MERRILL LYNCH
AGGREGATE BOND
INDEX FUND
Merrill Lynch
Index Funds, Inc.
[GRAPHIC OMITTED]
STRATEGIC
Performance
Annual Report
December 31, 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
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, December 31, 1998
DEAR SHAREHOLDER
Fiscal Year in Review
The 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. The Index consists of
securities from three major high-quality investment sectors: US Treasury and
agency issues, US Government agency mortgage-backed securities (MBS) and
investment-grade corporate bonds. As of December 31, 1998, the Index was
comprised of 7,218 securities, up from the 6,188 issues at 1997's year-end. The
US Government and agency securities sector had 1,947 securities in the Index,
which accounted for 46.3% of the Index (down from 49.6% a year ago). The next
largest sector, US Government agency MBS, had 544 positions and comprised 30.7%
of the Index (an increase from 29.4% a year ago). The last sector of the Index,
investment-grade corporate bonds, had the most securities at 4,613, although its
market value only accounted for 23% of the Index (up from 21% last year). Sector
weighting and security selection in the underlying benchmark is determined by
the market representation the sectors have in the overall market.
The Fund seeks to achieve its objective by investing all of its assets in
Merrill Lynch Aggregate Bond Index Series. In attempting to match the return of
the Index (before expenses), the Series is constructed through a stratified
sampling approach when selecting investments. This refers to duplicating
investment characteristics of the various positions of the Series with the
corresponding sector in the Index. This approach is necessary because
replicating the Index is not practical because of its size and illiquidity of
some issues. Each of the three sectors within the Series is separately managed.
As of December 31, 1998, the Series was comprised of 205 positions.
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 we
conduct an analysis of the duration exposure for each part of the yield curve
and match the distribution of the duration 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. Additionally, the corporate sector of
the Series must also match the credit and industry exposure of the Index.
The MBS sector of the Series is managed in a slightly different manner. 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, which 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, we manage this sector of the Series by
matching product. This entails having neutral exposure to coupon (5.5%-11%),
mortgage original term (30-year, 15-year and balloon) and agency issues.
Returns for high-quality income securities were very attractive in 1998.
Interest rates declined dramatically during the year, which resulted in higher
bond prices, adding to the income generated by the securities. Many factors
accounted for the lower interest rate environment. On the domestic front,
economic growth began to weaken, threatening the expansion which has been in
place nearly eight years. As a result, in an attempt to prevent a recession, the
Federal Reserve Board lowered interest rates three times in the fall. In
addition, interest rates were aided by another year of stable inflation.
Producer prices were actually down for the year and consumer prices increased a
negligible 1.6%. This created an environment of very high real interest rates
and set the stage for a rally of 83 basis points-116 basis points (0.83%-1.16%)
in intermediate-term and long-term maturity securities.
Other critical developments during the year included economic instability in
Asia, along with its possible contagion and the near collapse of the Russian
debt market. Closer to home, the near failure of a major hedge fund perpetuated
a flight to quality by investors. While these events were positive for all the
sectors of the Index, the liquidity crisis benefited the US Government
securities sector, as investor demand focused on US Treasury issues.
Since the investments held by the Series do not exactly correspond to those 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 in 1998. In fact, before expenses, the performance of the positions held in
the Series has followed the performance of the Index fairly closely.
For the year ended December 31, 1999, the Fund's Class A and Class D Shares had
total returns of +8.56% and +8.29%, respectively. This compares to the total
return of +8.69% for the unmanaged Lehman Brothers Aggregate Bond Index for the
same period. The ten-year US Treasury note started the year with a 5.74% yield.
The US Government sector of the Index saw the highest total return, with +9.85%
for the year. The liquidity crisis witnessed during the fall caused yield
spreads of MBS and corporate bonds to widen relative to their US Government
counterparts. Therefore, these securities did not appreciate to the same degree
as US Government securities since investors focused primarily on those issues,
regardless of relative value analysis. Accordingly, for the year ended December
31, 1998, the MBS sector of the Index provided a total return of +6.96%, while
the corporate bond sector had a total return of +8.57%.
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
January 29, 1999
- --------------------------------------------------------------------------------
On January 29, 1999, Jay C. Harbeck retired as Senior Vice President and
Co-Portfolio Manager of Merrill Lynch Aggregate Bond Index Fund. His colleagues
at Merrill Lynch Asset Management, L.P. join the Fund's Board of Directors in
wishing Mr. Harbeck well in his retirement.
- --------------------------------------------------------------------------------
2 & 3
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, December 31, 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 "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 12/31/98
===================================================================================================================
<S> <C> <C> <C> <C>
ML Aggregate Bond Index Fund Class A Shares* +8.56% +0.33% +18.87% 5.29%
- -------------------------------------------------------------------------------------------------------------------
ML Aggregate Bond Index Fund Class D Shares* +8.29 +0.26 +18.35 5.05
- -------------------------------------------------------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index** +8.69 +0.34 +19.44
===================================================================================================================
</TABLE>
* 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 commenced
operations on 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 12/31/98.
Total Return Based on a $10,000 Investment
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 Brothers
Aggregate Bond Index:
Beginning and ending values are:
4/30/97** 12/98
ML Aggregate Bond Index Fund+--
Class A Shares* $10,000 $11,887
ML Aggregate Bond Index Fund+--
Class D Shares* $10,000 $11,835
Lehman Brothers Aggregate Bond
Index++-- $10,000 $11,944
* 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 US Government and
agency securities, mortgage-backed securities issued by the Government
National Mortgage Association, the Federal Home Loan Mortgage Corporation
or the Federal National Mortgage Association and investment-grade (rated
BBB or better) corporate bonds.
Past performance is not predictive of future performance.
Average Annual Total Return
% Return
================================================================================
Class A Shares
================================================================================
Year Ended 12/31/98 + 8.56%
- --------------------------------------------------------------------------------
Inception (4/03/97) through 12/31/98 +10.41
- --------------------------------------------------------------------------------
% Return
================================================================================
Class D Shares
================================================================================
Year Ended 12/31/98 + 8.29%
- --------------------------------------------------------------------------------
Inception (4/03/97) through 12/31/98 +10.14
- --------------------------------------------------------------------------------
4 & 5
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, December 31, 1998
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
MERRILL LYNCH
AGGREGATE BOND
INDEX FUND As of December 31, 1998
=================================================================================================================================
<S> <C> <C>
Assets: Investment in Merrill Lynch Aggregate Bond Index Series, at value
(identified cost--$419,478,095) (Note 1a) .................................... $433,980,303
Deferred organization expenses (Note 1d) ....................................... 7,488
Prepaid registration fees (Note 1d) ............................................ 8,725
------------
Total assets ................................................................... 433,996,516
------------
=================================================================================================================================
Liabilities: Payables:
Dividends and distributions to shareholders (Note 1e) ........................ $ 462,165
Distributor (Note 2) ......................................................... 19,202
Administrative fees (Note 2) ................................................. 14,668 496,035
------------
Accrued expenses and other liabilities ......................................... 111,433
------------
Total liabilities .............................................................. 607,468
------------
=================================================================================================================================
Net Assets: Net assets ..................................................................... $433,389,048
============
=================================================================================================================================
Net Assets Class A Shares of Common Stock, $.0001 par value, 125,000,000 shares authorized $ 3,317
Consist of: Class D Shares of Common Stock, $.0001 par value, 125,000,000 shares authorized 769
Paid-in capital in excess of par ............................................... 418,834,805
Undistributed realized capital gains on investments from the Series--net ....... 47,949
Unrealized appreciation on investments from the Series--net .................... 14,502,208
------------
Net assets ..................................................................... $433,389,048
============
=================================================================================================================================
Net Asset Class A--Based on net assets of $351,785,913 and 33,165,113 shares outstanding . $ 10.61
Value: ------------
Class D--Based on net assets of $81,603,135 and 7,690,405 shares outstanding ... $ 10.61
------------
=================================================================================================================================
</TABLE>
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
MERRILL LYNCH
AGGREGATE BOND
INDEX FUND For the Year Ended December 31, 1998
=================================================================================================================================
<S> <C> <C>
Investment Investment income allocated from the Series .................................... $ 25,104,807
Income Expenses allocated from the Series ............................................. (495,877)
------------
(Note 1b): Net investment income from the Series .......................................... 24,608,930
------------
=================================================================================================================================
Expenses: Administration fee (Note 2) .................................................... $ 553,925
Transfer agent fees (Note 2) ................................................... 276,277
Account maintenance fee--Class D (Note 2) ...................................... 188,135
Printing and shareholder reports ............................................... 117,996
Registration fees (Note 1d) .................................................... 102,329
Professional fees .............................................................. 16,058
Amortization of organization expenses (Note 1d) ................................ 2,396
Accounting services (Note 2) ................................................... 1,222
Other .......................................................................... 4,207
------------
Total expenses before reimbursement ............................................ 1,262,545
Reimbursement of expenses (Note 2) ............................................. (184,245)
------------
Total expenses after reimbursement ............................................. 1,078,300
------------
Investment income--net ......................................................... 23,530,630
------------
=================================================================================================================================
Realized & Realized gain on investments from the Series--net .............................. 1,795,467
Unrealized Change in unrealized appreciation on investments from the Series--net .......... 7,162,089
Gain from the ------------
Series--Net: Net Increase in Net Assets Resulting from Operations ........................... $ 32,488,186
============
=================================================================================================================================
</TABLE>
See Notes to Financial Statements.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
MERRILL LYNCH For the For the Period
AGGREGATE BOND Year Ended April 3, 1997+ to
INDEX FUND Increase (Decrease) in Net Assets: Dec. 31, 1998 Dec. 31, 1997
=================================================================================================================================
<S> <C> <C>
Operations: Investment income--net ......................................................... $ 23,530,630 $ 9,002,884
Realized gain on investments from the Series--net .............................. 1,795,467 870,653
Change in unrealized appreciation on investments from the Series--net .......... 7,162,089 7,340,119
------------ ------------
Net increase in net assets resulting from operations ........................... 32,488,186 17,213,656
------------ ------------
=================================================================================================================================
Dividends & Investment income--net:
Distributions to Class A ...................................................................... (19,203,438) (7,292,400)
Shareholders Class D ...................................................................... (4,327,192) (1,710,484)
(Note 1e): Realized gain on investments from the Series--net:
Class A ...................................................................... (1,358,966) (709,638)
Class D ...................................................................... (319,027) (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 .............................................................. (25,208,623) (9,943,062)
------------ ------------
=================================================================================================================================
Capital Share Net increase in net assets derived from capital share transactions ............. 118,835,556 299,978,335
Transactions ------------ ------------
(Note 4):
=================================================================================================================================
Net Assets: Total increase in net assets ................................................... 126,115,119 307,248,929
Beginning of period ............................................................ 307,273,929 25,000
------------ ------------
End of period .................................................................. $433,389,048 $307,273,929
============ ============
=================================================================================================================================
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements
6 & 7
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, December 31, 1998
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data
and ratios have been derived Class A Class D
from information provided -------------------------------- --------------------------------
MERRILL LYNCH in the financial statements. For the For the Period For the For the Period
AGGREGATE BOND Year Ended April 3, 1997+ to Year Ended April 3, 1997+ to
INDEX FUND Increase (Decrease) in Net Asset Value: Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1998 Dec. 31, 1997
================================================================================================================================
<S> <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 ..................... .64 .48 .61 .46
Realized and unrealized gain on investments
from the Series--net ..................... .23 .45 .23 .45
-------- -------- ------- -------
Total from investment operations ........... .87 .93 .84 .91
-------- -------- ------- -------
Less dividends and distributions:
Investment income--net ................... (.64) (.48) (.61) (.46)
Realized gain on investments
from the Series--net ................... (.04) (.03) (.04) (.03)
In excess of realized gain on investments
from the Series--net ................... -- --++ -- --++
-------- -------- ------- -------
Total dividends and distributions .......... (.68) (.51) (.65) (.49)
-------- -------- ------- -------
Net asset value, end of period ............. $ 10.61 $ 10.42 $ 10.61 $ 10.42
======== ======== ======= =======
================================================================================================================================
Total Investment Based on net asset value per share ......... 8.56% 9.49%++ 8.29% 9.29%++++
Return: ======== ======== ======= =======
================================================================================================================================
Ratios to Average Expenses, net of reimbursement+++ .......... .35% .35%* .60% .60%*
Net Assets: ======== ======== ======= =======
Expenses+++ ................................ .40% .52%* .65% .77%*
======== ======== ======= =======
Investment income--net ..................... 5.99% 6.22%* 5.75% 5.98%*
======== ======== ======= =======
================================================================================================================================
Supplemental Net assets, end of period (in thousands) ... $351,786 $251,140 $81,603 $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.
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 "Corporation"). 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's financial statements are prepared in accordance with generally
accepted accounting principles which may require the use of management accruals
and estimates. 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 and have exclusive voting rights with respect
to matters relating to its account maintenance expenditures. 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 substantially 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 Corporation has 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
8 & 9
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, December 31, 1998
NOTES TO FINANCIAL STATEMENTS (concluded)
MERRILL LYNCH AGGREGATE BOND INDEX FUND
investment advice and related portfolio activities) necessary for the operation
of the Fund. For the year ended December 31, 1998, MLAM earned fees of $553,925,
of which $178,361 was voluntarily waived. MLAM also reimbursed the Fund for
additional expenses of $5,884.
The Corporation has also entered into a Distribution Agreement and Distribution
Plan 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
Corporation in accordance with Rule 12b-1 under the Investment Company Act of
1940, the Fund pays the Distributor an ongoing account maintenance fee. The fee
is 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 Incorporated ("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.
Financial Data Services, Inc. ("FDS"), 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, FDS, and/or ML & Co.
3. Investments:
Increases and decreases in the Fund's investment in the Series for the year
ended December 31, 1998 were $133,010,697 and $40,158,269, respectively.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions were
$118,835,556 and $299,978,335 for the year ended December 31, 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 Year Dollar
Ended December 31, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ................................... 18,291,863 $ 192,469,737
Shares issued to shareholders
in reinvestment of dividends
and distributions ............................. 1,779,251 18,748,052
----------- -------------
Total issued .................................. 20,071,114 211,217,789
Shares redeemed ............................... (11,018,167) (116,697,778)
----------- -------------
Net increase .................................. 9,052,947 $ 94,520,011
=========== =============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 Year Dollar
Ended December 31, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ................................... 4,911,003 $ 51,769,208
Shares issued to shareholders
in reinvestment of dividends
and distributions ............................. 370,997 3,909,217
---------- ------------
Total issued .................................. 5,282,000 55,678,425
Shares redeemed ............................... (2,979,562) (31,362,880)
---------- ------------
Net increase .................................. 2,302,438 $ 24,315,545
========== ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.
INDEPENDENT AUDITORS' REPORT
MERRILL LYNCH AGGREGATE BOND INDEX FUND
The Board of Directors and Shareholders, 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, 1998, the related statements of operations
for the year then ended and changes in net assets and the financial highlights
for the year then ended and 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 audits.
We conducted our audits 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 audits provide 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 Merrill Lynch Index Funds, Inc. as of December 31,
1998, the results of its operations, the changes in its net assets, and the
financial highlights for the respective stated periods in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 17, 1999
10 & 11
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, December 31, 1998
IMPORTANT TAX INFORMATION (unaudited)
MERRILL LYNCH AGGREGATE BOND INDEX FUND
None of the net investment income distributions paid monthly by Merrill Lynch
Aggregate Bond Index Fund during the fiscal year ended December 31, 1998 qualify
for the dividends received deduction for corporations. Additionally, the Fund
paid short-term and long-term capital gains distributions of $.014537 and
$.026771 per share, respectively, to shareholders of record on December 22,
1998.
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, 1998 ........................................... 45.14%
June 30, 1998 ............................................ 47.44
September 30, 1998 ....................................... 45.31
December 31, 1998 ........................................ 42.61
- --------------------------------------------------------------------------------
* 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, 1998, 47.81% 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.
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. $ 5,800,000 5.75 % 7/15/2003 $ 5,922,632 $ 5,949,524
Agency Obligations 1,300,000 7.18 6/27/2006 1,450,719 1,445,028
- --46.08%
====================================================================================================================================
Federal National Mortgage Association 300,000 5.45 10/10/2003 306,938 304,359
220,000 6.85 4/05/2004 236,345 235,882
1,700,000 5.75 2/15/2008 1,747,638 1,760,299
====================================================================================================================================
Financing Corp. 400,000 9.80 11/30/2017 600,000 586,436
====================================================================================================================================
Tennessee Valley Authority, Series E 1,490,000 6.25 12/15/2017 1,537,882 1,545,413
====================================================================================================================================
United States Treasury Bonds 25,510,000 8.75 5/15/2017 32,122,298 35,486,706
8,370,000 6.625 2/15/2027 8,332,363 9,900,120
5,500,000 6.375 8/15/2027 5,783,664 6,321,535
2,200,000 6.125 11/15/2027 2,284,813 2,462,614
====================================================================================================================================
United States Treasury Notes 10,000,000 6.25 5/31/1999 10,034,994 10,062,500
1,330,000 6.00 6/30/1999 1,336,791 1,339,137
10,150,000 5.875 8/31/1999 10,142,031 10,229,272
11,000,000 6.375 5/15/2000 11,065,830 11,244,090
16,840,000 6.00 8/15/2000 16,838,939 17,187,241
9,300,000 5.75 11/15/2000 9,378,117 9,480,141
400,000 5.375 2/15/2001 400,109 406,124
15,000,000 6.50 5/31/2002 15,060,237 15,836,700
550,000 6.25 6/30/2002 553,452 577,329
2,100,000 6.00 7/31/2002 2,091,984 2,188,599
6,800,000 6.25 8/31/2002 6,844,828 7,147,412
3,500,000 5.875 9/30/2002 3,488,125 3,637,795
3,300,000 5.75 10/31/2002 3,300,445 3,418,602
2,100,000 5.75 11/30/2002 2,102,945 2,177,112
1,800,000 5.625 12/31/2002 1,807,680 1,859,904
5,900,000 5.50 1/31/2003 5,915,541 6,074,227
3,000,000 6.25 2/15/2003 3,076,996 3,172,500
2,800,000 5.25 8/15/2003 2,892,477 2,871,316
3,500,000 5.75 8/15/2003 3,560,109 3,654,770
5,500,000 5.875 11/15/2005 5,801,445 5,866,960
4,650,000 6.25 2/15/2007 4,488,689 5,100,445
5,400,000 6.625 5/15/2007 5,530,381 6,072,462
4,400,000 6.125 8/15/2007 4,536,359 4,805,636
====================================================================================================================================
Total Investments in US Government & Agency Obligations--46.08% 190,573,796 200,408,190
====================================================================================================================================
US Government Agency Federal Home Loan Mortgage 1,400,000 5.50 TBA(2) 1,382,938 1,382,938
Mortgage-Backed Corporation Participation 857,086 6.00 4/01/2013--8/01/2013 850,271 859,966
Obligations*-- Certificates--Gold Program 8,170,186 6.50 4/01/2008--5/01/2013 8,193,280 8,291,200
30.22% 6,304,025 6.50 8/01/2028--10/01/2028 6,319,083 6,349,284
10,954,154 7.00 9/01/2025--11/01/2028 11,046,195 11,166,620
5,018,900 7.00 1/01/2008--6/01/2013 5,101,685 5,124,089
717,962 7.00(1) 7/01/2004--11/01/2004 724,254 724,474
1,200,000 7.00 TBA(2) 1,223,250 1,223,250
2,191,022 7.50 5/01/2009--5/01/2013 2,245,580 2,250,587
7,397,414 7.50 1/01/2023--3/01/2028 7,554,986 7,596,721
693,227 8.00 5/01/2012--9/01/2012 712,743 720,520
6,054,291 8.00 6/01/2024--1/01/2028 6,244,862 6,270,317
660,837 9.00 6/01/2025 705,031 701,928
659,024 9.50 2/01/2019 705,992 710,092
2,110,166 9.50 8/01/2020--10/01/2024 2,270,428 2,266,984
====================================================================================================================================
Federal National Mortgage Association 192,352 5.50 6/01/2011 179,489 189,886
Mortgage-Backed Securities 700,000 5.50 TBA(2) 692,125 691,026
493,108 6.00(1) 10/01/2004--11/01/2004 492,489 495,684
9,305,306 6.00 2/01/2013--12/01/2028 8,967,591 9,240,374
600,000 6.00 TBA(2) 592,125 592,122
1,420,989 6.50(1) 5/01/2004--10/01/2004 1,413,687 1,434,562
15,085,794 6.50 12/01/2025--12/01/2028 15,033,190 15,185,071
</TABLE>
12 & 13
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, December 31, 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)
====================================================================================================================================
US Government Agency Federal National Mortgage Association $1,600,000 6.50% TBA(2) $ 1,610,500 $ 1,610,500
Mortgage-Backed Mortgage-Backed Securities (concluded) 9,429,120 7.00 4/01/2027--9/01/2028 9,343,749 9,617,713
Obligations* 6,086,881 7.50 8/01/2027--11/01/2027 6,146,302 6,252,327
(concluded) 492,788 9.50 12/01/2017--1/01/2025 530,102 526,556
====================================================================================================================================
Government National Mortgage
Association 2,230,851 6.00 3/15/2011--10/15/2028 2,184,487 2,239,360
Mortgage-Backed Securities 4,044,237 6.50 4/15/2026--10/15/2028 3,986,358 4,084,930
200,000 6.50 TBA(2) 202,000 202,000
7,454,813 7.00 12/15/2023--9/15/2028 7,559,024 7,627,475
5,015,523 7.50 3/15/2024--7/15/2028 5,116,983 5,170,944
5,499,122 8.00 12/15/2022--4/15/2028 5,653,817 5,721,472
3,343,708 8.50 7/15/2025--3/15/2028 3,498,961 3,546,770
740,716 9.00 11/15/2016--11/15/2019 796,363 796,432
525,613 9.50 2/15/2017--9/15/2021 570,887 564,430
====================================================================================================================================
Total Investments in US Government Agency Mortgage-Backed Obligations--30.22% 129,850,807 131,428,604
====================================================================================================================================
<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% due
Securities** 1/07/1999 990,000 1,000,000
- --0.23%
====================================================================================================================================
Banking--2.26% A A1 1,000,000 BankAmerica Corporation, 6.875% due 6/01/2003 1,036,840 1,047,760
A A1 1,000,000 Chase Manhattan Corp., 9.75% due 11/01/2001 1,112,050 1,108,600
Citicorp:
A+ A1 500,000 9.50% due 2/01/2002 553,875 554,905
A+ A1 500,000 7.625% due 5/01/2005 527,890 545,530
A A2 1,000,000 First Bank Systems Inc., 7.55% due 6/15/2004 1,070,160 1,088,720
BBB+ A3 1,020,000 Fleet/Norstar Financial Group, Inc., 8.125% due
7/01/2004 1,066,374 1,139,391
A Aa3 500,000 NationsBank Corp., 6.50% due 8/15/2003 500,435 517,340
AA- Aa3 1,335,000 Norwest Corporation, 5.75% due 2/01/2003 1,259,239 1,343,918
A+ A1 1,050,000 Republic New York Corp., 7.53% due 12/04/2026 1,047,323 1,143,303
AA Aa1 230,000 Swiss Bank Corp. N.Y., 7.50% due 7/15/2025 225,195 249,890
A- Aa3 1,000,000 Wells Fargo Capital, 8.125% due 12/01/2026(a) 967,500 1,109,209
--------- ---------
9,366,881 9,848,566
====================================================================================================================================
Financial Services-- A A2 500,000 The Bear Stearns Companies Inc., 6.125% due
1.74% 2/01/2003 499,620 503,395
A+ Aa3 500,000 CITIGROUP Capital II, 7.75% due 12/01/2036 507,205 536,902
BBB Baa1 500,000 EOP Operating LP, 6.75% due 2/15/2008(a) 503,215 488,424
A A2 500,000 Equitable Companies, Inc., 9% due 12/15/2004 569,820 578,700
A- A3 200,000 Heller Financial, Inc., 7% due 5/15/2002 197,878 206,994
Lehman Brothers, Inc.:
A Baa1 1,000,000 10% due 5/15/1999 1,055,900 1,013,660
A Baa1 500,000 7.625% due 6/01/2006 536,160 526,200
A+ A1 1,000,000 Morgan Stanley Group Inc., 6.50% due 3/30/2001 1,016,970 1,021,900
NR++ Baa1 1,000,000 PaineWebber Group, Inc., 7.74% due 1/30/2012 1,063,050 1,135,400
A Aa3 1,000,000 Salomon Smith Barney Holdings, Inc., 7.125% due
10/01/2006 998,100 1,063,061
BBB Baa2 500,000 Spieker Properties, Inc., 6.875% due 2/01/2005 502,505 492,405
--------- ---------
7,450,423 7,567,041
====================================================================================================================================
Financial Services-- Associates Corp. N.A.:
Consumer--1.16% AA- Aa3 500,000 7.46% due 3/28/2000 513,070 512,460
AA- Aa3 500,000 7.125% due 5/15/2000 509,825 511,550
AA- Aa3 500,000 7.23% due 5/17/2006 525,535 543,355
A+ Aa3 200,000 CIT Group Holdings, Inc., 5.875% due 10/15/2008 178,758 201,834
A+ Aa3 1,000,000 Commercial Credit Co., 6.125% due 3/01/2000 985,890 1,008,040
A- Baa1 500,000 Finova Capital Corp., 6.45% due 6/01/2000 502,715 504,730
A A2 1,250,000 Household Finance Corp., 7.75% due 6/01/1999 1,279,178 1,261,675
A- A3 500,000 Washington Mutual, Inc., 7.25% due 6/15/2001 516,945 515,820
--------- ---------
5,011,916 5,059,464
====================================================================================================================================
Foreign Government AA+ Aa2 500,000 Canadian Government Bonds, 5.25% due 11/05/2008 499,885 500,625
Obligations--1.44% BBB+ A3 1,000,000 People's Republic of China, 7.30% due 12/15/2008 996,780 995,200
AA Aa2 1,000,000 Province of British Columbia, 7.25% due 9/01/2036 1,019,840 1,153,540
Province of Ontario:
AA- Aa3 500,000 7.375% due 1/27/2003 524,060 541,365
AA- Aa3 500,000 7.625% due 6/22/2004 531,870 554,080
Province of Saskatchewan:
A A2 750,000 8% due 7/15/2004 825,255 841,770
A A3 400,000 9.125% due 2/15/2021 513,708 540,432
AA Aa3 1,000,000 Republic of Italy, 6.875% due 9/27/2023 967,770 1,116,100
--------- ---------
5,879,168 6,243,112
====================================================================================================================================
Industrial--Consumer A+ A1 1,000,000 Anheuser-Busch Co., Inc., 6.75% due 11/01/2006 969,880 1,058,380
Goods--1.22% A+ A3 1,000,000 Coca-Cola Enterprises, 6.75% due 9/15/2028 1,011,695 1,035,050
AA Aa2 1,000,000 McDonald's Corp., 5.35% due 9/15/2008 1,005,310 1,000,140
BBB Baa2 1,000,000 Nabisco, Inc., 6% due 2/15/2001 997,450 988,120
Philip Morris Companies, Inc.:
A A2 500,000 9% due 1/01/2001 534,935 533,820
A A2 365,000 6.95% due 6/01/2006 367,606 388,721
BBB- Baa3 300,000 RJR Nabisco, Inc., 8.75% due 7/15/2007 319,341 302,256
--------- ---------
5,206,217 5,306,487
====================================================================================================================================
Industrial-- AA- A2 500,000 Consolidated Natural Gas Co., 6.625% due 12/01/2008 493,905 536,855
Energy--1.01% BBB Baa2 500,000 Diamond Shamrock, Inc., 8% due 4/01/2023 513,270 497,675
BBB+ Baa2 500,000 Enron Corp., 6.625% due 10/15/2003 499,400 511,295
K N Energy, Inc.:
BBB- Baa2 500,000 6.45% due 3/01/2003 500,510 502,870
BBB- Baa2 500,000 6.65% due 3/01/2005 500,495 505,215
BBB Baa2 500,000 Occidental Petroleum Corp., 10.125% due 11/15/2001 562,455 546,680
A- A3 1,000,000 Phillips Petroleum Co., 8.86% due 5/15/2022 1,088,410 1,115,680
BBB- Baa2 150,000 USX Corp., 8.125% due 7/15/2023 165,882 159,231
--------- ---------
4,324,327 4,375,501
====================================================================================================================================
14 & 15
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, December 31, 1998
SCHEDULE OF INVESTMENTS (continued)
</TABLE>
<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-- BBB+ A3 $ 500,000 Applied Materials, Inc., 6.75% due 10/15/2007 $ 503,500 $ 503,230
Manufacturing-- A A2 500,000 Atlantic Richfield Company, 8.44% due 2/21/2012 578,335 605,270
3.68% AA- Aa3 500,000 The Boeing Company, 6.35% due 6/15/2003 506,655 516,860
BBB+ Baa2 528,000 Celulosa Arauco, 6.75% due 12/15/2003 520,091 478,801
A+ A2 150,000 Chrysler Corp., 7.45% due 3/01/2027 157,253 172,181
Ford Motor Credit Co.:
A A1 1,000,000 7.75% due 11/15/2002 1,025,760 1,077,090
A A1 500,000 7.20% due 6/15/2007 522,220 550,860
AAA Aaa 300,000 General Electric Capital Corp., 8.375% due 3/01/2001 316,032 319,881
General Motors Acceptance Corp.:
A A2 100,000 9.375% due 4/01/2000 106,398 104,806
A A2 1,000,000 5.20% due 10/26/2000 999,950 996,362
A A2 1,400,000 9% due 10/15/2002 1,560,272 1,563,926
A A2 600,000 General Motors Corporation, 8.80% due 3/01/2021 737,202 773,208
BBB- Baa2 500,000 Georgia-Pacific Corp., 7.375% due 12/01/2025 512,055 511,380
A+ A1 1,000,000 International Business Machines Corp., 7.125% due 12/01/2096 948,080 1,121,140
Lockheed Martin Corp.:
BBB+ A3 500,000 7.25% due 5/15/2006 522,245 540,955
BBB+ A3 500,000 7.70% due 6/15/2008 557,860 565,255
Lucent Technologies, Inc.:
A A2 900,000 6.90% due 7/15/2001 895,563 938,106
A A2 500,000 5.50% due 11/15/2008 507,810 505,368
Raytheon Company:
BBB Baa1 600,000 6.75% due 3/15/2018 599,934 615,504
BBB Baa1 500,000 7.20% due 8/15/2027 528,010 536,445
BBB+ Baa3 500,000 Saga Petroleum ASA, 7.25% due 9/23/2027 503,060 463,645
BBB Ba1 500,000 Seagate Technology, Inc. 7.45% due 3/01/2037 505,315 484,425
A A2 1,500,000 TRW Inc., 6.25% due 1/15/2010 1,486,005 1,511,895
A- A2 500,000 Xerox Capital Trust I, 8% due 2/01/2027 517,340 542,763
---------- ----------
15,616,945 15,999,356
====================================================================================================================================
Industrial-- CSXCorporation:
Other--0.95% BBB Baa2 500,000 7.45% due 5/01/2007 536,420 544,855
BBB Baa2 200,000 7.90% due 5/01/2017 222,970 225,388
BBB- Baa3 750,000 Delta Air Lines, Inc., 10.375% due 2/01/2011 978,495 957,510
BBB+ Baa1 500,000 Norfolk Southern Corp., 7.70% due 5/15/2017 512,720 568,845
BBB- Baa3 1,000,000 Union Pacific Corp., 9.625% due 12/15/2002 1,135,940 1,127,100
BB+ Baa3 650,000 United Air Lines, Inc., 9% due 12/15/2003 721,292 715,320
---------- ----------
4,107,837 4,139,018
====================================================================================================================================
Industrial-- BBB+ Baa2 1,000,000 American Stores Co., 9.125% due 4/01/2002 1,110,040 1,101,120
Services--3.12% BBB- Baa3 450,000 Comcast Cable Communications, 8.375% due 5/01/2007 491,864 520,840
A- Baa1 500,000 Computer Associates, 6.375% due 4/15/2005(b) 491,015 497,923
A- A3 1,000,000 Dayton Hudson Co., 10% due 1/01/2011 1,227,430 1,318,100
A A2 500,000 First Data Corporation, 6.75% due 7/15/2005 517,910 519,725
BBB+ A3 1,000,000 Hertz Corp., 7% due 1/15/2028 970,760 1,027,340
May Department Stores Co.:
A A2 360,000 7.60% due 6/01/2025 345,942 414,130
A A2 500,000 6.70% due 9/15/2028 504,615 513,565
BBB- Baa3 1,000,000 News America Holdings, Inc., 8.50% due 2/15/2005 1,073,535 1,122,270
Penney (J.C.)&Co.:
A A2 1,000,000 7.60% due 4/01/2007 1,085,130 1,099,160
A A2 200,000 7.95% due 4/01/2017 204,476 224,326
AA Aa2 1,500,000 Procter & Gamble Co., 8% due 9/01/2024 1,901,175 1,885,290
A- A2 500,000 Sears Discover Credit Corp., 9.14% due 3/31/2012 605,320 630,380
A- A2 500,000 Sears, Roebuck & Co., 6.25% due 1/15/2004 493,995 512,230
BBB- Baa3 500,000 TCI Communications, Inc., 6.875% due 2/15/2006 482,050 533,535
BBB- Ba1 100,000 Tele-Communications, Inc., 9.80% due 2/01/2012 110,548 133,536
Time Warner, Inc.:
BBB Baa3 500,000 7.95% due 2/01/2000 515,375 512,970
BBB Baa3 400,000 8.18% due 8/15/2007 410,104 463,420
A A2 500,000 The Walt Disney Company, 6.75% due 3/30/2006 512,650 541,070
---------- ----------
13,053,934 13,570,930
====================================================================================================================================
Utilities-- A Baa1 1,000,000 360 Communications Co., 7.125% due 3/01/2003 1,019,270 1,058,250
Communications-- AA Aa2 1,000,000 Bell Atlantic, PA, 6% due 12/01/2028 993,000 980,620
1.63% AAA Aaa 900,000 BellSouth Telecommunications, Inc., 6.75% due 10/15/2033 796,973 900,828
A Baa1 750,000 GTE Corp., 7.83% due 5/01/2023 722,123 808,260
BBB+ Baa2 150,000 MCI Communications Corp., 7.50% due 8/20/2004 155,665 164,076
AA Aa3 500,000 SBC Communications Capital Corp., 6.625% due 7/15/2007 518,080 539,850
A- A3 500,000 U S West Capital Funding, Inc., 6.875% due 7/15/2028 519,175 533,965
A+ A2 700,000 U S West Communications, Inc., 6.875% due 9/15/2033 667,635 729,638
WorldCom, Inc.:
BBB+ Baa2 500,000 6.40% due 8/15/2005 498,990 519,660
BBB+ Baa2 750,000 7.75% due 4/01/2007 776,430 847,238
---------- ----------
6,667,341 7,082,385
====================================================================================================================================
Utilities-- AA- A1 1,470,000 Baltimore Gas & Electric Co., 8.375% due 8/15/2001 1,551,365 1,577,457
Gas & Electric-- BBB- Baa3 500,000 Commonwealth Edison, 6.95% due 7/15/2018 497,860 520,191
2.08% BBB+ Baa3 500,000 Consumers Energy Company, 6.375% due 2/01/2008 488,120 504,136
Detroit Edison Co.:
BBB+ A3 100,000 5.93% due 2/01/2001 96,905 101,060
A- A3 500,000 7.22% due 8/01/2002 518,860 527,150
AA- Aa3 1,000,000 Florida Power Corp., 6.875% due 2/01/2008 1,093,190 1,085,980
A- A3 500,000 Houston Lighting & Power Co., 8.75% due 3/01/2022 538,705 556,730
A- A3 1,000,000 Pennsylvania Power & Light Resources, Inc., 8.50% due
5/01/2022 1,056,750 1,095,860
A- A3 1,700,000 Public Service Electric & Gas Co., 6.50% due 6/01/2000 1,699,252 1,721,148
AA+ Aa2 1,250,000 Wisconsin Electric Power Co., 7.25% due 8/01/2004 1,280,138 1,367,225
---------- ----------
8,821,145 9,056,937
====================================================================================================================================
</TABLE>
16 & 17
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, December 31, 1998
SCHEDULE OF INVESTMENTS (continued)
<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, 8.20% due 10/15/2004 $ 450,003 $ 474,908
Corporate--1.90% BBB+ A2 500,000 BCH Cayman Islands, 6.50% due 2/15/2006 493,985 503,435
A A3 500,000 BHP Finance USA Ltd., 6.42% due 3/01/2026 497,170 497,025
BBB+ Baa3 400,000 Fairfax Financial Holdings Limited, 8.30% due 4/15/2026 438,736 418,092
A+ A1 550,000 Grand Metropolitan Investment PLC, 9% due 8/15/2011 617,518 697,279
A+ A2 1,000,000 Hydro-Quebec, 8.875% due 3/01/2026 1,116,000 1,317,140
BBB Baa2 1,000,000 Noranda Forest Inc., 6.875% due 11/15/2005 1,002,540 965,450
A A2 500,000 Norsk Hydro ASA, 6.70% due 1/15/2018 497,440 499,454
BBB+ A3 500,000 Philips Electronics N.V., 7.75% due 5/15/2025 512,285 535,800
A A1 1,000,000 Santander Finance Ltd., 7% due 4/01/2006 1,004,440 1,035,550
A+ Aa3 500,000 Sony Corporation, 6.125% due 3/04/2003 498,940 510,770
A- Baa1 500,000 Tyco International Group, Inc., 6.25% due 6/15/2003 501,190 505,115
A A2 300,000 Western Mining, 7.25% due 11/15/2013 291,822 309,636
------------ ------------
7,922,069 8,269,654
==================================================================================================================================
Total Investments in Corporate Bonds & Notes--22.42% 94,418,203 97,518,451
==================================================================================================================================
<CAPTION>
Short-Term Securities
==================================================================================================================================
<S> <C> <C> <C> <C> <C>
Repurchase 5,639,000 Morgan Stanley & Co., purchased on 12/30/1998 to yield
Agreements***-- 5.57% to 1/04/1999 5,639,000 5,639,000
1.29%
==================================================================================================================================
Total Investments in Short-Term Securities--1.29% 5,639,000 5,639,000
==================================================================================================================================
Total Investments--100.01% $420,481,806 434,994,245
============
Liabilities in Excess of Other Assets--(0.01%) (59,451)
------------
Net Assets--100.00% $434,934,794
============
==================================================================================================================================
</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.
(b) Restricted securities as to resale. The value of the
Series' investments in restricted securities was
approximately $498,000, representing 0.1% of net
assets.
- --------------------------------------------------------------
Value
Issue Acquisition Date Cost (Note 1a)
- --------------------------------------------------------------
Computer Associates,
6.375% due 4/15/2005. 8/12/1998 $491,015 $497,923
- --------------------------------------------------------------
Total $491,015 $497,923
======== ========
- --------------------------------------------------------------
(1) Represents balloon mortgages that amortize on a 30-year schedule and have
7-year maturities.
(2) 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, 1998
==================================================================================================================
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$420,481,806) (Note 1a) ........ $434,994,245
Cash ................................................................... 248,915
Receivables:
Interest ............................................................. $5,414,782
Contributions ........................................................ 664,369
Securities sold ...................................................... 609,897 6,689,048
----------
Deferred organization expenses (Note 1f) ............................... 5,520
Prepaid expenses ....................................................... 296
------------
Total assets ........................................................... 441,938,024
------------
==================================================================================================================
Liabilities: Payables:
Securities purchased ................................................. 6,228,786
Withdrawals .......................................................... 658,873
Investment adviser (Note 2) .......................................... 24,292 6,911,951
----------
Accrued expenses ....................................................... 91,279
------------
Total liabilities ...................................................... 7,003,230
------------
==================================================================================================================
Net Assets: Net assets ............................................................. $434,934,794
============
==================================================================================================================
Net Assets Partners' capital ...................................................... $420,422,355
Consist of: Unrealized appreciation on investments--net ............................ 14,512,439
------------
Net assets ............................................................. $434,934,794
============
==================================================================================================================
</TABLE>
See Notes to Financial Statements.
18 & 19
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, December 31, 1998
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
MERRILL LYNCH
AGGREGATE BOND
INDEX SERIES For the Year Ended December 31, 1998
=============================================================================================================
<S> <C> <C>
Investment Income Interest and discount earned .................................. $25,075,382
(Note 1e): Other ......................................................... 37,022
-----------
Total income .................................................. 25,112,404
-----------
=============================================================================================================
Expenses: Investment advisory fees (Note 2) ............................. $238,378
Accounting services (Note 2) .................................. 119,726
Custodian fees ................................................ 54,909
Professional fees ............................................. 49,041
Pricing fees .................................................. 29,781
Trustees' fees and expenses ................................... 3,393
Amortization of organization expenses (Note 1f) ............... 1,702
Interest ...................................................... 1,402
Other ......................................................... 766
--------
Total expenses before reimbursement ........................... 499,098
Reimbursement of expenses (Note 2) ............................ (2,537)
--------
Total expenses after reimbursement ............................ 496,561
-----------
Investment income--net ........................................ 24,615,843
-----------
=============================================================================================================
Realized & Realized gain from investments--net ........................... 1,822,916
Unrealized Gain on Change in unrealized appreciation on investments--net ......... 7,171,047
Investments--Net -----------
(Notes 1c, 1e & 3): Net Increase in Net Assets Resulting from Operations .......... $33,609,806
===========
=============================================================================================================
</TABLE>
See Notes to Financial Statements.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
MERRILL LYNCH For the For the Period
AGGREGATE BOND Year Ended April 3, 1997+ to
INDEX SERIES Increase (Decrease) in Net Assets: Dec. 31, 1998 Dec. 31, 1997
=======================================================================================================================
<S> <C> <C> <C>
Operations: Investment income--net ............................................. $ 24,615,843 $ 9,362,915
Realized gain on investments--net .................................. 1,822,916 870,626
Change in unrealized appreciation on investments--net .............. 7,171,047 7,341,392
------------ ------------
Net increase in net assets resulting from operations ............... 33,609,806 17,574,933
------------ ------------
=======================================================================================================================
Net Capital Increase in net assets derived from net capital contributions ...... 93,584,591 290,165,464
Contributions: ------------ ------------
=======================================================================================================================
Net Assets: Total increase in net assets ....................................... 127,194,397 307,740,397
Beginning of period ................................................ 307,740,397 --
------------ ------------
End of period ...................................................... $434,934,794 $307,740,397
============ ============
=======================================================================================================================
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
MERRILL LYNCH For the For the Period
AGGREGATE BOND The following ratios have been derived from Year Ended April 3, 1997+ to
INDEX SERIES information provided in the financial statements. Dec. 31, 1998 Dec. 31, 1997
==============================================================================================================
<S> <C> <C> <C>
Ratios to Average Expenses, net of reimbursement ......................... .12% .15%*
Net Assets: ======== ========
Expenses ............................................... .13% .18%*
======== ========
Investment income--net ................................. 6.20% 6.34%*
======== ========
==============================================================================================================
Supplemental Net assets, end of period (in thousands) ............... $434,935 $307,740
Data: ======== ========
Portfolio turnover ..................................... 27.89% 86.58%
======== ========
==============================================================================================================
</TABLE>
+ Commencement of operations.
* Annualized.
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 Series'
financial statements are prepared in accordance with generally accepted
accounting principles which may require the use of management accruals and
estimates. 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. Securities which are traded both in the over-the-counter
market and on a stock exchange are valued according to the broadest and most
representative market. Options written or purchased are valued at the last sale
price in the case of exchange-traded options. In the case of options traded in
the over-the-counter market, valuation is the last asked price (options written)
or the last bid price (options purchased). Other investments, including futures
contracts and related options, are stated at market value. Short-term
20 & 21
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, December 31, 1998
NOTES TO FINANCIAL STATEMENTS (concluded)
MERRILL LYNCH AGGREGATE BOND INDEX SERIES
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) Repurchase agreements--The Series invests in US Government securities
pursuant to repurchase agreements. Under such agreements, the counterparty
agrees to repurchase the security at a mutually agreed upon time and price. The
Series takes possession of the underlying securities, marks to market such
securities and, if necessary, receives additional securities daily to ensure
that the contract is fully collateralized.
(c) 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.
(d) 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.
(e) 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.
(f) Deferred organization expenses--Deferred organization expenses are charged
to expense on a straight-line basis over a period not exceeding five years.
(g) 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 Trust 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 year ended December 31, 1998, MLAM earned fees of $238,378, 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
year ended December 31, 1998 were $220,941,543 and $103,703,230, respectively.
Net realized gains for the year ended December 31, 1998 and net unrealized gains
as of December 31, 1998 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains Gains
- --------------------------------------------------------------------------------
Long-term investments .............................. $1,822,916 $14,512,439
---------- -----------
Total .............................................. $1,822,916 $14,512,439
========== ===========
- --------------------------------------------------------------------------------
As of December 31, 1998, net unrealized appreciation for Federal income tax
purposes aggregated $14,504,190, of which $15,033,924 related to appreciated
securities and $529,734 related to depreciated securities. At December 31, 1998,
the aggregate cost of investments for Federal income tax purposes was
$420,490,055.
INDEPENDENT AUDITORS' REPORT
MERRILL LYNCH AGGREGATE BOND INDEX SERIES
The Board of Trustees and Investors, 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, 1998,
the related statements of operations for the year then ended and changes in net
assets and the financial highlights for the year then ended and 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 audits.
We conducted our audits 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, 1998 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 audits provide 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 Merrill Lynch Index Trust as of December 31,
1998, the results of its operations, the changes in its net assets, and the
financial highlights for the respective stated periods in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 17, 1999
22 & 23
<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--12/98
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