listed below:

Name of Bidder: ______________________

                                BENEFICIAL OWNER

Shares of Series ___ now held           HOLD _______________________________
                                        BID at rate of _____________________
                                        SELL _______________________________

                           POTENTIAL BENEFICIAL OWNER

                                        # of shares of Series ___
                                        BID at rate of __________ Notes:

     (1)  If submitting more than one Bid for one Bidder, use additional Auction
          Bid Forms.
     (2)  If one or more Bids covering in the aggregate more than the number of
          outstanding shares held by any Beneficial Owner are submitted, such
          bid shall be considered valid in the order of priority set forth in
          the Auction Procedures on the above issue.
     (3)  A Hold or Sell Order may be placed only by a Beneficial Owner covering
          a number of shares not greater than the number of shares currently
          held.
     (4)  Potential Beneficial Owners may make only Bids, each of which must
          specify a rate. If more than one Bid is submitted on behalf of any
          Potential Beneficial Owner, each Bid submitted shall be a separate Bid
          with the rate specified.
     (5)  Bids may contain no more than three figures to the right of the
          decimal point (.001 of 1%). Fractions will not be accepted.

NAME OF BROKER-DEALER ________________________________
Authorized Signature _________________________________

                                       10
<PAGE>
                                PRIME RATE TRUST
                             BROKER-DEALER AGREEMENT


                                    EXHIBIT B

(Note: To be used only for transfers made other than pursuant to an Auction)

                                  TRANSFER FORM

Re:  Pilgrim Prime Rate Trust
     Auction Rate Cumulative Preferred Shares ("Preferred Shares")

We are (check one):

     [ ]  the Existing Holder named below;

     [ ]  the Broker-Dealer for such Existing Holder; or

     [ ]  the Agent Member for such Existing Holder.

     We hereby notify you that such Beneficial Owner has transferred shares of
Series ___ Preferred Shares to _________________________________.


                                         ---------------------------------------
                                         (Name of Existing Holder)


                                         ---------------------------------------
                                         (Name of Broker-Dealer)


                                         ---------------------------------------
                                         (Name of Agent Member)


                                         By:
                                            ------------------------------------
                                            Printed Name:
                                            Title:

                                       11
<PAGE>
                                PRIME RATE TRUST
                             BROKER-DEALER AGREEMENT


                                    EXHIBIT C

          (Note: To be used only for failures to deliver or to pay for
                  Preferred Shares sold pursuant to an Auction)


                         NOTICE OF A FAILURE TO DELIVER

     We are a Broker-Dealer for ___________________ (the "Purchaser"), which
purchased ________ shares of Series ___ Preferred Shares of Pilgrim Prime Rate
Trust in the Auction held on ____________________ from the seller of such
shares.

     We hereby notify you that (check one):

_____     the Seller failed to deliver such shares to the Purchaser.

_____     the Purchaser failed to make payment to the Seller upon delivery of
          such shares.


                                         Name:
                                              ----------------------------------
                                              (Name of Broker-Dealer)

                                         By:
                                            ------------------------------------
                                            Printed Name:
                                            Title:

                                       12
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.2.K.VII
<SEQUENCE>10
<FILENAME>0010.txt
<DESCRIPTION>FORM OF DTC LETTER OF REPRESENTATIONS
<TEXT>

                                   [GRAPHIC]

              BOOK-ENTRY-ONLY AUCTION-RATE/MONEY MARKET PREFERRED/
                      AND REMARKETED PREFERRED SECURITIES


                        FORM OF LETTER OF REPRESENTATIONS
                  [To be Completed by Issuer and Trust Company]


                            Pilgrim Prime Rate Trust
      --------------------------------------------------------------------
                                [Name of Issuer]

                              Bankers Trust Company
      --------------------------------------------------------------------
                             [Name of Trust Company]

                                                            --------------------
                                                                   [Date]


Attention: General Counsel's Office
The Depository Trust Company
55 Water Street 49th Floor
New York, NY  10041-0099


     Re: Auction Rate Cumulative Preferred Shares
         -----------------------------------------------------------------------

         -----------------------------------------------------------------------

         -----------------------------------------------------------------------
             [Issue description, including CUSIP number (the "Securities")]


Ladies and Gentlemen:

         This letter sets forth our understanding with respect to certain
matters relating to the Securities. Trust Company shall act as transfer agent,
registrar, dividend disbursing agent, redemption agent or other such agent with
respect to the Securities. The Securities have been issued pursuant to a
prospectus, private placement memorandum, or other such document authorizing the
issuance of the Securities dated _______________________________________ (the
"Document").

    Salomon Smith Barney Inc.   is distributing the Securities through the
- ------------------------------- Depository Trust Company ("DTC").
["Underwriter/Placement Agent"]
<PAGE>
         To induce DTC to accept the Securities as eligible for deposit at DTC,
and to act in accordance with its Rules with respect to the Securities, Issuer
and Trust Company make the following representations to DTC:

         1. Prior to closing on the Securities on ________________________ there
shall be deposited with DTC one or more Security certificates registered in the
name of DTC's nominee, Cede & Co., which represents 100% of the offering value
of the Securities. Said certificate(s) shall remain in DTC's custody as provided
in the Document. If, however, the aggregate principal amount of the Securities
exceeds $400 million, one certificate shall be issued with respect to each $400
million of principal amount and an additional certificate shall be issued with
respect to any remaining principal amount. Each Security certificate shall bear
the following legend:

               Unless this certificate is presented by an authorized
          representative of The Depository Trust Company, a New York corporation
          ("DTC"), to Issuer or its agent for registration of transfer,
          exchange, or payment, and any certificate issued is registered in the
          name of Cede & Co. or in such other name as is requested by an
          authorized representative of DTC (and any payment is made to Cede &
          Co. or to such other entity as is requested by an authorized
          representative of DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR
          VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the
          registered owner hereof, Cede & Co., has an interest herein.

         2. Issuer: (a) understands that DTC has no obligation to, and will not,
communicate to its participants ("Participants") or to any person having an
interest in the Securities any information contained in the Security
certificate(s); and (b) acknowledges that neither DTC's Participants nor any
person having an interest in the Securities shall be deemed to have notice of
the provisions of the Security certificate(s) by virtue of submission of such
certificate(s) to DTC.

         3. In the event of any solicitation of consents from or voting by
holders of the Securities, Issuer shall establish a record date for such
purposes (with no provision for revocation of consents or votes by subsequent
holders) and shall send notice of such record date to DTC no fewer than 15
calendar days in advance of such record date. Notices to DTC pursuant to this
Paragraph by telecopy shall be directed to DTC's Reorganization Department,
Proxy Unit at (212) 855-5181 or (212) 855-5182. If the party sending the notice
does not receive a telecopy receipt from DTC confirming that the notice has been
received, such party shall telephone (212) 855-5202. Notices to DTC pursuant to
this Paragraph, by mail or by any other means, shall be sent to:

                          Supervisor, Proxy Unit
                          Reorganization Department
                          The Depository Trust Company
                          55 Water Street 50th Floor
                          New York, NY 10041-0099

                                       -2-
<PAGE>
         4. In the event of a full or partial redemption of the Securities,
Issuer or Trust Company shall send a notice to DTC specifying: (a) the number of
Securities to be redeemed; and (b) the date such notice is to be distributed to
Security holders (the "Publication Date"). Such notice shall be sent to DTC by a
secure means (E.G., legible telecopy, registered or certified mail, overnight
delivery) in a timely manner designed to assure that such notice is in DTC's
possession no later than the close of business on the business day before or, if
possible, two business days before the Publication Date. Issuer or Trust Company
shall forward such notice either in a separate secure transmission for each
CUSIP number or in a secure transmission for multiple CUSIP numbers (if
applicable) which includes a manifest or list of each CUSIP number submitted in
that transmission. (The party sending such notice shall have a method to verify
subsequently the use of such means and the timeliness of such notice.) The
Publication Date shall be no fewer than 30 days nor more than 60 days prior to
the redemption date. Notices to DTC pursuant to this Paragraph by telecopy shall
be directed to DTC's Call Notification Department at (516) 227-4164 or (516)
227-4190. If the party sending the notice does not receive a telecopy receipt
from DTC confirming that the notice has been received, such party shall
telephone (516) 227-4070. Notices to DTC pursuant to this Paragraph, by mail or
by any other means, shall be sent to:

                     Manager, Call Notification Department
                     The Depository Trust Company
                     711 Stewart Avenue
                     Garden City, NY 11530-4719

         5. In the event of an invitation to tender the Securities (including
mandatory tenders, exchanges, and capital changes), notice by Issuer or Trust
Company to Security holders specifying the terms of the tender and the
Publication Date of such notice shall be sent to DTC by a secure means in the
manner set forth in the preceding Paragraph. Notices to DTC pursuant to this
Paragraph and notices of other corporate actions by telecopy shall be directed
to DTC's Reorganization Department at (212) 855-5488. If the party sending the
notice does not receive a telecopy receipt from DTC confirming that the notice
has been received, such party shall telephone (212) 855-5290. Notices to DTC
pursuant to this Paragraph, by mail or by any other means, shall be sent to:

                     Manager, Reorganization Department
                     Reorganization Window
                     The Depository Trust Company
                     55 Water Street 50th Floor
                     New York, NY 10041-0099

         6. All notices and payment advices sent to DTC shall contain the CUSIP
number of the Securities.

         7. The Document indicates that the dividend rate for the Securities may
vary from time to time. Absent other existing arrangements with DTC, Issuer or
Trust Company shall give DTC notice of each such change in the dividend rate, on
the same day that the new rate is determined, by telephoning DTC's Dividend
Announcement Section at (212) 855-4550, or by telecopy sent to (212) 855-4555.
Such verbal or telecopy notice shall be followed by prompt written confirmation

                                       -3-
<PAGE>
sent by a secure means (E.G., legible telecopy, registered or certified mail,
overnight delivery) in a timely manner designed to assure that such notice is in
DTC's possession no later than the close of business on the business day before
or, if possible, two business days before the Publication Date. Issuer or Agent
shall forward such notice either in a separate secure transmission for each
CUSIP number or in a secure transmission for multiple CUSIP numbers (if
applicable) which includes a manifest or list of each CUSIP number submitted in
that transmission. (The party sending such notice shall have a method to verify
subsequently the use and timeliness of such notice.) Notices to DTC pursuant to
this Paragraph, by mail or by any other means, shall be sent to:


                          Manager, Announcements
                          Dividend Department
                          The Depository Trust Company
                          55 Water Street 25th Floor
                          New York, NY 10041-0099

         8. The Document indicates that each purchaser of Securities must sign a
purchaser's letter which contains provisions restricting transfer of the
Securities purchased. Issuer and Trust Company acknowledge that as long as Cede
& Co. is the sole record owner of the Securities, Cede & Co. shall be entitled
to all voting rights applicable to the Securities and to receive the full amount
of all dividends, liquidation proceeds, and redemption proceeds payable with
respect to the Securities, even if the credits of Securities to the DTC accounts
of any DTC Participant result from transfers or failures to transfer in
violation of the provisions of the purchaser's letter. Issuer and Trust Company
acknowledge that DTC shall treat any Participant having Securities credited to
its DTC accounts as entitled to the full benefits of ownership of such
Securities. Without limiting the generality of the preceding sentence, Issuer
and Trust Company acknowledge that DTC shall treat any Participant having
Securities credited to its DTC accounts as entitled to receive dividends,
distributions, and voting rights, if any, in respect of Securities and, subject
to Paragraphs 12 and 13, to receive certificates evidencing Securities if such
certificates are to be issued in accordance with Issuer's certificate of
incorporation. (The treatment by DTC of the effects of the crediting by it of
Securities to the accounts of Participants described in the preceding two
sentences shall not affect the rights of Issuer, participants in auctions
relating to the Securities, purchasers, sellers, or holders of Securities
against any Participant.) DTC shall not have any responsibility to ascertain
whether any transfer of Securities is made in accordance with the provisions of
the purchaser's letter.

         9. Issuer or Trust Company shall provide a written notice of dividend
payment and distribution information to DTC as soon as the information is
available. Issuer or Trust Company shall provide this information to DTC
electronically, as previously arranged by Issuer or Trust Company and DTC, as
soon as the information is available. If electronic transmission has not been
arranged, absent any other arrangements between Issuer or Trust Company and DTC,
such information shall be sent by telecopy to DTC's Dividend Department at (212)
855-4555 or (212) 855-4556, and receipt of such notices shall be confirmed by
telephoning (212) 855-4550. Notices to DTC pursuant to this Paragraph, by mail
or by any other means, shall be addressed as indicated in Paragraph 7.

                                       -4-
<PAGE>
         10. Dividend payments and distributions shall be received by Cede &
Co., as nominee of DTC, or its registered assigns, in same-day funds no later
than 2:30 p.m. (Eastern Time) on the payment date. Issuer shall remit by 1:00
p.m. (Eastern Time) on the payment date, dividend and distribution payments due
Trust Company, or at such earlier time as may be required by Trust Company to
guarantee that DTC shall receive payment in same-day funds no later than 2:30
p.m. (Eastern Time) on the payment date. Absent any other arrangements between
Issuer or Trust Company and DTC, such funds shall be wired to the Dividend
Deposit Account number that will be stamped on the signature page hereof at the
time DTC executes this Letter of Representations.

         11. Issuer or Trust Company shall provide DTC, no later than 12:00 noon
(Eastern Time) on each payment date, automated notification of CUSIP-level
detail. If the circumstances prevent the funds paid to DTC from equaling the
dollar amount associated with the detail payments by 12:00 noon (Eastern Time),
Issuer or Trust Company must provide CUSIP-level reconciliation to DTC no later
than 2:30 p.m. (Eastern Time). Reconciliation must be provided by either
automated means or written format. Such reconciliation notice, if sent by
telecopy, shall be directed to DTC's Dividend Department at (212) 855-4633, and
receipt of such reconciliation notice shall be confirmed by telephoning (212)
855-4430.

         12. Redemption payments shall be received by Cede & Co., as nominee of
DTC, or its registered assigns, in same-day funds no later than 2:30 p.m.
(Eastern Time) on the payment date. Issuer shall remit by 1:00 p.m. (Eastern
Time) on the payment date all such redemption payments due Trust Company, or at
such earlier time as required by Trust Company to guarantee that DTC shall
receive payment in same-day funds no later than 2:30 p.m. (Eastern Time) on the
payment date. Absent any other arrangements between Issuer or Trust Company and
DTC, such funds shall be wired to the Redemption Deposit Account number that
will be stamped on the signature page hereof at the time DTC executes this
Letter of Representations.

         13. Reorganization payments and CUSIP-level detail resulting from
corporate actions (such as tender offers, remarketings, or mergers) shall be
received by Cede & Co., as nominee of DTC, or its registered assigns, in
same-day funds no later than 2:30 p.m. (Eastern Time) on the payment date.
Issuer shall remit by 1:00 p.m. (Eastern Time) on the payment date all such
reorganization payments due Trust Company, or at such earlier time as required
by Trust Company to guarantee that DTC shall receive payment in same-day funds
no later than 2:30 p.m. (Eastern Time) on the payment date. Absent any other
arrangements between Issuer or Trust Company and DTC, such funds shall be wired
to the Reorganization Deposit Account number that will be stamped on the
signature page hereof at the time DTC executes this Letter of Representations.

         14. DTC may direct Issuer or Trust Company to use any other number or
address as the number or address to which notices or payments may be sent.

         15. In the event of a redemption acceleration, or any similar
transaction (E.G., tender made and accepted in response to Issuer's or Trust
Company's invitation) necessitating a reduction in the number of Securities
outstanding, or an advance refunding of part of the Securities outstanding DTC,
in its discretion: (a) may request Issuer or Trust Company to issue and
authenticate a new Security certificate; or (b) may make an appropriate notation
on the Security certificate indicating the date and amount of such reduction in
the number of Securities outstanding, except in the case of final

                                       -5-
<PAGE>
redemption, in which case the certificate will be presented to Issuer or Trust
Company prior to payment, if required.

         16. In the event that Issuer determines that beneficial owners of
Securities shall be able to obtain certificated Securities, Issuer or Trust
Company shall notify DTC of the availability of certificates. In such event,
Issuer or Trust Company shall issue, transfer, and exchange certificates in
appropriate amounts, as required by DTC and others.

         17. DTC may discontinue providing its services as securities depository
with respect to the Securities at any time by giving reasonable notice to Issuer
or Trust Company (at which time DTC will confirm with Issuer or Trust Company
the aggregate principal amount of Securities outstanding). Under such
circumstances, at DTC's request, Issuer and Trust Company shall cooperate fully
with DTC by taking appropriate action to make available one or more separate
certificates evidencing Securities to any DTC Participant having Securities
credited to its DTC accounts.

         18. Issuer hereby authorizes DTC to provide to Trust Company listings
of Participants' holdings, known as Security Position Listings ("SPLs") with
respect to the Securities from time to time at the request of Trust Company.
Issuer also authorizes DTC, in the event of a partial redemption of Securities,
to provide Trust Company, upon request, with the names of those Participants
whose positions in Securities have been selected for redemption by DTC. DTC will
use its best efforts to notify Trust Company of those Participants whose
positions in Securities have been selected for redemption by DTC. Issuer
authorizes and instructs Trust Company to provide DTC with such signatures,
examples of signatures, and authorizations to act as may be deemed necessary or
appropriate by DTC to permit DTC to discharge its obligations to its
Participants and appropriate regulatory authorities. DTC charges a customary fee
for such SPLs. This authorization, unless revoked by Issuer, shall continue with
respect to the Securities while any Securities are on deposit at DTC, until and
unless Trust Company shall no longer be acting. In such event, Issuer shall
provide DTC with similar evidence, satisfactory to DTC, of the authorization of
any successor thereto so to act. Requests for SPLs shall be directed to the
Proxy Unit of DTC's Reorganization Department at (212) 855-5181 or (212)
855-5182. Receipt of such requests shall be confirmed by telephoning (212)
855-5202. Delivery by mail or by any other means, with respect to such SPL
request, shall be directed to the address indicated in Paragraph 3.

         19. Nothing herein shall be deemed to require Trust Company to advance
funds on behalf of Issuer.

         20. This Letter of Representations may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original,
but all such counterparts together shall constitute but one and the same
instrument.

         21. This Letter of Representations shall be governed by, and construed
in accordance with, the laws of the State of New York, without giving effect to
principles of conflicts of law.

         22. The sender of each notice delivered to DTC pursuant to this Letter
of Representations is responsible for confirming that such notice was properly
received by DTC.

                                       -6-
<PAGE>
         23. Issuer recognizes that DTC does not in any way undertake to, and
shall not have any responsibility to, monitor or ascertain the compliance of any
transactions in the Securities with the following, as amended from time to time:
(a) any exemptions from registration under the Securities Act of 1933; (b) the
Investment Company Act of 1940; (c) the Employee Retirement Income Security Act
of 1974; (d) the Internal Revenue Code of 1986; (e) any rules of any
self-regulatory organizations (as defined under the Securities Exchange Act of
1934); or (f) any other local, state, or federal laws or regulations thereunder.

         24. Issuer and Trust Company shall comply with the applicable
requirements stated in DTC's Operational Arrangements, as they may be amended
from time to time. DTC's Operational Arrangements are posted on DTC's website at
"www.DTC.org."

         25. The following rider(s), attached hereto, are hereby incorporated
into this Letter of Representations:


- --------------------------------------------------------------------------------


- --------------------------------------------------------------------------------

                                       -7-
<PAGE>
Notes:

A. If  there  is a Trust  Company  (as
defined    in    this     Letter    of
Representations),  Trust  Company,  as
well as Issuer, must sign this Letter.
If  there  is  no  Trust  Company,  in
signing  this  Letter   Issuer  itself
undertakes   to  perform  all  of  the
obligations set forth herein.

B. Schedule B contains statements that
DTC believes  accurately describe DTC,
the  method  of  effecting  book-entry
transfers  of  securities  distributed
through  DTC,   and  certain   related
matters.

                                          Very truly yours,


                                          --------------------------------------
                                                         [Issuer]

                                       By:
                                          --------------------------------------
                                             [Authorized Officer's Signature]


                                          --------------------------------------
                                                      [Trust Company]

                                       By:
                                          --------------------------------------
                                             [Authorized Officer's Signature]

Received and Accepted:
THE DEPOSITORY TRUST COMPANY


cc:  Underwriter
     Underwriter's Counsel

                                       -8-
<PAGE>
                                                                      SCHEDULE A

                    Auction Rate Cumulative Preferred Shares
- --------------------------------------------------------------------------------


- --------------------------------------------------------------------------------
                                [Describe Issue]



CUSIP Number                       Share Total                   Value ($Amount)






                                      -9-
<PAGE>
                                                                      SCHEDULE B

                  SAMPLE OFFERING DOCUMENT LANGUAGE DESCRIBING
                            BOOK-ENTRY-ONLY ISSUANCE
 (Prepared by DTC--bracketed material may be applicable only to certain issues)

         1. The Depository Trust Company ("DTC"), New York, NY, will act as
securities depository for the securities (the "Securities"). The Securities will
be issued as fully-registered securities registered in the name of Cede & Co.
(DTC's partnership nominee) or such other name as may be requested by an
authorized representative of DTC. One fully-registered Security certificate will
be issued for [each issue of] the Securities, [each] in the aggregate principal
amount of such issue, and will be deposited with DTC. [If, however, the
aggregate principal amount of [any] issue exceeds $400 million, one certificate
will be issued with respect to each $400 million of principal amount and an
additional certificate will be issued with respect to any remaining principal
amount of such issue.]

         2. DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York Banking
Law, a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Securities Exchange
Act of 1934. DTC holds securities that its participants ("Direct Participants")
deposit with DTC. DTC also facilitates the settlement among Direct Participants
of securities transactions, such as transfers and pledges, in deposited
securities through electronic computerized book-entry changes in Direct
Participants' accounts, thereby eliminating the need for physical movement of
securities certificates. Direct Participants include securities brokers and
dealers, banks, trust companies, clearing corporations, and certain other
organizations. DTC is owned by a number of its Direct Participants and by the
New York Stock Exchange, Inc., the American Stock Exchange LLC, and the National
Association of Securities Dealers, Inc. Access to the DTC system is also
available to others such as securities brokers and dealers, banks, and trust
companies that clear through or maintain a custodial relationship with a Direct
Participant, either directly or indirectly ("Indirect Participants"). The Rules
applicable to DTC and its Direct and Indirect Participants are on file with the
Securities and Exchange Commission.

         3. Purchases of Securities under the DTC system must be made by or
through Direct Participants, which will receive a credit for the Securities on
DTC's records. The ownership interest of each actual purchaser of each Security
("Beneficial Owner") is in turn to be recorded on the Direct and Indirect
Participants' records. Beneficial Owners will not receive written confirmation
from DTC of their purchase, but Beneficial Owners are expected to receive
written confirmations providing details of the transaction, as well as periodic
statements of their holdings, from the Direct or Indirect Participant through
which the Beneficial Owner entered into the transaction. Transfers of ownership
interests in the Securities are to be accomplished by entries made on the books
of Direct and Indirect Participants acting on behalf of Beneficial Owners.
Beneficial Owners will not receive certificates representing their ownership
interests in Securities, except in the event that use of the book-entry system
for the Securities is discontinued.

                                      -10-
<PAGE>
         4. To facilitate subsequent transfers, all Securities deposited by
Direct Participants with DTC are registered in the name of DTC's partnership
nominee, Cede & Co. or such other name as may be requested by an authorized
representative of DTC. The deposit of Securities with DTC and their registration
in the name of Cede & Co. or such other nominee do not effect any change in
beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of
the Securities; DTC's records reflect only the identity of the Direct
Participants to whose accounts such Securities are credited, which may or may
not be the Beneficial Owners. The Direct and Indirect Participants will remain
responsible for keeping account of their holdings on behalf of their customers.

         5. Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time. [Beneficial Owners of Securities may wish to
take certain steps to augment transmission to them of notices of significant
events with respect to the Securities, such as redemptions, tenders, defaults,
and proposed amendments to the security documents. Beneficial Owners of
Securities may wish to ascertain that the nominee holding the Securities for
their benefit has agreed to obtain and transmit notices to Beneficial Owners, or
in the alternative, Beneficial Owners may wish to provide their names and
addresses to the registrar and request that copies of the notices be provided
directly to them.]

         [6. Redemption notices shall be sent to DTC. If less than all of the
Securities within an issue are being redeemed, DTC's practice is to determine by
lot the amount of the interest of each Direct Participant in such issue to be
redeemed.]

         7. Neither DTC nor Cede & Co. (nor such other DTC nominee) will consent
or vote with respect to the Securities. Under its usual procedures, DTC mails an
Omnibus Proxy to Issuer as soon as possible after the record date. The Omnibus
Proxy assigns Cede & Co.'s consenting or voting rights to those Direct
Participants to whose accounts the Securities are credited on the record date
(identified in a listing attached to the Omnibus Proxy).

         8. Redemption proceeds, distributions, and dividend payments on the
Securities will be made to Cede & Co., or such other nominee as may be requested
by an authorized representative of DTC. DTC's practice is to credit Direct
Participants' accounts, upon DTC's receipt of funds and corresponding detail
information from Issuer or Agent on payable date in accordance with their
respective holdings shown on DTC's records. Payments by Participants to
Beneficial Owners will be governed by standing instructions and customary
practices, as is the case with securities held for the accounts of customers in
bearer form or registered in "street name," and will be the responsibility of
such Participant and not of DTC, Agent, or Issuer, subject to any statutory or
regulatory requirements as may be in effect from time to time. Payment of
redemption proceeds, distributions, and dividends to Cede & Co. (or such other
nominee as may be requested by an authorized representative of DTC) is the
responsibility of Issuer or Agent, disbursement of such payments to Direct
Participants shall be the responsibility of DTC, and disbursement of such
payments to the Beneficial Owners shall be the responsibility of Direct and
Indirect Participants.

                                      -11-
<PAGE>
         [9. A Beneficial Owner shall give notice to elect to have its
Securities purchased or tendered, through its Participant, to
[Tender/Remarketing] Agent, and shall effect delivery of such Securities by
causing the Direct Participant to transfer the Participant's interest in the
Securities, on DTC's records, to [Tender/Remarketing] Agent. The requirement for
physical delivery of Securities in connection with an optional tender or a
mandatory purchase will be deemed satisfied when the ownership rights in the
Securities are transferred by Direct Participants on DTC's records and followed
by a book-entry credit of tendered Securities to [Tender/Remarketing] Agent's
DTC account.]

         10. DTC may discontinue providing its services as securities depository
with respect to the Securities at any time by giving reasonable notice to Issuer
or Agent. Under such circumstances, in the event that a successor securities
depository is not obtained, Security certificates are required to be printed and
delivered.

         11. Issuer may decide to discontinue use of the system of book-entry
transfers through DTC (or a successor securities depository). In that event,
Security certificates will be printed and delivered.

            12. The information in this section concerning DTC and DTC's
book-entry system has been obtained from sources that Issuer believes to be
reliable, but Issuer takes no responsibility for the accuracy thereof.

                                      -12-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.2.L
<SEQUENCE>11
<FILENAME>0011.txt
<DESCRIPTION>OPINION OF DECHERT
<TEXT>

                             [LETTERHEAD OF DECHERT]


                                     Dechert
                               1775 Eye Street, NW
                              Washington, DC 20006

                                October 23, 2000

Pilgrim Prime Rate Trust
7337 East Doubletree Ranch Road
Scottsdale, AZ  85258

Ladies and Gentlemen:

         We have acted as counsel to Pilgrim Prime Rate Trust (the "Trust") in
connection with the Registration Statement of the Trust on Form N-2 (File Nos.
333-44918 and 811-05410) (the "Registration Statement"), under the Securities
Act of 1933, as amended (the "1933 Act"), and the Investment Company Act of
1940, as amended, relating to the proposed issuance of 10,800 Auction Rate
Cumulative Preferred Shares of the Trust designated as Series M, W and F (the
"Preferred Shares"). The Preferred Shares are to be sold pursuant to an
underwriting agreement to be entered into by the Trust and Salomon Smith Barney
Inc., as principal underwriter (the "Underwriting Agreement").

         We have examined the Trust's Declaration of Trust, as amended, and
Certificate of Designation for Preferred Shares, and are familiar with the
actions taken by the Trust's Trustees in connection with the issuance and the
sale of the Preferred Shares. We have also examined the form of underwriting
agreement filed as an exhibit to the Registration Statement and such other
documents and records as we have deemed necessary for the purpose of this
opinion.

         For purposes of this opinion, we have assumed that the Underwriting
Agreement in the form filed as an exhibit to the Registration Statement will
have been duly executed and delivered by and on behalf of each of the parties
thereto, and that the Trust or its agent receives consideration for the
Preferred Shares as set forth in the Registration Statement.

         Based on the foregoing, we are of the opinion that the issuance and the
sale of the Preferred Shares have been duly authorized; when issued in
accordance with the Underwriting Agreement, the Preferred Shares will be validly
issued by the Trust and fully paid and nonassessable.

         We consent to the filing of this opinion with and as part of the
Registration Statement and to the use of our name in such Registration Statement
and in the related Prospectus under the caption "Legal Matters." In giving such
consent we do not thereby admit that we are within the category of persons whose
consent is required by Section 7(a) of the 1933 Act, or the rules and
regulations thereunder.

                                             Very truly yours,

                                             /s/ Dechert
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.2.N
<SEQUENCE>12
<FILENAME>0012.txt
<DESCRIPTION>CONSENT OF KPMG LLP
<TEXT>

                          INDEPENDENT AUDITORS' CONSENT


The Board of Trustees
Pilgrim Prime Rate Trust:

We consent to the use of our report dated March 31, 2000 incorporated herein by
reference and to the references to our firm under the headings "Financial
Highlights and Investment Performance" and "Experts" in the Prospectus and
"Financial Statements" in the SAI filed with the Securities and Exchange
Commission on this Pre-Effective Amendment No. 1 to the Registration Statement
under the Securities Act of 1933 (File No. 333-44918) and in this Amendment No.
38 to the Registration Statement under the Investment Company Act of 1940 (File
No. 811-05410).


/s/ KPMG LLP


Los Angeles
October 19, 2000
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
