MERRILL LYNCH
AGGREGATE BOND
INDEX FUND
Merrill Lynch
Index Funds, Inc.
[GRAPHIC OMITTED]
STRATEGIC
Performance
Semi-Annual Report
June 30, 1998
<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
Jay C. Harbeck, Senior Vice President
Norman R. Harvey, Senior Vice President
Jeffrey B. Hewson, Senior Vice President
Gregory Mark Maunz, Senior Vice President
Eric S. Mitofsky, Senior Vice President
Joseph T. Monagle Jr., Senior Vice President
Donald C. Burke, 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
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, June 30, 1998
DEAR SHAREHOLDER
The primary investment objective of Merrill Lynch Aggregate Bond Index Fund is
to seek to provide investment returns that, before expenses, replicate the total
return of the unmanaged Lehman Brothers Aggregate Bond Index. This Index is a
highly recognized and widely referenced benchmark and often used when measuring
performance in the investment-grade fixed-income market. For the quarter ended
June 30, 1998, the Fund's Class A and Class D Shares had total returns of +2.29%
and +2.23%, respectively, compared to a +2.34% total return for the Index. (For
complete performance information, see page 3 of this report to shareholders.)
The Index is comprised of securities from three major high-quality investment
sectors: US Government and agency securities, US Government agency
mortgage-backed securities (MBS), and investment-grade corporate securities. The
weighting of each sector is determined by the relative market value of all
eligible securities outstanding within the three sectors. To be eligible,
securities must be fixed rate, mature in one year or more and meet minimum size
of issue requirements. As of June 30, 1998, the Treasury and agency sector
represented 48.4% of the Index, with MBS and corporate securities at 29.7% and
21.9% of the Index, respectively. This allocation represents a decline of 0.6%
for Treasury and agency securities and an increase of 0.3% for both MBS and
corporate securities from the beginning of the quarter.
The Fund seeks to achieve its objective by investing all of its assets in
Merrill Lynch Aggregate Bond Index Series. Each of the three sectors within the
Series is managed separately. The US Government and agency and corporate sectors
are managed similarly. In these two sectors, the Series seeks to neutralize
duration. Duration is an indicator of expected price volatility of a security
(or group of securities) when interest rates change. Hence, if the duration of
each sector is identical to the corresponding sector in the Index, then the
price movement of that sector in the Series should match the price movement in
the Index of that particular sector. In addition, duration matching techniques
are not complete until an analysis of the duration exposure is conducted for
each part of the yield curve and the distribution of the duration is matched to
ensure identical exposure. Therefore, the Series applies neutral partial
duration in addition to total duration management to ensure tracking errors do
not surface as a result of changes in the shape of the yield curve.
In addition to duration matching, other exercises are employed to match the
Series to its index counterpart. It is critical that industry subsector exposure
along with credit rating neutrality is achieved in order for tracking deviation
to remain at a minimal level.
Unlike the US Government and agency and corporate sectors which have
well-defined maturities and therefore absolute durations, the MBS sector of the
Series is subject to prepayments that impact duration. Since analysis can be
done to estimate future prepayments, the duration can be calculated assuming
these projected prepayments. However, since an uncertainty of prepayments
exists, there also is an uncertainty of duration. Accordingly, rather than
managing the MBS sector using duration neutrality, this sector of the Series is
managed by matching product. This entails the Series having a neutral exposure
to coupon (5.5%-11%), mortgage original term (30-year, 15-year, balloon) and
agency issues.
As of June quarter-end, there were 6,701 securities in the Index, up from 6,482
at March 31, 1998. Of this number, 1,725 represented US Government and agency
securities with 477 in MBS and 4,499 in corporate securities. The Series
attained identical Index characteristics through the acquisition of 179
securities. These included 30 securities in the US Government and agency sector,
30 securities in the MBS sector and 119 in the corporate sector.
In Conclusion
We appreciate your investment in Merrill Lynch Aggregate Bond Index Fund, and we
look forward to assisting you with your investment needs in the months and years
ahead.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President
/s/ Jay C. Harbeck
Jay C. Harbeck
Senior Vice President and
Co-Portfolio Manager
/s/ Jeffrey B. Hewson
Jeffrey B. Hewson
Senior Vice President and
Co-Portfolio Manager
/s/ Gregory Mark Maunz
Gregory Mark Maunz
Senior Vice President and
Co-Portfolio Manager
August 11, 1998
<PAGE>
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 "Recent Performance Results" and "Average
Annual 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,
distribution and transfer agency fees applicable to each class, which are
deducted from the income available to be paid to shareholders.
Recent Performance Results
<TABLE>
<CAPTION>
Standardized
12 Month 3 Month Since Inception 30-Day Yield
Total Return Total Return Total Return As of 6/30/98
================================================================================================================
<S> <C> <C> <C> <C>
ML Aggregate Bond Index Fund Class A Shares* +10.43% +2.29% +13.69% 5.79%
- ----------------------------------------------------------------------------------------------------------------
ML Aggregate Bond Index Fund Class D Shares* +10.05 +2.23 +13.34 5.54
- ----------------------------------------------------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index **+10.54 +2.34 +14.21 --
================================================================================================================
</TABLE>
* Investment results shown do not reflect sales charges; results shown would
be lower if a sales charge was included. Total investment returns are
based on changes in net asset values for the periods shown, and assume
reinvestment of all dividends and capital gains distributions at net asset
value on the payable date. The Fund's inception date is 4/03/97.
** 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. Since
inception total return is from 4/03/97 to 6/30/98.
Average Annual
Total Return
% Return
================================================================================
Class A Shares
================================================================================
Year Ended 6/30/98 +10.43%
- --------------------------------------------------------------------------------
Inception (4/03/97) through 6/30/98 +10.89
- --------------------------------------------------------------------------------
% Return
================================================================================
Class D Shares
================================================================================
Year Ended 6/30/98 +10.05%
- --------------------------------------------------------------------------------
Inception (4/03/97) through 6/30/98 +10.62
- --------------------------------------------------------------------------------
2 & 3
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, June 30, 1998
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
MERRILL LYNCH
AGGREGATE BOND
INDEX FUND As of June 30, 1998
===================================================================================================================================
<S> <C> <C> <C>
Assets: Investment in Merrill Lynch Aggregate Bond Index Series, at value
(identified cost--$393,836,924) (Note 1a) ................................... $403,677,652
Deferred organization expenses (Note 1d) ...................................... 11,972
Prepaid registration fees (Note 1d) ........................................... 31,564
------------
Total assets .................................................................. 403,721,188
------------
===================================================================================================================================
Liabilities: Payables:
Dividends and distributions to shareholders (Note 1e) ....................... $ 775,866
Administrative fees (Note 2) ................................................ 29,813
Distributor (Note 2) ........................................................ 15,382 821,061
------------
Accrued expenses and other liabilities ........................................ 72,889
------------
Total liabilities ............................................................. 893,950
------------
===================================================================================================================================
Net Assets: Net assets .................................................................... $402,827,238
============
===================================================================================================================================
Net Assets Class A Shares of Common Stock, $0.0001 par value, 125,000,000 shares
Consist of: authorized .................................................................. $ 3,120
Class D Shares of Common Stock, $0.0001 par value, 125,000,000 shares
authorized .................................................................. 718
Paid-in capital in excess of par .............................................. 392,930,924
Undistributed realized capital gains on investments from the Series--net ...... 51,748
Unrealized appreciation on investments from the Series--net ................... 9,840,728
------------
Net assets .................................................................... $402,827,238
============
===================================================================================================================================
Net Asset Class A--Based on net assets of $327,469,547 and 31,199,132 shares outstanding. $ 10.50
Value: ============
Class D--Based on net assets of $75,357,691 and 7,177,071 shares outstanding... $ 10.50
============
===================================================================================================================================
</TABLE>
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
MERRILL LYNCH
AGGREGATE BOND
INDEX FUND For the Six Months Ended June 30, 1998
===================================================================================================================================
<S> <C> <C> <C>
Investment Investment income allocated from the Series ................................... $ 11,559,367
Income Expenses allocated from the Series ............................................ (215,223)
(Note 1b): ------------
Net investment income from the Series ......................................... 11,344,144
------------
===================================================================================================================================
Expenses: Administration fee (Note 2) ................................................... $ 251,138
Transfer agent fees (Note 2) .................................................. 119,650
Account maintenance fee--Class D (Note 2) ..................................... 89,615
Registration fees (Note 1d) ................................................... 64,360
Printing and shareholder reports .............................................. 40,970
Professional fees ............................................................. 3,123
Amortization of organization expenses (Note 1d) ............................... 1,209
Accounting services (Note 2) .................................................. 617
Other ......................................................................... 1,845
------------
Total expenses before reimbursement ........................................... 572,527
Reimbursement of expenses (Note 2) ............................................ (70,451)
------------
Total expenses after reimbursement ............................................ 502,076
------------
Investment income--net ........................................................ 10,842,068
------------
===================================================================================================================================
Realized & Realized gain on investments from the Series--net ............................. 121,273
Unrealized Change in unrealized appreciation on investments from the Series--net ......... 2,500,609
Gain from the ------------
Series--Net: Net Increase in Net Assets Resulting from Operations .......................... $ 13,463,950
============
===================================================================================================================================
</TABLE>
See Notes to Financial Statements.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
MERRILL LYNCH For the Six For the Period
AGGREGATE BOND Months Ended April 3, 1997+ to
INDEX FUND Increase (Decrease) in Net Assets: June 30, 1998 Dec. 31, 1997
===================================================================================================================================
<S> <C> <C> <C>
Operations: Investment income--net ....................................................... $ 10,842,068 $ 9,002,884
Realized gain on investments from the Series--net ............................ 121,273 870,653
Change in unrealized appreciation on investments from the Series--net ........ 2,500,609 7,340,119
------------ ------------
Net increase in net assets resulting from operations ......................... 13,463,950 17,213,656
------------ ------------
===================================================================================================================================
Dividends & Investment income--net:
Distributions Class A .................................................................... (8,746,076) (7,292,400)
to Shareholders Class D .................................................................... (2,095,992) (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 ............................................................ (10,842,068) (9,943,062)
------------ ------------
===================================================================================================================================
Capital Share Net increase in net assets derived from capital share transactions ........... 92,931,427 299,978,335
Transactions ------------ ------------
(Note 4):
===================================================================================================================================
Net Assets: Total increase in net assets ................................................. 95,553,309 307,248,929
Beginning of period .......................................................... 307,273,929 25,000
------------ ------------
End of period ................................................................ $402,827,238 $307,273,929
============ ============
===================================================================================================================================
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements
4 & 5
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, June 30, 1998
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data Class A Class D
and ratios have been derived -------------------------------- ---------------------------
from information provided For the Six For the Period For the Six For the Period
MERRILL LYNCH in the financial statements. Months Ended April 3, 1997+ to Months Ended April 3, 1997+
AGGREGATE BOND June 30, December 31, June 30, to December 31,
INDEX FUND Increase (Decrease) in Net Asset Value: 1998 1997 1998 1997
===============================================================================================================================
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period ...... $ 10.42 $ 10.00 $ 10.42 $ 10.00
Operating -------- -------- ------- -------
Performance: Investment income--net .................... .31 .48 .30 .46
Realized and unrealized gain on investments
from the Series--net .................... .08 .45 .08 .45
-------- -------- ------- -------
Total from investment operations .......... .39 .93 .38 .91
-------- -------- ------- -------
Less dividends and distributions:
Investment income--net .................. (.31) (.48) (.30) (.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 ......... (.31) (.51) (.30) (.49)
-------- -------- ------- -------
Net asset value, end of period ............ $ 10.50 $ 10.42 $ 10.50 $ 10.42
======== ======== ======= =======
===============================================================================================================================
Total Investment Based on net asset value per share ........ 3.83%++++ 9.49%++++ 3.71%++++ 9.29%++++
Return: ======== ======== ======= =======
===============================================================================================================================
Ratios to Average Expenses, net of reimbursement+++ ......... .35%* .35%* .60%* .60%*
Net Assets: ======== ======== ======= =======
Expenses+++ ............................... .39%* .52%* .64%* .77%*
======== ======== ======= =======
Investment income--net .................... 6.09%* 6.22%* 5.85%* 5.98%*
======== ======== ======= =======
===============================================================================================================================
Supplemental Net assets, end of period (in thousands) .. $327,469 $251,140 $75,358 $56,134
Data: ======== ======== ======= =======
===============================================================================================================================
</TABLE>
* Annualized.
+ Commencement of operations.
See Notes to Financial Statements.
++ Amount is less than $.01 per share.
+++ Includes the Fund's share of the Series' allocated
expenses.
++++ Aggregate total investment return.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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. These unaudited financial
statements reflect all adjustments which are, in the opinion of management,
necessary to a fair statement of the results for the interim period presented.
All such adjustments are of a normal recurring nature. 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 period not exceeding five years.
(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 ("MLFD" or "Distributor"), a division of
Princeton Funds Distributor, Inc. ("PFD"), 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.,
6 & 7
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, June 30, 1998
NOTES TO FINANCIAL STATEMENTS (concluded)
MERRILL LYNCH AGGREGATE BOND INDEX FUND
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 six months ended
June 30, 1998, MLAM earned fees of $251,138, of which $64,567 was voluntarily
waived. MLAM also reimbursed the Fund for additional expenses of $5,884.
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, PFD, MLFDS, and/or ML & Co.
3. Investments:
Increases and decreases in the Fund's investment in the Series for the six
months ended June 30, 1998 were $87,393,653 and $5,243,415, respectively.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions were
$92,931,427 and $299,978,335 for the six months ended June 30, 1998 and for the
period April 3, 1997 to December 31, 1997, respectively.
Transactions in capital shares for each class were as follows:
- --------------------------------------------------------------------------------
Class A Shares for the Six Months Dollar
Ended June 30, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 10,206,934 $106,733,501
Shares issued to shareholders
in reinvestment of dividends ........... 709,728 7,421,160
---------- ------------
Total issued ........................... 10,916,662 114,154,661
Shares redeemed ........................ (3,829,696) (40,027,531)
---------- ------------
Net increase ........................... 7,086,966 $ 74,127,130
========== ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class A Shares for the Period Dollar
April 3, 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 Six Months Dollar
Ended June 30, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 3,075,432 $ 32,245,306
Shares issued to shareholders
in reinvestment of dividends ........... 156,034 1,631,750
---------- ------------
Total issued ........................... 3,231,466 33,877,056
Shares redeemed ........................ (1,442,362) (15,072,759)
---------- ------------
Net increase ........................... 1,789,104 $ 18,804,297
========== ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class D Shares for the Period Dollar
April 3, 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.
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
Merrill Lynch Aggregate Bond Index Series
============================================================================================================
Face Interest Maturity Value
Issue Amount Rate Date(s) Cost (Note 1a)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
US Government & Federal Home Loan Mortgage Corp. $ 1,200,000 5.75% 7/15/2003 $ 1,199,344 $ 1,199,344
Agency Obligations ===============================================================================================================
- --47.76% Tennessee Valley Authority, Series E 290,000 6.25 12/15/2017 300,025 300,025
===============================================================================================================
United States Treasury Bonds 25,110,000 8.75 5/15/2017 31,236,376 33,816,139
7,770,000 6.625 2/15/2027 7,641,168 8,774,039
3,300,000 6.375 8/15/2027 3,254,828 3,623,796
3,200,000 6.125 11/15/2027 3,294,812 3,428,992
===============================================================================================================
United States Treasury Notes 6,330,000 5.75 12/31/1998 6,327,625 6,342,850
10,000,000 6.25 5/31/1999 10,034,994 10,064,100
1,330,000 6.00 6/30/1999 1,336,792 1,336,437
10,150,000 5.875 8/31/1999 10,142,031 10,189,687
11,000,000 6.375 5/15/2000 11,065,830 11,163,240
16,840,000 6.00 8/15/2000 16,838,939 17,000,485
9,300,000 5.75 11/15/2000 9,378,117 9,346,500
400,000 5.375 2/15/2001 400,109 398,624
7,220,000 6.25 2/28/2002 7,361,917 7,385,843
16,300,000 6.50 5/31/2002 16,362,893 16,842,464
1,850,000 6.25 6/30/2002 1,852,833 1,896,546
2,100,000 6.00 7/31/2002 2,091,984 2,135,427
6,800,000 6.25 8/31/2002 6,844,828 6,977,412
3,500,000 5.875 9/30/2002 3,488,125 3,543,750
3,300,000 5.75 10/31/2002 3,300,445 3,326,796
2,100,000 5.75 11/30/2002 2,102,945 2,117,388
1,800,000 5.625 12/31/2002 1,807,680 1,807,866
5,900,000 5.50 1/31/2003 5,915,541 5,895,398
3,000,000 6.25 2/15/2003 3,076,996 3,087,180
1,400,000 5.75 8/15/2003 1,408,559 1,414,868
1,200,000 5.875 11/15/2005 1,214,063 1,222,872
4,650,000 6.25 2/15/2007 4,488,689 4,869,434
5,400,000 6.625 5/15/2007 5,530,381 5,799,924
7,400,000 6.125 8/15/2007 7,489,063 7,699,478
====================================================================================================================================
Total Investments in US Government & Agency Obligations--47.76% 186,787,932 193,006,904
====================================================================================================================================
</TABLE>
8 & 9
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, June 30, 1998
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Merrill Lynch Aggregate Bond Index Series (continued)
============================================================================================================
Face Interest Maturity Value
Issue Amount Rate Date(s) Cost (Note 1a)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
US Government Agency Federal Home Loan Mortgage $ 297,523 6.00% 5/01/2013 $ 293,340 $ 294,641
Mortgage-Backed Corporation Participation 296,950 6.50(1) 9/01/2002 297,042 299,362
Obligations*--29.59% Certificates--Gold Program 11,307,090 6.50 4/01/2008--5/01/2028 11,308,675 11,391,107
800,000 6.50 6/01/2028 797,031 797,744
1,400,683 7.00(2) 7/01/2004--11/01/2004 1,412,629 1,420,377
14,742,568 7.00 1/01/2008--6/01/2028 14,872,057 14,996,331
900,000 7.00 6/01/2027--12/01/2027 913,859 914,250
10,208,402 7.50 8/01/2012--3/01/2028 10,426,220 10,466,779
8,134,900 8.00 5/01/2012--1/01/2028 8,387,962 8,422,013
200,000 8.00 6/01/2024 207,500 206,874
779,784 9.00 6/01/2025 831,933 829,979
3,340,342 9.50 2/01/2019--10/01/2024 3,590,423 3,606,892
===============================================================================================================
Federal National 211,368 5.50 6/01/2011 197,233 206,016
Mortgage Association 318,077 6.00(2) 11/01/2004 315,975 316,983
Mortgage-Backed Securities 6,278,676 6.00 2/01/2013--6/01/2028 5,950,811 6,133,279
800,000 6.00 5/01/2013--8/01/2013 791,219 791,219
1,716,613 6.50(2) 5/01/2004--10/01/2004 1,707,735 1,729,024
5,993,716 6.50 3/01/2027--6/01/2028 5,901,214 5,969,392
1,900,000 6.50 6/01/2024 1,892,578 1,892,578
10,568,480 7.00 4/01/2027--1/01/2028 10,470,496 10,717,073
8,256,406 7.50 8/01/2027--11/01/202 78,337,584 8,457,090
728,376 9.50 12/01/2017--1/01/2025 783,334 783,157
===============================================================================================================
Government National 1,766,662 6.00 3/15/2011--2/15/2012 1,715,196 1,757,371
Mortgage Association 3,743,960 6.50 4/15/2026--3/15/2028 3,676,876 3,736,810
Mortgage-Backed 4,768,948 7.00 7/15/2027--6/15/2028 4,811,983 4,845,010
Securities 700,000 7.00 6/15/2028 711,438 711,151
4,787,872 7.50 3/15/2024--12/15/2027 4,856,082 4,921,078
400,000 7.50 12/15/2025--1/15/2027 411,125 411,124
5,697,895 8.00 11/15/2024--4/15/2027 5,835,241 5,904,443
200,000 8.00 12/15/2027 207,313 207,313
4,810,481 8.50 7/15/2025--3/15/2028 5,033,790 5,070,730
605,767 9.00 4/15/2018--11/15/2019 650,622 652,057
664,172 9.50 9/15/2021--2/15/2027 721,453 719,207
====================================================================================================================================
Total Investments in US Government Agency Mortgage-Backed Obligations--29.59% 118,317,969 119,578,454
====================================================================================================================================
<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,
Securities**--0.25% 5.50% due 1/07/1999 990,000 998,120
====================================================================================================================================
Banking--2.65% A A1 1,000,000 BankAmerica Corporation, 6.875% due 6/01/2003 1,036,840 1,034,520
A A1 1,000,000 Chase Manhattan Corp., 9.75% due 11/01/2001 1,112,050 1,108,440
A A1 500,000 Citicorp, 9.50% due 2/01/2002 553,875 551,980
A A1 500,000 Citicorp, 7.625% due 5/01/2005 527,890 537,225
A A2 1,000,000 First Bank Systems Inc., 7.55% due 6/15/2004 1,070,160 1,065,020
BBB+ A3 1,020,000 Fleet/Norstar Financial Group, Inc.,
8.125% due 7/01/2004 1,066,374 1,112,881
A Aa3 490,000 Midland Bank PLC, 7.625% due 6/15/2006 527,549 523,928
A A1 500,000 NationsBank Corp., 6.50% due 8/15/2003 500,435 506,710
AA- Aa3 1,835,000 Norwest Corporation, 5.75% due 2/01/2003 1,730,864 1,810,980
A+ A1 1,050,000 Republic New York Corp., 7.53% due 12/04/2026 1,047,322 1,101,439
AA Aa1 230,000 Swiss Bank Corp. N.Y., 7.50% due 7/15/2025 225,195 255,403
BBB+ A1 1,000,000 Wells Fargo Capital, 8.125% due 12/01/2026 (a) 967,500 1,112,441
---------- ----------
10,366,054 10,720,967
====================================================================================================================================
Financial Services-- A A2 500,000 Bear Stearns Companies Inc. (The),
1.48% 6.125% due 2/01/2003 499,620 498,775
BBB+ A3 200,000 Heller Financial, Inc., 7% due 5/15/2002 197,878 204,984
A Baa1 1,000,000 Lehman Brothers, Inc., 10% due 5/15/1999 1,055,900 1,032,800
A Baa1 500,000 Lehman Brothers, Inc., 7.625% due 6/01/2006 536,160 536,710
A+ A1 1,000,000 Morgan Stanley Group Inc., 6.50% due 3/30/2001 1,016,970 1,015,350
NR++ Baa1 1,000,000 Paine Webber Group, Inc., 7.74% due 1/30/2012 1,063,050 1,124,750
A A2 1,000,000 Salomon Smith Barney Holdings, Inc.,
7.125% due 10/01/2006 998,100 1,054,562
BBB Baa2 500,000 Spieker Properties, Inc., 6.875% due 2/01/2005 502,505 504,675
---------- ----------
5,870,183 5,972,606
====================================================================================================================================
Financial Services-- AA- Aa3 500,000 Associates Corp. N.A., 7.46% due 3/28/2000 513,070 513,965
Consumer--1.38% AA- Aa3 500,000 Associates Corp. N.A., 7.125% due 5/15/2000 509,825 511,800
AA- Aa3 500,000 Associates Corp. N.A., 7.23% due 5/17/2006 525,535 533,705
A+ Aa3 200,000 CIT Group Holdings, Inc., 5.875% due 10/15/2008 178,758 194,114
A+ A1 1,000,000 Commercial Credit Co., 6.125% due 3/01/2000 985,890 1,001,930
A- Baa1 500,000 Finova Capital Corp., 6.45% due 6/01/2000 502,715 503,815
A A2 1,250,000 Household Finance Corp., 7.75% due 6/01/1999 1,279,177 1,270,762
A+ Aa3 500,000 Travelers Capital II, 7.75% due 12/01/2036 507,205 523,940
A- A3 500,000 Washington Mutual, Inc., 7.25% due 6/15/2001 516,945 514,630
---------- ----------
5,519,120 5,568,661
====================================================================================================================================
Foreign Government AA Aa2 1,000,000 Province of British Columbia,
Obligations--1.16% 7.25% due 9/01/2036 1,019,840 1,140,910
AA- Aa3 500,000 Province of Ontario, 7.375% due 1/27/2003 524,060 526,420
AA- Aa3 500,000 Province of Ontario, 7.625% due 6/27/2004 531,870 539,940
A A3 750,000 Province of Saskatchewan, 8% due 7/15/2004 825,255 825,832
A A3 400,000 Province of Saskatchewan, 9.125% due 2/15/2021 513,708 533,712
AA Aa3 1,000,000 Republic of Italy, 6.875% due 9/27/2023 967,770 1,101,910
---------- ----------
4,382,503 4,668,724
====================================================================================================================================
</TABLE>
10 & 11
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, June 30, 1998
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 1a)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Industrial A+ A1 $1,000,000 Anheuser-Busch Co., Inc.,
Consumer Goods-- 6.75% due 11/01/2006 $ 969,880 $ 1,029,050
0.80% BBB Baa2 1,000,000 Nabisco, Inc., 6% due 2/15/2011 997,450 986,120
A A2 500,000 Philip Morris Companies, Inc.,
9% due 1/01/2001 534,935 530,995
A A2 365,000 Philip Morris Companies, Inc.,
6.95% due 6/01/2006 367,606 378,089
BBB- Baa3 300,000 RJR Nabisco, Inc., 8.75% due 7/15/2007 319,341 311,445
---------- ----------
3,189,212 3,235,699
====================================================================================================================================
Industrial-- AA- A1 500,000 Consolidated Natural Gas Co.,
Energy--0.97% 6.625% due 12/01/2008 493,905 520,970
BBB Baa2 500,000 Diamond Shamrock, Inc., 8% due 4/01/2023 513,270 518,875
BBB+ Baa2 500,000 Enron Corp., 6.625% due 10/15/2003 499,400 505,850
BBB- Baa2 500,000 K N Energy, Inc., 6.45% due 3/01/2003 500,510 500,530
BBB Baa2 500,000 Occidental Petroleum Corp.,
10.125% due 11/15/2001 562,455 556,890
A- A3 1,000,000 Phillips Petroleum Co., 8.86% due 5/15/2022 1,088,410 1,134,650
BBB- Baa3 150,000 USX Corp., 8.125% due 7/15/2023 165,882 168,372
---------- ----------
3,823,832 3,906,137
====================================================================================================================================
Industrial-- BBB+ A3 500,000 Applied Materials, Inc.,
Manufacturing-- 6.75% due 10/15/2007 503,500 510,415
3.81% A A2 500,000 Atlantic Richfield Company,
8.44% due 2/21/2012 578,335 601,600
AA Aa3 500,000 Boeing Company (The), 6.35% due 6/15/2003 506,655 505,760
BBB+ Baa2 528,000 Celulosa Arauco, 6.75% due 12/15/2003 520,091 508,612
A A2 150,000 Chrysler Corp., 7.45% due 3/01/2027 157,253 166,422
AA- Aa3 1,000,000 E.I. du Pont de Nemours, 7.95% due 1/15/2023 1,009,260 1,076,560
A A1 500,000 Ford Motor Credit Co., 8% due 6/15/2002 531,655 533,905
A A1 1,000,000 Ford Motor Credit Co., 7.75% due 11/15/2002 1,025,760 1,062,410
A A1 500,000 Ford Motor Credit Co., 7.20% due 6/15/2007 522,220 530,925
AAA Aaa 300,000 General Electric Capital Corp.,
8.375% due 3/01/2001 316,032 317,703
A- A3 100,000 General Motors Acceptance Corp.,
9.375% due 4/01/2000 106,398 105,494
A A2 1,400,000 General Motors Acceptance Corp.,
9% due 10/15/2002 1,560,272 1,546,958
A A2 600,000 General Motors Corporation,
8.80% due 3/01/2021 737,202 743,592
BBB- Baa2 500,000 Georgia-Pacific Corp., 7.375% due 12/01/2025 512,055 516,285
A+ A1 1,000,000 International Business Machines Corp.,
7.125% due 12/01/2096 948,080 1,069,180
BBB+ A3 500,000 Lockheed Martin Corp., 7.25% due 5/15/2006 522,245 530,485
A A2 900,000 Lucent Technologies, Inc.,
6.90% due 7/15/2001 895,563 925,029
BBB Baa1 600,000 Raytheon Company, 6.75% due 3/15/2018 599,934 612,564
BBB Baa1 500,000 Raytheon Company, 7.20% due 8/15/2027 528,010 534,890
BBB+ Baa2 500,000 Saga Petroleum ASA, 7.25% due 9/23/2027 503,060 505,785
BBB Ba1 500,000 Seagate Technology, Inc.,
7.45% due 3/01/2037 505,315 491,155
A A2 1,500,000 TRW Inc., 6.25% due 1/15/2010 1,486,005 1,474,500
A- A2 500,000 Xerox Capital Trust I, 8% due 2/01/2027 517,340 540,449
---------- ----------
15,092,240 15,410,678
====================================================================================================================================
Industrial BBB Baa2 500,000 CSX Corporation, 7.45% due 5/01/2007 536,420 531,565
Other--1.30% BBB Baa2 200,000 CSX Corporation, 7.90% due 5/01/2017 222,970 223,888
BBB- Baa3 750,000 Delta Air Lines, Inc.,
10.375% due 2/01/2011 978,495 978,495
BBB+ Baa1 1,500,000 Norfolk Southern Corp., 7.70% due 5/15/2017 1,538,160 1,682,655
BBB- Baa3 1,000,000 Union Pacific Corp., 9.625% due 12/15/2002 1,135,940 1,121,490
BB+ Baa3 650,000 United Air Lines, Inc., 9% due 12/15/2003 721,292 726,355
---------- ----------
5,133,277 5,264,448
====================================================================================================================================
Industrial-- BBB+ Baa2 1,000,000 American Stores Co., 9.125% due 4/01/2002 1,110,040 1,094,480
Services--2.60% BBB- Baa3 450,000 Comcast Cable Communications,
8.375% due 5/01/2007 491,864 505,420
BBB+ A3 1,000,000 Dayton Hudson Co., 10% due 1/01/2011 1,227,430 1,294,950
A A2 500,000 First Data Corporation, 6.75% due 7/15/2005 517,910 517,060
BBB+ A3 1,000,000 Hertz Corp., 7% due 1/15/2028 970,760 1,005,210
A A2 360,000 May Department Stores Co.,
7.60% due 6/01/2025 345,942 404,273
BBB- Baa3 1,000,000 News America Holdings, Inc.,
8.50% due 2/15/2005 1,073,535 1,107,750
A A2 1,000,000 Penney (J.C.) & Co., 7.60% due 4/01/2007 1,085,130 1,082,390
A A2 200,000 Penney (J.C.) & Co., 7.95% due 4/01/2017 204,476 226,570
A- A2 500,000 Sears Discover Credit Corp.,
9.14% due 3/31/2012 605,320 631,605
A- A2 500,000 Sears, Roebuck & Co., 6.25% due 1/15/2004 493,995 501,885
BBB- Baa3 500,000 TCI Communications, Inc.,
6.875% due 2/15/2006 482,050 515,775
BBB- Ba1 100,000 Tele-Communications, Inc.,
9.80% due 2/01/2012 110,548 128,631
BBB- Baa3 500,000 Time Warner, Inc., 7.95% due 2/01/2000 515,375 513,780
BBB- Baa3 400,000 Time Warner, Inc., 8.18% due 8/15/2007 410,104 445,716
A A2 500,000 Walt Disney Company (The),
6.75% due 3/30/2006 512,650 522,480
---------- ----------
10,157,129 10,497,975
====================================================================================================================================
Utilities-- A Baa1 1,000,000 360 Communications Co.,
Communications-- 7.125% due 3/01/2003 1,019,270 1,037,230
1.08% AAA Aaa 900,000 BellSouth Telecommunications, Inc.,
6.75% due 10/15/2033 796,973 880,488
A Baa1 750,000 GTE Corp., 7.83% due 5/01/2023 722,123 790,508
A Baa2 150,000 MCI Communications Corp.,
7.50% due 8/20/2004 155,665 158,806
A+ A2 700,000 U S West Communications, Inc.,
6.875% due 9/15/2033 667,635 674,919
BBB- Baa2 750,000 WorldCom Inc., 7.75% due 4/01/2007 776,430 813,495
---------- ----------
4,138,096 4,355,446
====================================================================================================================================
Utilities-- AA- A1 1,470,000 Baltimore Gas & Electric Co.,
Gas & Electric-- 8.375% due 8/15/2001 1,551,364 1,564,742
1.83% BBB+ Baa3 500,000 Consumers Energy Company,
6.375% due 2/01/2008(a) 488,120 497,601
BBB+ A3 100,000 Detroit Edison Co., 5.93% due 2/01/2001 96,905 99,789
A- A3 500,000 Detroit Edison Co., 7.22% due 8/01/2002 518,860 520,895
A- A3 500,000 Houston Lighting & Power Co.,
8.75% due 3/01/2022 538,705 576,270
A- A3 1,000,000 Pennsylvania Power & Light Resources, Inc.,
8.50% due 5/01/2022 1,056,750 1,099,490
A- A3 1,700,000 Public Service Electric & Gas Co.,
6.50% due 6/01/2000 1,699,252 1,713,923
AA+ Aa2 1,250,000 Wisconsin Electric Power Co.,
7.25% due 8/01/2004 1,280,137 1,328,025
---------- ----------
7,230,093 7,400,735
====================================================================================================================================
</TABLE>
12 & 13
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, June 30, 1998
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 1a)
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Yankees-- AA- Aa3 $ 425,000 Abbey National First Capital,
Corporate--2.14% 8.20% due 10/15/2004 $ 450,003 $ 467,959
BBB+ A3 500,000 BCH Cayman Islands, 6.50% due 2/15/2006 493,985 499,240
A A2 500,000 BHP Finance USA Ltd., 6.42% due 3/01/2026 497,170 499,330
BBB+ Baa3 400,000 Fairfax Financial Holdings Limited,
8.30% due 4/15/2026 438,736 453,912
A+ A1 550,000 Grand Metropolitan Investment PLC,
9% due 8/15/2011 617,518 675,736
A+ A3 1,000,000 Hutchison Whampoa Limited,
6.95% due 8/01/2007(a) 968,880 837,006
A+ A2 1,000,000 Hydro-Quebec, 8.875% due 3/01/2026 1,116,000 1,291,050
BBB Baa2 1,000,000 Noranda Forest Inc., 6.875% due 11/15/2005 1,002,540 1,011,410
A A2 500,000 Norsk Hydro ASA, 6.70% due 1/15/2018 497,440 504,335
BBB+ A3 500,000 Philips Electronics N.V.,
7.75% due 5/15/2025 512,285 560,830
A+ A1 1,000,000 Santander Finance Ltd., 7% due 4/01/2006 1,004,440 1,033,310
A+ Aa3 500,000 Sony Corporation, 6.125% due 3/04/2003 498,940 501,165
A A2 300,000 Western Mining, 7.25% due 11/15/2013 291,822 310,494
------------ ------------
8,389,759 8,645,777
===================================================================================================================================
Total Investments in Corporate Bonds & Notes--21.45% 84,281,498 86,645,973
===================================================================================================================================
<CAPTION>
Face Amount Short-Term Securities
===================================================================================================================================
<S> <C> <C> <C> <C>
Repurchase $6,136,000 Nikko Securities Co., purchased on
Agreements***-- 6/30/1998 to yield 5.80% to 7/01/1998 6,136,000 6,136,000
1.52%
===================================================================================================================================
Total Investments in Short-Term Securities--1.52% 6,136,000 6,136,000
===================================================================================================================================
Total Investments--100.32% $395,523,399 405,367,331
============
Liabilities in Excess of Other Assets--(0.32%) (1,273,717)
------------
Net Assets--100.00% $404,093,614
============
===================================================================================================================================
</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.
++ Not Rated.
(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.
See Notes to Financial Statements.
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
MERRILL LYNCH
AGGREGATE BOND
INDEX SERIES As of June 30, 1998
=====================================================================================================
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$395,523,399)
(Note 1a) ......................................... $405,367,331
Cash ................................................ 7,038
Receivables:
Interest .......................................... $4,756,947
Contributions ..................................... $1,523,268 6,280,215
----------
Deferred organization expenses (Note 1e) ............ 15,842
Prepaid expenses .................................... 714
------------
Total assets ........................................ 411,671,140
------------
=====================================================================================================
Liabilities: Payables:
Securities purchased .............................. 6,960,555
Withdrawals ....................................... 530,304
Investment adviser (Note 2) ....................... 19,498 7,510,357
----------
Accrued expenses and other liabilities .............. 67,169
------------
Total liabilities ................................... 7,577,526
------------
=====================================================================================================
Net Assets: Net assets .......................................... $404,093,614
============
=====================================================================================================
Net Assets Partners' capital ................................... $394,249,682
Consist of: Unrealized appreciation on investments--net ......... 9,843,932
------------
Net assets .......................................... $404,093,614
============
=====================================================================================================
</TABLE>
See Notes to Financial Statements.
14 & 15
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, June 30, 1998
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
MERRILL LYNCH
AGGREGATE BOND
INDEX SERIES For the Six Months Ended June 30, 1998
===============================================================================================================
<S> <C> <C> <C>
Investment Interest and discount earned .................................. $ 11,536,267
Income Other ......................................................... 11,154
(Note 1d): ------------
Total income .................................................. 11,547,421
------------
===============================================================================================================
Expenses: Investment advisory fees (Note 2) ............................. $ 107,980
Accounting services (Note 2) .................................. 62,213
Custodian fees ................................................ 24,869
Professional fees ............................................. 9,804
Pricing fees .................................................. 8,971
Amortization of organization expenses (Note 1e) ............... 1,764
Trustees' fees and expenses ................................... 1,761
Other ......................................................... 601
------------
Total expenses before reimbursement ........................... 217,963
Reimbursement of expenses (Note 2) ............................ (2,537)
------------
Total expenses after reimbursement ............................ 215,426
------------
Investment income--net ........................................ 11,331,995
------------
===============================================================================================================
Realized & Realized gain from investments--net ........................... 144,310
Unrealized Change in unrealized appreciation on investments--net ......... 2,502,540
Gain on ------------
Investments-- Net Increase in Net Assets Resulting from Operations .......... $ 13,978,845
Net (Notes 1b, ============
1d & 3):
===============================================================================================================
</TABLE>
See Notes to Financial Statements.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
MERRILL LYNCH For the Six For the Period
AGGREGATE BOND Months Ended April 3, 1997+ to
INDEX SERIES Increase (Decrease) in Net Assets: June 30, 1998 Dec. 31, 1997
====================================================================================================================
<S> <C> <C> <C>
Operations: Investment income--net ......................................... $ 11,331,995 $ 9,362,915
Realized gain on investments--net .............................. 144,310 870,626
Change in unrealized appreciation on investments--net .......... 2,502,540 7,341,392
------------ ------------
Net increase in net assets resulting from operations ........... 13,978,845 17,574,933
------------ ------------
====================================================================================================================
Net Capital Increase in net assets derived from net capital contributions .. 82,374,372 290,165,464
Contributions: ------------ ------------
====================================================================================================================
Net Assets: Total increase in net assets ................................... 96,353,217 307,740,397
Beginning of period .......................................... 307,740,397 --
------------ ------------
End of period ................................................ $404,093,614 $307,740,397
============ ============
====================================================================================================================
</TABLE>
+Commencement of operations.
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
MERRILL LYNCH For the Six For the Period
AGGREGATE BOND The following ratios have been derived from Months Ended April 3, 1997+ to
INDEX SERIES information provided in the financial statements. June 30, 1998 Dec. 31, 1997
==================================================================================================================
<S> <C> <C> <C>
Ratios to Expenses, net of reimbursement ................................. .12%* .15%*
Average ============ ============
Net Assets: Expenses ....................................................... .12%* .18%*
============ ============
Investment income--net ......................................... 6.30%* 6.34%*
============ ============
==================================================================================================================
Supplemental Net assets, end of period (in thousands) ....................... $ 404,094 $ 307,740
Data: ============ ============
Portfolio turnover ............................................. 13.60% 86.58%
============ ============
==================================================================================================================
</TABLE>
+ Commencement of operations.
* Annualized.
See Notes to Financial Statements.
16 & 17
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, June 30, 1998
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. These
unaudited financial statements reflect all adjustments which are, in the opinion
of management, necessary to a fair statement of the results for the interim
period presented. All such adjustments are of a normal recurring nature. 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). 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 period not exceeding five years.
(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.
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 six months ended June 30, 1998, MLAM earned fees of $107,980, of
which $2,537 was voluntarily waived.
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 six
months ended June 30, 1998 were $137,640,288 and $45,012,808, respectively.
Net realized gains for the six months ended June 30, 1998 and unrealized gains
as of June 30, 1998 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains Gains
- --------------------------------------------------------------------------------
Long-term investments .................. $144,310 $9,843,932
-------- ----------
Total .................................. $144,310 $9,843,932
======== ==========
- --------------------------------------------------------------------------------
As of June 30, 1998, net unrealized appreciation for Federal income tax purposes
aggregated $9,843,932, of which $10,241,853 related to appreciated securities
and $397,921 related to depreciated securities. At June 30, 1998, the aggregate
cost of investments for Federal income tax purposes was $395,523,399.
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--6/98
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