MERRILL LYNCH
AGGREGATE BOND
INDEX FUND
Merrill Lynch
Index Funds, Inc.
[GRAPHIC OMITTED]
STRATEGIC
Performance
Annual Report
December 31, 1999
<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
Christopher G. Ayoub, Senior Vice President
Robert C. Doll, Senior Vice President
Gregory Mark Maunz, Senior Vice President
Eric S. Mitofsky, Senior Vice President
Joseph T. Monagle Jr., Senior Vice President
Jeffrey B. Hewson, Vice President
Donald C. Burke, Vice President and 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, 1999
DEAR SHAREHOLDER
Merrill Lynch Aggregate Bond Index Fund is designed for investors who have an
investment objective of seeking to achieve investment returns that replicate the
total return of investment-grade fixed-income securities. As such, the Fund
seeks to achieve its objective by replicating the total return, before expenses,
of the unmanaged Lehman Brothers Aggregate Bond Index, a widely accepted
investment performance benchmark comprised of US Government securities, US
Government agency mortgage-backed securities (MBS) and investment-grade
corporate bonds. It is the intent of the Fund to provide returns that are
representative of the bond market as a whole, rather than to focus on or provide
bias to any specific sector. The Fund seeks to achieve its objective by
investing all of its assets in Master Aggregate Bond Index Series (formerly
Merrill Lynch Aggregate Bond Index Series). Therefore, the Series' structure is
dependent on the structure of the underlying benchmark. Sector weighting and
security selection in the underlying benchmark is determined by the market
representation that the sectors have in the overall market.
As of December 31, 1999, the Index was comprised of 5,567 securities, a decrease
from the 7,218 issues at the previous year-end. The decline was a function of
redefining the securities eligible for index inclusion and a drop in new
issuance. The US Government securities sector had 1,049 securities in the Index,
and accounted for 41.6% of the Index's market value. This is down from 46.3% a
year ago. The next largest sector was US Government agency MBS with 471
positions and comprising 34.2% of the Index, an increase from 30.7% at the
beginning of the year. Investment-grade corporate bonds comprised the final
sector of the Index. Although the corporate bond sector has the most securi-
ties at 4,047, its market value only accounted for 24.2% of the Index, up from
23% last year.
In attempting to match the return of the Index (before fund expenses) we have
implemented a stratified sampling approach when selecting investments. This
refers to duplicating investment characteristics of various positions, or cells,
of the Series with the corresponding cell in the Index. This approach is
necessary because fully replicating the Index is not practical because of its
size and the scarcity and illiquidity of some issues. In constructing the
Treasury and Government agency sectors, the measures of duration (which measures
the amount of price change when interest rates change) and convexity (which
measures the stability of duration) are identical in the Series and the Index.
In addition, an analysis of the duration exposure is conducted for each part of
the yield curve (partial duration) to ensure identical exposure to the yield
curve. This provides comfort that in the event the shape of the yield curve
changes, a deviation in performance will not result.
A similar approach is applicable in constructing the corporate bond sector of
the Series. However, in addition to duration, partial duration and convexity
exercises, credit and industry exposure of the Series is matched to the Index.
The MBS sector of the Series is managed in a slightly different manner. In the
analysis of MBS, the calculation of duration and convexity is highly dependent
on prepayment assumptions of the underlying mortgages. While there are many
models projecting prepayments, there has yet to emerge a model which can be
fully relied upon. As a result, the duration and convexity measurements may not
be accurate. In lieu of these measurements, the Series' construction is matched
by other elements. This entails having a neutral exposure to the MBS sector with
regard to coupon, original term (30-year, 15-year, balloon) and issuer.
Fiscal Year in Review
For the year ended December 31, 1999, the Fund's Class A and Class D Shares had
total returns of -1.36% and -1.50%, respectively. This compares to the total
return of -0.82% for the unmanaged Lehman Brothers Aggregate Bond Index for the
same period.
Total returns for most high-quality fixed-income investments were poor in 1999.
Yields on securities representing the entire yield curve rose significantly,
resulting in lower bond prices that, in many cases, were greater than the coupon
generated by the security. For example, the yield on the 30-year Treasury bond
rose 139 basis points (1.39%) and had a total return of -2.02%. All benchmark
Treasury notes with maturities longer than two years generated negative total
returns in 1999. During 1999, the MBS sector had the best performance within the
Index, returning +1.86%. Unfortunately, the magnitude of the yield increase
caused the corporate bond and Government sectors to lag their MBS counterparts
significantly, returning -1.96% and -2.23%, respectively.
In the short term, we expect continued pressure on interest rates as tight
labor, strong growth and inflation should keep the market in a difficult bind.
However, investor confidence should return following interest rate increases
which address the economic concerns mentioned above.
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/ Christopher G. Ayoub
Christopher G. Ayoub
Senior Vice President and
Portfolio Manager
/s/ Gregory Mark Maunz
Gregory Mark Maunz
Senior Vice President and
Portfolio Manager
/s/ Jeffrey B. Hewson
Jeffrey B. Hewson
Vice President and
Portfolio Manager
February 2, 2000
================================================================================
To reduce shareholders' expenses, Merrill Lynch Aggregate Bond Index Fund will
no longer be printing and mailing quarterly reports to shareholders. We will
continue to provide you with reports on a semi-annual and annual basis.
================================================================================
2 & 3
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, December 31, 1999
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. The Fund's Administrator voluntarily waived a
portion of its administrative fee. Without such waiver, the Fund's
performance would have been lower.
Recent Performance Results
<TABLE>
<CAPTION>
3 Month 12 Month Since Inception Standardized
As of December 31, 1999 Total Return Total Return Total Return 30-Day Yield
=====================================================================================================================
<S> <C> <C> <C> <C>
ML Aggregate Bond Index Fund Class A Shares* -0.30% -1.36% +17.25% 6.58%
- ---------------------------------------------------------------------------------------------------------------------
ML Aggregate Bond Index Fund Class D Shares* -0.27 -1.50 +16.57 6.32
- ---------------------------------------------------------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index** -0.12 -0.82 +18.46 --
=====================================================================================================================
</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'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.
================================================================================
Total Return Based on a $10,000 Investment--Class A & Class D Shares
A line graph depicting the growth of an investment in the Fund's Class A Shares
and Class D Shares compared to growth of an investment in the Lehman Aggregate
Index. Beginning and ending values are:
4/03/97** 12/99
ML Aggregate Bond Index Fund+--
Class A Shares* $10,000 $11,725
ML Aggregate Bond Index Fund+--
Class D Shares* $10,000 $11,657
Lehman Aggregate Index++ $10,000 $11,846
* Assuming transaction costs and other operating expenses, including
advisory fees.
** Commencement of operations.
+ The Fund invests all of its assets in Aggregate Bond Index Series of
Quantitative Master Series. 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 12/31/99 -1.36%
- --------------------------------------------------------------------------------
Inception (4/03/97) through 12/31/99 +5.97
- --------------------------------------------------------------------------------
% Return
================================================================================
Class D Shares
================================================================================
Year Ended 12/31/99 -1.50%
- --------------------------------------------------------------------------------
Inception (4/03/97) through 12/31/99 +5.75
- --------------------------------------------------------------------------------
4 & 5
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, December 31, 1999
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
MERRILL LYNCH
AGGREGATE BOND
INDEX FUND As of December 31, 1999
===============================================================================================================================
<C> <S> <C> <C>
Assets: Investment in Master Aggregate Bond Index Series, at value (identified
cost--$422,506,271) ......................................................... $ 404,613,201
Deferred organization expenses ................................................ 5,092
Prepaid registration fees ..................................................... 8,800
-------------
Total assets .................................................................. 404,627,093
-------------
===============================================================================================================================
Liabilities: Payables:
Dividends to shareholders ................................................... $438,547
Administrative fees ......................................................... 40,238
Distributor ................................................................. 18,152 496,937
--------
Accrued expenses and other liabilities ........................................ 133,132
-------------
Total liabilities ............................................................. 630,069
-------------
===============================================================================================================================
Net Assets: Net assets .................................................................... $ 403,997,024
=============
===============================================================================================================================
Net Assets Class A Shares of Common Stock, $.0001 par value, 125,000,000 shares authorized $ 3,291
Consist of: Class D Shares of Common Stock, $.0001 par value, 125,000,000 shares authorized 809
Paid-in capital in excess of par .............................................. 422,741,738
Accumulated distributions in excess of realized capital gains on investments
from the Series--net ........................................................ (82,459)
Accumulated realized capital losses on investments from the Series--net ....... (773,285)
Unrealized depreciation on investments from the Series--net ................... (17,893,070)
-------------
Net assets .................................................................... $ 403,997,024
=============
===============================================================================================================================
Net Asset Class A--Based on net assets of $324,254,277 and 32,913,257 shares outstanding $ 9.85
Value: =============
Class D--Based on net assets of $79,742,747 and 8,091,090 shares outstanding .. $ 9.86
=============
===============================================================================================================================
</TABLE>
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
MERRILL LYNCH
AGGREGATE BOND
INDEX FUND For the Year Ended December 31, 1999
==========================================================================================================================
<C> <S> <C> <C>
Investment Income: Investment income allocated from the Series .......................... $ 28,251,634
Expenses allocated from the Series ................................... 429,712
------------
Net investment income from the Series ................................ 27,821,922
------------
==========================================================================================================================
Expenses: Administration fee ................................................... $ 697,194
Transfer agent fees .................................................. 318,589
Account maintenance fee--Class D ..................................... 207,292
Registration fees .................................................... 113,018
Printing and shareholder reports ..................................... 58,892
Professional fees .................................................... 26,408
Amortization of organization expenses ................................ 2,396
------------
Total expenses before reimbursement .................................. 1,423,789
Reimbursement of expenses ............................................ (103,971)
------------
Total expenses after reimbursement ................................... 1,319,818
------------
Investment income--net ............................................... 26,502,104
------------
==========================================================================================================================
Realized & Realized loss on investments from the Series--net .................... (821,234)
Unrealized Change in unrealized appreciation/depreciation on investments from the
Series--net ........................................................ (32,395,278)
------------
Loss from the Net Decrease in Net Assets Resulting from Operations ................. $ (6,714,408)
Series--Net: ============
==========================================================================================================================
</TABLE>
See Notes to Financial Statements.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
MERRILL LYNCH For the Year Ended
AGGREGATE BOND December 31,
INDEX FUND ------------------------------
Increase (Decrease) in Net Assets: 1999 1998
======================================================================================================================
<C> <S> <C> <C>
Operations: Investment income--net ........................................... $ 26,502,104 $ 23,530,630
Realized gain (loss) on investments from the Series--net ......... (821,234) 1,795,467
Change in unrealized appreciation/depreciation on investments from
the Series--net ................................................ (32,395,278) 7,162,089
------------- -------------
Net increase (decrease) in net assets resulting from operations .. (6,714,408) 32,488,186
------------- -------------
======================================================================================================================
Dividends & Investment income--net:
Distributions to Class A ........................................................ (21,683,176) (19,203,438)
Shareholders: Class D ........................................................ (4,818,928) (4,327,192)
In excess of realized gain on investments from the Series--net:
Class A ........................................................ (66,954) (1,358,966)
Class D ........................................................ (15,505) (319,027)
------------- -------------
Net decrease in net assets resulting from dividends and
distributions to shareholders .................................. (26,584,563) (25,208,623)
------------- -------------
======================================================================================================================
Capital Share Net increase in net assets derived from capital share transactions 3,906,947 118,835,556
Transactions: ------------- -------------
======================================================================================================================
Net Assets: Total increase (decrease) in net assets .......................... (29,392,024) 126,115,119
Beginning of year ................................................ 433,389,048 307,273,929
------------- -------------
End of year ...................................................... $ 403,997,024 $ 433,389,048
============= =============
======================================================================================================================
</TABLE>
See Notes to Financial Statements.
6 & 7
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, December 31, 1999
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Class A
----------------------------------------------
The following per share data and ratios have been derived For the Year Ended
MERRILL LYNCH from information provided in the financial statements. December 31, For the Period
AGGREGATE BOND --------------------------- April 3, 1997+ to
INDEX FUND Increase (Decrease) in Net Asset Value: 1999 1998 Dec. 31, 1997
============================================================================================================================
<C> <S> <C> <C> <C>
Per Share Net asset value, beginning of period .................. $ 10.61 $ 10.42 $ 10.00
Operating ----------- ----------- -----------
Performance: Investment income--net ................................ .62 .64 .48
Realized and unrealized gain (loss) on investments from
the Series--net ..................................... (.76) .23 .45
----------- ----------- -----------
Total from investment operations ...................... (.14) .87 .93
----------- ----------- -----------
Less dividends and distributions:
Investment income--net .............................. (.62) (.64) (.48)
Realized gain on investments from the Series--net ... -- (.04) (.03)
In excess of realized gain on investments from the
Series--net ....................................... --++ -- --++
----------- ----------- -----------
Total dividends and distributions ..................... (.62) (.68) (.51)
----------- ----------- -----------
Net asset value, end of period ........................ $ 9.85 $ 10.61 $ 10.42
=========== =========== ===========
============================================================================================================================
Total Investment Based on net asset value per share .................... (1.36%) 8.56% 9.49%++
Return: =========== =========== ===========
============================================================================================================================
Ratios to Average Expenses, net of reimbursement+++ ..................... .35% .35% .35%*
Net Assets: =========== =========== ===========
Expenses+++ ........................................... .37% .40% .52%*
=========== =========== ===========
Investment income--net ................................ 6.06% 5.99% 6.22%*
=========== =========== ===========
============================================================================================================================
Supplemental Net assets, end of period (in thousands) .............. $ 324,254 $ 351,786 $ 251,140
Data: =========== =========== ===========
============================================================================================================================
<CAPTION>
Class D
----------------------------------------------
For the Year Ended
December 31, For the Period
--------------------------- April 3, 1997+ to
Increase (Decrease) in Net Asset Value: 1999 1998 Dec. 31, 1997
============================================================================================================================
<C> <S> <C> <C> <C>
Per Share Net asset value, beginning of period .................. $ 10.61 $ 10.42 $ 10.00
Operating ----------- ----------- -----------
Performance: Investment income--net ................................ .58 .61 .46
Realized and unrealized gain (loss) on investments from
the Series--net ..................................... (.75) .23 .45
----------- ----------- -----------
Total from investment operations ...................... (.17) .84 .91
----------- ----------- -----------
Less dividends and distributions:
Investment income--net .............................. (.58) (.61) (.46)
Realized gain on investments from the Series--net ... -- (.04) (.03)
In excess of realized gain on investments from
the Series--net ................................... --++ -- --++
----------- ----------- -----------
Total dividends and distributions ..................... (.58) (.65) (.49)
----------- ----------- -----------
Net asset value, end of period ........................ $ 9.86 $ 10.61 $ 10.42
=========== =========== ===========
============================================================================================================================
Total Investment Based on net asset value per share .................... (1.50%) 8.29% 9.29%++
Return: =========== =========== ===========
============================================================================================================================
Ratios to Average Expenses, net of reimbursement+++ ..................... .60% .60% .60%*
Net Assets: =========== =========== ===========
Expenses+++ ........................................... .62% .65% .77%*
=========== =========== ===========
Investment income--net ................................ 5.81% 5.75% 5.98%*
=========== =========== ===========
============================================================================================================================
Supplemental Net assets, end of period (in thousands) .............. $ 79,743 $ 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 Master
Aggregate Bond Index Series (the "Series") of the Quantitative Master Series
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 and Class D. 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 has 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 are included elsewhere in this
report.
8 & 9
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, December 31, 1999
NOTES TO FINANCIAL STATEMENTS (concluded)
MERRILL LYNCH AGGREGATE BOND INDEX FUND
(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 Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is Princeton
Services, Inc. ("PSI"), a wholly-owned subsidiary of Merrill Lynch & Co.,
Incorporated ("ML & Co."), which is the limited partner. The Fund pays a monthly
fee at an annual rate of .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. Effective August
2, 1999, the annual rate was changed to .19%. For the year ended December 31,
1999, FAM earned fees of $697,194, of which $103,971 was voluntarily waived.
The Corporation has also entered into a Distribution Agreement and Distribution
Plan with Merrill Lynch Funds Distributor ("MLFD" or the "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 .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 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 FAM at cost.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, 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, 1999 were $70,048,927 and $94,021,438, respectively.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions were
$3,906,947 and $118,835,556 for the years ended December 31, 1999 and December
31, 1998, respectively.
Transactions in capital shares for each class were as follows:
- --------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended December 31, 1999 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 13,411,892 $ 138,448,898
Shares issued to shareholders
in reinvestment of dividends
and distributions ...................... 1,890,860 19,194,348
------------- -------------
Total issued ........................... 15,302,752 157,643,246
Shares redeemed ........................ (15,554,608) (158,111,310)
------------- -------------
Net decrease ........................... (251,856) $ (468,064)
============= =============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 D Shares for the Year Dollar
Ended December 31, 1999 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 3,428,567 $ 35,277,078
Shares issued to shareholders
in reinvestment of dividends
and distributions ...................... 392,742 3,988,250
------------- -------------
Total issued ........................... 3,821,309 39,265,328
Shares redeemed ........................ (3,420,624) (34,890,317)
------------- -------------
Net increase ........................... 400,685 $ 4,375,011
============= =============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
============= =============
- --------------------------------------------------------------------------------
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, 1999, the related statements of operations
for the year then ended and changes in net assets for each of the years in the
two-year period then ended, and the financial highlights for each of the years
in the two-year period 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,
1999, 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 22, 2000
10 & 11
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, December 31, 1999
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, 1999 qualify
for the dividends received deduction for corporations. Additionally, the Fund
paid a long-term capital gains distribution of $.001862 per share to
shareholders of record on August 13, 1999.
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, 1999 40.94%
June 30, 1999 39.80
September 30, 1999 38.68
December 31, 1999 39.62
- --------------------------------------------------------------------------------
* 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, 1999, 37.95% 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 (in US dollars)
<TABLE>
<CAPTION>
Master Aggregate Bond Index Series
-------------------------------------------------------------------------------------------------------
Face Interest Maturity
Issue Amount Rate Date(s) Value
==============================================================================================================================
<C> <S> <C> <C> <C> <C>
US Government & Federal Home Loan Mortgage Corporation $ 5,800,000 5.75 % 7/15/2003 $ 5,611,691
Agency Obligations-- 1,300,000 7.18 6/27/2006 1,311,978
42.5% =======================================================================================================
Federal National Mortgage Association 1,200,000 5.625 3/15/2001 1,188,496
300,000 5.45 10/10/2003 286,317
220,000 6.85 4/05/2004 219,803
1,700,000 5.75 2/15/2008 1,565,261
=======================================================================================================
Financing Corp. 700,000 9.80 11/30/2017 875,217
=======================================================================================================
Tennessee Valley Authority, Series E 1,490,000 6.25 12/15/2017 1,337,275
=======================================================================================================
United States Treasury Bonds 800,000 8.75 11/15/2008 855,872
24,850,000 8.75 5/15/2017 29,680,094
8,000,000 6.625 2/15/2027 7,928,720
5,400,000 6.375 8/15/2027 5,186,538
1,600,000 6.125 11/15/2027 1,488,992
=======================================================================================================
United States Treasury Notes 8,900,000 5.375 2/15/2001 8,824,884
4,700,000 5.00 2/28/2001 4,639,793
5,300,000 4.875 3/31/2001 5,218,009
4,700,000 5.00 4/30/2001 4,630,957
9,600,000 5.25 5/31/2001 9,477,024
4,000,000 5.50 7/31/2001 3,956,880
4,900,000 5.50 8/31/2001 4,844,091
2,200,000 5.875 11/30/2001 2,185,898
12,530,000 6.50 5/31/2002 12,590,645
2,400,000 5.50 1/31/2003 2,344,872
2,800,000 5.25 8/15/2003 2,699,816
3,500,000 5.75 8/15/2003 3,428,355
5,200,000 4.25 11/15/2003 4,829,500
7,400,000 4.75 2/15/2004 6,980,272
3,400,000 5.875 2/15/2004 3,339,956
7,700,000 5.25 5/15/2004 7,376,369
3,120,000 6.00 8/15/2004 3,071,234
6,200,000 5.875 11/15/2005 6,018,836
5,550,000 6.25 2/15/2007 5,460,700
5,400,000 6.625 5/15/2007 5,421,114
3,200,000 6.125 8/15/2007 3,120,000
4,400,000 5.50 5/15/2009 4,099,568
600,000 6.00 8/15/2009 581,250
==============================================================================================================================
Total Investments in US Government & Agency Obligations
(Cost--$179,447,005)--42.5% 172,676,277
==============================================================================================================================
US Government Agency Federal Home Loan Mortgage Corporation-- 1,318,435 5.50 10/01/2013--1/01/2014 1,226,065
Mortgage-Backed Gold Program 1,446,507 5.50 12/01/2028--2/01/2029 1,282,217
Obligations**--34.1% 575,842 6.00 4/01/2013--8/01/2013 547,996
495,529 6.00 5/01/2029 454,131
7,276,253 6.50 1/01/2026--7/01/2029 6,875,007
3,737,217 7.00 1/01/2008--6/01/2013 3,709,974
13,231,361 7.00 9/01/2025--10/01/2029 12,821,418
1,380,608 7.50 5/01/2007--5/01/2013 1,393,694
5,733,740 7.50 1/01/2023--11/01/2029 5,683,889
4,220,546 8.00 6/01/2024--1/01/2028 4,257,428
554,003 8.50 5/01/2028--2/01/2029 568,806
432,543 9.00 6/01/2025 452,093
639,790 9.50 2/01/2019 682,651
=======================================================================================================
Federal National Mortgage Association 1,201,958 5.50 6/01/2011--2/01/2014 1,117,287
8,635,388 6.00 2/01/2013--7/01/2014 8,203,758
11,894,468 6.00 1/01/2026--7/01/2029 10,897,788
395,498 6.50(2) 10/01/2004 390,381
7,732,002 6.50 1/01/2013--7/01/2014 7,515,371
25,092,813 6.50 12/01/2025--5/01/2029 23,699,537
</TABLE>
12 & 13
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, December 31, 1999
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<TABLE>
<CAPTION>
Master Aggregate Bond Index Series (continued)
-------------------------------------------------------------------------------------------------------
Face Interest Maturity
Issue Amount Rate Date(s) Value
==============================================================================================================================
<C> <S> <C> <C> <C> <C>
US Government Agency Federal National Mortgage Association $ 393,925 7.00 % 6/01/2014 $ 389,699
Mortgage-Backed (concluded) 8,052,446 7.00 4/01/2027--9/01/2028 7,800,016
Obligations** 4,179,813 7.50 8/01/2027--11/01/2027 4,137,050
(concluded) 400,000 7.50 TBA(1) 395,750
=======================================================================================================
Government National Mortgage Association 197,989 5.50 4/15/2029 174,881
553,741 6.00 6/15/2011--2/15/2012 529,482
2,525,259 6.00 4/20/2026--6/15/2029 2,301,535
180,213 6.50 2/15/2014 174,807
8,510,529 6.50 4/15/2026--7/20/2029 7,991,144
192,727 7.00 4/15/2013 190,983
10,130,466 7.00 12/15/2023--10/15/2029 9,799,427
400,000 7.00 TBA(1) 395,872
6,307,171 7.50 3/15/2024--12/15/2029 6,244,022
3,125,069 8.00 12/15/2022--12/15/2029 3,164,002
500,000 8.00 TBA(1) 505,000
1,427,602 8.50 11/15/2017--3/15/2028 1,470,044
799,144 9.00 11/15/2016--11/15/2024 839,023
82,962 9.50 9/15/2021 88,302
==============================================================================================================================
Total US Government Agency Mortgage-Backed Obligations (Cost--$143,720,973)--34.1% 138,370,530
==============================================================================================================================
<CAPTION>
S&P Moody's Face
INDUSTRIES Ratings Ratings Amount Corporate Bonds & Notes
===================================================================================================================================
<C> <C> <C> <C> <S> <C>
Banking--2.8% A Aa3 $1,000,000 BankAmerica Corporation, 6.875% due 6/01/2003 989,680
NR* A2 2,000,000 BankBoston NA, 8.375% due 12/15/2002 2,051,720
Chase Manhattan Corporation:
A A1 1,000,000 9.75% due 11/01/2001 1,047,340
A A1 500,000 6.75% due 8/15/2008 475,700
Citicorp:
A+ A1 500,000 9.50% due 2/01/2002 524,445
A+ A1 500,000 7.625% due 5/01/2005 505,430
A+ A1 500,000 6.375% due 11/15/2008 462,205
A A1 1,000,000 First Bank Systems, Inc., 7.55% due 6/15/2004 999,890
A- A3 1,020,000 Fleet/Norstar Financial Group, Inc., 8.125% due 7/01/2004 1,044,531
A+ Aa3 1,335,000 Norwest Corp., 5.75% due 2/01/2003 1,284,911
A- A1 1,050,000 Republic New York, 7.53% due 12/04/2026 913,847
AA Aa2 230,000 Swiss Bank Corp., NY, 7.50% due 7/15/2025 219,618
A- Aa3 1,000,000 Wells Fargo Capital, 8.125% due 12/01/2026 (a) 942,231
------------
11,461,548
===================================================================================================================================
Financial Services-- A+ Aa3 500,000 Citigroup Capital II, 7.75% due 12/01/2036 456,726
2.0% BBB Baa1 500,000 EOP Operating LP, 6.75% due 2/15/2008 459,845
A A2 500,000 Equitable Companies Inc., 9% due 12/15/2004 530,580
A- A3 200,000 Heller Financial Inc., 7% due 5/15/2002 198,906
Lehman Brothers Holdings Inc.:
A Baa1 500,000 7.625% due 6/01/2006 496,030
A Baa1 1,000,000 7.20% due 8/15/2009 954,400
A+ Aa3 1,000,000 Morgan Stanley Group, Inc., 6.50% due 3/30/2001 994,580
BBB+ Baa1 1,000,000 PaineWebber Group Inc., 7.74% due 1/30/2012 971,110
A Aa3 2,000,000 Salomon Smith Barney Holdings, Inc., 6.25% due 5/15/2003 1,938,800
BBB+ Baa1 500,000 Simon Debartolo, 6.75% due 7/15/2004 470,600
BBB Baa2 500,000 Spieker Properties LP, 6.875% due 2/01/2005 475,975
------------
7,947,552
===================================================================================================================================
Financial Services-- Associates Corp. NA:
Consumer--0.9% AA- Aa3 500,000 6.50% due 7/15/2002 494,615
AA- Aa3 500,000 7.23% due 5/17/2006 496,935
A+ Aa3 200,000 CIT Group Holdings, Inc., 5.875% due 10/15/2008 176,538
A A2 1,000,000 Household Finance Corp., 5.875% due 2/01/2009 884,610
BBB Baa3 1,000,000 Newcourt Credit Group, 6.875% due 2/16/2005 979,620
A- A3 500,000 Washington Mutual, Inc., 7.25% due 6/15/2001 499,665
------------
3,531,983
===================================================================================================================================
Foreign Government AA+ Aa2 500,000 Canada Government Bond, 5.25% due 11/05/2008 440,950
Obligations--1.0% AA- Aa2 1,000,000 Province of British Columbia, 7.25% due 9/01/2036 945,770
Province of Ontario:
AA- Aa3 500,000 7.375% due 1/27/2003 505,200
AA- Aa3 500,000 7.625% due 6/22/2004 510,940
A A2 750,000 Province of Saskatchewan, 8% due 7/15/2004 775,860
AA Aa3 1,000,000 Republic of Italy, 6.875% due 9/27/2023 947,290
------------
4,126,010
===================================================================================================================================
Industrial--Consumer A+ A1 1,000,000 Anheuser-Busch Companies, Inc., 6.75% due 11/01/2006 963,970
Goods--1.5% A+ A3 1,000,000 Coca-Cola Enterprises, 6.75% due 9/15/2028 881,120
BBB- Baa3 1,000,000 Fred Meyer Inc., 7.45% due 3/01/2008 973,800
AA Aa2 1,000,000 McDonald's Corp., 5.35% due 9/15/2008 877,650
Nabisco Inc.:
BBB Baa2 1,000,000 6% due 2/15/2011 985,060
BBB Baa2 500,000 6.375% due 2/01/2035 464,360
Philip Morris Companies, Inc.:
A A2 500,000 9% due 1/01/2001 506,900
A A2 365,000 6.95% due 6/01/2006 359,562
------------
6,012,422
===================================================================================================================================
Industrial-- BBB- Baa3 500,000 CMS Panhandle Holding Co., 6.50% due 7/15/2009 (a) 457,195
Energy--1.3% AA- A2 500,000 Consolidated Natural Gas Company, 6.625% due 12/01/2008 464,120
</TABLE>
14 & 15
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, December 31, 1999
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<TABLE>
<CAPTION>
Master Aggregate Bond Index Series (continued)
------------------------------------------------------------------------------------------------------------
S&P Moody's Face
INDUSTRIES Ratings Ratings Amount Corporate Bonds & Notes
===================================================================================================================================
<C> <C> <C> <C> <S> <C>
Industrial--Energy Enron Corp.:
(concluded) BBB+ Baa2$ 500,000 6.625% due 10/15/2003 $ 485,580
BBB Baa3 1,000,000 6.75% due 7/01/2005 957,630
KN Energy, Inc.:
BBB- Baa2 500,000 6.45% due 3/01/2003 486,035
BBB- Baa2 500,000 6.65% due 3/01/2005 478,525
BBB Baa3 500,000 Occidental Petroleum Corp., 8.45% due 2/15/2029 518,590
A- A3 1,000,000 Phillips Petroleum, 8.86% due 5/15/2022 1,011,490
BBB- Baa2 150,000 USX Corp., 8.125% due 7/15/2023 149,867
BBB Baa2 500,000 Ultramar Diamond Shamrock, 8% due 4/01/2023 477,570
------------
5,486,602
===================================================================================================================================
Industrial-- A A2 500,000 Atlantic Richfield Company, 8.44% due 2/21/2012 541,990
Manufacturing--3.3% AA- A1 500,000 Boeing Co., 6.35% due 6/15/2003 489,700
A+ A1 150,000 Chrysler Corp., 7.45% due 3/01/2027 145,351
A- Baa1 500,000 Dana Corporation, 7% due 3/01/2029 435,060
Ford Motor Credit Company:
A A1 1,000,000 7.75% due 11/15/2002 1,016,650
A A1 1,500,000 7.20% due 6/15/2007 1,472,115
AAA Aaa 300,000 General Electric Capital Corp., 8.375% due 3/01/2001 305,520
General Motors Acceptance Corp.:
A A2 100,000 9.375% due 4/01/2000 100,789
A A2 1,400,000 9% due 10/15/2002 (b) 1,466,598
A A2 600,000 8.80% due 3/01/2021 659,856
BBB- Baa2 500,000 Georgia-Pacific Corp., 7.375% due 12/01/2025 458,300
A+ A1 1,000,000 International Business Machines Corp., 7.125% due 12/01/2096 913,890
Lockheed Martin Corp.:
BBB+ Baa1 500,000 7.25% due 5/15/2006 476,930
BBB+ Baa1 500,000 7.70% due 6/15/2008 479,645
A A2 400,000 Lucent Technologies Inc., 6.90% due 7/15/2001 400,784
BBB Baa1 600,000 Raytheon Co., 6.75% due 3/15/2018 521,136
BBB A3 500,000 Saga Petroleum ASA, 7.25% due 9/23/2027 452,545
BBB Ba1 500,000 Seagate Technology, Inc., 7.45% due 3/01/2037 435,685
BBB Baa1 1,000,000 TRW Inc., 6.25% due 1/15/2010 878,390
NR* Baa2 1,500,000 Union Carbide Corporation, 6.25% due 6/15/2003 1,451,865
BBB+ A2 500,000 Xerox Capital Trust I, 8% due 2/01/2027 449,884
------------
13,552,683
===================================================================================================================================
Industrial-- CSX Corp.:
Other--0.9% BBB Baa2 500,000 7.45% due 5/01/2007 491,510
BBB Baa2 200,000 7.90% due 5/01/2017 198,182
BBB- Baa3 750,000 Delta Airlines, 10.375% due 2/01/2011 857,258
BBB+ Baa1 500,000 Norfolk Southern Corporation, 7.70% due 5/15/2017 488,450
BBB- Baa3 1,000,000 Union Pacific Corp., 9.625% due 12/15/2002 1,060,860
BB+ Baa3 650,000 United Airlines, 9% due 12/15/2003 670,111
------------
3,766,371
===================================================================================================================================
Industrial-- BBB Baa3 450,000 Comcast Cable Communications, 8.375% due 5/01/2007 465,155
Services--3.0% A- Baa1 500,000 Computer Associates International, Inc., 6.375% due 4/15/2005 465,065
A- A3 1,000,000 Dayton Hudson Corp., 10% due 1/01/2011 1,169,360
A- A3 1,000,000 Hertz Corp., 7% due 1/15/2028 885,990
J.C. Penney Company, Inc.:
BBB+ A3 1,000,000 7.60% due 4/01/2007 929,540
BBB+ A3 200,000 7.95% due 4/01/2017 177,824
BBB- Baa3 1,000,000 J Seagrams & Sons, 7% due 4/15/2008 950,600
A+ A1 360,000 The May Department Stores Company, 7.60% due 6/01/2025 352,753
BBB- Baa3 2,000,000 News America Inc., 7.25% due 5/18/2018 1,813,240
AA Aa2 500,000 The Procter & Gamble Company, 8% due 9/01/2024 537,040
A- A2 500,000 Sears Discover Credit Corp., 9.14% due 3/13/2012 532,745
A- A2 500,000 Sears, Roebuck & Co., 6.25% due 1/15/2004 474,570
BBB Baa1 1,000,000 Service Corp. International, 6% due 12/15/2005 700,450
Tele-Communications Inc.:
AA- A2 1,375,000 8.25% due 1/15/2003 1,422,836
AA- A2 100,000 9.80% due 2/01/2012 116,834
BBB Baa3 1,000,000 Time Warner Inc., 7.75% due 6/15/2005 1,011,030
------------
12,005,032
===================================================================================================================================
Utilities-- A A2 1,000,000 360 Communications Co., 7.125% due 3/01/2003 994,480
Communications-- AA- A1 1,000,000 AT&T Corporation, 6% due 3/15/2009 907,120
1.8% AA Aa2 1,000,000 Bell Atlantic, PA, 6% due 12/01/2028 789,950
AAA Aaa 900,000 BellSouth Telecommunications, Inc., 6.75% due 10/15/2033 793,206
A Baa1 750,000 GTE Corp., 7.83% due 5/01/2023 711,998
A- A3 150,000 MCI Communications Corp., 7.50% due 8/20/2004 151,614
A- A3 750,000 MCI WorldCom Inc., 7.75% due 4/01/2007 764,843
AA Aa3 500,000 Southwestern Bell Telecommunications, 6.625% due 7/15/2007 478,655
BBB+ Baa1 500,000 Sprint Capital Corporation, 6.125% due 11/15/2008 453,340
A+ Baa1 700,000 US West Communications, 6.875% due 9/15/2033 594,734
A- A3 500,000 WorldCom Inc., 6.40% due 8/15/2005 478,915
------------
7,118,855
===================================================================================================================================
Utilities--Gas & AA- A1 1,470,000 Baltimore Gas & Electric Co., 8.375% due 8/15/2001 1,505,545
Electric--1.4% BBB Baa3 500,000 Commonwealth Edison, Inc., 6.95% due 7/15/2018 443,685
BBB+ Baa3 500,000 Consumers Energy, 6.375% due 2/01/2008 454,000
Detroit Edison Company:
A- A3 100,000 5.93% due 2/01/2001 99,002
A- A3 500,000 7.22% due 8/01/2002 499,045
AA- Aa3 1,000,000 Florida Power Corp., 6.875% due 2/01/2008 965,840
A- A3 500,000 Houston Lighting and Power, 8.75% due 3/01/2022 510,070
AA+ Aa2 1,250,000 Wisconsin Electric and Power, 7.25% due 8/01/2004 1,249,138
------------
5,726,325
===================================================================================================================================
</TABLE>
16 & 17
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, December 31, 1999
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<TABLE>
<CAPTION>
Master Aggregate Bond Index Series (concluded)
------------------------------------------------------------------------------------------------------------
S&P Moody's Face
INDUSTRIES Ratings Ratings Amount Corporate Bonds & Notes
===================================================================================================================================
<C> <C> <C> <C> <S> <C>
Yankee-- AA- Aa3 $ 425,000 Abbey National First Capital, 8.20% due 10/15/2004 $ 438,311
Corporate--2.3% A A1 500,000 BCH Ltd. (Cayman Islands), 6.50% due 2/15/2006 471,340
A- A3 500,000 BHP Finance USA Limited, 6.42% due 3/01/2026 484,380
BBB+ Baa2 528,000 Celulosa Arauco, 6.75% due 12/15/2003 504,504
BBB+ Baa3 400,000 Fairfax Financial Holdings Ltd., 8.30% due 4/15/2026 354,656
A+ A1 550,000 Grand Metropolitan Investment Corp., 9% due 8/15/2011 611,369
A+ A2 1,000,000 Hydro-Quebec, 8.875% due 3/01/2026 1,111,430
BBB- Baa3 1,000,000 Korea Development Bank, 6.625% due 11/21/2003 960,110
BBB- Baa3 500,000 Korea Telecom, 7.625% due 4/15/2007 480,650
BBB Baa2 1,000,000 Noranda Forest Inc., 6.875% due 11/15/2005 922,110
A A2 500,000 Norsk Hydro A/S, 6.70% due 1/15/2018 441,550
BBB+ A3 500,000 Phillips Electronics NV, 7.75% due 5/15/2025 476,365
A A1 1,000,000 Santander Financial Issuances Ltd., 7% due 4/01/2006 969,930
A+ Aa3 500,000 Sony Corporation, 6.125% due 3/04/2003 487,475
A- Baa1 500,000 Tyco International Group SA, 6.875% due 1/15/2029 424,935
A A2 300,000 WMC Finance USA, 7.25% due 11/15/2013 278,502
------------
9,417,617
===================================================================================================================================
Total Investments in Corporate Bonds & Notes (Cost--$96,004,752)--22.2% 90,153,000
===================================================================================================================================
Short-Term Investments
===================================================================================================================================
Repurchase 1,640,000 Donaldson, Lufkin & Jenrette, Inc., purchased on
Agreements***-- 12/31/1999 to yield 2.50% to 1/03/2000 1,640,000
0.4%
===================================================================================================================================
Total Short-Term Investments(Cost--$1,640,000)--0.4% 1,640,000
===================================================================================================================================
Total Investments (Cost--$420,812,730)--99.2% 402,839,807
Other Assets Less Liabilities--0.8% 3,308,471
------------
Net Assets--100.0% $406,148,278
============
===================================================================================================================================
</TABLE>
* Not Rated.
** 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.
*** Repurchase Agreements are fully collateralized by
US Government Agency Obligations.
(a) The security may be offered and sold to "qualified
institutional buyers" under Rule 144A of the
Securities Act of 1933.
(b) Represents a step bond; the interest rate shown
reflects the effective yield at the time of
purchase by the Series.
(1) Represents or includes a "to-be-announced" (TBA)
transaction. The Series has committed to purchase
securities for which all specific information is
not available at this time.
(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>
MASTER
AGGREGATE BOND
INDEX SERIES As of December 31, 1999
=====================================================================================================
<C> <S> <C> <C> <C>
Assets: Investments, at value (identified cost--$420,812,730) $ 402,839,807
Receivables:
Interest .......................................... $ 5,122,516
Securities sold ................................... 456,220
Contributions ..................................... 220,130 5,798,866
-------------
Deferred organization expenses ...................... 3,823
Prepaid expenses .................................... 90,239
-------------
Total assets ........................................ 408,732,735
-------------
=====================================================================================================
Liabilities: Payables:
Securities purchased .............................. 1,812,571
Withdrawals ....................................... 678,776
Investment adviser ................................ 3,958 2,495,305
-------------
Accrued expenses and other liabilities .............. 89,152
-------------
Total liabilities ................................... 2,584,457
-------------
=====================================================================================================
Net Assets: Net assets .......................................... $ 406,148,278
=============
=====================================================================================================
Net Assets Partners' capital ................................... $ 424,121,201
Consist of: Unrealized depreciation on investments--net ......... (17,972,923)
-------------
Net assets .......................................... $ 406,148,278
=============
=====================================================================================================
</TABLE>
See Notes to Financial Statements.
18 & 19
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, December 31, 1999
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
MASTER
AGGREGATE BOND
INDEX SERIES For the Year Ended December 31, 1999
=====================================================================================================================
<C> <S> <C> <C>
Investment Income: Interest and discount earned ..................................... $ 28,387,184
Other ............................................................ 800
------------
Total income ..................................................... 28,387,984
------------
=====================================================================================================================
Expenses: Investment advisory fees ......................................... $ 185,365
Accounting services .............................................. 97,195
Custodian fees ................................................... 58,019
Professional fees ................................................ 53,603
Pricing fees ..................................................... 26,996
Trustees' fees and expenses ...................................... 3,795
Amortization of organization expenses ............................ 1,697
Other ............................................................ 4,690
------------
Total expenses ................................................... 431,360
------------
Investment income--net ........................................... 27,956,624
------------
=====================================================================================================================
Realized & Realized loss from investments--net .............................. (884,394)
Unrealized Loss on Change in unrealized appreciation/depreciation on investments--net (32,485,362)
Investments-- Net: ------------
Net Decrease in Net Assets Resulting from Operations ............. $ (5,413,132)
============
=====================================================================================================================
</TABLE>
See Notes to Financial Statements.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
MASTER For the Year Ended
AGGREGATE BOND December 31,
INDEX SERIES ------------------------------
Increase (Decrease) in Net Assets: 1999 1998
==============================================================================================================================
<C> <S> <C> <C>
Operations: Investment income--net ................................................. $ 27,956,624 $ 24,615,843
Realized gain (loss) on investments--net ............................... (884,394) 1,822,916
Change in unrealized appreciation/depreciation on investments--net ..... (32,485,362) 7,171,047
------------- -------------
Net increase (decrease) in net assets resulting from operations ........ (5,413,132) 33,609,806
------------- -------------
==============================================================================================================================
Net Capital Increase (decrease) in net assets derived from net capital contributions (23,373,384) 93,584,591
Contributions: ------------- -------------
==============================================================================================================================
Net Assets: Total increase (decrease) in net assets ................................ (28,786,516) 127,194,397
Beginning of year ...................................................... 434,934,794 307,740,397
------------- -------------
End of year ............................................................ $ 406,148,278 $ 434,934,794
============= =============
==============================================================================================================================
</TABLE>
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
MASTER The following ratios have been For the Year Ended
AGGREGATE BOND derived from information provided in December 31, For the Period
INDEX SERIES -------------------------- April 3, 1997+ to
the financial statements. 1999 1998 Dec. 31, 1997
============================================================================================================
<C> <S> <C> <C> <C>
Ratios to Average Expenses, net of reimbursement ......... .10% .12% .15%*
Net Assets: =========== =========== ===========
Expenses ............................... .10% .13% .18%*
=========== =========== ===========
Investment income--net ................. 6.30% 6.20% 6.34%*
=========== =========== ===========
============================================================================================================
Supplemental Net assets, end of period (in thousands) $ 406,148 $ 434,935 $ 307,740
Data: =========== =========== ===========
Portfolio turnover ..................... 61.82% 27.89% 86.58%
=========== =========== ===========
============================================================================================================
</TABLE>
+ Commencement of operations.
* Annualized.
See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
MASTER AGGREGATE BOND INDEX SERIES
1. Significant Accounting Policies:
Master Aggregate Bond Index Series (the "Series") (formerly Merrill Lynch
Aggregate Bond Index Series) is part of Quantitative Master Series Trust (the
"Trust") (formerly Merrill Lynch Index 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 that 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 that 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 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 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
20 & 21
<PAGE>
Merrill Lynch Aggregate Bond Index Fund, December 31, 1999
NOTES TO FINANCIAL STATEMENTS (concluded)
MASTER AGGREGATE BOND INDEX SERIES
Merrill Lynch Aggregate Bond Index Fund, December 31, 1999 of the underlying
securities, marks to market such securities and, if necessary, receives
additional securities daily to ensure that the contract is fully collateralized.
If the counterparty defaults and the fair value of the collateral declines,
liquidation of the collateral by the Series may be delayed or limited.
(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 Fund Asset
Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc.
("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML &
Co."), which is the limited partner.
FAM 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 .06% of the average daily value of the Series' net
assets. Effective August 2, 1999, the annual rate was changed to .01%.
Merrill Lynch Trust Company, an indirect wholly-owned subsidiary of ML & Co., is
the Series' custodian.
Accounting services are provided to the Series by FAM at cost.
Certain officers and/or trustees of the Series are officers and/or directors of
FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended December 31, 1999 were $272,285,312 and $267,488,412, respectively.
Net realized losses for the year ended December 31, 1999 and net unrealized
losses as of December 31, 1999 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Losses Losses
- --------------------------------------------------------------------------------
Long-term investments ............................ $(884,394) $(17,972,923)
--------- ------------
Total ............................................ $(884,394) $(17,972,923)
========= ============
- --------------------------------------------------------------------------------
As of December 31, 1999, net unrealized depreciation for Federal income tax
purposes aggregated $18,078,179, of which $165,826 related to appreciated
securities and $18,244,005 related to depreciated securities. At December 31,
1999, the aggregate cost of investments for Federal income tax purposes was
$420,917,986.
4. Capital Loss Carryforward:
At December 31, 1999, the Series had a net capital loss carryforward of
approximately $115,000, all of which expires in 2007. This amount will be
available to offset like amounts of any future taxable gains.
INDEPENDENT AUDITORS' REPORT
MASTER AGGREGATE BOND INDEX SERIES
The Board of Trustees and Investors,
Master Aggregate Bond Index Series
(formerly Merrill Lynch Aggregate Bond Index Series):
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Master Aggregate Bond Index Series (one of the
series constituting Quantitative Master Series Trust (formerly Merrill Lynch
Index Trust)) as of December 31, 1999, the related statements of operations for
the year then ended and changes in net assets for each of the years in the
two-year period then ended, and the financial highlights for each of the years
in the two-year period 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, 1999 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 Master Aggregate
Bond Index Series of Quantitative Master Series Trust as of December 31, 1999,
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 22, 2000
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--12/99
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