MERRILL LYNCH
AGGREGATE BOND
INDEX FUND
Merrill Lynch
Index Funds, Inc.
[Graphic Omitted]
STRATEGIC
Performance
Annual Report
December 31, 1997
<PAGE>
Merrill Lynch Aggregate Bond Index Fund
Officers and
Directors
Terry K. Glenn, President and Director
Jack B. Sunderland, Director
Stephen B. Swensrud, Director
J. Thomas Touchton, Director
Norman R. Harvey, Senior Vice President
Joseph T. Monagle Jr., Senior Vice President
Jay C. Harbeck, Vice President
Gregory Mark Maunz, Vice President
Eric S. Mitofsky, Vice President
Gerald M. Richard, Treasurer
Ira P. Shapiro, Secretary
Custodian
Merrill Lynch Trust Company
800 Scudders Mill Road
Plainsboro, NJ 08536
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
Important Tax
Information
None of the net investment income distributions paid monthly by Merrill Lynch
Aggregate Bond Index Fund during the fiscal year ended December 31, 1997 qualify
for the dividends received deduction for corporations. The Fund paid a
short-term capital gain distribution of $0.032317 per share to shareholders of
record on December 22, 1997. Additionally, there were no long-term capital gains
distributed during the year.
The law varies in each state as to whether and what percentage of dividend
income attributable to Federal obligations is exempt from state income tax. We
recommend that you consult your tax adviser to determine if any portion of the
dividends you received is exempt from state income tax.
Listed at right are the percentages of total assets of the Fund invested in
Federal obligations as of the end of each quarter of the fiscal year:
- -------------------------------------------------------------------------
For the Percentage of
Quarter Ended Federal Obligations*
- -------------------------------------------------------------------------
March 31, 1997..................................... N/A
June 30, 1997...................................... 42.94%
September 30, 1997................................. 45.57
December 31, 1997.................................. 45.27
- -------------------------------------------------------------------------
* For purposes of this calculation, Federal obligations include US Treasury
Notes, US Treasury Bills, and US Treasury Bonds. Also included are
obligations issued by the following agencies: Banks for Cooperatives,
Federal Intermediate Credit Banks, Federal Land Banks, Federal Home Loan
Banks, and the Student Loan Marketing Association. Repurchase agreements
are not included in this calculation.
Of the Fund's net investment income distributions paid monthly during the fiscal
year ended December 31, 1997, 49.38% was attributable to Federal obligations. In
calculating the foregoing percentage, Fund expenses have been allocated on a pro
rata basis.
Please retain this information for your records.
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, December 31, 1997
DEAR SHAREHOLDER
Fiscal Year in Review
Merrill Lynch Aggregate Bond Index Fund commenced operations on April 3, 1997 in
an investment environment which proved to be very favorable to investors in
high-quality fixed-income securities. Interest rates declined fairly steadily
throughout the last six months of 1997, allowing securities to appreciate and
generate returns in excess of coupon flow to shareholders. Since inception
(April 3, 1997) through December 31, 1997, the Fund's Class A and Class D Shares
had total returns of +9.49% and +9.29%, respectively. This compares to the total
return of +9.89% for the unmanaged Lehman Brothers Aggregate Bond Index for the
same period. (For complete performance information, including average annual
total returns, see pages 3 and 4 of this report to shareholders.)
The investment objective of the Fund is to seek to provide investment returns
that, before expenses, replicate the total return of the unmanaged Lehman
Brothers Aggregate Bond Index. The Index is comprised of securities from the US
Treasury, agency, mortgage-backed and corporate investment-grade sectors. The
allocation of sectors in the Index is identical to their weighting in the actual
market. As of year-end, the Treasury and agency sectors represented 49.6% of the
Index, with mortgage-backed and corporate securities representing 29.4% and
21.0% of the Index, respectively.
The Fund seeks to achieve its objective by investing all of its assets in
Merrill Lynch Aggregate Bond Index Series. While the sector allocation in the
Series is identical to that of the Index, there is no guarantee that Series
performance will be identical to the Index. This is because the Fund is not an
exact replication of the Index. It does not utilize every security in the Index.
There are currently 6,188 positions in the Index, which makes it too large for
the Series to replicate exactly.
In constructing the Series, securities are selected which, in aggregate, possess
the same investment characteristics as the Index. In constructing the Treasury
and agency sectors, the measures of duration (which measure the amount of price
change when interest rates change) and convexity (which measure the stability of
duration) are identical in the Series and the Index. In addition, an analysis of
the duration exposure is conducted for each part of the yield curve (partial
duration) to ensure identical exposure to the yield curve. This provides comfort
that in the event the shape of the yield curve changes, a deviation in
performance will not result.
A similar approach is applicable in constructing the corporate sector of the
Series. However, in addition to duration, partial duration, and convexity
exercises, credit and industry exposure of the Series is matched to the Index.
The mortgage-backed sector is managed in a slightly different manner. In the
analysis of mortgage-backed securities, the calculation of duration and
convexity is highly dependent on prepayment assumptions of the underlying
mortgages. While there are many models projecting prepayments, there has yet to
emerge a model which can be fully relied upon. As a result, the duration and
convexity measurements may not be accurate. In lieu of these measurements, the
Series' construction is matched by other elements. The Series is neutral to the
mortgage sector in regard to coupon, original term (30-year, 15-year, balloon)
and issuer.
Since the Series is only a proxy of the Index, performance differences between
the Series and the Index (also known as tracking error) are expected to occur to
some extent. Tracking error has been low since inception, since the performance
of the 136 positions held in the Series have followed the performance of the
6,188 positions in the Index fairly closely.
In Conclusion
We appreciate your investment in Merrill Lynch Aggregate Bond Index Fund, and we
look forward to sharing our investment outlook with you in the months and years
ahead.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President
/s/ Jay C. Harbeck
Jay C. Harbeck
Vice President and
Co-Portfolio Manager
/s/ Gregory Mark Maunz
Gregory Mark Maunz
Vice President and
Co-Portfolio Manager
February 9, 1998
PERFORMANCE DATA
About Fund
Performance
Investors are able to purchase shares of the Fund through the Merrill Lynch
Select Pricing(SM) System, which offers two pricing alternatives:
o Class A Shares do not incur a maximum initial sales charge (front-end
load) or deferred sales charge and bear no ongoing distribution or account
maintenance fees. Class A Shares are available only to eligible investors.
o Class D Shares do not incur a maximum initial sales charge or deferred
sales charge and bear no ongoing distribution fee. In addition, Class D
Shares are subject to an ongoing account maintenance fee of 0.25%.
None of the past results shown should be considered a representation of future
performance. Figures shown in the "Aggregate Total Return" tables assume
reinvestment of all dividends and capital gains distributions at net asset value
on the payable date. Investment return and principal value of shares will
fluctuate so that shares, when redeemed, may be worth more or less than their
original cost. Dividends paid to each class of shares will vary because of the
different levels of account maintenance fees applicable to each class, which are
deducted from the income available to be paid to shareholders.
Recent
Performance
Results
<TABLE>
<CAPTION>
Standardized
30-Day
Since Yield
Inception+ 3 Month As of
12/31/97 9/30/97 4/03/97+ % Change % Change 12/31/97
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
ML Aggregate Bond Index Fund Class A Shares $10.42 $10.32 $10.00 +4.20% +0.97% 6.12%
- ----------------------------------------------------------------------------------------------------------------------------------
ML Aggregate Bond Index Fund Class D Shares 10.42 10.32 10.00 +4.20 +0.97 5.86
- ----------------------------------------------------------------------------------------------------------------------------------
ML Aggregate Bond Index Fund Class A Shares--Total Return +9.49(1) +2.89(2)
- ----------------------------------------------------------------------------------------------------------------------------------
ML Aggregate Bond Index Fund Class D Shares--Total Return +9.29(3) +2.82(4)
==================================================================================================================================
</TABLE>
+ The Fund commenced operations on April 3, 1997.
(1) Percent change includes reinvestment of $0.511 per share ordinary income
dividends.
(2) Percent change includes reinvestment of $0.218 per share ordinary income
dividends.
(3) Percent change includes reinvestment of $0.492 per share ordinary income
dividends.
(4) Percent change includes reinvestment of $0.210 per share ordinary income
dividends.
Pages 2 & 3
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, December 31, 1997
PERFORMANCE DATA (concluded)
Total Return Based on a $10,000 Investment
Class A & Class D Shares
A line graph depicting the growth of an investment in the Fund's Class A Shares
and Class D Shares compared to growth of an investment in the Lehman Aggregate
Index. Beginning and ending values are:
- --------------------------------------------------------------------------------
4/03/97** 12/97
ML Aggregate Bond Index Fund+--
Class A Shares* $10,000 $10,949
ML Aggregate Bond Index Fund+--
Class D Shares* $10,000 $10,929
Lehman Aggregate Index+++ $10,000 $10,989
- --------------------------------------------------------------------------------
* Assuming transaction costs and other operating expenses, including
advisory fees.
** Commencement of operations.
+ The Fund invests all of its assets in Merrill Lynch Aggregate Bond Index
Series of Merrill Lynch Index Trust. The Trust may invest in a
statistically selected sample of fixed-income securities and other types
of financial instruments.
+++ This unmanaged market-weighted Index is comprised of investment-grade
corporate bonds (rated BBB or better), mortgages and US Treasury and
Government agency issues with at least one year to maturity. Past
performance is not predictive of future performance.
% Return
Aggregate ==============================================================
Total Return Class A Shares
==============================================================
Inception (4/03/97) through 12/31/97 +9.49%
--------------------------------------------------------------
% Return
==============================================================
Class D Shares
==============================================================
Inception (4/03/97) through 12/31/97 +9.29%
--------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
MERRILL LYNCH
AGGREGATE BOND
INDEX FUND As of December 31, 1997
====================================================================================================================================
<C> <S> <C> <C>
Assets: Investment in Merrill Lynch Aggregate Bond Index Series, at value
(identified cost--$300,221,269) (Note 1a) ....................................... $ 307,561,388
Receivable from administrator (Note 2) .............................................. 42,805
Deferred organization expenses (Note 1d) ............................................ 11,972
Prepaid registration fees (Note 1d) ................................................. 31,564
-------------
Total assets ........................................................................ 307,647,729
-------------
====================================================================================================================================
Liabilities: Payables:
Dividends and distributions to shareholders (Note 1e) ............................ $ 225,266
Distributor (Note 2) ............................................................. 12,276 237,542
-------------
Accrued expenses and other liabilities .............................................. 136,258
-------------
Total liabilities ................................................................... 373,800
-------------
====================================================================================================================================
Net Assets: Net assets .......................................................................... $ 307,273,929
=============
====================================================================================================================================
Net Assets Class A Shares of Common Stock, $0.0001 par value, 125,000,000 shares authorized .... $ 2,411
Consist of: Class D Shares of Common Stock, $0.0001 par value, 125,000,000 shares authorized .... 539
Paid-in capital in excess of par .................................................... 300,000,385
Accumulated distributions in excess of realized capital gains on investments from
the Series--net (Note 1e) ....................................................... (69,525)
Unrealized appreciation on investments from the Series--net ......................... 7,340,119
-------------
Net assets .......................................................................... $ 307,273,929
=============
====================================================================================================================================
Net Asset Class A--Based on net assets of $251,140,395 and 24,112,166 shares outstanding ...... $ 10.42
Value: =============
Class D--Based on net assets of $56,133,534 and 5,387,967 shares outstanding ........ $ 10.42
=============
====================================================================================================================================
</TABLE>
See Notes to Financial Statements.
Pages 4 & 5
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, December 31, 1997
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
MERRILL LYNCH
AGGREGATE BOND
INDEX FUND For the Period April 3, 1997+ to December 31, 1997
===================================================================================================================================
<C> <S> <C> <C>
Investment Income Investment income allocated from the Series....................... $ 9,584,726
(Note 1b): Expenses allocated from the Series................................ (223,625)
------------
Net investment income from the Series............................. 9,361,101
------------
===================================================================================================================================
Expenses: Administration fee (Note 2)....................................... $ 204,163
Registration fees (Note 1d)....................................... 163,504
Transfer agent fees (Note 2)...................................... 72,915
Account maintenance fee--Class D (Note 2)......................... 71,476
Printing and shareholder reports.................................. 38,206
Professional fees................................................. 12,000
Amortization of organization expenses (Note 1d)................... 10,275
Accounting services (Note 2)...................................... 900
Directors' fees and expenses...................................... 750
Other ............................................................ 1,264
------------
Total expenses before reimbursement............................... 575,453
Reimbursement of expenses (Note 2)................................ (217,236)
------------
Total expenses after reimbursement................................ 358,217
------------
Investment income--net............................................ 9,002,884
------------
===================================================================================================================================
Realized &
Unrealized Realized gain on investments from the Series-- net................ 870,653
Gain from the Unrealized appreciation on investments from the Series--net....... 7,340,119
Series - Net: ------------
Net Increase in Net Assets Resulting from Operations.............. $ 17,213,656
============
===================================================================================================================================
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
MERRILL LYNCH For the Period
AGGREGATE BOND April 3, 1997+ to
INDEX FUND Increase (Decrease) in Net Assets: December 31, 1997
====================================================================================================================================
<C> <S> <C>
Operations: Investment income--net....................................................................... $ 9,002,884
Realized gain on investments from the Series--net............................................ 870,653
Unrealized appreciation on investments from the Series--net.................................. 7,340,119
------------
Net increase in net assets resulting from operations......................................... 17,213,656
------------
====================================================================================================================================
Dividends & Investment income--net:
Distributions to Class A................................................................................... (7,292,400)
Shareholders Class D................................................................................... (1,710,484)
(Note 1e): Realized gain on investments from the Series--net:
Class A................................................................................... (709,638)
Class D................................................................................... (161,015)
In excess of realized gain on investments from the Series -- net:
Class A................................................................................... (56,667)
Class D................................................................................... (12,858)
------------
Net decrease in net assets resulting from dividends and distributions to shareholders........ (9,943,062)
------------
====================================================================================================================================
Capital Share Net increase in net assets derived from capital share transactions........................... 299,978,335
Transactions ------------
(Note 4):
====================================================================================================================================
Net Assets: Total increase in net assets................................................................. 307,248,929
Beginning of period.......................................................................... 25,000
------------
End of period................................................................................ $307,273,929
============
====================================================================================================================================
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
For the Period
The following per share data and ratios have been derived April 3, 1997+ to
MERRILL LYNCH from information provided in the financial statements. December 31, 1997
AGGREGATE BOND ------------------------------
INDEX FUND Increase (Decrease) in Net Asset Value: Class A Class D
==========================================================================================================================
<C> <S> <C> <C>
Per Share Net asset value, beginning of period ............................. $ 10.00 $ 10.00
Operating ----------- -----------
Performance: Investment income--net ........................................... .48 .46
Realized and unrealized gain on investments from the Series--net . .45 .45
----------- -----------
Total from investment operations ................................. .93 .91
----------- -----------
Less dividends and distributions:
Investment income-- net ....................................... (.48) (.46)
Realized gain on investments from the Series-- net ............ (.03) (.03)
In excess of realized gain on investments from the Series-- net --++ --++
----------- -----------
Total dividends and distributions ................................ (.51) (.49)
----------- -----------
Net asset value, end of period ................................... $ 10.42 $ 10.42
=========== ===========
==========================================================================================================================
Total Investment Based on net asset value per share ............................... 9.49%++ 9.29%++
Return: =========== ===========
==========================================================================================================================
Ratios to Average Expenses, net of reimbursement+++ ................................ .35%* .60%*
Net Assets: =========== ===========
Expenses+++ ...................................................... .52%* .77%*
=========== ===========
Investment income--net ........................................... 6.22%* 5.98%*
=========== ===========
==========================================================================================================================
Supplemental Net assets, end of period (in thousands) ......................... $ 251,140 $ 56,134
Data: =========== ===========
==========================================================================================================================
</TABLE>
* Annualized.
+ Commencement of operations.
++ Amount is less than $.01 per share.
+++ Includes the Fund's share of the Series' allocated
expenses.
++ Aggregate total investment return.
See Notes to Financial Statements.
Pages 6 & 7
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, December 31, 1997
MERRILL LYNCH
AGGREGATE BOND
INDEX FUND
1. Significant Accounting Policies:
Merrill Lynch Aggregate Bond Index Fund (the "Fund") is part of Merrill Lynch
Index Funds, Inc. The Fund is registered under the Investment Company Act of
1940 as a non-diversified mutual fund. The Fund seeks to achieve its investment
objective by investing all of its assets in the Merrill Lynch Aggregate Bond
Index Series (the "Series") of the Merrill Lynch Index Trust, which has the same
investment objective as the Fund. The value of the Fund's investment in the
Series reflects the Fund's proportionate interest in the net assets of the
Series. The performance of the Fund is directly affected by the performance of
the Series. The financial statements of the Series, including the Schedule of
Investments, are included elsewhere in this report and should be read in
conjunction with the Fund's financial statements. The Fund offers two classes of
shares, Class A Shares and Class D Shares. Shares of Class A and Class D are
sold without the imposition of a front-end or deferred sales charge. Both
classes of shares have identical voting, dividend, liquidation and other rights
and the same terms and conditions, except that Class D Shares bear certain
expenses related to the account maintenance of such shares. The following is a
summary of significant accounting policies followed by the Fund.
(a) Valuation of investments--Valuation of securities is discussed in Note 1a of
the Series' Notes to Financial Statements which is included elsewhere in this
report.
(b) Income--The Fund's net investment income consists of the Fund's pro rata
share of the net investment income of the Series, less all actual and accrued
expenses of the Fund determined in accordance with generally accepted accounting
principles.
(c) Income taxes--It is the Fund's policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to shareholders. Therefore, no Federal
income tax provision is required.
(d) Prepaid registration fees and deferred organization expenses--Prepaid
registration fees are charged to expense as the related shares are issued.
Deferred organization expenses are charged to expense on a straight-line basis
over a five-year period.
(e) Dividends and distributions--Dividends from net investment income are
declared daily and paid monthly. Distributions of capital gains are recorded on
the ex-dividend dates. Distributions in excess of realized capital gains are due
primarily to differing tax treatments for post-October losses.
(f) Investment transactions--Investment transactions are accounted for on a
trade date basis.
2. Transactions with Affiliates:
The Fund has entered into a Distribution Agreement and Distribution Plans with
Merrill Lynch Funds Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc. Pursuant to the Distribution Plan
adopted by the Fund in accordance with Rule 12b-1 under the Investment Company
Act of 1940, the Fund pays the Distributor ongoing account maintenance fees. The
fees are accrued daily and paid monthly at the annual rate of 0.25% based upon
the average daily net assets of Class D Shares.
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner
& Smith Inc. ("MLPF&S"), a subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."),
also provides account maintenance services to the Fund. The ongoing account
maintenance fee compensates the Distributor and MLPF&S for providing account
maintenance services to Class D shareholders.
The Fund has also entered into an Administrative Services Agreement with Merrill
Lynch Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), a wholly-owned subsidiary of ML & Co., which is the
limited partner. The Fund pays a monthly fee at an annual rate of 0.14% of the
Fund's average daily net assets for the performance of administrative services
(other than investment advice and related portfolio activities) necessary for
the operation of the Fund. For the period April 3, 1997 to December 31, 1997,
MLAM earned fees of $204,163, of which $139,532 was voluntarily waived. MLAM
also reimbursed the Fund for additional expenses of $77,704.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), an indirect wholly-owned
subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or directors of
MLAM, PSI, MLFD, MLFDS, and/or ML & Co.
3. Investments:
Increases and decreases in the Fund's investment in the Series for the period
April 3, 1997 to December 31, 1997 were $297,366,838 and $7,375,841,
respectively.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions was
$299,978,335 for the period April 3, 1997 to December 31, 1997.
Transactions in capital shares for each class were as follows:
- ---------------------------------------------------------------------------
Class A Shares for the Period April 3, Dollar
1997+ to December 31, 1997 Shares Amount
- ---------------------------------------------------------------------------
Shares sold ................. 25,730,300 $ 262,000,547
Shares issued to shareholders
in reinvestment of dividends
and distributions ........... 719,579 7,438,280
----------- -------------
Total issued ................ 26,449,879 269,438,827
Shares redeemed ............. (2,338,963) (24,009,006)
----------- -------------
Net increase ................ 24,110,916 $ 245,429,821
=========== =============
- ---------------------------------------------------------------------------
+ Prior to April 3, 1997 (commencement of operations), the Fund issued 1,250
shares to MLAM for $12,500.
- ----------------------------------------------------------------------------
Class D Shares for the Period April 3, Dollar
1997+ to December 31, 1997 Shares Amount
- ----------------------------------------------------------------------------
Shares sold ................. 6,726,307 $ 68,244,160
Shares issued to shareholders
in reinvestment of dividends
and distributions ........... 145,936 1,506,072
---------- ------------
Total issued ................ 6,872,243 69,750,232
Shares redeemed ............. (1,485,526) (15,201,718)
---------- ------------
Net increase ................ 5,386,717 $ 54,548,514
========== ============
- ----------------------------------------------------------------------------
+ Prior to April 3, 1997 (commencement of operations), the Fund issued 1,250
shares to MLAM for $12,500.
INDEPENDENT AUDITORS' REPORT
MERRILL LYNCH
AGGREGATE BOND
INDEX FUND
The Board of Directors and Shareholders of
Merrill Lynch Index Funds, Inc.:
We have audited the accompanying statement of assets and liabilities of Merrill
Lynch Aggregate Bond Index Fund (one of the series constituting Merrill Lynch
Index Funds, Inc.) as of December 31, 1997, the related statements of operations
and changes in net assets, and the financial highlights for the period April 3,
1997 (commencement of operations) to December 31, 1997. These financial
statements and the financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and the financial highlights
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Aggregate Bond Index Fund of the Merrill Lynch Index Funds, Inc. as of December
31, 1997, the results of its operations, the changes in its net assets, and the
financial highlights for the period April 3, 1997 to December 31, 1997 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 10, 1998
Pages 8 & 9
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, December 31, 1997
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
Merrill Lynch Aggregate Bond Index Series
- ------------------------------------------------------------------------------------------------------------------------------------
Face Interest Maturity Value
Issue Amount Rate Date(s) Cost (Note 1a)
====================================================================================================================================
US Government
Obligations--48.83%
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
United States Treasury Bonds $18,810,000 8.75 % 5/15/2017 $ 22,890,325 $ 24,661,603
6,970,000 6.625 2/15/2027 6,771,640 7,566,771
3,100,000 6.375 8/15/2027 3,043,422 3,269,539
1,200,000 6.125 11/15/2027 1,210,875 1,233,192
====================================================================================================================================
United States Treasury Notes 7,020,000 6.25 6/30/1998 7,036,305 7,046,325
6,330,000 5.75 12/31/1998 6,327,625 6,338,925
10,000,000 6.25 5/31/1999 10,034,994 10,079,700
1,330,000 6.00 6/30/1999 1,336,792 1,336,650
9,950,000 5.875 8/31/1999 9,940,594 9,981,044
11,000,000 6.375 5/15/2000 11,065,830 11,165,000
16,840,000 6.00 8/15/2000 16,838,939 16,961,080
1,900,000 5.75 11/15/2000 1,901,586 1,903,553
16,300,000 6.50 5/31/2002 16,362,893 16,776,286
1,850,000 6.25 6/30/2002 1,852,833 1,886,704
2,100,000 6.00 7/31/2002 2,091,984 2,121,987
5,400,000 6.25 8/31/2002 5,413,547 5,510,538
3,500,000 5.875 9/30/2002 3,488,125 3,519,145
2,800,000 5.75 10/31/2002 2,796,719 2,802,632
1,500,000 5.75 11/30/2002 1,499,734 1,501,170
5,350,000 6.25 2/15/2007 5,158,501 5,520,505
4,200,000 6.625 5/15/2007 4,250,664 4,445,448
4,500,000 6.125 8/15/2007 4,481,047 4,624,470
====================================================================================================================================
Total Investments in US Government Obligations--48.83% 145,794,974 150,252,267
====================================================================================================================================
US Government Agency
Mortgage-Backed
Obligations*--29.24%
====================================================================================================================================
Federal Home Loan Mortgage 311,995 6.50(1) 9/01/2002 312,092 313,845
Corporation Participation 1,280,494 6.50 2/01/2011--5/01/2012 1,267,294 1,286,039
Certificates--Gold Program 7,035,000 6.50 TBA(3) 7,010,864 7,045,975
1,585,908 7.00(2) 7/01/2004--11/01/2004 1,599,394 1,609,189
7,384,978 7.00 5/01/2012--12/01/2027 7,379,925 7,470,397
700,000 7.00 TBA(3) 710,828 710,828
6,129,326 7.50 8/01/2012--12/01/2027 6,226,190 6,279,892
400,000 7.50 TBA(3) 409,375 409,375
6,357,719 8.00 5/01/2012--11/01/2027 6,538,407 6,587,340
900,000 8.00 TBA(3) 931,750 931,359
3,898,196 9.50 2/01/2019--10/01/2024 4,190,349 4,212,840
====================================================================================================================================
Federal National Mortgage Association 226,121 5.50 6/01/2011 211,000 219,125
Mortgage-Backed Securities 99,409 6.00(2) 11/01/2004 97,949 98,291
3,266,253 6.00 1/01/2026--11/01/2027 3,007,549 3,148,757
200,000 6.00 TBA(3) 192,563 192,563
1,880,817 6.50(2) 5/01/2004--10/01/2004 1,871,065 1,886,102
2,029,841 6.50 3/01/2027--11/01/2027 1,966,620 2,004,467
500,000 6.50 TBA(3) 493,203 493,203
10,991,268 7.00 4/01/2027--12/01/2027 10,887,234 11,070,186
100,000 7.00 TBA(3) 100,797 100,718
9,419,811 7.50 8/01/2027--11/01/2027 9,513,456 9,629,832
891,222 9.50 12/01/2017--1/01/2025 958,516 958,979
====================================================================================================================================
Government National Mortgage Association 1,859,649 6.00 3/15/2011--2/15/2012 1,805,336 1,841,629
Mortgage-Backed Securities 870,975 6.50 4/15/2026 821,439 861,987
718,000 6.50 TBA(3) 706,613 710,590
2,610,892 7.00 11/15/2027--12/15/2027 2,625,081 2,632,093
300,000 7.00 TBA(3) 302,156 302,156
4,143,384 7.50 3/15/2027--12/15/2027 4,186,484 4,244,359
300,000 7.50 TBA(3) 307,172 307,311
5,957,759 8.00 1/01/2020--10/15/2027 6,088,872 6,175,574
4,632,159 8.50 7/15/2025--10/15/2027 4,831,853 4,865,510
775,423 9.00 4/15/2018--11/15/2019 832,805 842,654
493,538 9.50 2/15/2027 535,797 535,360
====================================================================================================================================
Total Investments in US Government Agency Mortgage-Backed Obligations--29.24% 88,920,028 89,978,525
</TABLE>
<TABLE>
<CAPTION>
====================================================================================================================================
S&P Moody's Face
INDUSTRIES Ratings Ratings Amount Corporate Bonds & Notes
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Asset-Backed AAA Aaa $1,000,000 Standard Credit Card Master Trust, 5.50%
Securities**--0.32% due 1/07/1999 990,000 993,430
=================================================================================================================================
Banking--2.60% A- A1 1,000,000 Chase Manhattan Corp., 9.75% due 11/01/2001 1,112,050 1,114,530
A A1 500,000 Citicorp, 9.50% due 2/01/2002 553,875 556,870
A A1 500,000 Citicorp, 7.625% due 5/01/2005 527,890 534,575
BBB+ A3 1,020,000 Fleet/Norstar Financial Group, Inc., 8.125%
due 7/01/2004 1,066,374 1,108,648
A A2 500,000 NationsBank Corp., 6.50% due 8/15/2003 500,435 504,810
AA- Aa3 1,835,000 Norwest Corporation, 5.75% due 2/01/2003 1,730,864 1,796,465
A+ A1 1,050,000 Republic New York Corp., 7.53% due 12/04/2026 1,047,322 1,069,110
AA Aa2 230,000 Swiss Bank Corp. N.Y., 7.50% due 7/15/2025 225,195 249,424
BBB+ A1 1,000,000 Wells Fargo Capital, 8.125% due 12/01/2026 (a) 967,500 1,076,170
---------- ----------
7,731,505 8,010,602
=================================================================================================================================
Financial Services-- BBB+ A2 200,000 Heller Financial, Inc., 7% due 5/15/2002 197,878 203,024
1.53% A+ A1 275,000 International Lease Finance Corp., 6.625%
due 4/01/1999 274,461 276,493
A Baa1 1,000,000 Lehman Brothers, Inc., 10% due 5/15/1999 1,055,900 1,048,320
BBB+ Baa1 1,000,000 Paine Webber Group, Inc., 7.74% due 1/30/2012 1,063,050 1,097,720
A A2 2,000,000 Salomon Smith Barney Holdings, Inc., 7.125%
due 10/01/2006 1,996,200 2,071,740
---------- ----------
4,587,489 4,697,297
=================================================================================================================================
</TABLE>
Pages 10 & 11
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, December 31, 1997
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Merrill Lynch Aggregate Bond Index Series (continued)
---------------------------------------------------------------------------------------------------------------
S&P Moody's Face Value
INDUSTRIES Ratings Ratings Amount Corporate Bonds & Notes Cost (Note la)
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Financial Services-- AA- Aa3 $ 500,000 Associates Corp. N.A., 7.46% due 3/28/2000 $ 513,070 $ 515,405
Consumer--1.47% AA- Aa3 500,000 Associates Corp. N.A., 7.125% due 5/15/2000 509,825 512,530
A+ Aa3 200,000 CIT Group Holdings, Inc., 5.875% due 10/15/2008 178,758 188,574
A+ A1 1,000,000 Commercial Credit Co., 6.125% due 3/01/2000 985,890 998,390
A- Baa1 500,000 Finova Capital Corp., 6.45% due 6/01/2000 502,715 501,780
A A2 1,250,000 Household Finance Corp., 7.75% due 6/01/1999 1,279,177 1,275,987
A+ Aa3 500,000 Travelers Capital II, 7.75% due 12/01/2036 507,205 518,515
------------ ------------
4,476,640 4,511,181
=================================================================================================================================
Foreign Government BBB+ A3 600,000 People's Republic of China, 6.625% due 1/15/2003 589,332 590,880
Obligations--1.40% AA Aa2 1,000,000 Province of British Columbia, 7.25% due 9/01/2036 1,019,840 1,101,540
AA- Aa3 500,000 Province of Ontario, 7.375% due 1/27/2003 524,060 524,330
AA- Aa3 500,000 Province of Ontario, 7.625% due 6/27/2004 531,870 537,070
A A3 400,000 Province of Saskatchewan, 9.125% due 2/15/2021 513,708 519,076
AA Aa3 1,000,000 Republic of Italy, 6.875% due 9/27/2023 967,770 1,049,510
------------ ------------
4,146,580 4,322,406
=================================================================================================================================
Industrial-- A+ A1 1,000,000 Anheuser-Busch Co., Inc., 6.75% due 11/01/2006 969,880 1,009,730
Consumer Goods-- A A2 500,000 Philip Morris Companies, Inc., 9% due 1/01/2001 534,935 534,220
0.73% A A2 365,000 Philip Morris Companies, Inc., 6.95% due 6/01/2006 367,606 378,016
BBB- Baa3 300,000 RJR Nabisco, Inc., 8.75% due 7/15/2007 319,341 325,329
------------ ------------
2,191,762 2,247,295
=================================================================================================================================
Industrial-- AA- A1 500,000 Consolidated Natural Gas Co., 6.625% due 12/01/2008 493,905 510,915
Energy--0.97% BBB+ Baa2 500,000 Enron Corp., 6.625% due 10/15/2003 499,400 503,110
AA Aa2 100,000 Mobil Corp., 7.25% due 3/15/1999 101,251 101,369
BBB Baa2 500,000 Occidental Petroleum Corp., 10.125% due 11/15/2001 562,455 564,120
A- A3 1,000,000 Phillips Petroleum Co., 8.86% due 5/15/2022 1,088,410 1,129,440
BBB- Baa3 150,000 USX Corp., 8.125% due 7/15/2023 165,882 167,502
------------ ------------
2,911,303 2,976,456
=================================================================================================================================
Industrial-- A A3 150,000 Chrysler Corp., 7.45% due 3/01/2027 157,253 160,359
Manufacturing-- AA- Aa3 1,000,000 E.I. du Pont de Nemours, 7.95% due 1/15/2023 1,009,260 1,053,260
3.05% A A1 500,000 Ford Motor Credit Co., 8% due 6/15/2002 531,655 532,615
A A1 1,000,000 Ford Motor Credit Co., 7.75% due 11/15/2002 1,025,760 1,060,990
A A1 500,000 Ford Motor Credit Co., 7.20% due 6/15/2007 522,220 527,140
AAA Aaa 300,000 General Electric Capital Corp., 8.375% due 3/01/2001 316,032 319,116
A- A3 1,600,000 General Motors Acceptance Corp., 5.45% due 3/01/1999 1,571,584 1,588,832
A- A3 100,000 General Motors Acceptance Corp., 9.375% due 4/01/2000 106,398 106,414
BBB- Baa2 500,000 Georgia-Pacific Corp., 7.375% due 12/01/2025 512,055 509,435
A A1 1,000,000 International Business Machines Corp., 7.125%
due 12/01/2096 948,080 1,034,560
BBB+ A3 500,000 Lockheed Martin Corp., 7.25% due 5/15/2006 522,245 524,045
A A2 900,000 Lucent Technologies, Inc., 6.90% due 7/15/2001 895,563 923,292
BBB Baa3 500,000 Seagate Technology, Inc., 7.45% due 3/01/2037 505,315 513,510
A- A2 500,000 Xerox Capital Trust I, 8% due 2/01/2027 517,340 529,369
------------ ------------
9,140,760 9,382,937
=================================================================================================================================
Industrial-- BBB+ Baa1 1,500,000 Norfolk Southern Corp., 7.70% due 5/15/2017 1,538,160 1,652,520
Other--1.24% BBB Baa2 1,000,000 Union Pacific Corp., 9.625% due 12/15/2002 1,135,940 1,130,740
BB+ Baa3 650,000 United Air Lines, Inc., 9% due 12/15/2003 721,292 729,274
A A2 300,000 WMC Finance, USA, 7.25% due 11/15/2013 291,822 308,643
------------ ------------
3,687,214 3,821,177
=================================================================================================================================
Industrial-- BBB+ Baa2 1,000,000 American Stores Co., 9.125% due 4/01/2002 1,110,040 1,100,080
Services--2.50% BBB- Baa3 500,000 Circus Circus Enterprises, Inc., 7.625% due 7/15/2013 502,325 512,775
BBB- Baa3 450,000 Comcast Cable Communications, 8.375% due 5/01/2007 491,864 501,165
BBB+ Baa1 1,000,000 Dayton Hudson Co., 10% due 1/01/2011 1,227,430 1,276,770
A A2 360,000 May Department Stores Co., 7.60% due 6/01/2025 345,942 392,868
BBB Baa3 1,000,000 News America Holdings, Inc., 8.50% due 2/15/2005 1,073,535 1,096,610
A A2 200,000 Penney (J.C.) & Co., 7.95% due 4/01/2017 204,476 223,612
A- A2 500,000 Sears, Roebuck & Co., 6.25% due 1/15/2004 493,995 497,240
BBB- Ba1 500,000 TCI Communications, Inc., 6.875% due 2/15/2006 482,050 501,840
BBB- Ba1 100,000 Tele-Communications, Inc., 9.80% due 2/01/2012 110,548 124,321
BBB- Ba1 500,000 Time Warner, Inc., 7.95% due 2/01/2000 515,375 515,370
BBB- Ba1 400,000 Time Warner, Inc., 8.18% due 8/15/2007 410,104 435,384
A A2 500,000 Walt Disney Co., 6.75% due 3/30/2006 512,650 516,045
------------ ------------
7,480,334 7,694,080
=================================================================================================================================
Utilities-- BBB- Ba1 1,000,000 360 Communications Co., 7.125% due 3/01/2003 1,019,270 1,021,260
Communications-- AAA Aaa 900,000 BellSouth Telecommunications, Inc., 6.75% due 10/15/2033 796,973 873,216
1.24% A Baa1 750,000 GTE Corp., 7.83% due 5/01/2023 722,123 779,843
A A2 150,000 MCI Communications Corp., 7.50% due 8/20/2004 155,665 157,271
A Aa3 200,000 U S West Communications, Inc., 6.875% due 9/15/2033 178,850 191,516
BBB- Ba1 750,000 WorldCom, Inc., 7.75% due 4/01/2007 776,430 805,418
------------ ------------
3,649,311 3,828,524
=================================================================================================================================
Utilities-- AA- A1 1,470,000 Baltimore Gas & Electric Co., 8.375% due 8/15/2001 1,551,365 1,570,474
Gas & Electric-- BBB+ A3 100,000 Detroit Edison Co., 5.93% due 2/01/2001 96,905 99,275
2.29% BBB+ A3 500,000 Detroit Edison Co., 7.22% due 8/01/2002 518,860 518,905
A- A3 500,000 Houston Lighting & Power Co., 8.75% due 3/01/2022 538,705 561,515
A- A3 1,000,000 Pennsylvania Power & Light Resources, Inc., 8.50%
due 5/01/2022 1,056,750 1,067,710
A- A3 1,700,000 Public Service Electric & Gas Co., 6.50% due 6/01/2000 1,699,252 1,711,662
A A2 200,000 Virginia Electric and Power Co., 6.25% due 8/01/1998 200,378 200,378
AA+ A2 1,250,000 Wisconsin Electric Power Co., 7.25% due 8/01/2004 1,280,137 1,315,525
------------ ------------
6,942,352 7,045,444
=================================================================================================================================
Yankees-- AA- Aa3 425,000 Abbey National First Capital, 8.20% due 10/15/2004 450,003 464,920
Corporate--1.44% A A2 500,000 BHP Finance USA Ltd., 6.42% due 3/01/2026 497,170 501,355
A+ A2 550,000 Grand Metropolitan Investment PLC, 9% due 8/15/2011 617,518 662,084
</TABLE>
Pages 12 & 13
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, December 31, 1997
SCHEDULE OF INVESTMENTS (concluded)
<TABLE>
<CAPTION>
Merrill Lynch Aggregate Bond Index Series (concluded)
---------------------------------------------------------------------------------------------------------------
S&P Moody's Face Value
INDUSTRIES Ratings Ratings Amount Corporate Bonds & Notes Cost (Note la)
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Yankees-- A+ A2 $1,000,000 Hydro-Quebec, 8.875% due 3/01/2026 1,116,000 $ 1,242,780
Corporate BBB+ A3 500,000 Philips Electronics N.V., 7.75% due 5/15/2025 512,285 534,110
(concluded) A+ A1 1,000,000 Santander Finance Ltd., 7% due 4/01/2006 1,004,440 1,022,190
------------ ------------
4,197,416 4,427,439
=================================================================================================================================
Total Investments in Corporate Bonds & Notes--20.78% 62,132,666 63,958,268
=================================================================================================================================
Face Amount Short-Term Securities
=================================================================================================================================
Repurchase $11,793,000 Nikko Securities Co., purchased on 12/31/97 to yield
Agreements***-- 6.75% to 1/02/1998 11,793,000 11,793,000
3.83%
=================================================================================================================================
Total Investments in Short-Term Securities--3.83% 11,793,000 11,793,000
=================================================================================================================================
Total Investments--102.68% $308,640,668 315,982,060
============
Liabilities in Excess of Other Assets--(2.68%) (8,241,663)
------------
Net Assets--100.00% $307,740,397
============
=================================================================================================================================
</TABLE>
* Mortgage-Backed Obligations 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.
** Subject to principal paydowns.
*** Repurchase Agreements are fully collateralized by
US Government Agency Obligations.
(a) The security may be offered and sold to "qualified
institutional buyers" under Rule 144A of the
Securities Act of 1933.
(1) Represents balloon mortgages that amortize on a
30-year schedule and have 5-year maturities.
(2) Represents balloon mortgages that amortize on a
30-year schedule and have 7-year maturities.
(3) Represents a "to-be-announced" (TBA) transaction.
The Series has committed to purchasing securities
for which final maturity information is not
available at this time.
Ratings of issues shown have not been audited by
Deloitte & Touche LLP.
See Notes to Financial Statements.
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
MERRILL LYNCH
AGGREGATE BOND
INDEX SERIES As of December 31, 1997
==============================================================================================================
<S> <C> <C>
Assets: Investments, at value (identified cost--$308,640,668) (Note 1a) $315,982,060
Cash ....................................................... 98,056
Receivables:
Interest ................................................ $3,587,396
Contributions ........................................... 473,792 4,061,188
----------
Deferred organization expenses (Note 1e) ................... 15,842
Prepaid expenses ........................................... 714
------------
Total assets ............................................... 320,157,860
------------
==============================================================================================================
Liabilities: Payables:
Securities purchased .................................... 12,133,853
Withdrawals ............................................. 181,211
Investment adviser (Note 2) ............................. 1,471 12,316,535
----------
Accrued expenses and other liabilities ..................... 100,928
------------
Total liabilities .......................................... 12,417,463
------------
==============================================================================================================
Net Assets: Net assets ................................................. $307,740,397
============
==============================================================================================================
Net Assets Partners' capital .......................................... $300,399,005
Consist of: Unrealized appreciation on investments--net ................ 7,341,392
------------
Net assets ................................................. $307,740,397
============
==============================================================================================================
</TABLE>
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
MERRILL LYNCH
AGGREGATE BOND
INDEX SERIES For the Period April 3, 1997+ to December 31, 1997
==============================================================================================================
<C> <S> <C> <C>
Investment Income Interest and discount earned............................... $ 9,531,892
(Note 1d): Other ..................................................... 54,707
------------
Total income............................................... 9,586,599
------------
==============================================================================================================
Expenses: Accounting services (Note 2)............................... $ 113,606
Investment advisory fees (Note 2).......................... 88,609
Custodian fees............................................. 34,772
Professional fees.......................................... 16,098
Pricing fees............................................... 6,615
Trustees' fees and expenses................................ 3,065
Amortization of organization expenses (Note 1e)............ 2,775
Registration fees.......................................... 250
Other ..................................................... 879
Total expenses before reimbursement........................ 266,669
----------
Reimbursement of expenses (Note 2)......................... (42,985)
----------
Total expenses after reimbursement......................... 223,684
------------
Investment income--net..................................... 9,362,915
------------
==============================================================================================================
Realized & Realized gain from investments--net........................ 870,626
Unrealized Gain on Unrealized appreciation on investments--net................ 7,341,392
Investments - Net ------------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations....... $ 17,574,933
============
==============================================================================================================
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
Pages 14 & 15
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, December 31, 1997
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
MERRILL LYNCH For the Period
AGGREGATE BOND April 3, 1997+ to
INDEX SERIES Increase (Decrease) in Net Assets: December 31, 1997
===============================================================================================================
<C> <S> <C>
Operations: Investment income--net............................................... $ 9,362,915
Realized gain on investments--net.................................... 870,626
Unrealized appreciation on investments--net.......................... 7,341,392
------------
Net increase in net assets resulting from operations................. 17,574,933
------------
===============================================================================================================
Net Capital Increase in net assets derived from net capital contributions........ 290,165,464
Contributions: ------------
===============================================================================================================
Net Assets: Total increase in net assets......................................... 307,740,397
Beginning of period.................................................. --
------------
End of period........................................................ $307,740,397
============
===============================================================================================================
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
MERRILL LYNCH For the Period
AGGREGATE BOND The following ratios have been derived from April 3, 1997+ to
INDEX SERIES information provided in the financial statements. December 31, 1997
===============================================================================================================
<C> <S> <C>
Ratios to Average Expenses, net of reimbursement ................................. .15%*
Net Assets: ===========
Expenses ....................................................... .18%*
===========
Investment income--net ......................................... 6.34%*
===========
===============================================================================================================
Supplemental Net assets, end of period (in thousands) ....................... $ 307,740
Data: ===========
Portfolio turnover ............................................. 86.58%
===========
===============================================================================================================
</TABLE>
* Annualized.
+ Commencement of operations.
See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
MERRILL LYNCH
AGGREGATE BOND
INDEX SERIES
1. Significant Accounting Policies:
Merrill Lynch Aggregate Bond Index Series (the "Series") is part of Merrill
Lynch Index Trust (the "Trust"). The Trust is registered under the Investment
Company Act of 1940 and is organized as a Delaware business trust. The following
is a summary of significant accounting policies followed by the Series.
(a) Valuation of investments--Portfolio securities which are traded on stock
exchanges are valued at the last sale price as of the close of business on the
day the securities are being valued or, lacking any sales, at the closing bid
price. Securities traded in the over-the-counter market are valued at the last
quoted bid price at the close of trading on the New York Stock Exchange on each
day by brokers that make markets in the securities. Securities traded in the
NASDAQ National Market System are valued at the last sale price prior to the
time of valuation. Portfolio securities which are traded both on the
over-the-counter market and on a stock exchange are valued according to the
broadest and most representative market. Options written are valued at the last
sale price in the case of exchange-traded options or, in the case of options
traded in the over-the-counter market, the last asked price. Options purchased
are valued at the last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last bid price.
Other investments, including futures contracts and related options, are stated
at market value. Short-term securities are valued at amortized cost, which
approximates market value. Securities and assets for which market quotations are
not readily available are valued at fair market value, as determined in good
faith by or under the direction of the Trust's Board of Trustees.
(b) Derivative financial instruments--The Series may engage in various portfolio
investment techniques to provide liquidity, or in connection with the Series'
arbitrage strategies. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
o Financial futures contracts--The Series may purchase or sell financial futures
contracts and options on such futures contracts as a proxy for a direct
investment in securities underlying the Series' index. Upon entering into a
contract, the Series deposits and maintains as collateral such initial margin as
required by the exchange on which the transaction is effected. Pursuant to the
contract, the Series agrees to receive from or pay to the broker an amount of
cash equal to the daily fluctuation in value of the contract. Such receipts or
payments are known as variation margin and are recorded by the Series as
unrealized gains or losses. When the contract is closed, the Series records a
realized gain or loss equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed.
o Options--The Series is authorized to purchase and write call and put options.
When the Series writes an option, an amount equal to the premium received by the
Series is reflected as an asset and an equivalent liability. The amount of the
liability is subsequently marked to market to reflect the current market value
of the option written. When a security is purchased or sold through an exercise
of an option, the related premium paid (or received) is added to (or deducted
from) the basis of the security acquired or deducted from (or added to) the
proceeds of the security sold. When an option expires (or the Series enters into
a closing transaction), the Series realizes a gain or loss on the option to the
extent of the premiums received or paid (or a gain or loss to the extent that
the cost of the closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(c) Income taxes--The Series is classified as a partnership for Federal income
tax purposes. As a partnership for Federal income tax purposes, the Series will
not incur Federal income tax liability. Items of partnership income, gain, loss
and deduction will pass through to investors as partners in the Series.
Therefore, no Federal income tax provision is required.
(d) Security transactions and investment income--Security transactions are
accounted for on the date the securities are purchased or sold (the trade
dates). Dividend income is recorded on the ex-dividend dates. Interest income
(including amortization of discount) is recognized on the accrual basis.
Realized gains and losses on security transactions are determined on the
identified cost basis.
(e) Deferred organization expenses--Deferred organization expenses are charged
to expense on a straight-line basis over a five-year period.
(f) Dollar rolls--The Series may sell securities for delivery in the current
month and simultaneously contract to repurchase substantially similar (same
type, coupon and maturity) securities on a specific future date.
Pages 16 & 17
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, December 31, 1997
NOTES TO FINANCIAL STATEMENTS (concluded)
MERRILL LYNCH
AGGREGATE BOND
INDEX SERIES
2. Investment Advisory Agreement and Transactions with Affiliates:
The Series has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch &
Co., Inc. ("ML & Co."), which is the limited partner.
MLAM is responsible for the management of the Series' portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Series. For such services, the Series pays a monthly
fee at an annual rate of 0.06% of the average daily value of the Series' net
assets. For the period April 3, 1997 to December 31, 1997, MLAM earned fees of
$88,609, of which $37,562 was voluntarily waived. MLAM also reimbursed the
Series for additional expenses of $5,423.
Accounting services are provided to the Series by MLAM at cost.
Certain officers and/or trustees of the Series are officers and/or directors of
MLAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
period April 3, 1997 to December 31, 1997 were $458,285,968 and $162,247,751,
respectively.
Net realized and unrealized gains as of December 31, 1997 were as follows:
- ------------------------------------------------------------------------
Realized Unrealized
Gains Gains
- ------------------------------------------------------------------------
Long-term investments .............. $ 870,626 $ 7,341,392
----------- -----------
Total .............................. $ 870,626 $ 7,341,392
=========== ===========
- ------------------------------------------------------------------------
As of December 31, 1997, net unrealized appreciation for Federal income tax
purposes aggregated $7,333,370, of which $7,369,835 related to appreciated
securities and $36,465 related to depreciated securities. At December 31, 1997,
the aggregate cost of investments for Federal income tax purposes was
$308,648,690.
INDEPENDENT AUDITORS' REPORT
MERRILL LYNCH
AGGREGATE BOND
INDEX SERIES
The Board of Trustees and Investors of
Merrill Lynch Index Trust:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Aggregate Bond Index Series (one
of the series constituting Merrill Lynch Index Trust) as of December 31, 1997,
the related statements of operations and changes in net assets, and the
financial highlights for the period April 3, 1997 (commencement of operations)
to December 31, 1997. These financial statements and the financial highlights
are the responsibility of the Trust's management. Our responsibility is to
express an opinion on these financial statements and the financial highlights
based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and the financial highlights
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned at December 31, 1997 by
correspondence with the custodian and brokers. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Aggregate Bond Index Series of the Merrill Lynch Index Trust as of December 31,
1997, the results of its operations, the changes in its net assets, and the
financial highlights for the period April 3, 1997 to December 31, 1997 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 10, 1998
Pages 18 & 19
<PAGE>
This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of the Fund unless accompanied or preceded by the Fund's
current prospectus. Past performance results shown in this report should not be
considered a representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Statements and other information
herein are as dated and are subject to change.
Merrill Lynch
Index Funds, Inc.
Box 9011
Princeton, NJ
08543-9011 Index 1--12/97
[LOGO] Printed on post-consumer recycled paper
