839244 001 BancoP 1-40 · ("S&P") have downgraded the general obligation bonds ("GOs") of the Commonwealth of Puerto Rico as well as the obligations of certain Commonwealth agencies

2019

Dear Shareholder:

The Puerto Rico Investors Tax-Free Fund III, Inc. (the “Fund”) is pleased to present its Annual Report to Shareholders for the fiscal year ended on August 31, 2019.

PUERTO RICO INVESTORS TAX-FREE FUND III, INC.

The Fund's investment objective is to achieve a high level of current income that, for Puerto Rico investors, is exempt from Federal and Puerto Rico income taxes, consistent with the preservation of capital for its shareholders.

FUND PERFORMANCE

For the fiscal year ended on August 31, 2019, the Fund generated a total rate of return on investment of 32.47% and 31.71% based on the net asset value per share (“NAV”) and market value per share, respectively.

The Fund’s NAV as of August 31, 2019 was $4.16, compared to $3.38 at the end of the prior fiscal year. Meanwhile, the average dividend yield for the period, computed over the original investment of $10 per share, was 2.66%. At the end of the fiscal year, the market price of the shares was $2.68, representing a 35.6% discount to NAV. The Fund’s investment portfolio had a weighted-average duration of 8.46 years as of August 31, 2019.

The accompanying Figure 1 shows the breakdown of the investment portfolio as of August 31, 2019.

Figure 1. Asset Allocation as of August 31, 2019

45.00%

39.55%

13.32%

1.26%

0.33%

0.32%

0.09%

0.07%

0.05%

0.01%

0% 10% 20% 30% 40% 50%

US GVMNT. SPONSORED ENTITIES

PR GVMNT. INST. TAX EXPT. NOTES

US MUNICIPAL OBLIGATIONS

PR FANNIE MAE TAXABLE

PUERTO RICO TAX EXEMPT NOTES

PUERTO RICO GNMA EXEMPT

PUERTO RICO AGENCIES

PUERTO RICO GNMA TAXABLE

AFICA

PR FREDDIE MAC TAXABLE

Figure 1.Asset Allocation

as of August 31, 2019

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INVESTMENT STRATEGY

The Fund's investment advisers strive to select investment assets that maximize risk/return relationships, while adhering to the Fund's investment objectives.

ECONOMIC OVERVIEW

Puerto Rico – Economy and Markets

The Economic Development Bank of Puerto Rico's EDB Economic Activity Index (the "EDB-EAI") is a coincident index for the economic activity of Puerto Rico. It is highly correlated to Puerto Rico's real GNP in both level and annual growth rate. It summarizes the behavior of four (4) major monthly indicators consisting of the following: total payroll employment, cement sales, gasoline consumption, and total electric power generation. For August 2019, the EDB-EAI figure was 121.1, a 0.6% decrease compared to August 2018, the third negative growth after eleven year-over-year consecutive increments, and a 0.4% rise when compared to July 2019. For fiscal year ending in June 2019, the growth was 5.8% with respect to fiscal year 2018. The increment observed in fiscal year 2019 is the first one after six consecutive declines. However, for the period July to August of fiscal year 2020, it declined by 0.7%.

As of August 31, 2019, approximately 39.6% of the Fund’s investment portfolio consists of Puerto Rico government or government-related securities including, among others, COFINA and POB bonds. Prices on these securities increased significantly during the Fund's fiscal year responding to successful restructuring efforts for COFINA bonds and positive legal implications for POB bonds. Please refer to "Puerto Rico – Update" below for further details.

As of August 31, 2019, Puerto Rico has defaulted on many of its debt obligations. At the end of the fiscal year, 7.5% of the total assets of the Fund were invested in Puerto Rico bonds that have defaulted and stopped generating income.

Puerto Rico – Update

Fitch Ratings ("Fitch"), Moody's Investors Service ("Moody's"), and S&P Global Ratings ("S&P") have downgraded the general obligation bonds ("GOs") of the Commonwealth of Puerto Rico as well as the obligations of certain Commonwealth agencies and public corporations, including the Employees Retirement System of the Government of the Commonwealth of Puerto Rico ("ERS"), on numerous occasions. Fitch downgraded the GOs to "D" (default) and its ratings for the Commonwealth as a bond issuer, to "RD" on July 6, 2016, and for ERS to "D" on July 20, 2017, respectively. S&P had previously downgraded ERS, to "C" on September 10, 2015, and subsequently the GOs, to "D"(default) on July 7, 2016, and the debt ratings for the Government Development Bank for Puerto Rico, to "D" (default) on September 8, 2016. Moody's downgraded ERS, to "C" onApril 5, 2017, and the GOs, to "Ca" on October 11, 2017. No ratings have been issued on the newly-issued exchange bonds by the Puerto Rico Sales Tax Financing Corporation ("COFINA"), as described below.

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On June 30, 2016, the Puerto Rico Oversight, Management, and Economic Stability Act ("PROMESA") was signed into law. It created the Financial Oversight and Management Board for Puerto Rico (the "Oversight Board") with broad powers designed to help the Commonwealth balance its finances, restructure its debt, and ensure a return to the markets. The enactment of PROMESA operated as a stay of any actions or proceedings against the Commonwealth and its agencies and instrumentalities by its creditors, which stay was in effect through May 1, 2017. As of that date, the Oversight Board has filed five (5) petitions to commence cases under Title III of PROMESA in the U.S. District Court for the District of Puerto Rico (the "District Court") with respect to all debt issued by the following: the Commonwealth of Puerto Rico; COFINA; ERS; the Puerto Rico Highways and Transportation Authority; and the Puerto Rico Electric Power Authority ("PREPA"). The filing of these petitions triggered a new stay of any actions or proceedings against these five debtors.

In the COFINA Title III case, the Commonwealth, COFINA, certain COFINA bondholders, and others participated in a mediation process, led by a team of five judges appointed by the District Court. On August 29, 2018, COFINA, the Puerto Rico Fiscal Agency and Financial Advisory Authority (known by its Spanish initials "AAFAF"), the Oversight Board, and certain COFINA credit parties entered into a Plan Support Agreement, which provided for the apportionment of Puerto Rico Rico's sales and use tax between the Commonwealth and COFINA and the restructuring of COFINA's debt and served as the basis for a plan of adjustment for the COFINA debt. COFINA's Third Amended Plan of Adjustment (the "Plan") was approved by the District Court on February 4, 2019 and went effective on February 12, 2019. Pursuant to the Plan, COFINA bondholders received newly-issued COFINA bonds based on their creditor class. Under the Plan, the newly exchanged bonds are secured by 53.65% of the pledged sales and use tax through 2058, which amount to $420 million for fiscal year 2019, and increase by 4% each year thereafter, capping out at $992.5 million in fiscal year 2041. Following the consummation of the Plan, several labor unions and other litigants filed notices with the U.S. Court of Appeals for the First Circuit (the "Circuit Court"), to appeal the District Court's approval of the Plan.

In the ERS Title III case, certain ERS bondholders had reached a consensual agreement with the Commonwealth, ERS, and the Oversight Board prior to May 21, 2017, which provided, among other things, that (i) all employer contributions received by ERS during the pendency of the PROMESA stay would be segregated in an account for the benefit of holders of the ERS bonds, and (ii) ERS would transfer to Bank of New York Mellon ("BNYM"), as ERS' fiscal agent, the amounts required each month for the payment of interest on the ERS bonds. After the filing of ERS' Title III petition on May 21, 2017, AAFAF, on behalf of ERS, delivered a non-funding notice as permitted under this agreement on June 5, 2017, stating that ERS would discontinue transferring the amounts necessary to pay interest due on the ERS bonds commencing on July 1, 2017 and going forward. Certain ERS bondholders filed a motion to lift the automatic stay with the District Court on May 31, 2017, to seek adequate protection of the ERS bondholders' collateral. The Puerto Rico Legislature adopted a joint resolution on June 25, 2017, which, among other things, purported to terminate the obligations of all Puerto Rico central government instrumentalities, as well as all public corporations and municipalities, to transmit employer contributions to ERS. On June 28, 2017, the District Court ordered the ERS

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creditors, the Oversight Board, and the Commonwealth to attempt to reach another consensual agreement, in line with what was previously agreed.

On July 17, 2017, the District Court issued an order approving a joint stipulation (the "Joint Stipulation") entered into among certain ERS bondholders, the Commonwealth, ERS, and the Oversight Board, which provided for (i) the payment of interest on the ERS bonds through the date on which the District Court would enter a ruling in an action seeking declaratory relief regarding the validity of ERS bondholders' liens and security interests in certain collateral, as well as (ii) the deposit by the Commonwealth of approximately $18,500,000 in employer contributions from municipalities and public corporations into a segregated account of ERS for the benefit of ERS bondholders in each of July, August, September, and October of 2017 (the "Declaratory Relief Action"). The Fund received the required interest payments on the ERS bonds through and including November 1, 2017. On December 28, 2017, the District Court issued another order (the "December 2017 Order"), affirming that the Joint Stipulation required the continued payment of monthly interest on the ERS bonds in the aggregate amount of $13,876,582.48 beyond October 31, 2017. These interest payments continued until July 20, 2018, when the amounts held in the segregated account for such interest payments were exhausted The December 2017 Order also contemplated that the monthly interest payments required thereunder be applied to all series of the ERS bonds, including capital appreciation bonds that would otherwise not be entitled to current interest, with such payments expressly constituting "adequate protection payments" for all ERS bondholders, in accordance with the December 2017 Order, PROMESA, and the U.S. Bankruptcy Code. The District Court reserved for future consideration the final allowance and treatment of such "adequate protection payments" in determining the allowed amount of the claims under the ERS bonds in the ERS Title III case.

The District Court dismissed the Declaratory Relief Action on August 17, 2018, ruling against the ERS bondholders and determining, among other things, that they did not possess a perfected security interest in the ERS bondholders' collateral, and that any security interest held by the ERS bondholders in the ERS collateral was invalid and unenforceable. On January 30, 2019, the Circuit Court reversed the District Court's order and remanded to the District Court for further proceedings. Subsequently, on June 28, 2019, the District Court resolved the issue of whether the security interest of the ERS bondholders attached to revenues received by ERS during the post-petition period, ruling that that ERS bondholders were not entitled to continued payment in bankruptcy, inasmuch as the bonds' revenues weren't protected "special revenues" under Section 928 of the U.S. Bankruptcy Code. The ERS bondholders have appealed this decision to the Circuit Court, and an oral hearing has been scheduled for December 4, 2019. In addition to defending the ERS bondholders' collateral in the Declaratory Relief Action, certain ERS bondholders instituted a lawsuit on July 27, 2017, challenging the Puerto Rico Legislature's June 25, 2017 joint resolution purporting to terminate employer contributions to ERS. That litigation remains pending.

On February 15, 2019, the Circuit Court reversed a prior District Court decision that had validated the process by which the Oversight Board was appointed. The Circuit Court concluded that the appointments clause of the U.S. Constitution requires Senate confirmation of all principal officers of the U.S. government, including the Oversight

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Board members. However, the Circuit Court only severed the specific invalidated clauses from the remaining provisions of PROMESA and did not invalidate the entire statute, rejecting the appellants' request to invalidate all actions taken by the Oversight Board to date. The Circuit Court granted a 90-day stay on its ruling, to allow the President and U.S. Senate to reconstitute the Oversight Board. On April 29, 2019, the White House notified its intention to ask the U.S. Senate to confirm the current members of the Oversight Board. Afterwards, the Oversight Board appealed the Circuit Court's decision to the U.S. Supreme Court, and the Circuit Court delayed enforcement of its February 2019 ruling pending a final determination for such appeal. Oral arguments were heard by the U.S. Supreme Court on October 15, 2019.

Between April 30, 2019 and May 2, 2019, the Oversight Board and the Commonwealth'sUnsecured Creditors Committee filed complaints against certain bondholders, as well as certain individuals and companies supplying goods and services to the Commonwealth, seeking to avoid transfers and disallow claims relating to allegedly fraudulent transfers under the Commonwealth laws and U.S. Bankruptcy Code. On May 23, 2019, the Oversight rejected the government's revised 2019-2020 budget for the Commonwealth as not compliant with the PROMESA requirements and, on May 28, 2019, delivered their version of a revised compliant budget to the Puerto Rico government for review and adoption.

On July 24, 2019, the District Court issued an order which stayed a substantial portion of the adversary proceedings and contested matters with respect to the Puerto Rico government debtors currently in Title III of PROMESA. The stay will remain in effect through December 31, 2019, and parties to any stayed proceedings or contested matters have been ordered to participate in discussions and communications to address potentially overlapping key issues; identify the issues that must be litigated or otherwise resolved to achieve confirmation of a plan of adjustment for each of the debtors in the respective Title III proceedings; and develop efficient approaches to the resolution of each such issues.

Any future developments in this respect could result in additional interruptions in cash flow on debt payments, which may result in more price volatility, across Puerto Rico securities. There can be no assurance that any additional defaults by the Commonwealth and other Commonwealth instrumentalities will not have an additional adverse impact on the Fund'snet investment income and its ability to declare and pay dividends in the future.

The passage of Hurricane María over Puerto Rico on September 20, 2017 is considered the most destructive storm to hit Puerto Rico in almost 90 years. It knocked out all electric power, destroyed more than 100,000 homes, and ruptured bridges and other public infrastructure. Puerto Rico is facing substantial economic and revenue disruption in the near term, and diminished output and revenue has negatively impacted the Puerto Rico government's ability to repay its debt. While it remains too early to determine the long-term economic effects post-Hurricane María, the long-term repercussions may be mixed. On one hand, an exodus of residents relocating to the U.S. mainland has eroded Puerto Rico's economic base. However, significant amounts of U.S. federal aid and private insurance proceeds will be available to aid in rebuilding, thereby spurring economic growth and infrastructure replacement.

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On November 29, 2018, the Puerto Rico government announced that it had concluded the restructuring of the debt of the Government Development Bank for Puerto Rico ("GDB").The GDB restructuring under Title VI of PROMESA covers approximately $4 billion of debt; bondholders received $550 of new bonds for every $1,000 of their existing GDB bond claims, while Puerto Rico municipalities will realize about $55 million in near-term debt service savings.

On May 3, 2019, PREPA, AAFAF, the Oversight Board, and the Ad Hoc Group of PREPA Bondholders executed a Definitive Restructuring Support Agreement (the "RSA"). Pursuant to the RSA, the bondholders will exchange their existing PREPA bonds for two types of new securitization bonds. The RSA provides that the repayment of the bonds will be backed by a fixed transition charge (the "Transition Charge"), subject to a predetermined maximum, that does not vary with the fluctuation in sales of PREPA. The exchange ratio of the Series A bonds will be approximately 67.5% of the respective bond holder's claim amount (as further described in the RSA), while the Series B bonds will be exchanged for capital appreciation bonds with an additional recovery of approximately 10% of the respective claim (as further described in the RSA). Interest accrued on the Series A bonds is paid only to the extent that there are sufficient receipts from the Transition Charge to pay such interest; otherwise, the interest thereon will accrue and compound. Principal on the Series A bonds will be paid to the extent there are excess receipts from the Transition Charge, after payment of interest. There will be no debt service payments on the Series B bonds until the Series A bonds are paid in full. The terms of the RSA require the enactment of legislation by the Puerto Rico Government and will be subject to the approval of the District Court. Certain members of the U.S. House of Representatives have expressed reservations regarding the RSA.

On August 2, 2019, Puerto Rico Governor Ricardo Rosselló resigned amid allegations of government corruption and the contemporaneous dissemination of certain internal communications, involving Governor Rosselló, containing controversial statements. This resulted in widespread public protests. After a failed attempt by the designated Secretary of State, Mr. Pedro Pierluisi, to assume the governorship, the Puerto Rico Secretary of Justice, Ms. Wanda Vázquez, was sworn in to succeed Mr. Rosselló as Puerto Rico Governor. While the impact on the Puerto Rico economy of the public unrest and Mr. Rosselló's resignation has not been quantified, it has been widely reported that these events have had a negative impact.

Most recently, on August 12, 2019, the Puerto Rico Aqueduct and Sewer Authority reached certain agreements with the U.S. federal government to restructure almost $1 billion debt. Specifically, the restructured debt is divided into $570 million from the U.S Environmental Protection Agency's state revolving funds for drinking and clean water and $403 million from the U.S. Department of Agriculture's Rural Development program. The agreements change the economic terms of both obligations.

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United States – Economy and Markets

U.S. economic data continued to indicate modest economic growth with Real Gross Domestic Product ("GDP") expanding by 2.9% in 2018. Job growth remained solid, with non-farm payroll averaging 235,000 per month, with an increase in average hourly earnings of 3.3%. In addition, the national unemployment rate fell to 3.9% in 2018 from 4.4% in 2017. Nonetheless, for the First and Second Quarters of 2019 GDP grew 2.7% and 2.3%, respectively, showing a slight deceleration in economic growth. However, the labor market continued to be strong with unemployment rate at 3.7% and non-farm payrolls of 130,000 in August 2019.

The Core Personal Consumption Expenditure Price Index ("Core PCE") provides a measure of the prices paid by people for domestic purchases and services, excluding the prices of food and energy. The Core PCE is the U.S. Federal Reserve's preferred inflation measure, with a 2% target. As measured by Core PCE, consumer prices went up by 1.9% during 2018, compared to a 1.6% increase during 2017. However, inflation continued to be tame with increases of 1.6% in the Core PCE for the First and Second Quarters of 2019, below the Fed's 2% long-run target.

Early in the fiscal year of the Fund, the U.S. Federal Reserve continued its gradual tightening of monetary policy by raising the Federal Funds Target Rate by .25% two times, one in September 2018 and another one in December 2018. The Federal Funds Target Rate range changed from 1.75%-2.00% at the beginning of the fiscal year to 2.00%-2.25% at the end of August 2019, reflecting two increases of .25% and one decrease of .25% in July 2019. The Federal Open Market Committee (the "FOMC") changed its monetary policy to neutral in early 2019 and later signaled possible Fed Funds Rate cuts in the future as a result of global developments and economic data. The first cut of .25% came in July 2019 and another cut of .25% in September 2019.

As stated by the U.S. Federal Reserve in previous FOMC statements, the FOMC continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the FOMC's symmetric 2% objective as the most likely outcomes. Considering global economic and financial development and muted inflation pressures, the FOMC will be patient as it determines what future adjustments to the target range for the federal funds may be appropriate to support these outcomes. This assessment will consider a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. Economic data and global developments in the Second Quarter 2019 contributed to a change in outlook for lower interest rates and a more accommodative Fed with an easier monetary policy to ensure that the expansion continues amid a global slowdown and threats from abroad.

At the end of August 2019, the bond market, as indicated by Fed Fund Futures, expected a series of 25 basis points cut to the Federal Funds Target Rate (2.00%-2.25%) in 2019, starting with the FOMC meeting in September. The Treasury yield curve reflected lower interest rates across all maturities: 2 year 1.51%, 5 year 1.39%, 10 year 1.50% and 30 year 1.96%. For instance, the yield on Treasury Note 10 year dropped to 1.50% at the end of August 2019 from 2.68% at the beginning of the calendar year.

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On February 9, 2018, President Donald J. Trump signed into law the Bipartisan Budget Act of 2018, which includes a disaster relief package of up to $16 billion for Puerto Rico and the U.S. Virgin Islands, to be used for the Medicaid program and projects under the Community Development Block Grant. Delays in the implementation of procedures for the disbursement of such funds in Puerto Rico have been widely reported. Governor Rosselló had also announced plans to privatize PREPA and the generation of energy in Puerto Rico and award a concession of the distribution and transmission of energy. Thereafter, on February 13, 2018, the Commonwealth, PREPA, and the Puerto Rico Aqueduct and Sewer Authority submitted revised fiscal plans to the Oversight Board for its review and certification. Such fiscal plans establish the fiscal roadmap for the Commonwealth through the fiscal year ending in 2023. The Oversight Board has requested revisions to such fiscal plans on various occasions.

On May 24, 2018, President Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155), which contains an amendment to the U.S. Investment Company Act of 1940, as amended (the "1940 Act"), to repeal the exemption from its coverage of investment companies created under the laws of Puerto Rico, the U.S. Virgin Islands, or any other U.S. possession. The bill amends the 1940 Act by eliminating the exemption provided to U.S. possessions under its Section 6(a)(1). The repeal of the exemption will take effect three (3) years after enactment of the bills. The amendment also provides the U.S. Securities and Exchange Commission ("SEC") with the authority to extend the three-year safe harbor by up to an additional three (3) years. According to a report issued by the House Financial Services Committee in connection with a similar amendment previously considered by the U.S. House of Representatives, the elimination of the 1940 Act exemption of investment companies headquartered in a U.S. territory would subject them to existing U.S. federal requirements for investment companies, such as registering with the SEC, meeting minimum capital requirements, making disclosures to investors, and registering the securities they offer. Currently, Fund management is evaluating the impact that these additional requirements will have on the Fund and is seeking guidance from the SEC as to the application of the 1940 Act's provisions and regulations. The Fund is currently exploring with the SEC whether there may be possible SEC relief alternatives to address the Fund's specific circumstances, including the possibility of extending the three-year safe harbor. The cost of the mandate will include registration fees and the ongoing costs of complying with SEC requirements. There is no assurance as to what the ultimate impact of this law may be on the Fund or what guidance the SEC may provide in such respect.

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OUTLOOK

The U.S. economic outlook indicates a moderate economic growth with uncertainties,coupled with low unemployment and inflation rates. The U.S. Federal Reserve is morecautious on economic conditions and will act as appropriate in future FOMC as economicactivity is moderate, growth in business investment is soft and inflation is running below2%. Despite Puerto Rico's fiscal situation, challenges for economic growth and thecomplexities of Puerto Rico debt's defaults, negotiations, restructurings and politics, PuertoRico Municipal bonds have experienced significant improvement in price and liquidity. Inaddition, COFINA debt was successfully restructured. The current conditions, interest ratesand outlook continue to present a challenging investment environment for the managementof the Fund. Notwithstanding, Banco Popular and UBS Puerto Rico remain committed toproviding professional asset management services to the Fund for the benefit of itsshareholders.

Enrique Vila del Corral, CPAChairman of the Board and President

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THE BENEFITS AND RISKS OF LEVERAGING

The Puerto Rico Investors Tax-Free Fund III, Inc. is permitted to use leverage in an amount not to exceed 50% of the Fund's total assets. In addition, the Fund may also borrow for temporary or emergency purposes in an amount of up to an additional 5% of its total assets. The Fund obtains leverage by borrowing, using its investment portfolio as well as securities otherwise obtained as collateral.

Leverage can produce additional income when the income derived from investments financed with borrowed funds exceeds the cost of such funds. In such an event, the Fund’s net income will be greater than it would be without leverage.

If, on the other hand, the income derived from securities purchased with borrowed funds is not sufficient to cover the cost of such funds, the Fund’s net income will be less than it would be without leverage.

Leverage often increases the risk for shareholders of Common Stock. In addition, leverage may have a negative impact on net asset value. Leverage could also increase market price volatility, interest rate and market risk. On the other hand, adding leverage to the Fund could result in higher net income.

SHARE REPURCHASE PROGRAM

On January 31, 2014, the Board of Directors approved the implementation of a Share Repurchase Program for the acquisition of the Fund's shares of Common Stock (the "Shares"), in open-market transactions at share prices equal to or at a discount of the corresponding NAV per Share, of up to 25% of each Fund's total assets as of such date. The Fund's Share Repurchase Program is implemented on a discretionary basis, under the direction of the co-Investment Advisers. The Fund's repurchase activity for each fiscal year is disclosed in the Annual Report to Shareholders attached hereto (see Note 4), as well as the quarterly reports to shareholders.

The undertaking of a repurchase program does not obligate the Fund to purchase specific amounts of Shares. During the fiscal year, the Shares continued to experience a period of limited liquidity and/or trading at a discount to their net asset value. Although the holders of the Shares do not have the right to redeem their Shares inasmuch as the Fund is closed-ended, the Fund may, at its sole discretion, effect repurchases of Shares in the open market, in an attempt to increase the liquidity of the Shares as well as reduce any market discount from their corresponding net asset value. There is no assurance that, if such action is undertaken, it will result in the improvement of the Shares' liquidity or reducing any such market discount. Moreover, while such undertaking may have a favorable effect on the market price of the Shares, the repurchase of the Shares by the Fund will decrease theFund's total assets and therefore, have the effect of increasing the Fund's expense ratio.

Repurchases by the Fund must be conducted in accordance with the terms and conditions contained in Article 10 of Regulation No. 8469 issued by the Puerto Rico Office of the Commissioner of Financial Institutions (the "PROCFI") and procedures adopted by the Fund's Board of Directors to address potential conflicts of interest with affiliated broker-

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dealers Popular Securities and UBS Financial Services Incorporated of Puerto Rico. Among other things, such regulation and procedures require that to the extent that various sellers indicate interest in selling shares of the Fund, it will purchase such shares starting with the lowest offered price and in the following order of priority for each price: (1) individual and corporate investors, irrespective of the broker-dealer that serves as record owner of the shares to be repurchased; (2) the trading desks of Puerto Rico broker-dealers which are unaffiliated with the Fund; and (3) the trading desks of Popular Securities and UBS Financial Services Incorporated of Puerto Rico. If sellers offer more shares for repurchase than the Fund is able to accept at any particular price for a particular level of priority, repurchase offers will be accepted on a pro-rata basis within that particular level of priority. Additionally, to the extent that Popular Securities or UBS Financial Services Incorporated of Puerto Rico elects to offer the Fund's shares of Common Stock for repurchase from its respective securities inventory, it must do so at its corresponding offer price per share reported to the public.

For the fiscal year ended August 31, 2019, the Fund did not repurchase any shares. Since the program's inception, the Fund has repurchased 5,766,397 shares of common stock in the open market with a net asset value of $23,987,266 and a cost of $21,342,647, which represent 17.39% of the total assets of the Fund as of January 31, 2014 (net of shares acquired for dividend reinvestment purposes and which remain outstanding).

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GLOSSARY OF MUTUAL FUND TERMS

Bond - Security issued by a government or corporation to those from whom it has borrowed money. A bond usually promises to pay interest income to the bondholder at regular intervals and to repay the entire amount borrowed at maturity date.

Realized Gain (Loss) - The profit (loss) from the sale of securities. Realized gains are paid to fund shareholders on a per share basis. When a gain distribution is made, the fund's net asset value drops by the amount of the distribution because the distribution is no longer considered part of the fund's assets.

Dividend - A per share distribution of the income earned from the fund's portfolio holdings. When a dividend distribution is made, the fund's net asset value drops by the amount of the distribution because the distribution is no longer considered part of the fund's assets.

Interest Rate Swap - An agreement to exchange one interest rate stream for another. No principal changes hands.

Investment Adviser - An investment professional who is responsible for managing a portfolio's assets prudently and making appropriate investment decisions, such as which securities to buy, hold and sell, based on the investment objectives of the portfolio.

Leverage - Vehicle used by the Fund to increase the amounts available for investment through the issuance of commercial paper or repurchase agreements transactions.

Long-Term - An investment with a maturity greater than one year.

Mutual Fund - A company which combines the investment money of many people whose financial goals are similar, and invests that money in a variety of securities. A mutual fund allows the smaller investor the benefits of diversification, professional management and constant supervision usually available only to large investors.

Net Asset Value (NAV) Per Share - The NAV per share is determined by subtracting a fund's total liabilities from its total assets, and dividing that amount by the number of fund shares outstanding.

Offering Price - The offering price of a share of a mutual fund is the price at which the share is sold to the public.

Repurchase Agreements - Transactions in which the Fund sells securities to a bank or dealer, and agrees to repurchase them at a mutually agreed date and price.

Short-Term - An investment with a maturity of one year or less.

Total Investment Return - The change in value of a fund investment over a specified period of time, taking into account the change in a fund's market price and the reinvestment of all fund distributions.

Turnover Ratio - The turnover ratio represents the fund's level of trading activity. A fund divides the lesser of purchases or sales (expressed in dollars and excluding all securities with maturities of less than one year) by the fund's average monthly assets.

Yield - The annualized rate of income as measured against the current net asset value of fund shares.

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13

Puerto Rico Investors Tax-Free Fund III, Inc. August 31, 2019

SCHEDULE OF INVESTMENTS

Face Amount Issuer Coupon

Maturity Date

Fair Value

AFICA Bonds - 0.07% of net assets applicable to common shares, total cost of $4,215,000

$240,000 (1) (7) ^ PALMAS DEL MAR COUNTRY CLUB PROJECT 7.00% 12/20/18 $2,4003,975,000 (1) (7) ^ PALMAS DEL MAR COUNTRY CLUB PROJECT 7.25% 12/20/30 29,8134,215,000 32,213

Principal Outstanding

AmountPuerto Rico Agencies - 0.13% of net assets applicable to common shares, total cost of $62,331

62,331 (3) ECONOMIC DEVELOPMENT CORPORATION - BANKTRUST MORTGAGE TRUST SERIES 2 CLASS H 7.00% 02/01/23 62,331

Puerto Rico GNMA Exempt - 0.50% of net assets applicable to common shares, total cost of $216,674

25,851 (2) GNMA (POOL 402480) 7.50% 11/15/24 25,899453 (2) GNMA (POOL 406023) 7.50% 12/15/24 452

43,579 (2) GNMA (POOL 406027) 7.50% 12/15/24 44,38043,884 (2) (6) GNMA P&I (POOL 406058) 7.50% 01/15/25 44,704

100,000 (2) GNMA SERIAL (POOL 556254) Units 89-92 6.50% 08/15/31 111,616213,767 227,051

Puerto Rico GNMA Taxable - 0.11% of net assets applicable to common shares, total cost of $45,112

1,507 (2) GNMA P&I (POOL 494908) 7.00% 12/15/28 1,51331,139 (2) GNMA P&I (POOL 494909) 7.00% 12/15/28 34,386

8,879 (2) GNMA P&I (POOL 531461) 8.00% 05/15/30 9,0763,586 (2) GNMA P&I (POOL 548495) 7.00% 05/15/31 3,592

45,111 48,567

Puerto Rico Freddie Mac Taxable - 0.03% of net assets applicable to common shares, total cost of $12,2776,848 (4) FGLMC (POOL C18249) 7.00% 11/01/28 7,531

209 (4) FGLMC (POOL C31546) 7.50% 10/01/29 2085,120 (4) FGLMC (POOL D75620) 7.50% 02/01/23 5,168

12,177 12,907

Puerto Rico Fannie Mae Taxable - 1.94% of net assets applicable to common shares, total cost of $800,9065,500 (5) FNMA (POOL 302501) 8.50% 12/01/24 5,790

34,618 (5) (6) FNMA (POOL 368033) 7.50% 12/01/26 38,73211,127 (5) FNMA (POOL 504108) 7.00% 06/01/29 12,25236,409 (5) FNMA (POOL 504109) 7.50% 05/01/29 36,70788,316 (5) (6) FNMA (POOL 504117) 7.50% 05/01/29 96,95649,899 (5) FNMA (POOL 523140) 7.50% 04/01/30 56,362

9,066 (5) FNMA (POOL 536049) 7.50% 10/01/30 9,2192,387 (5) FNMA (POOL 580540) 6.00% 06/01/31 2,628

25,454 (5) FNMA (POOL 626656) 6.50% 03/01/32 28,19849,074 (5) (6) FNMA (POOL 627603) 6.50% 11/01/31 55,218

487,922 (5) (6) FNMA (POOL 849999) 5.00% 01/01/36 543,406799,772 885,468

Puerto Rico Tax Exempt Notes - 0.50% of net assets applicable to common shares, total cost of $217,5619,417 (9) COMMUNITY ENDOWMENT, INC. (COLLATERALIZED BY GNMA POOL 470920) 7.00% 04/15/28 10,301

26,392 (9) COMMUNITY ENDOWMENT, INC. (COLLATERALIZED BY GNMA POOL 514582) 7.00% 08/15/29 26,72832,604 (9) COMMUNITY ENDOWMENT, INC. (COLLATERALIZED BY GNMA POOL 514585) 7.00% 08/15/29 32,79347,280 (9) COMMUNITY ENDOWMENT, INC. (COLLATERALIZED BY GNMA POOL 449355) 7.50% 09/15/27 50,98233,929 (9) COMMUNITY ENDOWMENT, INC. (COLLATERALIZED BY GNMA POOL 514606) 7.50% 09/15/29 34,19557,297 (9) COMMUNITY ENDOWMENT, INC. (COLLATERALIZED BY GNMA POOL 515390) 7.50% 04/15/30 64,193

4,931 (9) COMMUNITY ENDOWMENT, INC. (COLLATERALIZED BY FNMA POOL 536042) 8.00% 09/01/30 5,6715,712 (9) COMMUNITY ENDOWMENT, INC. (COLLATERALIZED BY FNMA POOL 536024) 8.50% 05/01/30 6,152

217,562 231,015

Face Amount

Puerto Rico Government Instrumentalities Tax-Exempt Notes - 60.88% of net assets applicable to common shares, total cost of $32,458,852$5,565,000 ++ * (7) (8) EMPLOYEES RETIREMENT SYSTEM - SENIOR PENSION FUNDING BONDS SERIES A 6.20% 07/01/40 2,629,463

205,000 ++ * (7) (8) EMPLOYEES RETIREMENT SYSTEM - SENIOR PENSION FUNDING BONDS SERIES B 6.30% 07/01/36 96,8632,715,000 ++ * (7) (8) EMPLOYEES RETIREMENT SYSTEM - SENIOR PENSION FUNDING BONDS SERIES B 6.55% 07/01/55 1,282,8381,715,000 ++ * (7) (8) EMPLOYEES RETIREMENT SYSTEM - SENIOR PENSION FUNDING BONDS SERIES B 6.55% 07/01/56 810,337

905,000 ++ * (7) (8) EMPLOYEES RETIREMENT SYSTEM - SENIOR PENSION FUNDING BONDS SERIES B 6.55% 07/01/57 427,613710,000 * (7) + PUERTO RICO SALES TAX FINANCING CORPORATION - RESTRUCTURED SERIES A-1 4.50% 07/01/34 758,252360,000 * (7) + PUERTO RICO SALES TAX FINANCING CORPORATION - RESTRUCTURED SERIES A-1 4.55% 07/01/40 370,688

3,654,000 * (7) + PUERTO RICO SALES TAX FINANCING CORPORATION - RESTRUCTURED SERIES A-2 4.33% 07/01/40 3,713,3787,574,000 * (7) + PUERTO RICO SALES TAX FINANCING CORPORATION - CAPITAL APPRECIATION RESTRUCTURED SERIES A-1 0.00% 07/01/46 2,024,4547,332,000 * (7) + PUERTO RICO SALES TAX FINANCING CORPORATION - CAPITAL APPRECIATION RESTRUCTURED SERIES A-1 0.00% 07/01/51 1,415,736

110,000 * (7) + PUERTO RICO SALES TAX FINANCING CORPORATION - RESTRUCTURED SERIES A-2 4.54% 07/01/53 111,5092,640,000 * (7) + PUERTO RICO SALES TAX FINANCING CORPORATION - RESTRUCTURED SERIES A-1 4.75% 07/01/53 2,706,8198,058,000 * (7) + PUERTO RICO SALES TAX FINANCING CORPORATION - RESTRUCTURED SERIES A-1 5.00% 07/01/58 8,401,7542,984,000 * (7) + PUERTO RICO SALES TAX FINANCING CORPORATION - RESTRUCTURED SERIES A-2 4.78% 07/01/58 3,062,330

44,527,000 27,812,034

The accompanying notes are an integral part of these financial statements.

14


SCHEDULE OF INVESTMENTS (concluded)

Face Amount Issuer Coupon

Maturity Date

Fair Value

US Government Sponsored Entities - 69.27% of net assets applicable to common shares, total cost of $26,520,447$1,548,000 (6) (7) FANNIE MAE NOTE 6.63% 11/15/30 $2,307,308

610,000 (6) (7) FEDERAL FARM CREDIT BANK 5.70% 10/25/27 793,903303,000 (6) FEDERAL FARM CREDIT BANK 6.18% 11/06/28 416,357100,000 (7) FEDERAL FARM CREDIT BANK 2.90% 05/16/31 100,002400,000 (6) (7) FEDERAL HOME LOAN BANK BOND 3.94% 06/18/30 409,229

2,490,000 (6) (7) FEDERAL HOME LOAN BANK BOND 4.10% 06/15/33 2,517,4484,300,000 (6) (7) FEDERAL HOME LOAN BANK BOND 3.13% 04/28/36 4,300,047

500,000 (7) FEDERAL HOME LOAN BANK BOND 3.00% 05/23/36 500,0051,700,000 (7) FEDERAL HOME LOAN BANK BOND 3.00% 06/16/36 1,691,793

12,480,000 (6) FEDERAL HOME LOAN BANK BOND 5.50% 07/15/36 18,605,75824,431,000 31,641,850

US Municipal Obligations - 20.51% of net assets applicable to common shares, total cost of $8,063,787400,000 (7) STATE OF ILLINOIS - VARIOUS PURPOSE GENERAL OBLIGATION BONDS - 2012 SERIES B 5.00% 01/01/23 420,760

1,100,000 (7) STATE OF ILLINOIS - VARIOUS PURPOSE GENERAL OBLIGATION BONDS - 2012 SERIES B 5.25% 01/01/25 1,166,2422,680,000 (7) STATE OF ILLINOIS - VARIOUS PURPOSE GENERAL OBLIGATION BONDS - 2012 SERIES B 5.43% 01/01/42 2,784,9762,100,000 (7) STATE OF CALIFORNIA - VARIOUS PURPOSE GENERAL OBLIGATION BONDS 7.95% 03/01/36 2,160,8581,700,000 (7) STATE OF CALIFORNIA - VARIOUS PURPOSE GENERAL OBLIGATION BONDS 7.63% 03/01/40 2,835,9747,980,000 9,368,810

Total investments 153.94% of net assets applicable to common shares) 70,322,246Liabilities minus other assets (-53.94% of net assets applicable to common shares) (24,641,839)Net Assets attributable to common shares - 100% $45,680,407

(1) AFICA - Puerto Rico Industrial, Tourism, Medical, Educational, and Environmental Pollution Control Facilities Financing Authority. Revenue bonds payable solely from cash flows generated by the underlying project.(2) PR GNMA - Represents mortgage-backed obligations guaranteed by the Government National Mortgage Association. They are subject to principal paydowns as a result of prepayments or refinancing of the underlying mortgage instruments.

As a result, the average life may be substantially less than the original maturity.(3) These securities were purchased under an agreement that they can be resold, pledged, hypothecated, or transferred only to institutional investors.(4) Puerto Rico Freddie Mac Taxable - Represents mortgage-backed obligations guaranteed by the Federal Home Loan Mortgage Corporation. They are subject to principal paydowns as a result of prepayments or refinancing of the

underlying mortgage instruments. As a result, the average life may be substantially less than the original maturity.(5) PR Fannie Mae Taxable - Represents mortgage-backed obligations guaranteed by the Federal National Mortgage Association. They are subject to principal paydowns as a result of prepayments or refinancing of the underlying mortgage instruments.

As a result, the average life may be substantially less than the original maturity.(6) A portion or all of the security has been pledged as collateral for securities sold under agreements to repurchase.(7) Security may be called before its maturity date.(8) The bonds are limited, non-recourse obligations of the Employees Retirement System payable solely from, and secured solely by, employer contributions made after the date of issuance of the bonds.(9) Community Endowment - These obligations are collateralized by Mortgage-Backed Securities and the only source of repayment is the collateral. They are subject to principal paydowns as a result of prepayments or refinancing of the underlying

mortgage instruments. As a result, the average life may be substantially less than the original maturity.* Revenue Bonds- issued by agencies and payable from revenues and other sources of income of the agency as specified in the applicable prospectus. These obligations are not an obligation of the Commonwealth of Puerto Rico.^ AFICA Palmas del Mar Country Club Project has defaulted on its monthly interest payment of $25,416 since July 20, 2016.

AFICA Palmas del Mar Country Club Project with face value of $240,000 defaulted on its principal payment on December 20, 2018.+ These securities are the newly exchanged bonds under the COFINA's Third Amended Plan of Adjustment (the "Plan"). See Note 14 for further information.

++ Employees Retirement System ("ERS") securities are not accruing interest income. These bonds are under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act ("PROMESA"). See Note 13 for further information.


15


STATEMENT OF ASSETS AND LIABILITIES

Assets: Investments in securities:Securities pledged as collateral under repurchase agreements, at fair value (cost -$21,763,860) $26,742,467Other securities, at fair value (cost - $50,849,087) 43,579,779 $70,322,246

Cash and cash equivalents 292,600Receivable for paydowns 2,064Interest receivable 544,482Other assets 50,647Total assets 71,212,039

Liabilities: Securities sold under agreements to repurchase 25,247,000Payables:

Interest 16,744Investment advisory fees 14,719Administration fees 8,831Dividend payable 73,247 113,541

Accrued expenses and other liabilities 171,091Total liabilities 25,531,632

Net Assets Applicable to Common Shares: $45,680,407

Net Assets Capital Stock, $0.01 par value, 98,000,000 shares authorized, 10,987,003 issued and outstanding $109,870Consist of: Paid-in capital 128,963,330

Undistributed net investment income 1,526,306Accumulated net realized loss on investments and derivatives (82,628,398)Unrealized net depreciation on investments (2,290,701)Net assets applicable to common shares $45,680,407

Net asset value applicable to common shares - per share; 10,987,003 shares outstanding $4.16


16

Puerto Rico Investors Tax-Free Fund III, Inc.

STATEMENT OF OPERATIONSFor the year ended

August 31, 2019

Investment income: Interest $2,846,151

Expenses: Interest and leverage related expenses 769,968Investment advisory fees 495,937Administration fees 99,185Custodian and transfer agent fees 66,126Professional fees 106,620Insurance expense 50,960Directors' fees and expenses 28,430Printing and shareholder reports 14,038Other 23,712 Total expenses 1,654,976Waived investment advisory, custodian, and transfer agent fees (396,754) Net expenses after waived fees 1,258,222

Net investment income: 1,587,929

Realized Gain (Loss) & Unrealized Net realized loss on investments (1,582,432)Appreciation (Depreciation) on Change in unrealized depreciation on investments 11,453,307Investments: Total net gain on investments 9,870,875

Net increase in net assets resulting from operations $11,458,804


17


STATEMENTS OF CHANGES IN NET ASSETS

Increase (Decrease) in Net Assets:For the year ended

August 31, 2019For the year ended

August 31, 2018

Operations: Net investment income $1,587,929 $1,082,859Net realized loss on investments (1,582,432) -Change in unrealized depreciation on investments 11,453,307 291,511Net increase in net assets resulting from operations 11,458,804 1,374,370

Distributions to CommonShareholders from: Dividends from net investment income (2,914,334) (1,117,314)

Capital ShareTransactions: Reinvestment of dividends on common shares 48,389 14,470

Increase in net assets derived from common share transactions 48,389 14,470

Net Assets: Net increase in net assets attributable to common shareholders 8,592,859 271,526Balance at beginning of the year 37,087,548 36,816,022Balance at end of the year $45,680,407 $37,087,548


18


STATEMENT OF CASH FLOWS

Increase (Decrease) in Cash

For the year ended August 31, 2019

Cash Provided by Net increase in net assets resulting from operations $11,458,804Operating Activities:

Adjusted by: Purchase of portfolio securities (6,993,935) Sales of portfolio securities 6,772,511 Proceeds from exchange of COFINA bonds 2,997,961 Restructuring expenses (260,232) Calls and maturities of portfolio securities 4,258,000 Proceeds from mortgage-backed securities paydowns 217,865 Net realized loss on investments 1,582,432 Net realized loss on paydowns 606 Change in unrealized depreciation on investments (11,453,307) Amortization and accretion of premiums and discounts on investments (169,555) Increase in interest and dividend receivables (108,800) Increase in other assets (5,067) Decrease in interest payable (15,160) Increase in investment advisory fees payable 140 Increase in administration fees payable 84 Increase in accrued expenses and other liabilities 69,320Total cash provided by operating activities 8,351,667

Cash Used in Repurchase agreements related repayments; net of issuances of $443,098,709 (5,380,617)Financing Activities: Dividends to common shareholders paid in cash (2,838,422)

Total cash used in financing activities (8,219,039)

Cash: Net increase in cash and cash equivalents 132,628Cash and cash equivalents at beginning of year 159,972Cash and cash equivalents at end of year $292,600

Cash Flow Cash paid for interest and leverage related expenses $785,128Information:

Non-cash activities:

Dividends reinvested by common shareholders $48,389

COFINA exchange bonds face value - coupon bonds $15,611,000 COFINA exchange bonds face value - zero coupon bonds $20,348,000


19

PUERTO RICO INVESTORS TAX-FREE FUND III, INC. AUGUST 31, 2019

NOTES TO FINANCIAL STATEMENTS

Note 1 - Reporting Entity and Significant Accounting Policies:

Puerto Rico Investors Tax-Free Fund III, Inc. (the "Fund") is a non-diversified, closed-end management investment company. The Fund is a corporation organized under the laws of the Commonwealth of Puerto Rico and is registered as an investment company under the Puerto Rico Investment Companies Act of 1954, as amended. The Fund was incorporated on July 31, 1995 and started operations on September 29, 1995.

The Fund’s investment objective is to achieve a high level of current income that, for the Puerto Rico investors, is exempt from Federal and Puerto Rico income taxes, consistent with the preservation of capital. There is no assurance that the Fund will achieve its investment objective.

The Fund is an investment company that applies the accounting and reporting guidance in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 946, Financial Services – Investment Companies(“ASC 946”). The financial statements are prepared in accordance with United States (“US”) generally accepted accounting principles (“GAAP”), which requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements:

(a) Cash and Cash Equivalents – Cash and cash equivalents consist of demand deposits and funds invested in short-term investments with original maturities of 90 days or less. Cash and cash equivalents are valued at amortized cost, which approximates fair value. At August 31, 2019, cash and cash equivalents consisted of a time deposit open account amounting to $292,600 with Banco Popular de Puerto Rico, which is an affiliated entity. This amount is fully collateralized by U.S. Government debentures with AAA credit rating.

(b) Valuation of Investments - Investments included in the Fund’s financial statements have been stated at fair values as determined by Banco Popular de Puerto Rico, as the Fund's administrator, with the assistance of the Investment Advisers (Refer to Note 3 for details on investment agreements), on the basis of valuations provided by dealers or by pricing services, which are approved by the Fund’s management and the Board of Directors, in accordance with the valuation methods set forth in the Governing Documents (Prospectus and Valuation Committee) and related policies and procedures. See Note 2 for further discussions regarding fair value disclosures.

(c) Taxation – The Fund has elected to be treated as a registered investment company under the Puerto Rico Internal Revenue Code of 2011, as amended, and the regulations and administrative pronouncements promulgated thereunder. As a registered investment company under the Puerto Rico Investment Companies Act, the Fund will not be subject to Puerto Rico (“PR”) income tax for any taxable year if it distributes at least 90% of its taxable net investment income for such year, as determined for these purposes. Accordingly, as the Fund intends to meet this distribution requirement, the income earned by the Fund is not subject to Puerto Rico income tax at the Fund level. The Fund has never been subject to taxation.

In addition, the fixed income and equity investments of the Fund are exempt from Puerto Rico personal property taxes. The Fund is exempt from United States income taxes, except for dividends received from United States sources, which are subject to a 10% United States withholding tax, if certain requirements are met. Dividend income is recorded net of taxes. In the opinion of the Fund's legal counsel, the Fund is not required to file a U.S. federal income tax return.

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GAAP requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Fund’s tax return to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the “more-likely-than-not” threshold are recorded as a tax benefit or expense in the current year. Management has analyzed the Fund’s tax positions taken on its Puerto Rico income tax returns for all open tax years (the current and prior three tax years) and has concluded that no liability should be recorded related to uncertaintax positions taken on returns filed for open tax years. On an ongoing basis, management will monitor the Fund's tax position to determine if adjustments to this conclusion are necessary.

The balance of undistributed net investment income and of accumulated net realized loss on investments and derivatives reflect the reclassification of permanent differences and temporary differences between book and tax balances that becomes permanent. As a result of these reclassifications, the amounts shown in the Statement of Assets and Liabilities reflect the amounts for tax purposes, except for remaining temporary differences, if any (See Note 11).

(d) Statement of Cash Flows - The Fund invests in securities and distributes dividends from net investment income, whichare paid in cash or are reinvested at the discretion of common shareholders. These activities are reported in the Statement of Changes in Net Assets. Additional information on cash receipts and payments is presented in the Statement of Cash Flows.

Accounting practices that do not affect the reporting of activities on a cash basis include carrying investments at fair value and amortizing premiums or discounts on debt obligations.

(e) Dividends and Distributions to Shareholders - Dividends from net investment income are declared and paid monthly. The Fund may at times pay out less than the entire amount of net investment income earned in any particular period and may at times pay out such accumulated undistributed income earned in other periods in order to permit a more stable level of distribution. The Fund records dividends to its shareholders on the ex-dividend date. The Fund does not expect to make distributions of net realized capital gains, although the Fund’s Board of Directors reserves the right to do so in its sole discretion.

(f) Securities Sold under Agreements to Repurchase - Under these agreements, the Fund sells securities, receives cash in exchange and agrees to repurchase the securities at a mutually agreed date and price. Ordinarily, those counterparties with which the Fund enters into these agreements require delivery of collateral, nevertheless, the Fund retains ownership of the collateral through the agreement that requires the repurchase and return of such collateral. These transactions are treated as financings and recorded as liabilities. Therefore, no gain or loss is recognized on the transaction and the securities pledged as collateral remain recorded as assets of the Fund. These agreements involve the risk that the market value of the securities purchased with the proceeds from the sale of securities received by the Fund may decline below the price of the securities that the Fund is obligated to repurchase and that the value of the collateral posted by the Fund increases in value and the counterparty does not return it. 71BBecause the Fund borrows under repurchase agreements based on the estimated fair value of the pledged assets, the Fund’s ongoing ability to borrow under its repurchase facilities may be limited and itslenders may initiate margin calls in the event of adverse changes in the market. A decrease in market value of the pledged assets may require the Fund to post additional collateral or otherwise sell assets at a time when it may not be in the best interest of the Fund to do so (See Note 6).

(g) Short-term notes - The Fund has a short-term notes payable program as a funding vehicle to increase the amount available for investments. The short-term notes are issued from time to time in denominations of $25,000 maturing in periods of up to 270 days. The notes are collateralized by the pledge of certain securities of the Fund. The pledged securities are held by Banco Popular de Puerto Rico (the Custodian), as collateral agent, for the benefit of the holders of the notes. There were no short-term notes outstanding during the year ended August 31, 2019.

(h) Paydowns - Realized gains and losses on mortgage-backed securities paydowns are recorded as an adjustment to interest income as required by GAAP. For the year ended August 31, 2019, the Fund decreased interest income in the

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amount of $606 related to realized loss on mortgage-backed securities paydowns. For purpose of dividend distributions,net investment income excludes the effect of mortgage-backed securities paydowns gains and losses (See Note 11).

(i) Restructuring Expenses - Legal expenses incurred by the Fund related to Puerto Rico bond restructurings that have been accounted for as a realized loss.

(j) Other – Security transactions are accounted for on a trade date (the date the order to buy or sell is executed). Realized gains and losses on security transactions are determined based on the identified cost method. Premiums and discounts on securities purchased are amortized over the life or the expected life of the respective securities using the effective interest method. Interest income is accrued daily except when collection is not expected. Dividend income on common equity securities is recorded on the ex-dividend date.

Note 2 – Fair Value Measurements:

Under GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability.

GAAP establishes a fair value hierarchy that prioritizes the inputs and valuation techniques used to measure fair value into three levels in order to increase consistency and comparability in fair value measurements and disclosures. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used for the fair value measurement are observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs reflect the Fund’s estimates about assumptions that market participants would use in pricing the asset or liability based on the best information available. The hierarchy is broken down into three levels based on the reliability of inputs as follows:

Level 1 – Unadjusted quoted prices in active markets for identical assets at the measurement date. Valuation on these instruments does not need a significant degree of judgment since valuations are based on quoted prices that are readily available in an active market.

Level 2 – Quoted prices other than those included in Level 1 that are observable either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or that can be corroborated by observable market data for substantially the full term of the financial instrument.

Level 3 – Unobservable inputs are significant to the fair value measurement. Unobservable inputs reflect the Fund’s own assumptions about assumptions that market participants would use in pricing the asset or liability.

The Fund maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available. The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing on those securities. Fair value is based upon quoted market prices when available. If listed price or quotes are not available, the Fund employs internally developed models that primarily use market-based inputs including yield curves, interest rates, volatilities, and credit curves, among others. Valuation adjustments are limited to those necessary to ensure that the financial instrument’s fair value is adequately representative of the price that would be received or paid in the marketplace. These adjustments include amounts that reflect counterparty credit quality, constraints on liquidity, and unobservable parameters that are applied consistently.

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The estimated fair value may be subjective in nature and may involve uncertainties and matters of significant judgment for certain financial instruments. Changes in the underlying assumptions used in calculating fair value could significantly affect the results. In addition, the fair value estimates are based on outstanding balances without attempting to estimate the value of anticipated future business. Therefore, the estimated fair value may materially differ from the value that couldactually be realized on a sale. The Fund monitors the portfolio securities to ensure they are in the correct hierarchy level.

On November 8, 2013, the Board of Directors of the Fund delegated to the Valuation Committee, comprised of voting members of Popular Asset Management, a division of Banco Popular, and UBS Asset Managers of PR, a division of UBS Trust Company of PR, certain procedures and functions related to the valuation of portfolio securities for the purpose of determining the Net Asset Value of the Fund. The Valuation Committee is generally responsible for determining the fair value of the following types of portfolio securities:

- Portfolio instruments for which no price or value is available at the time the Fund’s NAV is calculated on a particular day;

- Portfolio instruments for which the prices or values available do not, in the judgment of the Investment Advisers, represent the fair value of the portfolio instruments;

- A price of a portfolio instrument that has not changed for four consecutive weekly pricing periods, except for Puerto Rico taxable securities and U.S. portfolio instruments;

- Any PR taxable securities and the U.S. portfolio instruments whose value has not changed from the previous weekly pricing period.

Following is a description of the Fund’s valuation methodologies used for assets and liabilities measured at fair value:

AFICA bonds: The fair value of AFICA bonds is based on quotes obtained from local brokers. AFICA bonds are segregated and the like characteristics divided into specific sectors. Market inputs used in the evaluation process include all or some of the following: trades, bid price or spread, quotes, benchmark curves including but not limited to Treasury benchmarks, LIBOR and swap curves, and discount and capital rates. These bonds are classified as Level 2.

Mortgage and other asset-backed securities: Certain agency mortgage and other asset-backed securities (“MBS”) are priced based on a bond’s theoretical value derived from the prices of similar bonds; “similar” being defined by credit quality and market sector. Their fair value incorporates an option adjusted spread. GNMA Puerto Rico Serials are priced using a pricing matrix with quoted prices from local broker dealers, based on trade activity in local markets and is compared with data from exchange platforms where similar instruments regularly trade. The agency MBS and GNMA Puerto Rico Serials are classified as Level 2.

Puerto Rico Tax Exempt Notes: Prices for these securities are obtained from broker quotes. These securities trade in over-the-counter markets. Quoted prices are based on recent trading activity for similar instruments and do not trade in highly liquid markets. Community Endowments are generally classified as Level 2 and the pricing is based on their collateral.

Obligations of Puerto Rico and political subdivisions: Obligations of Puerto Rico and political subdivisions are segregated and the like characteristics divided into specific sectors. Market inputs used in the evaluation process include all or some of the following: trades, bid price or spread, quotes, benchmark curves including but not limited to Treasury benchmarks, LIBOR and swap curves, and discount and capital rates. These bonds are classified as Level 2.

Obligations of U.S. Government Sponsored Entities, State, and Municipal Obligations: The fair value of Obligations of U.S. Government sponsored entities, state and municipal obligations is obtained from third-party pricing service providers that use a pricing methodology based on an active exchange market and based on quoted market prices for

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similar securities. These securities are classified as Level 2. U.S. agency structured notes are priced based on a bond’s theoretical value from similar bonds defined by credit quality and market sector, and for which the fair value incorporates an option adjusted spread in deriving their fair value. These securities are classified as Level 2.

The following is a summary of the levels within the fair value hierarchy in which the Fund invests based on inputs used to determine the fair value of such securities:

Hierarchy

Level 1 Level 2 Level 3 Balance at 8/31/2019Assets:AFICA Bonds $ - $ 32,213 $ - $ 32,213Puerto Rico Agencies - - 62,331 62,331Mortgage-Backed Securities:

Puerto Rico GNMA Exempt - 227,051 - 227,051Puerto Rico GNMA Taxable - 48,567 - 48,567Puerto Rico Freddie Mac Taxable - 12,907 - 12,907Puerto Rico Fannie Mae Taxable - 885,468 - 885,468

Puerto Rico Tax Exempt Notes - 231,015 - 231,015Puerto Rico Govt. Instrumentalities Tax Exempt Notes - 27,812,034 - 27,812,034US Government Sponsored Entities - 31,641,850 - 31,641,850US Municipal Obligations - 9,368,810 - 9,368,810Total $ - $ 70,259,915 $ 62,331 $ 70,322,246

Temporary cash investments are valued at amortized cost, which approximates fair value. As of year-end there were no temporary cash investments.

The following is a reconciliation of assets for which Level 3 inputs were used in determining fair value:

Balance as of 8/31/2018 Realized gain (loss)

Change in Unrealized (depreciation)/appreciation Paydowns

Transfers in (out) to Level 3

Balance as of 8/31/2019

Economic Development Corporation -7% due 2/1/23 $ 85,484 - - (23,153) - $ 62,331

Quantitative Information about Level 3 Fair Value Measurements:

At August 31, 2019, Level 3 securities were valued based on broker-dealer indicative quotes determined using pricing models, discounted cash flows methodologies, or similar techniques, for which the determination of fair value is based on significant unobservable inputs that require significant judgment or estimation.

Fair Value at August 31, 2019 Valuation Technique Unobservable Inputs Price

Economic Development Corporation 7% due 2/1/23 $62,331 Broker Quotes Evaluated Quotes $100.00

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Note 3 - Investment Advisory, Administrative, Custodian, Transfer Agency Agreements, and Other Transactions with Affiliates:

Pursuant to separate Investment Advisory Agreements with UBS Asset Managers of Puerto Rico, a division of UBS TrustCompany of Puerto Rico, and Banco Popular de Puerto Rico ("Banco Popular") (collectively, the "Investment Advisers"), the Fund receives advisory services in exchange for a fee. The investment advisory fee is calculated at an annual rate of 0.75% of the Fund’s average weekly net assets, as defined in the agreement. For these calculations, average net assets include the liquidation value of all outstanding debt securities of the Fund. For the year ended August 31, 2019, the gross investment advisory fees amounted to $495,937. The total waived fees amounted to $330,628 for a net fee of $165,309.

Banco Popular also provides administrative, custody, and transfer agency services pursuant to Administration, Custodian,and Transfer Agency Agreements. Under the terms of the Administration Agreement, Banco Popular provides facilities and personnel to the Fund for the performance of the administrator duties. The fees related to these services are calculated at an annual rate of 0.15% of the Fund’s average weekly net assets as defined in the agreement. For the year endedAugust 31, 2019, the fee for such services amounted to $99,185. The fees related to Custody and Transfer Agency are calculated at an annual rate of 0.05%, each, of the Fund’s average weekly net assets and amounted to $66,126 for the yearended August 31, 2019. Custody and Transfer Agency fees were waived in their entirety.

The Fund is not registered under the U.S. Investment Company Act of 1940, as amended, and therefore is not subject to the restrictions contained therein regarding, among other things, transactions between the Fund, Banco Popular, and UBSFinancial Services Incorporated of Puerto Rico (“UBS Puerto Rico”) or their affiliates ("Affiliated Transactions"). In that regard, the Board of Directors of the Fund adopted a set of procedures for Affiliated Transactions ("Procedures") in an effort to address potential conflicts of interest that may arise.

It is anticipated that Affiliated Transactions will continue to take place in the future and that any Affiliated Transaction will be subject to the Procedures adopted by the Board of Directors.

Certain officers and directors of the Fund are also officers and directors of the Investment Advisers and/or their affiliates. The six independent directors of the Fund's Board are paid based upon an agreed fee of $1,000 per meeting. Three of the independent directors of the Fund also serve on the Fund's audit committee and are paid based upon an agreed fee of$1,000 per committee meeting. In addition to the meetings at $1,000 which amounted to $27,000, the directors also met twice for an extraordinary director committee meeting at an agreed fee of $143 per director. For the year ended August 31, 2019, the compensation expense for the six independent directors of the Fund was $28,430.

The affiliates of the Fund may have lending, banking, brokerage, underwriting, or other business relationships with the issuers of the securities in which the Fund invests.

The total amount (in thousands) of other affiliated and unaffiliated transactions, listed by counterparty, during the year were as follows:

Purchases %

Sales of Portfolio

Securities %

Securities Sold under Agreements to

Repurchase %UBS Puerto Rico $ 4,255 61% $ - -% $ 39,681 9%Unaffiliated 2,739 39% 6,773 100% 403,418 91%

Total $ 6,994 100% $ 6,773 100% $ 443,099 100%

On May 24, 2018, President Trump signed into law the Economic Growth, Regulatory Relief, and Consumer ProtectionAct (S. 2155), which contains an amendment to the U.S. Investment Company Act of 1940, as amended (the "1940 Act"),to repeal the exemption from its coverage of investment companies created under the laws of Puerto Rico, the U.S. Virgin

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Islands, or any other U.S. possession. The bill amends the 1940 Act by eliminating the exemption provided to U.S.possessions under its Section 6(a)(1). The repeal of the exemption will take effect three (3) years after enactment of thebills. The amendment also provides the U.S. Securities and Exchange Commission (“SEC”) with the authority to extendthe three-year safe harbor by up to an additional three (3) years. According to a report issued by the House FinancialServices Committee in connection with a similar amendment previously considered by the U.S. House of Representatives,the elimination of the 1940 Act exemption of investment companies headquartered in a U.S. territory would subject themto existing U.S. federal requirements for investment companies, such as registering with the SEC, meeting minimumcapital requirements, making disclosures to investors, and registering the securities they offer. Currently, Fundmanagement is evaluating the impact that these additional requirements will have on the Fund and is seeking guidancefrom the SEC as to the application of the 1940 Act's provisions and regulations. The Fund is currently exploring with theSEC whether there may be possible SEC relief alternatives to address the Fund’s specific circumstances, including thepossibility of extending the three-year safe harbor. The cost of the mandate will include registration fees and the ongoingcosts of complying with SEC requirements. There is no assurance as to what the ultimate impact of this law may be on theFund or what guidance the SEC may provide in such respect.

Note 4 - Capital Share Transactions:

Currently, the Fund's shares are experiencing a period of limited liquidity and/or trading at a discount to its net asset value. Although the holders of the shares do not have the right to redeem their shares inasmuch as the Fund is closed-ended, the Fund may offer a repurchase of shares in the open market, in an attempt to increase the liquidity of the shares as well as reduce any market discount from its corresponding net asset value. There is no assurance that, if such action is undertaken, it will result in the improvement of the shares' liquidity or reducing any such market discount. The Fund’s policies require that repurchase of shares from an affiliated party be effected in accordance with procedures to address any conflicts ofinterest which may arise.

On January 31, 2014, the Board of Directors authorized the repurchase by the Fund of outstanding shares of Common Stock (the "Shares") in open-market transactions up to an aggregate dollar amount of shares to be repurchased of up to 25% of the Fund's total assets, at share prices equal to or at a discount of the corresponding net asset value ("NAV") per share. As of August 31, 2019, 7.61% or $9,344,225 of total assets are still available to be repurchased.

For the year ended August 31, 2019, there was no common stock repurchased by the Fund.

Capital share transactions for the years ended August 31, 2019 and 2018, were as follows:

Shares AmountCommon shares: 2019 2018Beginning balance 10,973,812 10,968,967Shares issued due to reinvestment of dividends at net asset value 13,191 4,845Ending balance 10,987,003 10,973,812

Dollar AmountCommon shares: 2019 2018Dividends reinvested by common shareholders $ 48,389 $ 14,470Increase in net assets derived from common shares transactions $ 48,389 $ 14,470

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Note 5 - Investment Transactions:

The cost of securities purchased and proceeds from sales, maturities, calls and paydowns of portfolio securities (in thousands), excluding short-term transactions, for the year ended August 31, 2019 were as follows:

Purchases Sales Maturities/Calls Paydowns

Puerto Rico Agencies $ - $ - $ - $ 23Puerto Rico GNMA Exempt - - - 28Puerto Rico GNMA Taxable - - - 10Puerto Rico Freddie Mac Taxable - - - 6Puerto Rico Fannie Mae Taxable - - - 129Puerto Rico Tax Exempt Notes - - - 22Puerto Rico Govt. Instrumentalities Tax Exempt Notes 2,739 2,759 - -US Government Sponsored Entities 4,255 4,014 4,258 -

Total $ 6,994 $ 6,773 $ 4,258 $ 218

Note 6 - Securities Sold under Agreements to Repurchase:

Weighted average interest rate at end of year 2.50%Maximum aggregate balance outstanding at any time during the year $30,727,950Average balance outstanding during the year $27,022,622Average interest rate during the year 2.82%

At August 31, 2019, interest rates on securities sold under agreements to repurchase ranged from 2.23% to 2.70% with maturities up to September 23, 2019. Some of the outstanding agreements to repurchase as of year end may be called by the counterparty before their maturity date.

At August 31, 2019, investment securities with fair values amounting to $26,742,467 are pledged as collateral forsecurities sold under agreements to repurchase. The counterparties have the right to sell or repledge the assets during the term of the repurchase agreement with the Fund. Interest payable on securities sold under agreements to repurchase amounted to $16,744 at August 31, 2019.

At August 31, 2019, the total value (in thousands) of securities sold to affiliates and non-affiliates under agreements to repurchase was as follows:

Counterparty Amount %UBS Puerto Rico $ 3,056 12%Unaffiliated 22,191 88%Total $ 25,247 100%

Note 7 - Short-Term and Long-Term Financial Instruments:

The fair market value of short-term financial instruments, which include $25,247,000 of securities sold under agreements to repurchase, are substantially the same as the carrying amount reflected in the Statement of Assets and Liabilities as these are reasonable estimates of fair value, given the relatively short period of time between origination of the instrument and their expected realization. There are no long-term financial debt instruments outstanding at August 31, 2019.

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Note 8 – Credit Facilities:

The Fund has available with Banco Popular (an affiliate of the Investment Advisers) an uncommitted line of credit that is part of a credit facility extended to the Puerto Rico Investors Family of Funds and the Popular Family of Funds. The proceeds of the credit advances will be exclusively used by the Fund for short term funding needs arising from failed repurchase agreement transactions or cash shortfalls due to the non-receipt by the Fund of payments in the settlementprocess of transactions to which the Fund is a party. The Fund can obtain credit advances not to exceed the lesser of $20,000,000 or ten percent (10%) of Banco Popular’s capital stock and surplus, provided that the aggregate sum of all outstanding balances under all credit facilities never exceed $200,000,000. Interest on the unpaid balance of each credit advance accrues at a rate of 2.25% over the one week LIBOR Rate and will be payable on the dates set forth in each credit facility note. As of August 31, 2019, the Fund had no outstanding balance and had the complete credit facility available for drawing, subject to the limitations described above.

Note 9 - Concentration of Credit Risk:

Concentration of credit risk (whether on or off-balance sheet) that arise from financial instruments exist for groups of customers or counterparties when they have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. For this purpose, management has determined to disclose any investment whose fair value is over 5% of Net Assets, both individually or in the aggregate. Moreover, collateralized investments have been excluded for this disclosure.

The major concentrations of credit risk arise from the Fund's investment securities in relation to the location of issuers. For calculation of concentration, all fixed-income securities guaranteed by the U.S. Government are excluded. At August 31, 2019, the Fund had investments with market values of $27,812,034, which were issued by entities located in the Commonwealth of Puerto Rico and are not guaranteed by the U.S. Government nor the Puerto Rico Government. Also, at August 31, 2019, the Fund had investments with market values of $2,307,308, $28,024,280, $4,371,978 and $4,996,832which were each issued by one issuer located in the United States of America and not guaranteed by the U.S. Government.

As stated in the Prospectus, the Fund will ordinarily invest at least 67% of its total assets in Puerto Rico obligations (“the 67% Investment Requirement”). Therefore, to the extent the securities are not guaranteed by the U.S. Government or any of its subdivisions, the Fund is more susceptible to factors affecting issuers of Puerto Rico obligations than an investment company that is not concentrated in Puerto Rico obligations to such degree.

Note 10 - Investment and Other Requirements and Limitations:

The Fund is subject to certain requirements and limitations related to investments and leverage. Some of these requirements and limitations are imposed statutorily or by regulation while others are by procedures established by the Board of Directors. The most significant requirements and limitations are discussed below.

The Fund's investment objective is to provide investors in its Common Stock with current income, consistent with the preservation of capital. To achieve its investment objective and comply with the Office of the Commissioner of Financial Institutions (“OCFI”) regulations, the Fund must invest at least 67% of its total assets in securities issued by the Commonwealth of Puerto Rico, its political subdivisions, agencies and instrumentalities and in Puerto Rico mortgage-backed securities, equity, debt securities, and repurchase agreements issued by corporations or partnerships organized under the laws of the Commonwealth of Puerto Rico, or issued by U.S. or foreign corporations and partnerships doing business in Puerto Rico provided they comply with certain requirements. Up to 33 % of its total assets may be invested in securities issued by the United States government, its political subdivisions, agencies and instrumentalities and municipal securities issued in the United States.

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From time to time, the Fund is permitted not to comply with the 67% Investment Requirement. According to the Commissioner’s ruling, non-compliance may be allowed for a limited period of time due to market scarcity of allowable securities and certain other limited circumstances.

The Fund's leverage, as measured in relation to total assets, may not exceed 50%. Should this ratio be exceeded, the Fund is precluded from further leverage transactions until the maximum 50% ratio is restored.

The Fund may issue preferred stock, debt securities and other forms of leverage to the extent that immediately after their issuance the value of the Fund’s total assets less all the Fund’s liabilities and indebtedness which are not represented by preferred stock, debt securities, or other forms of leverage being issued or already outstanding is equal to or greater than200% of the aggregate par value of all outstanding preferred stock (not including any accumulated dividends or other distributions attributable to such preferred stock) and the total amount outstanding of debt securities and other forms of leverage.

At August 31, 2019, the Fund was not in compliance with the 67% Investment Requirement. The Fund sought andobtained temporary waivers from the Puerto Rico Office of the Commissioner of Financial Institutions with respect to its Puerto Rico asset investments and leverage limitations until June 30, 2020. These waivers provide temporary relief to the Fund from having to limit or otherwise change the strategy of its investment or leverage transactions. Management intends to continue to seek these waivers in the future. If further relief is not granted, the Fund would have to use proceeds derived from the sale, exchange, prepayment, maturity, or any voluntary or involuntary disposition of an asset to re-achieve compliance with the 67% investment requirement in Puerto Rico assets, and would not be able to renew leverage beyond its leverage limitations.

Based on the representations and opinion of the Investment Advisers and consistent with the Fund’s investment objective, the OCFI has granted to the Fund, in a letter dated September 18, 2015, no-objection relief with respect to the Fund’s investment-grade credit rating requirement. This permits the Fund to continue to invest in Puerto Rico securities that do not have an investment-grade credit rating notwithstanding that the current credit rating of such securities is below investment-grade, under certain conditions and at the discretion of the Investment Adviser. Such no-objection relief iseffective through June 30, 2020 or such other later date which may be approved by the OCFI.

Note 11 - Reconciliation between Net Investment Income and Distributable Net Investment Income for TaxPurposes and Net Realized Loss on Investments and Net Realized Loss on Investments for Tax Purposes:

As a result of certain reclassifications made for financial statement presentation, the Fund’s net investment income and net realized loss on investments reflected in the financial statements differ from distributable net investment income and net realized loss on investments for tax purposes, respectively, as follows:

Net investment income $1,587,929Reclassification of realized loss on securities’ paydowns 606Distributable net investment income for tax purposes $1,588,535

Net realized loss on investments $ (1,582,432)Reclassification of realized loss on securities’ paydowns (606)Net realized loss on investments, for tax purposes $ (1,583,038)

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The undistributed net investment income and accumulated net realized loss on investments and derivatives, (for tax purposes) at August 31, 2019 were as follows:

Undistributed net investment income, beginning of the year $ 2,852,105Distributable net investment income for the year 1,588,535Dividends (2,914,334)Undistributed net investment income, end of the year $ 1,526,306

Accumulated net realized loss on investments and derivatives, beginning of the year $(81,045,360)Net realized loss on investments for the year (1,583,038)Accumulated net realized loss on investments and derivatives, end of the year $(82,628,398)

Note 12 – Indemnification:

In the normal course of business, the Fund enters into contracts that contain a variety of indemnifications. The Fund’s maximum exposure under these agreements is unknown. However, the Fund has not paid prior claims or losses pursuant to these contracts and expects the risk of losses to be remote.

Note 13 – Risks and Uncertainties:

The Fund is exposed to various types of risks, such as geographic concentration, industry concentration, non-diversification, interest rate, and credit risks, among others. This list is qualified in its entirety by reference to the more detailed information provided in the prospectus for the securities issued by the Fund.

The Fund’s assets are invested primarily in securities of Puerto Rico issuers. As a result, the Fund has greater exposure to adverse economic, political or regulatory changes in Puerto Rico than a more geographically diversified fund, particularly with regards to municipal bonds issued by the Commonwealth and its related instrumentalities, which are currently experiencing significant price volatility and low liquidity. Also, the Fund’s net asset value and its yield may increase or decrease more than that of a more diversified investment company as a result of changes in the market’s assessment of thefinancial condition and prospects of such Puerto Rico issuers.

Interest rate risk is the risk that interest rates will rise so that the value of existing fixed rate securities will fall. The current low long-term rates present the risk that interest rates may rise and that as a result the Fund’s investments will decline in value. Also, the Fund’s yield will tend to lag behind changes in prevailing short-term interest rates. In addition, during periods of rising interest rates, the average life of certain types of securities may be extended because of the right of the issuer to defer payments or make slower than expected principal payments. This may lock-in a below market interest rate, increase the security’s duration (the estimated period until the security is paid in full), and reduce the value of the security. This is known as extension risk, which the Fund is also subject to. Conversely, during periods of declining interest rates, the issuer of a security may exercise its option to prepay principal earlier than scheduled in order to refinance at lower interest rates, forcing the Fund to reinvest in lower yielding securities. This is known as prepayment risk, which the Fund is also subject to.

Credit risk is the risk that debt securities in the Fund’s portfolio will decline in price or fail to make dividend or interestpayments when due because the issuer of the security experiences a decline in its financial condition. The risk is greater in the case of securities rated below investment grade, or rated in the lowest investment grade category.

The Fund may engage in repurchase agreements, which are transactions in which the Fund sells a security to a counterparty and agrees to buy it back at a specified time and price in a specified currency. Repurchase agreements

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involve the risk that the buyer of the securities sold by the Fund might be unable to deliver the securities when the Fund seeks to repurchase them and may be unable to replace the securities or only at a higher cost.

Mortgage-backed securities in which the Fund may invest have many of the risks of traditional debt securities but, in general, differ from investments in traditional debt securities in that, among other things, principal may be prepaid at any time due to prepayments by the obligors on the underlying obligations. As a result, the Fund may receive principalrepayments on these securities earlier or later than anticipated by the Fund. In the event of prepayments that are received earlier than anticipated, the Fund may be required to reinvest such prepayments at rates that are lower than the anticipated yield of the prepaid obligation. The rate of prepayments is influenced by a variety of economic, geographic, demographic, and other factors, including, among others, prevailing mortgage interest rates, local and regional economic conditions, and home owner mobility. Since a substantial portion of the assets of the Fund may be invested in mortgage-backed securities at any time, the Fund may be subject to these risks and other risks related to such securities to a significant degree, which might cause the market value of the Fund’s investments to fluctuate more than otherwise would be the case. Collateralized mortgage obligations or “CMOs” exhibit similar risks to those of mortgage-backed securities but also present certain special risks. CMO classes may be specially structured in a manner that provides a variety of investment characteristics, such as yield, effective maturity, and interest rate sensitivity. As market conditions change, however, particularly during periods of rapid or unanticipated changes in interest rates, the ability of a CMO class to provide the anticipated investment characteristics and performance may be significantly reduced. These changes may result in volatility in the market value, and in some instances, reduced liquidity of the CMO class.

The Fund may also invest in illiquid securities which are securities that cannot be sold within a reasonable period of time, not to exceed seven days, in the ordinary course of business at approximately the amount at which the Fund has valued the securities. There presently are a limited number of participants in the market for certain Puerto Rico securities or other securities or assets that the Fund may own. That and other factors may cause certain securities to have periods of illiquidity. Illiquid securities may trade at a discount from comparable, more liquid investments.

There may be few or no dealers making a market in certain securities owned by the Fund, particularly with respect to securities of Puerto Rico issuers including, but not limited to, investment companies. Dealers making a market in those securities may not be willing to provide quotations on a regular basis to the Investment Adviser. It may, therefore, be particularly difficult to value those securities.

In order to attempt to hedge various portfolio positions or to enhance its return, the Fund may invest a portion of its total assets in certain instruments which are or may be considered derivatives. Because of their increased volatility and potential leveraging effect (without being subject to the Fund’s leverage limitations), derivative instruments may adversely affect the Fund. For example, investments in indexed securities, including, among other things, securities linked to an equities or commodities index and inverse floating rate securities, may subject the Fund to the risks associated with changes in the particular indices, which may include reduced or eliminated interest payments and losses of invested principal. Such investments, in effect, may also be leveraged, thereby magnifying the risk of loss.

Fitch Ratings ("Fitch"), Moody’s Investors Service ("Moody's"), and S&P Global Ratings ("S&P") have downgraded the general obligation bonds (“GOs”) of the Commonwealth of Puerto Rico as well as the obligations of certain Commonwealth agencies and public corporations, including the Employees Retirement System of the Government of the Commonwealth of Puerto Rico ("ERS"), on numerous occasions. Fitch downgraded the GOs to “D” (default) and its ratings for the Commonwealth as a bond issuer, to “RD” on July 6, 2016, and for ERS to “D” on July 20, 2017, respectively. S&P had previously downgraded ERS, to "C" on September 10, 2015, and subsequently the GOs, to “D” (default) on July 7, 2016, and the debt ratings for the Government Development Bank for Puerto Rico, to “D” (default) on September 8, 2016. Moody’s downgraded ERS, to "C" on April 5, 2017, and the GOs, to “Ca” on October 11, 2017. No ratings have been issued on the newly-issued exchange bonds by the Puerto Rico Sales Tax Financing Corporation (“COFINA”), as described below.

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On June 30, 2016, the Puerto Rico Oversight, Management, and Economic Stability Act ("PROMESA") was signed intolaw. It created the Financial Oversight and Management Board for Puerto Rico (the "Oversight Board") with broad powersdesigned to help the Commonwealth balance its finances, restructure its debt, and ensure a return to the markets. Theenactment of PROMESA operated as a stay of any actions or proceedings against the Commonwealth and its agencies andinstrumentalities by its creditors, which stay was in effect through May 1, 2017. As of that date, the Oversight Board hasfiled five (5) petitions to commence cases under Title III of PROMESA in the U.S. District Court for the District of PuertoRico (the "District Court") with respect to all debt issued by the following: the Commonwealth of Puerto Rico; COFINA;ERS; the Puerto Rico Highways and Transportation Authority; and the Puerto Rico Electric Power Authority (“PREPA”).The filing of these petitions triggered a new stay of any actions or proceedings against these five debtors.

In the ERS Title III case, certain ERS bondholders had reached a consensual agreement with the Commonwealth, ERS,and the Oversight Board prior to May 21, 2017, which provided, among other things, that (i) all employer contributionsreceived by ERS during the pendency of the PROMESA stay would be segregated in an account for the benefit of holdersof the ERS bonds, and (ii) ERS would transfer to Bank of New York Mellon ("BNYM"), as ERS' fiscal agent, the amountsrequired each month for the payment of interest on the ERS bonds. After the filing of ERS' Title III petition on May 21,2017, AAFAF, on behalf of ERS, delivered a non-funding notice as permitted under this agreement on June 5, 2017,stating that ERS would discontinue transferring the amounts necessary to pay interest due on the ERS bonds commencingon July 1, 2017 and going forward. Certain ERS bondholders filed a motion to lift the automatic stay with the DistrictCourt on May 31, 2017, to seek adequate protection of the ERS bondholders' collateral. The Puerto Rico Legislatureadopted a joint resolution on June 25, 2017, which, among other things, purported to terminate the obligations of all PuertoRico central government instrumentalities, as well as all public corporations and municipalities, to transmit employercontributions to ERS. On June 28, 2017, the District Court ordered the ERS creditors, the Oversight Board, and theCommonwealth to attempt to reach another consensual agreement, in line with what was previously agreed.

On July 17, 2017, the District Court issued an order approving a joint stipulation (the "Joint Stipulation") entered intoamong certain ERS bondholders, the Commonwealth, ERS, and the Oversight Board, which provided for (i) the paymentof interest on the ERS bonds through the date on which the District Court would enter a ruling in an action seekingdeclaratory relief regarding the validity of ERS bondholders’ liens and security interests in certain collateral, as well as (ii)the deposit by the Commonwealth of approximately $18,500,000 in employer contributions from municipalities and publiccorporations into a segregated account of ERS for the benefit of ERS bondholders in each of July, August, September, andOctober of 2017 (the "Declaratory Relief Action"). The Fund received the required interest payments on the ERS bondsthrough and including November 1, 2017. On December 28, 2017, the District Court issued another order (the "December2017 Order”), affirming that the Joint Stipulation required the continued payment of monthly interest on the ERS bonds inthe aggregate amount of $13,876,582.48 beyond October 31, 2017. These interest payments continued until July 20, 2018,when the amounts held in the segregated account for such interest payments were exhausted. The December 2017 Orderalso contemplated that the monthly interest payments required thereunder be applied to all series of the ERS bonds,including capital appreciation bonds that would otherwise not be entitled to current interest, with such payments expresslyconstituting “adequate protection payments” for all ERS bondholders, in accordance with the December 2017 Order,PROMESA, and the U.S. Bankruptcy Code. The District Court reserved for future consideration the final allowance andtreatment of such “adequate protection payments” in determining the allowed amount of the claims under the ERS bondsin the ERS Title III case.

The District Court dismissed the Declaratory Relief Action on August 17, 2018, ruling against the ERS bondholders anddetermining, among other things, that they did not possess a perfected security interest in the ERS bondholders' collateral,and that any security interest held by the ERS bondholders in the ERS collateral was invalid and unenforceable. OnJanuary 30, 2019, the Circuit Court reversed the District Court’s order and remanded to the District Court for furtherproceedings. Subsequently, on June 28, 2019, the District Court resolved the issue of whether the security interest of theERS bondholders attached to revenues received by ERS during the post-petition period, ruling that that ERS bondholderswere not entitled to continued payment in bankruptcy, inasmuch as the bonds' revenues weren’t protected "specialrevenues" under Section 928 of the U.S. Bankruptcy Code. The ERS bondholders have appealed this decision to the

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Circuit Court, and an oral hearing has been scheduled for December 4, 2019. In addition to defending the ERSbondholders’ collateral in the Declaratory Relief Action, certain ERS bondholders instituted a lawsuit on July 27, 2017,challenging the Puerto Rico Legislature’s June 25, 2017 joint resolution purporting to terminate employer contributions toERS. That litigation remains pending.

On February 15, 2019, the Circuit Court reversed a prior District Court decision that had validated the process by whichthe Oversight Board was appointed. The Circuit Court concluded that the appointments clause of the U.S. Constitutionrequires Senate confirmation of all principal officers of the U.S. government, including the Oversight Board members.However, the Circuit Court only severed the specific invalidated clauses from the remaining provisions of PROMESA anddid not invalidate the entire statute, rejecting the appellants' request to invalidate all actions taken by the Oversight Boardto date. The Circuit Court granted a 90-day stay on its ruling, to allow the President and U.S. Senate to reconstitute theOversight Board. On April 29, 2019, the White House notified its intention to ask the U.S. Senate to confirm the currentmembers of the Oversight Board. Afterwards, the Oversight Board appealed the Circuit Court's decision to the U.S.Supreme Court, and the Circuit Court delayed enforcement of its February 2019 ruling pending a final determination forsuch appeal. Oral arguments were heard by the U.S. Supreme Court on October 15, 2019.

Between April 30, 2019 and May 2, 2019, the Oversight Board and the Commonwealth's Unsecured Creditors Committee filed complaints against certain bondholders, as well as certain individuals and companies supplying goods and services to the Commonwealth, seeking to avoid transfers and disallow claims relating to allegedly fraudulent transfers under the Commonwealth laws and U.S. Bankruptcy Code. On May 23, 2019, the Oversight rejected the government’s revised 2019-2020 budget for the Commonwealth as not compliant with the PROMESA requirements and, on May 28, 2019, delivered their version of a revised compliant budget to the Puerto Rico government for review and adoption.

On July 24, 2019, the District Court issued an order which stayed a substantial portion of the adversary proceedings andcontested matters with respect to the Puerto Rico government debtors currently in Title III of PROMESA. The stay willremain in effect through December 31, 2019, and parties to any stayed proceedings or contested matters have been orderedto participate in discussions and communications to address potentially overlapping key issues; identify the issues that mustbe litigated or otherwise resolved to achieve confirmation of a plan of adjustment for each of the debtors in the respectiveTitle III proceedings; and develop efficient approaches to the resolution of each such issues.

For a summary with respect to the COFINA restructuring, please see Note 14 – COFINA RESTRUCTURING below.

On May 3, 2019, PREPA, AAFAF, the Oversight Board, and the Ad Hoc Group of PREPA Bondholders executed aDefinitive Restructuring Support Agreement (the "RSA"). Pursuant to the RSA, the bondholders will exchange theirexisting PREPA bonds for two types of new securitization bonds. The RSA provides that the repayment of the bonds willbe backed by a fixed transition charge (the “Transition Charge”), subject to a predetermined maximum, that does not varywith the fluctuation in sales of PREPA. The exchange ratio of the Series A bonds will be approximately 67.5% of therespective bond holder’s claim amount (as further described in the RSA), while the Series B bonds will be exchanged forcapital appreciation bonds with an additional recovery of approximately 10% of the respective claim (as further describedin the RSA). Interest accrued on the Series A bonds is paid only to the extent that there are sufficient receipts from theTransition Charge to pay such interest; otherwise, the interest thereon will accrue and compound. Principal on the SeriesA bonds will be paid to the extent there are excess receipts from the Transition Charge, after payment of interest. Therewill be no debt service payments on the Series B bonds until the Series A bonds are paid in full. The terms of the RSArequire the enactment of legislation by the Puerto Rico Government and will be subject to the approval of the DistrictCourt. Certain members of the U.S. House of Representatives have expressed reservations regarding the RSA.

On August 2, 2019, Puerto Rico Governor Ricardo Rosselló resigned amid allegations of government corruption and thecontemporaneous dissemination of certain internal communications, involving Governor Rosselló, containing controversialstatements. This resulted in widespread public protests. After a failed attempt by the designated Secretary of State, Mr.Pedro Pierluisi, to assume the governorship, the Puerto Rico Secretary of Justice, Ms. Wanda Vázquez, was sworn in to

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succeed Mr. Rosselló as Puerto Rico Governor. While the impact on the Puerto Rico economy of the public unrest andMr. Rosselló's resignation has not been quantified, it has been widely reported that these events have had a negativeimpact.

As of August 31, 2019, 39% of the Fund’s assets were held in securities issued by Puerto Rico Employees Retirement System and Puerto Rico Sales Tax Financing Corporation. There can be no assurance that any additional defaults by the Commonwealth and other Commonwealth instrumentalities will not have an adverse impact on the Fund’s net investmentincome and its ability to declare and pay dividends in the future. Any future developments in this respect could result in additional interruptions in cash flow on debt payments, which may result in more price volatility, across Puerto Rico securities.

Note 14 – COFINA Restructuring:

In the COFINA Title III case, the Commonwealth, COFINA, certain COFINA bondholders, and others participated in a mediation process, led by a team of five judges appointed by the District Court. On August 29, 2018, COFINA, the Puerto Rico Fiscal Agency and Financial Advisory Authority (known by its Spanish initials "AAFAF"), the Oversight Board, and certain COFINA credit parties entered into a Plan Support Agreement, which provided for the apportionment of Puerto Rico Rico's sales and use tax between the Commonwealth and COFINA and the restructuring of COFINA's debt and served as the basis for a plan of adjustment for the COFINA debt. COFINA's Third Amended Plan of Adjustment (the "Plan") was approved by the District Court on February 4, 2019 and went effective on February 12, 2019. Pursuant to the Plan, COFINA bondholders received newly-issued COFINA bonds based on their creditor class. Under the Plan, the newly exchanged bonds are secured by 53.65% of the pledged sales and use tax through 2058, which amount to $420 million for fiscal year 2019, and increase by 4% each year thereafter, capping out at $992.5 million in fiscal year 2041. Following the consummation of the Plan, several labor unions and other litigants filed notices with the U.S. Court of Appeals for the First Circuit (the "Circuit Court"), to appeal the District Court's approval of the Plan.

As established in COFINA's plan of adjustment, the Fund has received (i) new COFINA current interest bonds with anaggregate face value amounting to $15,611,000, (ii) new COFINA capital appreciation bonds with an aggregate face valueamounting to $20,348,000, (iii) an aggregate cash payment in the amount of approximately $2,134,617 related to suchrestructuring, and (iv) an additional cash payment in the amount of $863,344 in consummation costs, by reason of theFund being a participant and signatory to the COFINA Plan Support Agreement (the "COFINA PSA"). The total cashreceived was $2,997,961, which was accounted for as a realized gain. Subsequently, the Fund distributed a specialdividend of an aggregate $2,319,546, to holders of common stock on March 31, 2019.

As reflected in the attached Statement of Cash Flows, the Fund incurred $260,232 in legal expenses related to Puerto Ricobond restructurings during the fiscal year ended August 31, 2019, which were accounted for as restructuring expenses,$118,416 of which were related to the COFINA restructuring. Under the terms of the COFINA plan of adjustment,COFINA bondholders received approximately 93% of their senior COFINA principal bond holdings and approximately56.40% of their subordinated COFINA principal bond holdings (such percentages include cash payments received by allCOFINA bondholders). As a participant and signatory to the COFINA PSA, the Fund received an additional cash paymentin consummation costs in the before-mentioned amount. A net realized loss attributable to the COFINA bond restructuringwas recognized in the amount of $919,919.

Additionally, pursuant to a Tax Exemption Implementation Agreement dated as of February 12, 2019 (the “TaxImplementation Agreement”), COFINA agreed to continue to pursue guidance from the U.S. Internal Revenue Service (the“IRS”) regarding the tax treatment of certain series of the newly-issued COFINA bonds, subject to a twenty-five (25) basispoint reduction in the yield on such bonds in any future exchange. On May 15, 2019, COFINA entered into a closingagreement (the “IRS Closing Agreement”) with the IRS in which the IRS permits COFINA to make certain allocationswith respect to the use of proceeds of such series of bonds, and upon their exchange for a new sub-series, interest (otherthan pre-issuance accrued interest) thereon will be excluded from gross income for federal income tax purposes under

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Section 103 of the U.S. Internal Revenue Code. This exchange transaction was consummated on August 1, 2019, wherebythe Fund exchanged its qualifying series of COFINA newly-issued bonds for a new series of bonds exempt from taxationunder Section 103 of the U.S. Internal Revenue Code.

Note 15 - Subsequent Events:

On September 27, 2019, the Board of Directors declared an ordinary net investment income dividend of $0.006667 per common share, totaling $73,253 which was paid on October 10, 2019 to common shareholders of record as of September 30, 2019.

On October 31, 2019, the Board of Directors declared an ordinary net investment income dividend of $0.0075 per common share, totaling $82,407 which was paid on November 12, 2019 to common shareholders of record as of October 31, 2019.

The Fund has performed an evaluation of events occurring subsequent to August 31, 2019 through November 21, 2019,which is the date the financial statements were available to be issued. Management has determined that there were no events occurring in this period that required disclosure in or adjustment to the accompanying financial statements other than those disclosed above.

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Remember that:

Mutual Funds Shares are not bank deposits or FDIC insured. Mutual Funds Shares are not obligations of or guaranteed by Banco Popular de Puerto Rico or UBS

Financial Services Incorporated of Puerto Rico or any of their affiliates. Mutual Funds Shares are subject to investment risks, including possible loss of the principal amount

invested.

INVESTMENT ADVISERS Banco Popular de Puerto Rico 209 Muñoz Rivera Avenue Suite 1112 San Juan, Puerto Rico 00918 UBS Trust Company of Puerto Rico 250 Muñoz Rivera Avenue San Juan, Puerto Rico 00918 ADMINISTRATOR, TRANSFER AGENT AND CUSTODIAN Banco Popular de Puerto Rico Popular Fiduciary Services 209 Muñoz Rivera Avenue Popular Center, North Tower, 4th Floor San Juan, Puerto Rico 00918 PUERTO RICO LEGAL COUNSEL Avilés Pagán Law Offices, PSC 261 Tanca Street, Sixth Floor San Juan, Puerto Rico 00901 U. S. LEGAL COUNSEL Sidley Austin, LLP 787 Seventh Avenue New York, New York 10019 INDEPENDENT ACCOUNTANTS PricewaterhouseCoopers, LLP PO Box 363566 San Juan, Puerto Rico 00936-3566

DIRECTORS AND OFFICERS Enrique Vila del Corral Chairman of the Board and President Clotilde Pérez Director Gabriel Pagán Pedrero Director Carlos J. Nido Director Jorge I. Vallejo Director Luis M. Pellot Director Leslie Highley, Jr. Senior Vice President Javier Rubio Senior Vice President José González Treasurer