PUTNAM MUNICIPAL BOND FUND



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                            AUCTION AGENCY AGREEMENT

                          dated as of __________, 2001

                                   Relating to

                Auction Rate Municipal Preferred Shares, Series A

                Auction Rate Municipal Preferred Shares, Series B

                                       of

                           PUTNAM MUNICIPAL BOND FUND



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



                             BANKERS TRUST COMPANY,

                                as Auction Agent





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                            AUCTION AGENCY AGREEMENT



         This Auction Agency Agreement (this "Agreement"), dated as of

____________, 2001, is between Putnam Municipal Bond Fund (the "Fund") and

Bankers Trust Company, a New York banking corporation.



         The Fund proposes to issue 2,920 Auction Rate Municipal Preferred

Shares ("AMPS"), Series A ("Series A AMPS") and 2,400 Auction Rate Municipal

Preferred Shares, Series B ("Series B AMPS"), all without par value and with a

liquidation preference of $25,000 per share plus accumulated but unpaid

dividends, pursuant to and with the powers, preferences and rights assigned to

them as set forth in Amendment No. 6 to the Bylaws of the Fund (the Series A

AMPS and Series B AMPS are herein collectively referred to as the "Preferred

Shares").



         The Fund desires that Bankers Trust Company perform certain duties as

agent in connection with each Auction (as defined below) of Preferred Shares (in

such capacity, the "Auction Agent"), and as the transfer agent, registrar,

dividend paying agent and redemption agent with respect to the Preferred Shares

(in such capacity, the "Paying Agent"), upon the terms and conditions of this

Agreement, and the Fund hereby appoints Bankers Trust Company as said Auction

Agent and Paying Agent in accordance with those terms and conditions

(hereinafter generally referred to as the "Auction Agent," except in Sections 3

and 4 below).



         NOW, THEREFORE, in consideration of the premises and the mutual

covenants contained herein, the Fund and the Auction Agent agree as follows:



I.       DEFINITIONS AND RULES OF CONSTRUCTION.



         1.1      TERMS DEFINED BY REFERENCE TO THE BYLAWS.



         Capitalized terms not defined herein shall have the respective meanings

specified in the Bylaws.



         1.2      CERTAIN DEFINED TERMS.



         As used herein, the following terms shall have the following meanings,

unless the context otherwise requires:



                  (a) "Agent Member" of any Person shall mean such Person's

agent member of a participant in the Securities Depository that will act on

behalf of a Bidder.



                  (b)      "Agreement" shall mean this Auction Agency Agreement.



                  (c)      "Auction" shall have the meaning specified in

Section 2.1 hereof.



                  (d) "Auction Procedures" shall mean the Auction Procedures

that are set forth in Article 12, Section 12.1, Part II of the Bylaws.



                  (e) "Authorized Officer" shall mean each Managing Director,

Vice President, Assistant Vice President and Associate of the Auction Agent and

every other officer or employee



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of the Auction Agent designated as an "Authorized Officer" for purposes

hereof in a written communication from the Auction Agent to the Fund.



                  (f) "Broker-Dealer Agreement" shall mean each agreement

between the Auction Agent and a broker-dealer substantially in the form attached

hereto as Exhibit A.



                  (g)      "Bylaws" shall mean the Bylaws of the Fund as

amended from time to time.



                  (h) "Fund Officer" shall mean the President, any Vice

President (whether or not designated by a number or word or words added before

or after the title "Vice President"), and the Treasurer of the Fund and every

other officer or employee of the Fund designated as a "Fund Officer" for

purposes hereof in a notice from the Fund to the Auction Agent.



                  (i) "Holder" shall be a holder of record of one or more

Preferred Shares, listed as such in the share register maintained by the Paying

Agent pursuant to Section 4.6 hereof.



         1.3      RULES OF CONSTRUCTION.



         Unless the context or use indicates another or different meaning or

intent, the following rules shall apply to the construction of this Agreement:



                  (a)      Words importing the singular number shall include

the plural number and vice versa.



                  (b) The captions and headings herein are solely for

convenience of reference and shall not constitute a part of this Agreement nor

shall they affect its meaning, construction or effect.



                  (c) The words "hereof," "herein," "hereto," and other words of

similar import refer to this Agreement as a whole.



                  (d)      All references herein to a particular time of day

shall be to New York City time.



II.      THE AUCTION.



         2.1      PURPOSE; INCORPORATION BY REFERENCE OF AUCTION PROCEDURES.



                  (a) The Bylaws provide that the Applicable Rate on each

series of the Preferred Shares for each Dividend Period therefor after the

Initial Rate Period shall generally be the rate per annum that a commercial

bank, trust company or other financial institution appointed by the Fund

advises results from the implementation of the Auction Procedures. The

Trustees of the Fund have adopted a resolution appointing Bankers Trust

Company as Auction Agent for the purposes of the Auction Procedures. The

Auction Agent hereby accepts such appointment and agrees that, on each

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