MERRILL LYNCH CORPORATE HIGH YIELD FUND INC, 485BPOS, 1999-07-27

MERRILL LYNCH CORPORATE HIGH YIELD FUND INC
485BPOS, 1999-07-27

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As filed with the Securities and Exchange Commission on July 27, 1999

File No. 333-47971
File No. 811-08699
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 2 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 4 [X]
(Check appropriate box or boxes)

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Merrill Lynch Corporate High Yield Fund, Inc.
(Exact Name of Registrant as Specified in Charter)

800 Scudders Mill Road, Plainsboro, New Jersey 08536
(Address of Principal Executive Offices)

Registrant's Telephone Number, including Area Code (609) 282-2800

Terry K. Glenn
Merrill Lynch Corporate High Yield Fund, Inc.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address: P.O. Box 9011, Princeton, New Jersey 08543-9011
(Name and Address of Agent for Service)

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Copies to:
Counsel for the Company: Michael J. Hennewinkel, Esq.
Leonard B. Mackey, Jr., Esq. FUND ASSET MANAGEMENT L.P.
ROGERS & WELLS LLP P.O. Box 9011
200 Park Avenue Princeton, N.J. 08543-9011
New York, New York 10106

----------

It is proposed that this filing will become effective (check appropriate box):

[ ] immediately upon filing pursuant to paragraph (b)
[X] on July 27, 1999 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.

If appropriate, check the following box:

[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.

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Title of Securities Being Registered: Shares of Common Stock, Class A, Class B,
Class C, and Class D.

================================================================================

<PAGE>

PROSPECTUS
[LOGO] Merrill Lynch

Merrill Lynch Corporate High Yield Fund, Inc.

July 27, 1999

This Prospectus contains information you should know before investing, including
information about risks. Please read it before you invest and keep it for future
reference.

The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation to
the contrary is a criminal offense.

<PAGE>

Table of Contents

PAGE
[CLIPART] KEY FACTS
---------------------------------------------------------------------
The Merrill Lynch Corporate High Yield Fund at a Glance.......... 3

Fees and Expenses................................................ 5

[CLIPART] DETAILS ABOUT THE FUND
---------------------------------------------------------------------
How the Fund Invests............................................. 7

Investment Risks................................................. 9

[CLIPART] YOUR ACCOUNT
---------------------------------------------------------------------
Merrill Lynch Select Pricing(SM) System.......................... 19

How to Buy, Sell, Transfer and Exchange Shares................... 25

Participation in Merrill Lynch Fee-Based Programs................ 29

[CLIPART] MANAGEMENT OF THE FUND
---------------------------------------------------------------------
Fund Asset Management............................................ 32

Financial Highlights............................................. 33

[CLIPART] FOR MORE INFORMATION
---------------------------------------------------------------------
Shareholder Reports...................................... Back Cover

Statement of Additional Information...................... Back Cover

MERRILL LYNCH CORPORATE HIGH YIELD FUND, INC.

<PAGE>

Key Facts [CLIPART]

In an effort to help you better
understand the many concepts involved in
making an investment decision, we have
defined the highlighted terms in this
prospectus in the sidebar.

Fixed income securities -- Instruments
that pay a stated rate of interest or
other repayment, including regular debt
obligations as well as convertible
securities and preferred stock that
carries a promised level of dividend
payments.

Corporate Bonds or Notes -- fixed income
debt securities issued by corporations,
as distinct from securities issued by a
government or its agencies or
instrumentalities.

Convertible Securities -- fixed income
securities, such as corporate bonds or
preferred stock, that are exchangeable
for shares of common stock of the issuer
or another company.

Preferred Stock -- class of stock that
often pays dividends at a specified rate
and has preference over common stock in
dividend payments and liquidation of
assets. Preferred stock may also be
convertible into common stock.

Foreign Securities -- securities issued
by a foreign corporation or government,
as distinct from securities issued by a
U.S. corporation or the U.S. Government.

THE MERRILL LYNCH CORPORATE HIGH YIELD FUND AT A GLANCE
- --------------------------------------------------------------------------------

What are the Fund's stated investment objectives?

The primary investment objective of the Fund is to obtain current income. As a
secondary objective, the Fund seeks capital appreciation when consistent with
its primary objective.

What are the Fund's goals?

The Fund's main goal is current income -- it looks for securities that pay
interest or dividends. The Fund may also seek growth of capital by looking for
investments that will increase in value. However, the Fund's investments
emphasize current income more than growth of capital. We cannot guarantee that
the Fund will achieve its goals.

What are the Fund's main investment strategies?

The Fund invests primarily in a diversified portfolio of fixed income
securities, such as corporate bonds and notes, convertible securities and
preferred stock that are rated in the lower rating categories of the recognized
rating agencies (Baa or lower by Moody's Investors Service, Inc. ("Moody's") or
BBB or lower by Standard & Poor's Ratings Group ("S&P")) or unrated securities
that Fund management believes are of comparable quality. Securities rated below
Baa by Moody's or below BBB by S&P are commonly known as "junk bonds." Junk
bonds are high risk investments, and may result in the Fund losing both income
and principal. The Fund will invest most of its assets in securities issued by
U.S. companies, but may also invest a portion of its assets in foreign
securities. In determining which fixed income securities the Fund will invest
in, Fund management, in addition to considering ratings, will conduct its own
independent credit analysis of the issuers of the securities. For this purpose,
Fund management will consider a number of factors, including the financial
condition of the issuer, its cash flow and borrowing needs, the value of its
assets and the strength of its management. Fund management will also consider
general business conditions, including expected changes in the general economy
and interest rates and the economic outlook for specific industries.

What are the main risks of investing in the Fund?

As with any mutual fund, the value of the Fund's investments -- and therefore
the value of Fund shares -- may go up or down. These changes may occur in
response to interest rate changes or in response to other factors that may
affect a particular issuer or obligation. Generally, when interest rates go up,
the value of fixed income instruments goes down. The Fund should be considered
high risk because it invests primarily in junk bonds. Investing in junk bonds is
riskier than investing in higher quality fixed income securities -- price
fluctuations may be larger and more frequent, and there is greater level

MERRILL LYNCH CORPORATE HIGH YIELD FUND, INC. 3

<PAGE>

[CLIPART] Key Facts

of credit risk (that is the risk of losing income or principal). The Fund faces
additional risks when it invests in foreign securities, such as changes in
foreign currency exchange rates, liquidity risk, and adverse political, social,
and economic instability. If the value of the Fund's investments goes down, you
may lose money.

Who should invest?

The Fund may be an appropriate investment for you if you:

o Are looking for an investment that provides income.

o Want a professionally managed and diversified portfolio without the
administrative burdens of direct investments in corporate bonds and other
fixed income securities.

o Are willing to accept greater credit risk in return for the possibility
of receiving higher current income.

RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------

Performance information is not available for the Fund because the Fund has been
in operation for less than one full fiscal year.

4 MERRILL LYNCH CORPORATE HIGH YIELD FUND, INC.

<PAGE>

UNDERSTANDING
EXPENSES

Fund investors pay various fees and
expenses, either directly or indirectly.
Listed below are some of the main types
of expenses, which all mutual funds may
charge:

Expenses paid directly by the shareholder:

Shareholder fees -- these include sales
charges which you may pay when you buy
or sell shares of the Fund.

Expenses paid indirectly by the shareholder:

Annual Fund Operating Expenses --
expenses that cover the costs of
operating the Fund.

Management Fee -- a fee paid to the
Investment Adviser for managing the
Fund.

Distribution Fee -- fees used to support
the Fund's marketing and distribution
efforts, such as compensating Financial
Consultants.

Service (Account Maintenance) Fees --
fees used to compensate securities
dealers for account maintenance
activities.

FEES AND EXPENSES
- --------------------------------------------------------------------------------

The Fund offers four different classes of shares. Although your money will be
invested the same way no matter which class of shares you buy, there are
differences among the fees and expenses associated with each class. Not everyone
is eligible to buy every class. After determining which classes you are eligible
to buy, decide which class best suits your needs. Your Merrill Lynch Financial
Consultant can help you with this decision.

This table shows the different fees and expenses that you may pay if you buy and
hold the different classes of shares of the Fund. Future expenses may be greater
or less than those indicated below.

Shareholder Fees (fees paid
directly from your
investment):(a) Class A Class B(b) Class C Class D
- --------------------------------------------------------------------------------
Maximum Sales Charge (Load)
imposed on purchases (as a
percentage of offering price) 4.00%(c) None None 4.00%(c)
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge
(Load)(as a percentage of
original purchase price or
redemption proceeds,
whichever is lower) None(d) 4.0%(c) 1.0%(c) None(d)
- --------------------------------------------------------------------------------
Sales Charge (Load) imposed on
Dividend Reinvestments None None None None
- --------------------------------------------------------------------------------
Redemption Fee None None None None
- --------------------------------------------------------------------------------
Exchange Fee None None None None
- --------------------------------------------------------------------------------

Annual Fund Operating Expenses
(expenses that are deducted from
Fund assets):
- --------------------------------------------------------------------------------
Management Fees(e) 0.60% 0.60% 0.60% 0.60%
- --------------------------------------------------------------------------------
Distribution and/or Service
(12b-1) Fees(f) None 0.75% 0.80% 0.25%
- --------------------------------------------------------------------------------
Other Expenses (including transfer
agency fees)(g) 0.16% 0.17% 0.17% 0.16%
- --------------------------------------------------------------------------------
Total Annual Fund Operating
Expenses(e) 0.76% 1.52% 1.57% 1.01%
- --------------------------------------------------------------------------------

(a) In addition, Merrill Lynch may charge clients a processing fee (currently
$5.35) when a client buys or redeems shares.

(b) Class B shares automatically convert to Class D shares about ten years
after you buy them and will no longer be subject to distribution fees.

(d) You may pay a deferred sales charge if you purchase $1 million or more and
you redeem within one year.

(e) For the fiscal period May 1, 1998 (commencement of operations) to March
31, 1999, the Investment Advisor voluntarily waived a portion of the
management fee due and voluntarily reimbursed the Fund for a portion of
other expenses (excluding Rule 12b-1 fees). Total Annual Fund Operating
Expenses after giving effect to the waiver of fees and reimbursement of
expenses were: 0.52% for Class A shares, 1.27% for Class B shares, 1.31%
for Class C shares and 0.75% for Class D shares. The fee waiver and
expense reimbursement may be discontinued or reduced by the Investment
Advisor at any time without notice.

(f) The Fund calls the "Service Fee" an "Account Maintenance Fee." Account
Maintenance Fee is the term used in this Prospectus and in all other Fund
materials. If you hold Class B or Class C shares for a long time, it may
cost you more in distribution (12b-1) fees than the maximum sales charge
that you would have paid if you had bought one of the other classes.

(g) The Fund pays the Transfer Agent $11.00 for each Class A and Class D
shareholder account and $14.00 for each Class B and Class C shareholder
account and reimburses the Transfer Agent's out-of-pocket expenses. The
Fund pays a 0.10% fee for certain accounts that participate in the Merrill

MERRILL LYNCH CORPORATE HIGH YIELD FUND, INC. 5
<PAGE>

[CLIPART] Key Facts

footnotes continued from previous page

Lynch Mutual Fund Advisor program. The Fund also pays a $0.20 monthly
closed account charge, which is assessed upon all accounts that close
during the year. This fee begins the month following the month the account
is closed and ends at the end of the calendar year. For the period May 1,
1998 (commencement of operations) to March 31, 1999, the Fund paid the
Transfer Agent fees totaling $284,403. The Investment Adviser provides
accounting services to the Fund at its cost. For the period May 1, 1998
(commencement of operations) to March 31, 1999, the Fund reimbursed the
Investment Adviser $95,192 for these services.

Example:

These examples are intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.

These examples assume that you invest $10,000 in the Fund for the time periods
indicated, that your investment has a 5% return each year, that you pay the
sales charges, if any, that apply to the particular class and that the Fund's
operating expenses remain the same. This assumption is not meant to indicate you
will receive a 5% annual rate of return. Your annual return may be more or less
than the 5% used in this example. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:

EXPENSES IF YOU DID REDEEM YOUR SHARES:
---

1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
Class A $475 $633 $805 $1,305
- --------------------------------------------------------------------------------
Class B $555 $680 $829 $1,813
- --------------------------------------------------------------------------------
Class C $260 $496 $855 $1,867
- --------------------------------------------------------------------------------
Class D $499 $709 $936 $1,587
- --------------------------------------------------------------------------------

EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:
-------

1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
Class A $475 $633 $805 $1,305
- --------------------------------------------------------------------------------
Class B $155 $480 $829 $1,813
- --------------------------------------------------------------------------------
Class C $160 $496 $855 $1,867
- --------------------------------------------------------------------------------
Class D $499 $709 $936 $1,587
- --------------------------------------------------------------------------------

6 MERRILL LYNCH CORPORATE HIGH YIELD FUND, INC.

<PAGE>

[CLIPART] Details About the Fund

Yield -- the income generated by an
investment in the Fund.

Corporate Loans -- loans made by
commercial banks and other financial
institutions to corporate borrowers.

Distressed Securities -- securities,
including corporate loans, that are
subject to bankruptcy proceedings or
otherwise in default or at risk of
being in default at the time they are
acquired.

HOW THE FUND INVESTS
- --------------------------------------------------------------------------------

The Fund's main goal is current income. The Fund also seeks growth of capital
when consistent with its primary goal of current income. The Fund invests
primarily in a diversified portfolio of fixed income securities, such as
corporate bonds and notes, convertible securities and preferred stock.

The Fund normally expects to invest over 90% of its assets in fixed income
securities, and will primarily invest in fixed-income securities rated in the
lower rating categories of the established rating services (Baa or lower by
Moody's or BBB or lower by S&P) or in unlisted securities that Fund management
believes are of comparable quality. In addition, as a matter of investment
policy, the Fund will invest at least 65% of its assets in corporate bonds or
notes rated below in Baa by Moody's or below BBB by S&P or unrated securities
that Fund management believes are of comparable quality. Securities rated below
investment grade are commonly called "junk bonds." The Fund may invest up to
100% of its assets in junk bonds. Although junk bonds generally have higher
yields than higher-rated securities, they are high risk investments that may not
pay interest or return principal as scheduled.The Fund may buy higher-rated
securities when Fund management believes the Fund can achieve a substantial
reduction in risk of loss with only a relatively small decrease in yield.

The Fund may also invest up to:

o 15% of its assets in secondary market purchases of corporate loans,

o 10% of its assets in distressed securities,

o 25% of its assets in foreign securities, and

o 15% of its assets in illiquid securities.

The Fund does not intend to invest in common stock or other equity
securities.However, the Fund may acquire and hold equity securities offered as
part of a unit in conjunction with fixed income securities or in connection with
a conversion or exchange of fixed income securities.

Other than with respect to distressed securities, the Fund does not intend to
invest in securities in the lowest rating categories (Ca or below for Moody's
and CC or below for S&P) unless the Fund management's own credit analysis
suggests that the issuer of the security has a stronger credit standing than
suggested by the ratings.

Under unusual market or economic conditions, the Fund may, for temporary
defensive purposes, invest up to 100% of its assets in U.S. Government

MERRILL LYNCH CORPORATE HIGH YIELD FUND, INC. 7

<PAGE>

[CLIPART] Details About the Fund

Illiquid Securities -- securities that
cannot be resold within seven days under
normal circumstances at prices
approximating carrying value or that
have contractual or legal restrictions
on resale.

Repurchase Agreements -- agreements
where another party sells securities to
the Fund and at the same time agrees to
repurchase the securities at a
particular time and price.

When Issued -- the purchase of a new
security before it has been issued.

Forward Commitment -- the purchase of a
security for delivery beyond normal
settlement periods.

Standby Commitment -- an agreement by
the Fund to purchase a stated amount of
a fixed-income security from an issuer
for a stated price and coupon in
exchange for a commitment fee.

securities, certificates of deposit, bankers acceptances, commercial paper
rated in the highest rating category by a recognized rating service, cash or
other high quality fixed income securities that the Adviser believes are
consistent with a defensive posture. The yield on such securities may be lower
than the yield on lower-rated fixed income securities. Temporary defensive
positions may limit the ability for the Fund to achieve its investment objective
and inhibit any potential increase in the value of your Fund shares.

The Fund may purchase or sell futures contracts and options thereon solely for
hedging purposes, including anticipatory hedges. The Fund may also purchase or
sell options on debt securities -- either for hedging purposes or for
non-hedging purposes intended to increase the Fund's returns.

The Fund may also engage in the following portfolio strategies:

o lending its portfolio securities,

o investing in repurchase agreements,

o purchasing securities on a when issued or forward commitment basis,

o purchasing or selling securities for delayed delivery, and

o entering into standby commitment agreements.

Fund management considers the ratings assigned by rating agencies as one factor
in performing its own independent credit analysis. The Fund's ability to achieve
its stated investment objective and goals depends to a greater extent on
independent credit analysis than funds that invest in higher-rated securities.
To analyze a security, Fund management looks at both the issuer and at general
business conditions.

With respect to the issuer, Fund management looks at, among other things:

o Financial condition

o Cash flow and borrowing needs

o Whether the company has attracted reputable equity investors or
sponsors

o Value of assets

o Management strength

o Ability to respond to changes in business conditions

o Results of operations

8 MERRILL LYNCH CORPORATE HIGH YIELD FUND, INC.
<PAGE>

ABOUT THE
PORTFOLIO MANAGERS

Vincent T. Lathbury and Aldona Schwartz
have been primarily responsible for the
management of the Fund since its
inception.

Mr. Lathbury is a Senior Vice President
and a portfolio manager of the Fund. Mr.
Lathbury has been a First Vice President
of Merrill Lynch Asset Management since
1997 and was a Vice President from 1982
to 1997.

Ms. Schwartz is a Vice President and a
portfolio manager of the Fund. Ms.
Schwartz has been a Director (Global
Fixed Income) of Merrill Lynch Asset
Management since 1999 and was a Vice
President from 1990 to 1999.

ABOUT THE
INVESTMENT ADVISER

The Fund is managed by Fund Asset
Management.

o Visibility in the market, because securities of companies that are less
well known may be less liquid

Fund management also looks at general business conditions, including:

o Expected changes in the general economy and interest rates

o Economic outlook for specific industries

o The availability of new investment opportunities

INVESTMENT RISKS
- --------------------------------------------------------------------------------

This section contains a summary discussion of the general risks of investing in
the Fund. As with any mutual fund, there can be no guarantee that the Fund will
meet its goals or that the Fund's performance will be positive for any period of
time.

Market and Selection Risk -- Market risk is the risk that the stock or bond
markets will go down in value, including the possibility that the markets will
go down sharply and unpredictably. Selection risk is the risk that the
investments that Fund management selects will underperform the market or other
funds with similar investment objectives and investment strategies.

Credit Risk -- Credit risk is the risk that the issuer of debt securities will
be unable to pay the interest or principal when due. The degree of credit risk
depends on both the financial condition of the issuer and the terms of the
obligation.

Interest Rate Risk -- Interest rate risk is the risk that prices of fixed income
securities generally increase when interest rates decline and decrease when
interest rates increase. Prices of longer term securities generally change more
in response to interest rate changes than prices of shorter term securities.

Risks associated with certain types of securities in which the Fund may invest
include:

Junk Bonds -- As a matter of investment policy, the Fund normally invests at
least 65% of its total assets in junk bonds. Although junk bonds generally pay
higher rates of interest than investment grade bonds, there is a greater risk

MERRILL LYNCH CORPORATE HIGH YIELD FUND, INC. 9

<PAGE>

[CLIPART] Details About the Fund

of loss of income or principal. Junk bonds are high-risk investments that may
cause losses in the Fund. The major risks in junk bond investments include:

o Junk bonds may be issued by less creditworthy companies. Issuers of
junk bonds may have a larger amount of outstanding debt relative to
their assets than issuers of investment grade bonds. In the event of an
issuer's bankruptcy, claims of other creditors may have priority over
the claims of junk bond holders, leaving few or no assets available to
repay junk bond holders. Prices of junk bonds are subject to extreme
price fluctuations. Adverse changes to the issuer's industry and
general economic conditions may have a greater impact on the prices of
junk bonds than on other higher rated fixed income securities. Issuers
of junk bonds may be unable to meet their interest or principal payment
obligations because of an economic downturn, specific issuer
developments, or the unavailability of additional financing.

o Junk bonds frequently have redemption features that permit an issuer to
repurchase the security from the Fund before it matures. If the issuer
redeems junk bonds, the Fund may have to invest the proceeds in bonds
with lower yields and may lose income.

o Junk bonds may be less liquid than higher rated fixed income
securities, even under normal economic conditions. There are fewer
dealers in the junk bond market, and there may be significant
differences in the prices quoted for junk bonds by the dealers. Because
they are less liquid, judgment may play a greater role in valuing
certain of the Fund's securities than in the case with securities
trading in a more liquid market.

o The Fund may incur expenses to the extent necessary to seek recovery
upon default or to negotiate new terms with a defaulting issuer.

Corporate Loans -- Commercial banks and other financial institutions make
corporate loans to companies that need capital to grow or restructure. Borrowers
generally pay interest on corporate loans at rates that change in response to
changes in market interest rates or the prime rates of U.S. banks

10 MERRILL LYNCH CORPORATE HIGH YIELD FUND, INC.
<PAGE>

or the London Interbank Offered Rate ("LIBOR"). As a result, the value of
corporate loan investments generally is less responsive to shifts in market
interest rates. Because the trading market for corporate loans is less developed
than the secondary market for bonds and notes, the Fund may experience
difficulties from time to time in selling its corporate loans. Borrowers
frequently provide collateral to secure repayment of these obligations. Leading
financial institutions often act as agent for a broader group of lenders,
generally referred to as a "syndicate." The syndicate's agent arranges the
corporate loans, holds collateral and accepts payments of principal and
interest. By investing in a corporate loan, the Fund becomes a member of the
syndicate. If the agent develops financial problems, the Fund may not recover
its investment.

The corporate loans in which the Fund invests can be expected to provide higher
yields than bonds and notes that have investment grade ratings, but may be
subject to greater risk of loss of principal and income. Borrowers do not always
provide collateral for corporate loans, and when there is collateral, the value
of the collateral may not completely cover the borrower's obligations at the
time of a default. If a borrower files for protection from its creditors under
the U.S. bankruptcy laws, these laws may limit the Fund's rights to its
collateral. In addition, the value of collateral may erode during a bankruptcy
case. In the event of a bankruptcy, the holder of a corporate loan may not
recover its principal, may experience a long delay in recovering its investment
and may not receive any interest during the delay.

Distressed Securities -- The Fund may invest in distressed securities.
Distressed securities are speculative and involve substantial risks. Generally,
the Fund will invest in distressed securities when Fund management believes they
offer significant potential for higher returns or can be exchanged for other
securities that offer this potential. However, there can be no assurance that
the Fund will achieve these returns or that the issuer will make an exchange
offer or adopt a plan of reorganization. The Fund will generally not receive
interest payments on the distressed securities and may incur costs to protect
its investment. In addition, distressed securities involve the substantial risk
that principal will not be repaid. Distressed securities and any securities
received in an exchange may be subject to restrictions or resale.

Illiquid and Restricted Securities -- The Fund may invest up to 15% of its
assets in illiquid securities. If the Fund buys illiquid securities it may be

MERRILL LYNCH CORPORATE HIGH YIELD FUND, INC. 11

<PAGE>

unable to resell them or may be able to sell them only at a price below current
value.

[CLIPART] Details About the Fund

The Fund may invest up to 10% of its assets in restricted securities. Restricted
securities have contractual or legal restrictions on their resale. They include
private placement securities that the Fund buys directly from the issuer.
Private placement and other restricted securities may not be listed on an
exchange and may have no active trading market.

Restricted securities may be illiquid. The Fund may get only limited information
about the issuer, so may be less able to predict a loss. In addition, if Fund
management receives material adverse non-public information about the issuer,
the Fund will not be able to sell the security.

Convertibles -- Convertibles are generally debt securities or preferred stocks
that may be converted into common stock. Convertibles typically pay current
income, as either interest (debt security convertibles) or dividends (preferred
stocks). A convertible's value usually reflects both the stream of current
income payments and the value of the underlying common stock. The market value
of a convertible performs like regular debt securities; that is, if market
interest rates rise, the value of a convertible usually falls. Since it is
convertible into common stock, the convertible also has the same types of market
and issuer risk as the value of the underlying common stock.

Foreign Securities -- Since the Fund may invest in foreign securities, the Fund
offers the potential for more diversification than funds that invest only in the
United States. This is because securities traded on foreign markets have often
(though not always) performed differently than securities in the United States.
However, foreign investments involve special risks not present in U.S.
investments that can increase the chances that the Fund will lose money. In
particular, investment in foreign securities involves the following risks, which
are generally greater for investments in emerging markets:

o The economies of certain foreign markets often do not compare favorably
with that of the U.S. in areas such as growth of gross national
product, reinvestment of capital, resources and balance of payments.
Some of these economies may rely heavily on particular industries or
foreign capital and are more vulnerable to diplomatic developments, the
imposition of economic sanctions

12 MERRILL LYNCH CORPORATE HIGH YIELD FUND, INC.

<PAGE>

against a particular country or countries, changes in international
trading patterns, trade barriers, and other protectionist or
retaliatory measures.

o Investments in foreign markets may be adversely affected by
governmental actions such as the imposition of capital controls,
nationalization of companies or industries, expropriation of assets, or
the imposition of punitive taxes.

o The governments of certain countries may prohibit or impose substantial
restrictions on foreign investing in their capital markets or in
certain industries. Any of these actions could severely affect security
prices, impair the Fund's ability to purchase or sell foreign
securities or transfer its assets or income back into the U.S., or
otherwise adversely affect the Fund's operations.

o Other foreign market risks include foreign exchange controls,
difficulties in pricing securities, defaults on foreign government
securities, difficulties in enforcing favorable legal judgments in
foreign courts, and political and social instability. Legal remedies
available to investors in certain foreign countries may be less
extensive than those available to investors in the U.S. or other
foreign countries.

o Because there are fewer investors in foreign markets and a smaller
number of securities traded each day, it may be difficult for the Fund
to buy and sell securities on those markets.

o Non-U.S. markets have different clearance and settlement procedures,
and in certain markets settlements may be unable to keep pace with the
volume of securities transactions which may cause delays. This means
that the Fund's assets may be uninvested and not earning returns. The
Fund may miss investment opportunities or be unable to dispose of a
security because of these delays.

MERRILL LYNCH CORPORATE HIGH YIELD FUND, INC. 13

<PAGE>

[CLIPART] Details About the Fund

they develop unevenly and may never fully develop. They are more likely to
experience hyperinflation and currency devaluations, which adversely affects
returns to U.S. investors. In addition, the securities markets in many of these
countries have far lower trading volumes and less liquidity than developed
markets. Since these markets are so small, they may be more likely to suffer
sharp and frequent price changes or long-term price depression because of
adverse publicity, investor perceptions, or the actions of a few large
investors. In addition, traditional measures of investment value used in the
United States, such as price to earnings ratios, may not apply to certain small
markets.

Many emerging markets have histories of political instability and abrupt changes
in policies. As a result, their governments are more likely to take actions that
are hostile or detrimental to private enterprise or foreign investment than
those of more developed countries. Certain emerging markets may also face other
significant internal or external risks, including the risk of war, and ethnic,
religious, and racial conflicts. In addition, governments in many emerging
market countries participate to a significant degree in their economies and
securities markets, which may impair investment and economic growth.

Sovereign Debt -- The Fund may invest in sovereign debt securities issued or
guaranteed by foreign government entities. Investments in sovereign debt
subjects the Fund to a higher degree of risk that a government entity may delay
or refuse payment of interest or repayment of principal on its sovereign debt. A
government may fail to make payment for many reasons including cash flow
problems, lack of foreign exchange, political constraints, the relative size of
its debt positions to its economy or its failure to put in place economic
reforms required by the International Monetary Fund or other multilateral
agencies as a condition to their contributions to the government entity. If a
government entity fails to make its payments, the Fund may be requested to
extend the period in which the government entity must pay and to make further
loans to the government entity. There is no bankruptcy proceeding by which all
or part of sovereign debt that a government entity has not repaid may be
collected.

Currency Risk and Exchange Risk -- Certain securities in which the Fund invests
may be denominated or quoted in currencies other than the U.S. dollar. Changes
in foreign currency exchange rates will affect the value of such securities of
the Fund. Generally, when the U.S. dollar rises in value against a foreign
currency, your investment in a security denominated in that

14 MERRILL LYNCH CORPORATE HIGH YIELD FUND, INC.

<PAGE>

currency loses value because the currency is worth fewer U.S. dollars. Similarly
when the U.S. dollar decreases in value against a foreign currency, your
investment in a security denominated in that currency gains value because the
currency is worth more U.S. dollars. This risk is generally known as "currency
risk" which is the possibility that a stronger U.S. dollar will reduce returns
for U.S. investors investing overseas and a weak U.S. dollar will increase
returns for U.S. investors investing overseas.

Governmental Supervision and Regulation/Accounting Standards -- Many foreign
governments supervise and regulate brokers and the sale of securities less than
the United States does. Other countries may not have laws to protect investors
the way that the U.S. securities laws do. For example, some foreign countries
may have no laws or rules against insider trading. Insider trading occurs when a
person buys or sells a company's securities based on non-public information
about that company. Accounting standards in other counties are not necessarily
the same as in the United States. If the accounting standards in another country
do not require as much detail as U.S. accounting standards, it may be harder for
Fund management to completely and accurately determine a company's financial
condition. Also brokerage commissions and other costs of buying or selling
securities often are higher in foreign countries than they are in the United
States. This reduces the amount the Fund can earn on its investments.

Certain Risks of Holding Fund Assets Outside the United States -- The Fund
generally holds the foreign securities in which it invests outside the United
States in foreign banks and securities depositories. Some foreign banks and
securities depositories may be recently organized or new to the foreign custody
business. In addition, there may be limited or no regulatory oversight over
their operations. Also, the laws of certain countries may put limits on the
Fund's ability to recover its assets if a foreign bank, depository or issuer of
a security, or any of their agents, goes bankrupt. In addition, it is often more
expensive for the Fund to buy, sell and hold securities in certain foreign
markets than in the U.S. The increased expense of investing in foreign markets
reduces the amount the Fund can earn on its investments and typically results in
a higher operating expense ratio for the Fund than investment companies invested
only in the United States.

MERRILL LYNCH CORPORATE HIGH YIELD FUND, INC. 15

<PAGE>

[CLIPART] Details About the Fund

in payment for or delivery of securities) not typically involved with the
settlement of U.S. investments. Communications between the United States and
emerging market countries may be unreliable, increasing the risk of delayed
settlements or losses of security certificates. Settlements in certain
foreign countries at times have not kept pace with the number of securities
transactions; these problems may make it difficult for the Fund to carry out
transactions. If the Fund cannot settle or is delayed in settling a purchase of
securities, it may miss attractive investment opportunities and certain of its
assets may be uninvested with no return earned for some period. If the Fund
cannot settle or is delayed in settling a sale of securities, it may lose money
if the value of the security then declines or, if it has contracted to sell the
security to another party, the Fund could be liable to that party for any losses
incurred.

Dividends or interest on, or proceeds from sales of, foreign securities may be
subject to foreign withholding taxes, and special U.S. tax considerations may
apply.

European Economic and Monetary Union ("EMU") -- Certain European countries have
entered into EMU in an effort to, among other things, reduce barriers between
countries, and reduce or eliminate currency fluctuations among these countries.
EMU has established a single common European currency (the "euro"), which was
introduced on January 1, 1999 and is expected to replace the existing national
currencies of all EMU participants by July 1, 2002. Upon introduction of the
euro, certain securities (beginning with government and corporate bonds) were
redenominated in the euro, and will now be listed, trade and make dividend and
other payments only in euros. Although EMU is generally expected to have a
beneficial effect, it could negatively affect the Fund in a number of
situations, including as follows:

o If the transition to the euro does not proceed as planned.

o If a participating country withdraws from EMU and securities
redenominated in euros are transferred back into that country's
national currency.

These issues may negatively affect the operations of the companies the Fund
invests in as well.

Derivatives -- The Fund may use derivatives. Derivatives are financial
instruments whose value is derived from another security, a commodity (such

16 MERRILL LYNCH CORPORATE HIGH YIELD FUND, INC.
<PAGE>

as gold or oil) or an index such as the S&P 500. Derivatives allow the Fund to
increase or decrease its risk exposure more quickly and efficiently than other
types of instruments. The Fund may use futures, forwards and options.
Derivatives are volatile and involve significant risks, including:

o Leverage Risk -- the risk associated with certain types of investments
or trading strategies (such as borrowing money to increase the amount
of investments) that relatively small market movements may result in
large changes in the value of an investment. Certain investments or
trading strategies that involve leverage can result in losses that
greatly exceed the amount originally invested.

o Credit Risk -- the risk that the counterparty (the party on the other
side of the transaction) on a derivative transaction will be unable to
honor its financial obligation to the Fund.

o Currency Risk -- the risk that changes in the exchange rate between
currencies will adversely affect the value (in U.S. dollar terms) of an
investment.

o Liquidity Risk -- the risk that certain securities may be difficult or
impossible to sell at the time that the seller would like or at the
price that the seller believes the security is currently worth.

Repurchase Agreements -- The Fund may invest in obligations which are subject to
repurchase agreements with any member bank of the Federal Reserve System or
primary dealer in U.S. Treasury Securities. The bank or dealer agrees to
repurchase the security from the Fund at a set time and price, which sets the
yield. If the bank or dealer defaults, the Fund may suffer time delays and incur
costs and possible losses.

When Issued Securities, Delayed-Delivery Securities and Forward Commitments --
When issued and delayed-delivery securities and forward commitments involve the
risk that the security the Fund buys will lose value prior to its delivery.
There also is the risk that the security will not be issued or that the other
party will not meet its obligation. If this occurs, the Fund both loses the
investment opportunity for the assets it has set aside to pay for the security
and any gain in the security's price.

MERRILL LYNCH CORPORATE HIGH YIELD FUND, INC. 17
<PAGE>

[CLIPART] Details About the Fund

Standby Commitment Agreements -- The Fund may enter into standby commitment
agreements. These agreements commit the Fund, for a stated period of time, to
purchase a stated amount of securities which may be issued and sold to the Fund
at the option of the issuer. The price of the security is fixed at the time of
the commitment. At the time of entering into the agreement the Fund is paid a
commitment fee, regardless of whether or not the security is ultimately issued.
The Fund will enter into such agreements for the purpose of investing in the
security underlying the commitment at a price that is considered advantageous to
the Fund.The Fund will not enter into a standby commitment with a remaining term
in excess of 45 days and will limit its investment in such commitments so that
the aggregate purchase price of securities subject to such commitments, together
with the value of portfolio securities subject to legal restrictions on resale
that affect their marketability, will not exceed 15% of its net assets taken at
the time of the commitment. The Fund segregates liquid assets in an aggregate
amount equal to the purchase price of the securities underlying the commitment.

STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------

If you would like further information about the Fund, including how it invests,
please see the Statement of Additional Information.

18 MERRILL LYNCH CORPORATE HIGH YIELD FUND, INC.
<PAGE>

[CLIPART] Your Account

MERRILL LYNCH SELECT PRICING(SM) SYSTEM
- --------------------------------------------------------------------------------

The Fund offers four share classes, each with its own sales charge and expense
structure, allowing you to invest in the way that best suits your needs. Each
share class represents the same ownership interest in the same investment
portfolio. When you choose your class of shares you should consider the size of
your investment and how long you plan to hold your shares. Your Merrill Lynch
Financial Consultant can help you determine which share class is best suited to
your personal financial goals.

For example, if you select Class A or D shares, you pay a sales charge at the
time of purchase. If you buy Class D shares, you also pay an ongoing account
maintenance fee of 0.25%. You may be eligible for a sales charge waiver.

If you select Class B or C shares, you will invest the full amount of your
purchase price but you will be subject to an account maintenance fee of 0.25%
and a distribution fee of 0.50% for Class B Shares and 0.55% for Class C Shares.

Because these fees are paid out of the Fund's assets on an ongoing basis, over
time these fees increase the cost of your investment and may cost you more than
paying an initial sales charge. In addition, you may be subject to a deferred
sales charge when you sell Class B or C shares.

The Fund's shares are distributed by Merrill Lynch Funds Distributor, a division
of Princeton Funds Distributor, Inc., an affiliate of Merrill Lynch.

MERRILL LYNCH CORPORATE HIGH YIELD FUND, INC. 19
<PAGE>

[CLIPART] Your Account

The table below summarizes key features of the Merrill Lynch Select Pricing(SM)
System.

<TABLE>
<CAPTION>
Class A Class B Class C Class D
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Availability Limited to certain Generally available Generally available Generally available
investors including: through Merrill Lynch. through Merrill Lynch. through Merrill Lynch.
o Current Class A Limited availability Limited availability Limited availability
shareholders through other through other through other
o Certain Retirement securities dealers. securities dealers. securities dealers.
Plans
o Participants in
certain Merrill
Lynch-sponsored
programs
o Certain affiliates of
Merrill Lynch.
- ------------------------------------------------------------------------------------------------------------------------
Initial Sales Yes. Payable at time No. Entire purchase No. Entire purchase Yes. Payable at time
Charge? of purchase. Lower price is invested in price is invested in of purchase. Lower
sales charges shares of the Fund. shares of the Fund. sales charges
available for larger available for larger
investments. investments.
- ------------------------------------------------------------------------------------------------------------------------
Deferred Sales No. (May be charged Yes. Payable if you Yes. Payable if you No. (May be charged
Charge? for purchases over redeem within four redeem within one for purchases over
$1 million that are years of purchase. year of purchase. $1 million that are
redeemed within redeemed within
one year.) one year.)
- ------------------------------------------------------------------------------------------------------------------------
Account Maintenance No. 0.25% Account 0.25% Account 0.25% Account
and Distribution Maintenance Fee Maintenance Fee Maintenance Fee
Fees? 0.50% Distribution 0.55% Distribution No Distribution Fee.
Fee. Fee.
- ------------------------------------------------------------------------------------------------------------------------
Conversion to No. Yes, automatically No. No.
Class D shares? after approximately
ten years.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>

20 MERRILL LYNCH CORPORATE HIGH YIELD FUND, INC.

<PAGE>

Right of Accumulation -- permits you to
pay the sales charge that would apply to
the cost or value (whichever is higher)
of all shares you own in the Merrill
Lynch mutual funds that offer Select
Pricing options.

Letter of Intent -- permits you to pay
the sales charge that would be
applicable if you add up all shares of
Merrill Lynch Select Pricing System
funds that you agree to buy within a 13
month period. Certain restrictions
apply.

Class A and Class D Shares -- Initial Sales Charge Options

If you select Class A or Class D shares, you will pay a sales charge at the time
of purchase

Dealer
Compensation
As a % of As a % of as a % of
Your Investment Offering Price Your Investment* Offering Price
- --------------------------------------------------------------------------------
Less than $25,000 4.00% 4.17% 3.75%
- --------------------------------------------------------------------------------
$25,000 but less
than $50,000 3.75% 3.90% 3.50%
- --------------------------------------------------------------------------------
$50,000 but less
than $100,000 3.25% 3.36% 3.00%
- --------------------------------------------------------------------------------
$100,000 but less
than $250,000 2.50% 2.56% 2.25%
- --------------------------------------------------------------------------------
$250,000 but less
than $1,000,000 1.50% 1.52% 1.25%
- --------------------------------------------------------------------------------
$1,000,000 and over** 0.00% 0.00% 0.00%
- --------------------------------------------------------------------------------

* Rounded to the nearest one-hundredth percent.

** If you invest $1,000,000 or more in Class A or Class D shares, you may not
pay an initial sales charge. However, if you redeem your shares within one
year after purchase, you may be charged a deferred sales charge. This charge
is 1% of the lesser of the original cost of the shares being redeemed or your
redemption proceeds. A sales charge of 0.75% will be charged on purchases of
$1,000,000 or more of Class A or Class D shares by certain employer-
sponsored retirement or savings plans.

No initial sales charge applies to Class A or Class D shares that you buy
through reinvestment of dividends or distributions.

A reduced or waived sales charge on a purchase of Class A or Class D shares may
apply for:

o Purchases under a Right of Accumulation or Letter of Intent.

o Merrill Lynch Blueprint(SM) Program participants.

o TMA(SM) Managed Trusts.

o Certain Merrill Lynch investment or central asset accounts.

o Certain employer-sponsored retirement or savings plans.

MERRILL LYNCH CORPORATE HIGH YIELD FUND, INC. 21

<PAGE>

[CLIPART] Your Account

o Purchases using proceeds from the sale of certain Merrill Lynch closed-end
funds under certain circumstances.

o Certain investors, including directors of Merrill Lynch mutual funds and
Merrill Lynch employees.

o Certain Merrill Lynch fee-based programs.

Only certain investors are eligible to buy Class A shares. Your Merrill Lynch
Financial Consultant can help you determine whether you are eligible to buy
Class A shares or to participate in any of these programs.

If you decide to buy shares under the initial sales charge alternative and you
are eligible to buy both Class A and Class D shares, you should buy Class A
shares since Class D shares are subject to an account maintenance fee, while
Class A shares are not.

If you redeem Class A or Class D shares and within 30 days buy new shares of the
same class, you will not pay a sales charge on the new purchase amount. The
amount eligible for this "Reinstatement Privilege" may not exceed the amount of
your redemption proceeds. To exercise the privilege, contact your Merrill Lynch
Financial Consultant or the Fund's Transfer Agent at 1-800-MER-FUND.

Class B and Class C Shares -- Deferred Sales Charge Options

If you select Class B or Class C shares, you do not pay an initial sales charge
at the time of purchase. However, if you redeem your Class B shares within four
years after purchase or your Class C shares within one year after purchase, you
may be required to pay a deferred sales charge. You will also pay distribution
fees of 0.50% on Class B shares and 0.55% on Class C shares and account
maintenance fees of 0.25% on both Class B and Class C shares each year under a
distribution plan that the Fund has adopted under Rule 12b-1 of the Investment
Company Act of 1940. Because these fees are paid out of the Fund's assets on an
ongoing basis, over time these fees increase the cost of your investment and may
cost you more than paying an initial sales charge. The Distributor uses the
money that it receives from the deferred sales charges and the distribution fees
to cover the costs of marketing, advertising and compensating the Merrill Lynch
Financial Consultant or other securities dealer who assists you in purchasing
Fund shares.

22 MERRILL LYNCH CORPORATE HIGH YIELD FUND, INC.

<PAGE>

Class B Shares

If you redeem Class B shares within four years after purchase, you may be
charged a deferred sales charge. The amount of the charge gradually decreases as
you hold your shares over time, according to the following schedule:

Years Since Purchase Sales Charge*
----------------------------------------------------------
0 - 1 4.00%
----------------------------------------------------------
1 - 2 3.00%
----------------------------------------------------------
2 - 3 2.00%
----------------------------------------------------------
3 - 4 1.00%
----------------------------------------------------------
4 and thereafter 0.00%
----------------------------------------------------------

* The percentage charge will apply to the lesser of the original cost of the
shares being redeemed or the proceeds of your redemption. Shares acquired
through reinvestment of dividends or distributions are not subject to a
deferred sales charge. Not all Merrill Lynch funds have identical deferred
sales charge schedules. If you exchange your shares for shares of another
fund, the higher charge will apply.

The deferred sales charge relating to Class B shares may be reduced or waived in
certain circumstances, such as:

o Certain post-retirement withdrawals from an IRA or other retirement plan
if you are over 59 1/2 years old.

o Redemption by certain eligible 401(a) and 401(k) plans, certain related
accounts and group plans participating in the Merrill Lynch Blueprint(SM)
Program, and certain retirement plan rollovers.

o Redemption in connection with participation in certain Merrill Lynch
fee-based programs.

o Withdrawals resulting from shareholder death or disability as long as the
waiver request is made within one year of death or disability or, if
later, reasonably promptly following completion of probate, or in
connection with involuntary termination of an account in which Fund shares
are held.

o Withdrawal through the Merrill Lynch Systematic Withdrawal Plan of up to
10% per year of your Class B account value at the time the plan is
established.

MERRILL LYNCH CORPORATE HIGH YIELD FUND, INC. 23
<PAGE>

[CLIPART] Your Account

Your Class B shares convert automatically into Class D shares approximately ten
years after purchase. Any Class B shares received through reinvestment of
dividends or distributions paid on converting shares will also convert at that
time. Class D shares are subject to lower annual expenses than Class B shares.
The conversion of Class B to Class D shares is not a taxable event for federal
income tax purposes.

Different conversion schedules apply to Class B shares of different Merrill
Lynch mutual funds. For example, Class B shares of a fixed-income fund convert
approximately ten years after purchase compared to approximately eight years for
equity funds. If you exchange Class B shares with an eight-year conversion
schedule for Class B shares with a ten-year conversion schedule, or vice versa,
the conversion schedule applicable to the Class B shares acquired in the
exchange will apply. If you acquire your Class B shares in an exchange from
another fund, the Fund's ten year conversion schedule will apply. If you
exchange your Class B shares in the Fund for Class B shares of another fund, the
other fund's conversion schedule will apply. The length of time that you hold
both the original and exchanged Class B shares in both funds will count toward
the conversion schedule. The conversion schedule may be modified in certain
other cases as well.

Class C Shares

If you redeem Class C shares within one year after purchase, you may be charged
a deferred sales charge of 1.00%. The charge will apply to the lesser of the
original cost of the shares being redeemed or the proceeds of your redemption.
You will not be charged a deferred sales charge when you redeem shares that you
acquire through reinvestment of Fund dividends or distributions. The deferred
sales charge relating to Class C shares will be reduced or waived in connection
with involuntary termination of an account in which Fund shares are held and
withdrawals through the Merrill Lynch Systematic Withdrawal Plan.

Class C shares do not offer a conversion privilege.

24 MERRILL LYNCH CORPORATE HIGH YIELD FUND, INC.

<PAGE>

HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
- --------------------------------------------------------------------------------

The following chart summarizes how to buy, sell, transfer and exchange shares
through Merrill Lynch or other securities dealers. You may also buy shares
through the Transfer Agent. To learn more about buying shares through the
Transfer Agent, call 1-800-MER-FUND. Because the selection of a mutual fund
involves many considerations, your Merrill Lynch Financial Consultant may help
you with this decision.

MERRILL LYNCH CORPORATE HIGH YIELD FUND, INC. 25
<PAGE>

[CLIPART] Your Account

If You Want to Your Choices Information Important for You to Know
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Buy Shares First, select the share class Refer to the Merrill Lynch Select Pricing table on page 20. Be sure
appropriate for you to read this Prospectus carefully.
-------------------------------------------------------------------------------------------------------
Next, determine the amount of The minimum initial investment for the Fund is $1,000 for all
your investment accounts except:
o $500 for Employee Access(SM) Accounts
o $250 for certain Merrill Lynch fee-based programs.
o $100 for Merrill Lynch Blueprint(SM) Program
o $100 for retirement plans.
(The minimums for initial investments may be waived
under certain circumstances.)
------------------------------------------------------------------------------------------------------

Have your Merrill Lynch The price of your shares is based on the next calculation of net
Financial Consultant or asset value after your order is placed. Any purchase orders placed
securities dealer submit your prior to the close of business on the New York Stock Exchange
purchase order (generally 4:00 p.m. Eastern Time) will be priced at the net asset
value determined that day.

Purchase orders placed after that time will be priced at the net
asset value determined on the next business day. The Fund may reject
any order to buy shares and may suspend the sale of shares at any
time. Merrill Lynch may charge a processing fee to confirm a
purchase. This fee is currently $5.35.
------------------------------------------------------------------------------------------------------
Or contact the Transfer Agent To purchase shares directly, Call the Transfer Agent at
1-800-MER-FUND and request a purchase application. Mail the
completed purchase application to the Transfer Agent at the address
on the inside back cover of this Prospectus.
- ----------------------------------------------------------------------------------------------------------------------------
Add to Your Purchase additional shares The minimum investment for additional purchases is generally $50 for
Investment all accounts except that retirement plans have a minimum additional
purchase of $1 and that minimums for certain programs, such as automatic
investment plans, may be higher than $50.

(The minimum for additional purchases may be waived under
certain circumstances.)
------------------------------------------------------------------------------------------------------
Acquire additional shares All dividends and capital gains distributions are automatically
through the automatic reinvested without a sales charge.
dividend reinvestment plan
------------------------------------------------------------------------------------------------------
Participate in the automatic You may invest a specific amount on a periodic basis through
investment plan certain Merrill Lynch investment or central asset accounts.
- ----------------------------------------------------------------------------------------------------------------------------
Transfer Shares to Transfer to a participating You may transfer your Fund shares only to another securities
Another Securities securities dealer dealer that has entered into an agreement with Merrill Lynch. Certain
Dealer shareholder services may not be available for the transferred shares.
You may only purchase additional shares of funds previously
owned before the transfer. All future trading of these assets must
be coordinated by the receiving firm.
- ----------------------------------------------------------------------------------------------------------------------------

</TABLE>

26 MERRILL LYNCH CORPORATE HIGH YIELD FUND, INC.
<PAGE>

If You Want to Your Choices Information Important for You to Know
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Transfer Shares to Transfer to a non-participating You must either:
Another Securities securities dealer o Transfer your shares to an account with the Transfer Agent; or
Dealer (continued) o Sell your shares.
- ----------------------------------------------------------------------------------------------------------------------------

Sell Your Shares Have your Merrill Lynch The price of your shares is based on the next calculation of net
Financial Consultant or asset value after your order is placed. For your request, you
securities dealer submit your must submit your request to your dealer prior to that day's close of
sales order business on the New York Stock Exchange (generally 4:00 p.m. Eastern
time). Any redemption request placed from a dealer after that time
will be priced at the net asset value at the close of business on the
next business day. Dealers must submit redemption requests to the Fund
not more than thirty minutes after the close of business on the New York
Stock Exchange.

Securities dealers, including Merrill Lynch, may charge a fee to
process a redemption of shares. Merrill Lynch currently charges a
fee of $5.35. No processing fee is charged if you redeem shares
held by the Transfer Agent.

The Fund may reject an order to sell shares under certain
circumstances.
------------------------------------------------------------------------------------------------------
Sell through the Transfer You may sell shares held at the Transfer Agent by writing to the
Agent Transfer Agent at the address on the inside back cover of this
prospectus. All shareholders on the account must sign the letter
and signatures must be guaranteed. If you hold stock certficiates,
return the certificates with the letter. The Transfer Agent will
normally mail redemption proceeds within seven days following
receipt of a properly completed request. If you make a redemption
request before the Fund has collected payment for the purchase of
shares, the Fund or the Transfer Agent may delay mailing your
proceeds. This delay will usually not exceed ten days.

If you hold share certificates, they must be delivered to the
Transfer Agent before they can be converted. Check with the
Transfer Agent or your Merrill Lynch Financial Consultant for
details.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>

MERRILL LYNCH CORPORATE HIGH YIELD FUND, INC. 27
<PAGE>

[CLIPART] Your Account

Sell Shares Participate in the Fund's You can choose to receive systematic payments from your Fund
Systematically Systematic Withdrawal Plan account either by check or through direct deposit to your bank
account on a monthly or quarterly basis. If you hold your fund shares
in a CMA(R), CBA(R) or Retirement Account you can arrange for
systematic redemptions of a fixed dollar amount on a monthly,
bi-monthly, quarterly, semi-annual or annual basis, subject to
certain conditions. Under either method you must have dividends
and other distributions automatically reinvested. For Class B and C
shares your total annual withdrawals cannot be more than 10%
per year of the value of your shares at the time your plan is
established. The deferred sales charge is waived for systematic
redemptions. Ask your Merrill Lynch Financial Consultant for
details.

- ---------------------------------------------------------------------------------------------------------------------------
Exchange Your Select the fund into which you You can exchange your shares of the Fund for shares of many
Shares want to exchange. Be sure to other Merrill Lynch mutual funds. You must have held the shares
read that fund's prospectus used in the exchange for at least 15 calendar days before you can
exchange to another fund.

Each class of Fund shares is generally exchangeable for shares of
the same class of another fund. If you own Class A shares and wish
to exchange into a fund in which you have no Class A shares, you
will exchange into Class D shares.

Some of the Merrill Lynch mutual funds impose a different initial
or deferred sales charge schedule. If you exchange Class A or D
shares for shares of a fund with a higher initial sales charge than
you originally paid, you will be charged the difference at the time
of exchange. If you exchange Class B shares for shares of a fund
with a different deferred sales charge schedule, the higher
schedule will apply. The time you hold Class B or C shares in both
funds will count when determining your holding period for
calculating a deferred sales charge at redemption. If you exchange
Class A or D shares for money market fund shares, you will receive
Class A shares of Summit Cash Reserves Fund. Class B or C shares of
the Fund will be exchanged for Class B shares of Summit.

Although there is currently no limit on the number of exchanges
that you can make, the exchange privilege may be modified or
terminated at any time in the future.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>

28 MERRILL LYNCH CORPORATE HIGH YIELD FUND, INC.

<PAGE>

Net Asset Value -- the market value of
the Fund's total assets after deducting
liabilities, divided by the number of
shares outstanding.

HOW SHARES ARE PRICED
- --------------------------------------------------------------------------------

When you buy shares, you pay the net asset value, plus any applicable sales
charge. This is the offering price. Shares are also redeemed at their net asset
value, minus any applicable deferred sales charge. The Fund calculates its net
asset value (generally by using market quotations) each day the New York Stock
Exchange is open, after the close of business on the Exchange (the Exchange
generally closes at 4:00 p.m. New York time). The net asset value used in
determining your price is the next one calculated after your purchase or
redemption order is placed. Foreign securities owned by the Fund may trade on
weekends or other days when the Fund does not price its shares. As a result, the
Fund's net asset value may change on days when you will not be able to purchase
or redeem the Fund's shares.

Generally, Class A shares will have the highest net asset value because that
class has the lowest expenses, and Class D shares will have a higher net asset
value than Class B or Class C shares. Class B shares will have a higher net
asset value than Class C shares because Class B shares have lower distribution
expenses than Class C shares. Also dividends paid on Class A and Class D shares
will generally be higher than dividends paid on Class B and Class C shares
because Class A and Class D shares have lower expenses.

PARTICIPATION IN MERRILL LYNCH FEE-BASED PROGRAMS
- --------------------------------------------------------------------------------

If you participate in certain fee-based programs offered by Merrill Lynch, you
may be able to buy Class A shares at net asset value, including by exchanges
from other share classes. Sales charges on the shares being exchanged may be
reduced or waived under certain circumstances.

You generally cannot transfer shares held through a fee-based program into
another account. Instead, you will have to redeem your shares held through the
program and purchase shares of another class, which may be subject to
distribution and account maintenance fees. This may be a taxable event and you
will pay any applicable sales charges.

If you leave one of these programs, your shares may be redeemed or automatically
exchanged into another class of Fund shares or into a money market fund. The
class you receive may be the class you originally owned when you entered the
program, or in certain cases, a different class. If the exchange is into Class B
shares, the period before conversion to Class D

MERRILL LYNCH CORPORATE HIGH YIELD FUND, INC. 29
<PAGE>

[CLIPART] Your Account

Dividends -- ordinary income and capital
gains paid to shareholders. Dividends
may be reinvested in additional Fund
shares as they are paid.

shares may be modified. Any redemption or exchange will be at net asset value.
However, if you participate in the program for less than a specified period, you
may be charged a fee in accordance with the terms of the program.

Details about these features and the relevant charges are included in the client
agreement for each fee-based program and are available from your Merrill Lynch
Financial Consultant.

DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------

The Fund will distribute any net investment income monthly, and any net realized
long or short term capital gains at least annually. The Fund may also pay a
special distribution at the end of the calendar year to comply with Federal tax
requirements. If your account is with Merrill Lynch and you would like to
receive dividends in cash, contact your Merrill Lynch Financial Consultant. If
your account is with the Transfer Agent and you would like to receive dividends
in cash, contact the Transfer Agent.

You will pay tax on dividends from the Fund whether you receive them in cash or
additional shares. If you redeem Fund shares or exchange them for shares of
another fund, any gain on the transaction may be subject to tax. The Fund
intends to make distributions that will either be taxed as ordinary income or
capital gains. Capital gains dividends are generally taxed at different rates
than ordinary income dividends.

If you are neither a lawful permanent resident nor a citizen of the U.S. or if
you are a foreign entity, the Fund's ordinary income dividends (which include
distributions of net short term capital gains) will generally be subject to a
30% U.S. withholding tax, unless a lower treaty rate applies.

Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.

30 MERRILL LYNCH CORPORATE HIGH YIELD FUND, INC.
<PAGE>

"BUYING A DIVIDEND"

Unless your investment is in a tax
deferred account, you may want to
avoid buying shares shortly before
the Fund pays a dividend. The reason?
If you buy shares when a fund has
realized but not yet distributed income
or capital gains, you will pay the full
price for the shares and then receive a
portion of the price back in the form of
a taxable dividend. Before investing you
may want to consult your tax adviser.

By law, the Fund must withhold 31% of your dividends and proceeds if you have
not provided a taxpayer identification number or social security number or if
the number you have provided is incorrect.

This section summarizes some of the consequences under current U.S. federal tax
law of an investment in the Fund. It is not a substitute for personal tax
advice. Consult your personal tax adviser about the potential tax consequences
of an investment in the Fund under all applicable tax laws.

MERRILL LYNCH CORPORATE HIGH YIELD FUND, INC. 31

<PAGE>

[CLIPART] Management of the Fund

FUND ASSET MANAGEMENT
- --------------------------------------------------------------------------------

Fund Asset Management, L.P., the Fund's Investment Adviser, manages the Fund's
investments and its business operations under the overall supervision of the
Fund's Board of Directors. The Investment Adviser has the responsibility for
making all investment decisions for the Fund. The Investment Adviser has a
sub-advisory agreement with Merrill Lynch Asset Management U.K., an affiliate,
under which the Investment Adviser may pay a fee for services it receives. The
Fund pays the Investment Adviser a fee at the annual rate of 0.60% of the
average daily net assets of the Fund. For the period May 1, 1998 to March 31,
1999, the Investment Adviser received a management fee of $2,515,345 (based on
an average daily net assets of approximately $456.7 million), of which
$1,042,353 was voluntarily waived.

Fund Asset Management is part of Merrill Lynch Asset Management Group, which had
approximately $516 billion in investment company and other portfolio assets
under management as of June 1999. This amount includes assets managed for
Merrill Lynch affiliates.

A Note About Year 2000

Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). The Fund could be adversely
affected if the computer systems used by the Fund's management or other Fund
service providers do not properly address this problem before January 1, 2000.
The Fund's management expects to have addressed this problem before then, and
does not anticipate that the services it provides will be adversely affected.
The Fund's other service providers have told the Fund management that they also
expect to resolve the Year 2000 Problem, and the Fund's management will continue
to monitor the situation as the Year 2000 approaches. However, if the problem
has not been fully addressed, the Fund could be negatively affected. The Year
2000 Problem could also have a negative impact on the companies in which the
Fund invests. This negative impact may be greater for companies in foreign
markets, especially emerging markets, since they may be less prepared than
domestic companies and managers. If the companies in which the Fund invests have
Year 2000 problems, the Fund's returns could be adversely affected.

32 MERRILL LYNCH CORPORATE HIGH YIELD FUND, INC.

<PAGE>

FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

The financial highlights table is intended to help you understand the Fund's
financial performance for the period May 1, 1998 (commencement of operations) to
March 31, 1999. Certain information reflects financial results for a single Fund
share. The total returns in the table represent the rate that an investor would
have earned on an investment in the Fund (assuming reinvestment of all dividends
and distributions). This information has been audited by Deloitte & Touche LLP,
whose report, along with the Fund's financial statements, are included in the
Fund's annual report to shareholders, which is available upon request.

For the Period May 1, 1998+
to March 31, 1999
-------------------------------------------
Increase (Decrease) in
Net Asset Value Class A Class B Class C Class D
- --------------------------------------------------------------------------------
Per Share Operating Performance:
- --------------------------------------------------------------------------------
Net asset value, beginning
of period $10.00 $10.00 $10.00 $10.00
- --------------------------------------------------------------------------------
Investment income--net .79 .73 .72 .77
- --------------------------------------------------------------------------------
Realized and unrealized
loss on investments--net (.58) (.58) (.58) (.58)
- --------------------------------------------------------------------------------
Total from investment operations .21 .15 .14 .19
- --------------------------------------------------------------------------------
Less dividends from
investment income--net (.79) (.73) (.72) (.77)
- --------------------------------------------------------------------------------
Net asset value, end of period $ 9.42 $ 9.42 $ 9.42 $ 9.42
- --------------------------------------------------------------------------------
Total Investment Return:**
- --------------------------------------------------------------------------------
Based on net asset value per share 2.51%# 1.80%# 1.75%# 2.28%#
- --------------------------------------------------------------------------------
Ratios to Average Net Assets:
- --------------------------------------------------------------------------------
Expenses, net of reimbursement .52%* 1.27%* 1.31%* .75%*
- --------------------------------------------------------------------------------
Expenses .76%* 1.52%* 1.57%* 1.01%*
- --------------------------------------------------------------------------------
Investment income--net 9.39%* 8.61%* 8.53%* 9.10%*
- --------------------------------------------------------------------------------
Supplemental Data:
- --------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $12,864 $502,377 $119,281 $74,017
- --------------------------------------------------------------------------------
Portfolio turnover 49.40% 49.40% 49.40% 49.40%
- --------------------------------------------------------------------------------

* Annulized
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations
# Aggregate total investment return.

MERRILL LYNCH CORPORATE HIGH YIELD FUND, INC. 33
<PAGE>

(This page intentionally left blank)

MERRILL LYNCH CORPORATE HIGH YIELD FUND, INC.

<PAGE>

---------------------------------
POTENTIAL
INVESTORS

Open an account (two options)
---------------------------------

(1) (2)
- ---------------------------- -----------------------------------
MERRILL LYNCH TRANSFER AGENT
FINANCIAL CONSULTANT Financial Data Services, Inc.
OR SECURITIES DEALER P.O. Box 45289
Jacksonville, Florida 32232-5289
Advises shareholders on
their fund investments. Performs recordkeeping and
- ---------------------------- reporting services.
-----------------------------------

----------------------------------------------------
DISTRIBUTOR

Merrill Lynch Funds Distributor,
a division of Princeton Funds Distributor, Inc.
P.O. Box 9081
Princeton, New Jersey 08543-9081

Arranges for the sale of Fund shares.
----------------------------------------------------

- ------------------------ -----------------------------------
COUNSEL CUSTODIAN
------------------
Roger & Wells LLP THE FUND State Street Bank and Trust Company
200 Park Avenue P.O. Box 351
New York, New York 10166 The Board of Boston, MA 02171
Directors oversees
Provides legal advice the Fund. Holds the Fund's
to the Fund. ------------------ assets for safekeeping.
- ------------------------ ------------------------------------

- ----------------------------------- ------------------------------------
INDEPENDENT AUDITORS INVESTMENT ADVISER

Deloitte & Touche LLP Fund Asset Management, L.P.
117 Campus Drive
Princeton, New Jersey 08540-6400 ADMINISTRATIVE OFFICES
800 Scudders Mill Road
Audits the financial Plainsboro, New Jersey 08536
statements of the Fund on behalf of
the shareholders. MAILING ADDRESS
- ----------------------------------- P.O. Box 9011
Princeton, New Jersey 08543-9011

TELEPHONE NUMBER
1-800-MER-FUND

Manages the Fund's
day-to-day activities.
------------------------------------

MERRILL LYNCH CORPORATE HIGH YIELD FUND, INC.
<PAGE>

[CLIPART] For More Information

Shareholder Reports

Additional information about the Fund's investments is available in the Funds's
annual and semi-annual reports to shareholders. In the Fund's annual report you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. You
may obtain these reports at no cost by calling 1-800-MER-FUND.

The Fund will send you one copy of each shareholder report and certain other
mailings, regardless of the number of Fund accounts you have. To receive
separate shareholder reports for each account, call your Merrill Lynch Financial
Consultant or write to the Transfer Agent at its mailing address. Include your
name, address, tax identification number and Merrill Lynch brokerage or mutual
fund account number. If you have any questions, please call your Merrill Lynch
Financial Consultant or the Transfer Agent at 1-800-MER-FUND.

Statement of Additional Information

The Fund's Statement of Additional Information contains further information
about the Fund and is incorporated by reference (legally considered to be part
of this prospectus). You may request a free copy by writing the Fund at
Financial Data Services, Inc. P.O. Box 45289 Jacksonville, Florida 32232-5289 or
by calling 1-800-MER-FUND.

Contact your Merrill Lynch Financial Consultant or the Fund at the telephone
number or address indicated on the inside back cover of this prospectus if you
have any questions.

Information about the Fund (including the Statement of Additional Information)
can be reviewed and copied at the SEC's Public Reference Room in Washington,
D.C. Call 1-800-SEC-0330 for information on the operation of the public
reference room. This information is also available on the SEC's Internet site at
http://www.sec.gov and copies may be obtained upon payment of a duplicating fee
by writing the Public Reference Section of the SEC, Washington, D.C. 20549-6009.

You should rely only on the information contained in this prospectus. No one is
authorized to provide you with information that is different.

File #811-08699
Code #19025-07-99
(C)Fund Asset Management, L.P.

PROSPECTUS

[LOGO] Merrill Lynch

Merrill Lynch
Corporate High Yield Fund, Inc.

July 27, 1999

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

Merrill Lynch Corporate High Yield Fund, Inc.
P.O. Box 9011, Princeton, New Jersey 08543-9011 o Phone No. (609) 282-2800

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

Merrill Lynch Corporate High Yield Fund, Inc. (the "Fund") is a diversified
open-end investment company. The main goal of the Fund is to obtain current
income. As a secondary objective, the Fund seeks capital appreciation when
consistent with its primary objective. The Fund seeks to achieve its objectives
by investing in a diversified portfolio of corporate fixed-income securities,
such as corporate bonds and notes, convertible securities and preferred stocks.
Under normal circumstances, more than 90% of the assets of the Fund will be
invested in fixed-income securities, including convertible and nonconvertible
debt securities and preferred stock. In addition, as a matter of operating
policy, at least 65% of the Fund's total assets will under normal circumstances
be invested in corporate securities rated below Baa by Moody's Investors
Service, Inc. ("Moody's") or below BBB by Standard & Poor's Ratings Group
("S&P"), and unrated securities of comparable quality. The Fund may invest
substantially all of its assets in investments that are rated in the lower
rating categories of the established rating services (Baa or lower by Moody's or
BBB or lower by S&P), or in unrated securities that Fund Asset Management, L.P.
("FAM" or the "Investment Adviser") considers to be of comparable quality. Lower
rated securities, commonly known as "junk bonds," generally involve greater
risks, including risk of default, volatility of price and risks to principal and
income, than securities in the higher rating categories. Because investment in
junk bonds entails relatively greater risk of loss of income or principal than
an investment in higher-rated securities, an investment in the Fund may not be
appropriate for all investors. The Fund should be considered as a means of
diversifying an investment portfolio and not in itself a balanced investment
plan. There can be no assurance that the Fund's investment objectives will be
achieved.

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

Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares of common stock, each with a different combination of
sales charges, ongoing fees and other features. The Merrill Lynch Select
Pricing(SM) System permits an investor to choose the method of purchasing shares
that the investor believes is most beneficial given the amount of the purchase,
the length of time the investor expects to hold the shares and other relevant
circumstances.

This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the Prospectus of the Fund, dated July
27, 1999 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling (800) 637-3863 or by writing the Fund at the above address. The
Prospectus is incorporated by reference into this Statement of Additional
Information, and this Statement of Additional Information is incorporated by
reference into the Prospectus. The Fund's audited financial statements are
incorporated in this Statement of Additional Information by reference to its
1999 annual report to shareholders. You may request a copy of the annual report
at no charge by calling (800) 456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m.
on any business day.
----------------------

Fund Asset Management, L.P. -- Investment Adviser
Merrill Lynch Funds Distributor -- Distributor

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

The date of this Statement of Additional Information is July 27, 1999.

<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
<S> <C>
Page
Investment Objectives and Policies ...................................................................... 2
Transactions in Fixed-Income Securities .............................................................. 2
Transactions inFutures and Options Thereon ........................................................... 4
Transactions in Options on Debt Securities ........................................................... 5
Other Portfolio Strategies ........................................................................... 6
Risk Factors and Special Considerations ................................................................. 9
Risk Factors in Transactions in Junk Bonds ........................................................... 9
Risk Factors in Transactions in Distressed Securities ................................................ 9
Risk Factors in Transactions in Corporate Loans ...................................................... 10
Risk Factors in Transactions in Foreign Securities ................................................... 10
RiskFactors in Transactions in Futures and Options Thereon ........................................... 13
Investment Restrictions ................................................................................. 14
Management of the Fund .................................................................................. 15
Directors and Officers ............................................................................... 15
Compensation of Directors ............................................................................ 17
Investment Advisory Arrangements ..................................................................... 17
Duration and Termination ............................................................................. 18
Code of Ethics ....................................................................................... 19
Transfer AgencyService Arrangements .................................................................. 19
Purchase of Shares ...................................................................................... 19
Initial Sales Charge Alternatives-- Class A and Class D Shares ....................................... 20
Reduced Initial Sales Charges-- Class A and Class D Shares ........................................... 22
Deferred Sales Charge Alternatives-- Class B and Class C Shares ...................................... 24
Employer-Sponsored Retirement or Savings Plans and Certain Other Arrangements ........................ 27
Distribution Plans ................................................................................... 27
Limitations on the Payment of Deferred Sales Charges ................................................. 29
Redemption of Shares .................................................................................... 30
Redemption ........................................................................................... 30
Repurchase ........................................................................................... 31
Reinstatement Privilege-- Class A and Class D Shares ................................................. 31
Deferred Sales Charge--Class B and Class C Shares .................................................... 31
Portfolio Transactions .................................................................................. 32
Determination of Net Asset Value ........................................................................ 34
Shareholder Services .................................................................................... 35
Automatic Investment Plans ........................................................................... 36
Fee-Based Programs ................................................................................... 36
Automatic Reinvestment of Dividends and Capital Gains Distribution ................................... 36
Systematic Withdrawal Plans .......................................................................... 37
Exchange Privilege ................................................................................... 38
Exercise of the Exchange Privilege ................................................................... 39
Retirement Plans ..................................................................................... 40
Merrill Lynch Blueprint(SM) Program .................................................................. 40
Dividends and Taxes ..................................................................................... 40
Dividends ............................................................................................ 40
Federal Income Taxes ................................................................................. 41
Tax Treatment of Transactions in Options on Debt Securities, Futures Contracts and Options
Thereon ................................................................................................ 43
Performance Data ........................................................................................ 43
Additional Information .................................................................................. 45
Organization of the Fund ............................................................................. 45
Description of Shares ................................................................................ 45
Computation of Offering Price Per Share .............................................................. 46
Independent Auditors .................................................................................... 47
Custodian ............................................................................................... 47
Transfer Agent .......................................................................................... 47
Distributor ............................................................................................. 47
Legal Counsel ........................................................................................... 47
Reports to Shareholders ................................................................................. 47
Shareholder Inquiries ................................................................................... 47
Additional Information .................................................................................. 47
Financial Statements .................................................................................... 47
Appendix A: Interest Rate Futures, Options Thereon and Options on Debt Securities ....................... A-1
Appendix B: Description of Corporate Bond Ratings ....................................................... B-1
Part C. Other Information ............................................................................... C-1

</TABLE>

<PAGE>

INVESTMENT OBJECTIVES AND POLICIES

The primary investment objective of the Fund is to obtain current income.
As a secondary objective, the Fund seeks capital appreciation when consistent
with its primary objective. These investment objectives are a fundamental policy
of the Fund and may not be changed without a vote of the majority of the
outstanding voting securities of the Fund. See "Investment Restrictions." The
Fund seeks to achieve its objectives by investing in a diversified portfolio of
Corporate fixed-income securities, such as corporate bonds and notes,
convertible securities, and preferred stocks. There can be no assurance that the
objective of the Fund can be attained.

Transactions in Fixed-Income Securities

The Fund seeks current income by investing primarily in fixed-income
securities that are rated in the lower rating categories of the established
rating services (Baa or lower by Moody's and BBB or lower by S&P), or in unrated
securities considered by the Investment Adviser to be of comparable quality.
Securities rated below Baa by Moody's or below BBB by S&P, and unrated
securities of comparable quality, are commonly known as "junk bonds." See
"Appendix: Description of Corporate Bond Ratings" for additional information
concerning rating categories. Junk bonds may constitute as much as 100% of the
Fund's investments. Although junk bonds can be expected to provide higher
yields, such securities may be subject to greater market fluctuations and risk
of loss of income and principal than lower-yielding, higher-rated fixed-income
securities. See "Risk Factors in Transactions in Junk Bonds." Because investment
in junk bonds entails relatively greater risk of loss of income or principal
than an investment in higher-rated securities, an investment in the Fund may not
be appropriate for all investors. The Fund should be considered as a means of
diversifying an investment portfolio and not in itself a balanced investment
plan.Purchasers should carefully assess the risks associated with an investment
in the Fund.

The securities in the Fund will be varied from time to time depending upon
the judgment of management as to prevailing conditions in the domestic and
foreign economies and the securities markets and the prospects for interest rate
changes among different categories of fixed-income securities. The Fund
anticipates that under normal circumstances more than 90% of its assets will be
invested in fixed-income securities, including convertible and nonconvertible
debt securities and preferred stocks. In addition, as a matter of operating
policy at least 65% of the Fund's total assets will under normal circumstances
be invested in corporate securities rated below Baa by Moody's or below BBB by
S&P and unrated securities of comparable quality. The remaining assets of the
Fund may be held in cash or, as described herein, may be used in connection with
transactions in futures contracts and options thereon solely for the purpose of
hedging the Fund against adverse movements in the market value of fixed-income
securities held by the Fund, or which the Fund intends to purchase. Transactions
in options on debt securities also may be entered into for such hedging
purposes, as well as for non-hedging purposes intended to increase the Fund's
returns. For a more complete description of futures and options transactions,
see "Transactions in Futures and Options Thereon" and "Transactions in Options
on Debt Securities" below. The Fund does not intend to invest in common stocks,
rights or other equity securities, but may acquire or hold such securities (if
consistent with its objectives) when such securities are acquired in unit
offerings with fixed-income securities or in connection with an actual or
proposed conversion or exchange of fixed-income securities.

The Fund will invest most of its assets in securities issued by U.S.
Companies. However, the Fund may invest in securities issued by foreign
governments ( or political subdivisions or instrumentalities thereof) or foreign
companies (collectively, "Foreign Securities"). The Fund may only invest in
Foreign Securities if, at the time of acquisition, no more than 25% of its total
assets (taken at market value at the time of the investment) would be invested
in Foreign Securities following such investment. Certain Foreign Securities may
be subject to non-U.S. withholding taxes.

Up to 15% of the Fund's total assets may be invested in Corporate Loans (as
defined below). Up to 10% of the Fund's total assets may be invested in
Distressed Securities (as defined below), which includes publicly offered or
privately placed debt securities and Corporate Loans that, at the time of
investment, are the subject of bankruptcy proceedings or otherwise in default as
to the repayment of principal or payment of interest or are rated in the lowest
rating categories (Ca or lower by Moody's and CC or lower by S&P), or that, if
unrated, are in the judgment of the Investment Adviser of comparable quality.
For these reasons, an investment in the Fund may be speculative in that it
involves a high degree of risk and should not constitute a complete investment
program. See "Risk Factors in Transactions in Corporate Loans" and "Risk Factors
in Transactions in Distressed Securities".

2
<PAGE>

Selection and supervision by the management of the Fund of portfolio
investments involve continuous analysis of individual issuers, general business
conditions and other factors that may be too time-consuming or too costly for
the average investor. The furnishing of these services does not, of course,
guarantee successful results. Fund Asset Management, L.P.'s ("FAM" or the
"Investment Adviser") analysis of issuers includes, among other things, historic
and current financial conditions, current and anticipated cash flow and
borrowing requirements, value of assets in relation to historical cost, strength
of management, responsiveness to business conditions, credit standing, and
current and anticipated results of operations. Analysis of general business
conditions and other factors may include anticipated change in economic activity
and interest rates, the availability of new investment opportunities, and the
economic outlook for specific industries. While the Investment Adviser considers
as one factor in its credit analysis the ratings assigned by the rating
services, the Investment Adviser performs its own independent credit analysis of
issuers and consequently, the Fund may invest, without limit, in unrated
securities. As a result, the Fund's ability to achieve its investment objective
may depend to a greater extent on the Investment Adviser's own credit analysis
than mutual funds that invest in higher-rated securities. Although the Fund will
invest primarily in lower-rated securities, other than with respect to
Distressed Securities (which are discussed below) it will not invest in
securities in the lowest rating categories (Ca or below for Moody's and CC or
below for S&P) unless the Investment Adviser believes that the financial
condition of the issuer or the protection afforded to the particular securities
is stronger than would otherwise be indicated by such low ratings. Securities
that are subsequently downgraded may continue to be held and will be sold only
if, in the judgment of the Investment Adviser, it is advantageous to do so.

In furtherance of its primary investment objective, the Fund may invest up
to 15% of its total assets in secondary market purchases of loans extended to
corporate borrowers by commercial banks and other financial institutions
("Corporate Loans"). As in the case of junk bonds, the Corporate Loans in which
the Fund may invest may be rated in the lower rating categories of the
established rating services (Baa or lower by Moody's and BBB or lower by S&P),
or may be unrated investments of comparable quality. As in the case of junk
bonds, such Corporate Loans can be expected to provide higher yields than
higher-rated fixed-income securities but may be subject to greater risk of loss
of principal and income. As discussed below under "Risk Factors in Transactions
in Corporate Loans," however, there are some significant differences between
Corporate Loans and junk bonds.

The Fund may also from time to time invest up to 10% of its assets in
securities which are the subject of bankruptcy proceedings or otherwise in
default or in significant risk of being in default ("Distressed Securities").
Distressed Securities that are in default or in risk of being in default but not
yet in bankruptcy proceedings may be the subject of a pre-bankruptcy exchange
offer pursuant to which holders of the Distressed Securities receive securities
or assets in exchange for the Distressed Securities. Holders of Distressed
Securities that are the subject of bankruptcy proceedings may, following
approval of a plan of reorganization by the bankruptcy court, receive securities
or assets in exchange for the Distressed Securities. Generally, the Fund will
invest in Distressed Securities when the Investment Adviser anticipates that it
is reasonably likely that the securities will be subject to such an exchange
offer or plan of reorganization, as to which there can be no assurance.
Normally, the Fund will invest in Distressed Securities at a price that
represents a significant discount from the principal amount due on maturity of
the securities. The Fund will invest in Distressed Securities when the
Investment Adviser believes that, based on its analysis of the asset values of
the issuer of the Distressed Securities and the issuer's overall business
prospects, upon completion of an exchange offer or plan of reorganization with
respect to the Distressed Securities the Fund would receive, in exchange for its
Distressed Securities, securities or assets with terms and credit
characteristics which offer the Fund significant opportunities for capital
appreciation and future high rates of current income. See "Risk Factors in
Transactions in Distressed Securities."

When changing economic conditions and other factors cause the yield
difference between lower-rated and higher-rated securities to narrow, the Fund
may purchase higher-rated securities if the Investment Adviser believes that the
risk of loss of income and principal may be substantially reduced with only a
relatively small reduction in yield. In addition, under unusual market or
economic conditions, the Fund, for temporary defensive or other purposes, may
invest up to 100% of its assets in securities issued or guaranteed by the United
States Government or its instrumentalities or agencies, certificates of deposit,
bankers' acceptances and other bank obligations, commercial paper rated in the
highest category by an established rating agency, or other fixed-income
securities deemed by the Investment Adviser to be consistent with a defensive
posture, or may hold its assets in cash. The yield on such securities may be
lower than the yield on lower-rated fixed-income securities.

3
<PAGE>

Transactions in Futures and Options Thereon

The Fund may engage in hedging transactions in interest rate, bond and bond
index futures contracts and options thereon. The Fund will limit transactions in
futures and options on futures to financial futures contracts (i.e., contracts
for which the underlying commodity is a bond, bond index or interest rate index)
purchased or sold for hedging purposes (including anticipatory hedges). The Fund
will further limit transactions in futures and options on futures to the extent
necessary to prevent the Fund from being deemed a "commodity pool" under
regulations of the Commodity Futures Trading Commission. The Fund currently may
trade only in futures contracts on U.S. Treasury bonds, bills and notes and
Government National Mortgage Association ("GNMA") mortgage-backed certificates
and options on such futures contracts. However, under its investment
restrictions the Fund is permitted to trade in such additional types of interest
rate futures contracts and options thereon as its Board of Directors determines
is appropriate for trading by the Fund, subject to the restrictions noted below.
The Fund is subject to the tax requirement that less than 30% of its gross
income be derived from the sale or other disposition of stocks, securities and
certain options, futures or forward contracts held for less than three months.
This requirement may limit the Fund's ability to engage in the hedging
transactions and strategies described below. Set forth below is information
concerning options and futures contracts. Reference is made to Appendix A
"Interest Rate Futures, Options Thereon and Options on Debt Securities" attached
hereto for a more complete description of options and futures transactions.

Futures. The Fund may engage in transactions in futures contracts and
options thereon. As set forth in Appendix A, futures are standardized,
exchange-traded derivatives contracts which obligate a purchaser to take
delivery, and a seller to make delivery, of a specific amount of a commodity at
a specified future date at a specified price. Options on futures are options to
either buy (call) or sell (put) a futures contract at a specified price prior to
a specified date. No price is paid upon entering into a futures contract
(although a fee, or option premium, is generally paid to the seller of an option
on a futures contract at the initiation of the transaction). Rather, upon
purchasing or selling a futures contract the Fund is required to deposit
collateral ("margin") equal to a percentage (generally less than 10%) of the
contract value. Each day thereafter until the futures position is closed, the
Fund will pay additional margin representing any loss experienced as a result of
the futures position the prior day or be entitled to a payment representing any
profit experienced as a result of the futures position the prior day.

The Fund may sell futures contracts or purchase a put option on futures
contracts in anticipation of an increase in interest rates. Generally, as
interest rates rise, the market value of the fixed-income securities held by the
Fund will fall, reducing its net asset value. The sale of futures contracts may
limit the Fund's risk of loss through a decline in the market value of portfolio
holdings correlated with the futures contracts prior to the futures contracts'
expiration date. In the event the market value of the portfolio holdings
correlated with the futures contracts increases rather than decreases, however,
the Fund will realize a loss on the futures position and a lower overall return
than would have been realized without the purchase of the futures contracts.

The Fund may purchase futures contracts or purchase a call option on
futures contracts in anticipation of a decrease in interest rates. Generally, as
interest rates decrease, the market value of fixed-income securities which the
Fund may be considering purchasing will increase. The purchase of futures
contracts may protect the Fund from having to pay more for such securities when
it identifies specific securities it wishes to purchase. In the event that such
securities decline in value or the Fund determines not to purchase any
additional securities, however, the Fund may realize a loss relating to the
futures position.

Call Options on Futures Contracts. As set forth in Appendix A, a call
option on a futures contract provides the purchaser with the right, but not the
obligation, to enter into a "long" position in the underlying futures contract
at any time up to the expiration of the option. The purchase of an option on a
futures contract presents more limited risk than the trading of the underlying
futures contract, although, depending on the price of the option compared to
either the futures contract upon which it is based, or the underlying debt
securities, exercise of the option may or may not be less risky than ownership
of the futures contract or underlying debt securities. Like the purchase of a
futures contract, the Fund will purchase a call option on a futures contract to
hedge against a market advance resulting from declining interest rates when the
Fund is not fully invested.

The writing of a call option on a futures contract may constitute a partial
hedge against declining prices of fixed-income securities of the Fund, if the
futures price at expiration is below the exercise price of the option. In

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<PAGE>

such event, the Fund will retain the full amount of the option premium, which
provides a partial hedge against any decline that may have occurred in the
Fund's fixed-income investments. Conversely, if the futures price is above the
exercise price at any point prior to expiration, the option may be exercised and
the Fund would be required to enter into the underlying futures contract at an
unfavorable price.

Put Options on Futures Contracts. As set forth in Appendix A, a put option
on a futures contract provides the purchaser with the right, but not the
obligation, to enter into a "short" position in the futures contract at any time
up to the expiration of the option. The Fund will purchase a put option on a
futures contract to hedge its securities against the risk of a decline in market
value as a result of rising interest rates.

The writing of a put option on a futures contract may constitute a partial
hedge against increasing prices of fixed-income securities which the Fund
intends to purchase, if the futures price at expiration is higher than the
exercise price. In such event, the Fund will retain the full amount of the
option premium, which provides a partial hedge against any increase in the price
of fixed-income securities which the Fund intends to purchase. Conversely, if
the futures price is below the exercise price at any point prior to expiration,
the option may be exercised and the Fund would be required to enter into the
underlying futures contract at an unfavorable price.

Transactions in Options on Debt Securities

The Fund may write call and put options on U.S. Treasury bills, notes and
bonds in order to increase the return on their investments and in order to hedge
optionable U.S. Treasury securities held by the Fund. Unlike futures contracts
and options thereon, options on debt securities will not be traded solely for
hedging purposes. Such options generally have a maximum exercise period of nine
months.

The Fund also may purchase put options on optionable U.S. Treasury bills,
notes and bonds held in the Fund and, under certain limited circumstances
described below, call options on such instruments. Purchases of put options may
enable the Fund to limit the risk of declines in the value of the portfolio
security underlying the put, until the expiration of the option or the closing
of the option transaction. By purchasing a put, however, the Fund will be
required to pay the premium, which will reduce the benefits obtained from the
transaction.

The Fund will purchase a call option only where the market price of the
underlying security declines substantially following the writing of a call
option, and the Fund either re-hedges the security by writing a second call
option at a lower exercise price or disposes of the security. In such event, the
Fund would usually enter into a closing transaction in connection with the first
option it wrote. However, if the first option has been held less than three
months, the Fund may desire not to enter into a closing transaction in order to
comply with certain provisions of the Internal Revenue Code. In such
circumstances, the Fund may purchase a call option in an opening transaction
with the same exercise price and expiration date as the option it sold.

The Fund may write call options which give the holder the right to buy the
underlying security covered by the option from the Fund at the stated exercise
price. The Fund also may write put options that give the holder the right to
sell the underlying security to the Fund at the stated exercise price. The Fund
will write only covered options, which means that so long as the Fund is
obligated as the writer of a call option, it will own the underlying securities
subject to the options and, in the case of put options, that the Fund will,
through its Custodian, have deposited and maintained short-term U.S. Treasury
obligations with a securities depository with a value equal to or greater than
the exercise price of the underlying securities. The writer of a covered call
option has no control over when he may be required to sell his securities since
he may be assigned an exercise notice at any time prior to the termination of
his obligation as a writer. If an option expires unexercised, the writer
realizes a gain in the amount of the premium. Such a gain, of course, may be
offset by a decline in the market value of the underlying security during the
option period. If a call option is exercised, the writer realizes a gain or loss
from the sale of the underlying security.

The Fund will receive a premium from writing a put or call option, which
increases the Fund's return on the underlying security in the event the option
expires unexercised or is closed out at a profit. In the former instance, the
Fund increases its return by retaining the premium without being required to
purchase or sell the underlying security. In the latter case, the Fund increases
its return by liquidating the option position at a profit. The amount of the
premium will reflect, among other factors, the current market price of the
underlying security, the relationship of the exercise price to the market price,
the time period until the expiration of the option and interest rates. By
writing a call, the Fund limits its opportunity to profit from an increase in
the market value of the

5
<PAGE>

underlying security above the exercise price of the option for so long as the
Fund's obligation as a writer continues. By writing a put, the Fund will be
obligated to purchase the underlying security at a price that may be higher than
the market value of that security at the time of exercise for as long as the
option is outstanding. In addition, in closing out an option position, the Fund
may incur a loss. Thus, in some periods the Fund will receive less total return
and in other periods greater total return from its option positions than it
otherwise would have received from the underlying securities. To the extent that
such transactions are engaged in for hedging purposes, any gain (or loss)
thereon may offset, in whole or in part, gains (or losses) on securities held in
the Fund or increases in the value of securities the Fund intends to acquire.
The Fund will attempt to achieve, through the receipt of premiums on covered
options, a more consistent average total return than it would otherwise realize
from holding the underlying securities alone. To facilitate closing
transactions, as described below, the Fund will ordinarily only write options
for which a liquid secondary market appears to exist.

The Fund may engage in closing transactions in order to terminate
outstanding options that it has written. To effect a closing transaction, the
Fund purchases, prior to the exercise of an outstanding option that it has
written, an option of the same series as that on which it desires to terminate
its obligation. Profit or loss from a closing purchase transaction will depend
on whether the cost of the transaction is more or less than the premium received
on the sale of the option plus the related transaction costs.

Options referred to herein may be options issued by The Options Clearing
Corporation (the "Clearing Corporation") which are currently traded on the
Chicago Board Options Exchange, American Stock Exchange, Philadelphia Stock
Exchange, Pacific Stock Exchange or New York Stock Exchange. Options referred to
herein may also be options traded on foreign securities exchanges such as the
London Stock Exchange and the Amsterdam Stock Exchange. An option position may
be closed out only on an exchange which provides a secondary market for an
option of the same series. If a secondary market does not exist, it might not be
possible to effect closing transactions in particular options and the Fund may
be subject to exercise of the option under unfavorable circumstances. In the
case of a covered call option, the Fund will not be able to sell the underlying
security until the option expires or until it delivers the underlying security
upon exercise. Reasons for the absence of a liquid secondary market on an
exchange include the following: (i) there may be insufficient trading interest
in certain options; (ii) restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; (iii) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options or underlying securities; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the facilities
of an exchange or the Clearing Corporation may not at all times be adequate to
handle current trading volume; or (vi) one or more exchanges could, for economic
or other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that exchange (or in that class or series of options)
would cease to exist, although outstanding options on that exchange that had
been issued by the Clearing Corporation as a result of trades on that exchange
would continue to be exercisable in accordance with their terms. The Fund will
enter into transactions in options on debt securities only when the management
of the Fund believes that a liquid secondary market for such options is
available. See Appendix A "Interest Rate Futures, Options Thereon and Options on
Debt Securities" attached hereto.

Exchanges generally introduce options series on specific issues of U.S.
Treasury bonds and notes as such securities are issued. Such Exchanges, however,
do not ordinarily introduce new series of options on such issues to replace
expiring series inasmuch as trading interest tends to center on the most
recently auctioned issues of Treasury bonds and notes. Consequently, options
representing a full range of expirations will not usually be available for every
issue on which options are traded.

Other Portfolio Strategies

The Fund may engage in the additional portfolio strategies described below.

Repurchase Agreements -- The Fund may invest in repurchase agreements.
Repurchase agreements may be entered into only with a member bank of the Federal
Reserve System or primary dealer in U.S. government securities or an affiliate
thereof. Under such agreements, the seller agrees, upon entering into the
contract, to repurchase the security at a mutually agreed-upon time and price,
thereby determining the yield during the term of the agreement. This results in
a fixed rate of return for the Fund insulated from market fluctuations during
such period. Such agreements usually cover short periods, such as under one
week. Repurchase agreements may be

6
<PAGE>

construed to be collateralized loans by the purchaser to the seller secured by
the securities transferred to the purchaser. The Fund will require the seller to
provide additional collateral if the market value of the securities falls below
the repurchase price at any time during the term of the repurchase agreement. In
the event of default by the seller under a repurchase agreement construed to be
a collateralized loan, the underlying securities are not owned by the Fund but
only constitute collateral for the seller's obligation to pay the repurchase
price. Therefore, the Fund may suffer time delays and incur costs or possible
losses in connection with the disposition of the collateral. Instead of the
contractual fixed rate of return, the rate of return to the Fund will be
dependent upon intervening fluctuations of the market value of such security and
the accrued interest on the security. In such event, the Fund would have rights
against the seller for breach of contract with respect to any losses arising
from market fluctuations following the failure of the seller to perform. From
time to time, the Fund also may invest in securities pursuant to purchase and
sale contracts. While the substance of purchase and sale contracts is similar to
repurchase agreements, because of the different treatment with respect to
accrued interest and additional collateral, management believes that purchase
and sale contracts are not repurchase agreements as such term is understood in
the banking and brokerage community. As a matter of operating policy, the Fund
will not enter into repurchase agreements or purchase and sale contracts with
greater than seven days to maturity if, at the time of such investment, more
than 15% of the total assets of the Fund would be so invested.

Forward Commitments -- The Fund may purchase securities on a when-issued
basis or forward commitment basis, and may purchase or sell securities for
delayed delivery. These transactions occur when securities are purchased or sold
by the Fund with payment and delivery taking place in the future to secure what
is considered an advantageous yield and price to the Fund at the time of
entering into the transaction. The value of the security on the delivery date
may be more or less than its purchase price. The Fund will establish a
segregated account in connection with such transactions in which the Fund will
deposit liquid securities with a value at least equal to the Fund's exposure, on
a mark-to-market basis, to the transaction (as calculated pursuant to
requirements of the Commission). Such segregation will ensure that the Fund has
assets available to satisfy its obligations with respect to the transaction, but
will not limit the Fund's exposure to loss).

U.S. Government securities and corporate debt obligations may be purchased
on a forward commitment basis at fixed purchase terms with periods of up to 45
days between the commitment and settlement dates. The purchase will be recorded
on the date the Fund enters into the commitment and the value of the security
will thereafter be reflected in the calculation of the Fund's net asset value.
Although the Fund will generally enter into forward commitments with the
intention of acquiring securities for its portfolio, the Fund may dispose of a
commitment prior to settlement if the Investment Adviser deems it appropriate to
do so. There can, of course, be no assurance that the judgments upon which these
techniques are based will be accurate or that such techniques when applied will
be effective. The Fund will enter into forward commitment arrangements only with
respect to securities in which it may otherwise invest pursuant to its
investment objectives and policies.

Illiquid and Restricted Securities -- The Fund may invest up to 15% of its
net assets in securities that lack an established secondary trading market or
otherwise are considered illiquid. Liquidity of a security relates to the
ability to dispose easily of the security and the price to be obtained upon
disposition of the security, which may be less than would be obtained for a
comparable more liquid security. Illiquid securities may trade at a discount
from comparable, more liquid investments. Investment of the Fund's assets in
illiquid securities may restrict the ability of the Fund to dispose of its
investments in a timely fashion and for a fair price as well as its ability to
take advantage of market opportunities. The risks associated with illiquidity
will be particularly acute where the Fund's operations require cash, such as
when the Fund redeems shares or pays dividends, and could result in the Fund
borrowing to meet short-term cash requirements or incurring capital losses on
the sale of illiquid investments.

The Fund may invest in securities that are not registered ("restricted
securities") under the Securities Act of 1933, as amended (the "Securities
Act"). Restricted securities may be sold in private placement transactions
between the issuers and their purchasers and may be neither listed on an
exchange nor traded in other established markets. In many cases, privately
placed securities may not be freely transferable under the laws of the
applicable jurisdiction or due to contractual restrictions on resale. As a
result of the absence of a public trading market, privately placed securities
may be less liquid and more difficult to value than publicly traded securities.
To the extent that privately placed securities may be resold in privately
negotiated transactions, the prices realized from the sales, due to illiquidity,
could be less than those originally paid by the Fund or less than their fair
market

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<PAGE>

value. In addition, issuers whose securities are not publicly traded may
not be subject to the disclosure and other investors protection requirements
that may be applicable if their securities were publicly traded. If any
privately placed securities held by the Fund are required to be registered under
the securities laws of one or more jurisdictions before being resold, the Fund
may be required to bear the expenses of registration. Certain of the Fund's
investments in private placements may consist of direct investments and may
include investments in smaller, less-seasoned issuers, which may involve greater
risks. These issuers may have limited product lines, markets or financial
resources, or they may be dependent on a limited management group. In making
investments in such securities, the Fund may obtain access to material nonpublic
information which may restrict the Fund's ability to conduct portfolio
transactions in such securities.

The Fund may purchase restricted securities that can be offered and sold to
"qualified institutional buyers" under Rule 144A under the Securities Act.The
Board of Directors has determined to treat as liquid Rule 144A securities that
are either (i) freely tradable in their primary markets offshore or (ii)
non-investment grade debt securities which the Manager determines are as liquid
as publicly-registered non-investment grade debt securities. The Board of
Directors has adopted guidelines and delegated to the Manager the daily function
of determining and monitoring liquidity of restricted securities. The Board of
Directors, however, will retain sufficient oversight and be ultimately
responsible for the determinations. Since it is not possible to predict with
assurance exactly how this market for restricted securities sold and offered
under Rule 144A will continue to develop, the Board of Directors will carefully
monitor the Fund's investments in these securities. This investment practice
could have the effect of increasing the level of illiquidity in the Fund to the
extent that qualified institutional buyers become for a time uninterested in
purchasing these securities.

Standby Commitment Agreements -- The Fund may from time to time enter into
standby commitment agreements. Such agreements commit the Fund, for a stated
period of time, to purchase a stated amount of a fixed-income security, which
may be issued and sold to the Fund at the option of the issuer. The price and
coupon of the security is fixed at the time of the commitment. At the time of
entering into the agreement, the Fund may be paid a commitment fee, regardless
of whether or not the security is ultimately issued, which is typically
approximately 0.5% of the aggregate purchase price of the security which the
Fund has committed to purchase. The Fund will enter into such agreements only
for the purpose of investing in the security underlying the commitment at a
yield and price which is considered advantageous to the Fund. The Fund will not
enter into a standby commitment with a remaining term in excess of 45 days and
will limit its investment in such commitments so that the aggregate purchase
price of the securities subject to such commitments, together with the value of
portfolio securities subject to legal restrictions on resale, will not exceed
15% of its assets taken at the time of acquisition of such commitment or
security. The Fund will at all times maintain a segregated account with its
custodian of cash or liquid securities in an amount equal to the purchase price
of the securities underlying the commitment.

There can be no assurance that the securities subject to a standby
commitment will be issued and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since the issuance of
the security underlying the commitment is at the option of the issuer, the Fund
may bear the risk of a decline in the value of such security and may not benefit
from an appreciation in the value of the security during the commitment period.

The purchase of a security subject to a standby commitment agreement and
the related commitment fee will be recorded on the date on which the security
can reasonably be expected to be issued and the value of the security will
thereafter be reflected in the calculation of the Fund's net asset value. The
cost basis of the security will be adjusted by the amount of the commitment fee.
In the event the security is not issued, the commitment fee will be recorded as
income on the expiration date of the standby commitment.

Lending of Portfolio Securities -- Subject to investment restriction (5) in
the Investment Restriction section on page 14, the Fund from time to time may
lend securities from its portfolio to brokers, dealers and financial
institutions and receive as collateral cash or U.S. Treasury securities which at
all times while the loan is outstanding will be maintained in amounts equal to
at least 100% of the current market value of the loaned securities. The Fund and
the Borrower negotiate a rate for the loan premium. Any cash collateral will be
invested in short-term securities. Such loans, which will not have terms longer
than 30 days, will be terminable at any time. The Fund will have the right to
regain record ownership of loaned securities to exercise beneficial rights

8
<PAGE>

such as voting rights, subscription rights and rights of dividends, interest or
other distributions. The Fund may pay reasonable fees to persons unaffiliated
with the Fund for services in arranging such loans. In the event of a default by
the borrower, the Fund may suffer time delays and incur costs or possible losses
in connection with the disposition of the collateral.

RISK FACTORS AND SPECIAL CONSIDERATIONS

Risk Factors in Transactions in Junk Bonds

Junk bonds are regarded as being predominantly speculative as to the
issuer's ability to make payments of principal and interest. Investment in such
securities involves substantial risk. Issuers of junk bonds may be highly
leveraged and may not have available to them more traditional methods of
financing. Therefore, the risks associated with acquiring the securities of such
issuers generally are greater than is the case with higher rated securities. For
example, during an economic downturn or a sustained period of rising interest
rates, issuers of junk bonds may be more likely to experience financial stress,
especially if such issuers are highly leveraged. In addition, the market for
junk bonds is relatively new and has not weathered a major economic recession,
and it is unknown what effects such a recession might have on such securities.
During such periods, such issuers may not have sufficient revenues to meet their
interest payment obligations. The issuer's ability to service its debt
obligations also may be adversely affected by specific issuer developments, or
the issuer's inability to meet specific projected business forecasts, or the
unavailability of additional financing. The risk of loss due to default by the
issuer is significantly greater for the holders of junk bonds because such
securities may be unsecured and may be subordinated to other creditors of the
issuer. While most of the junk bonds in which the Fund may invest do not include
securities that, at the time of investment, are in default or the issuers of
which are in bankruptcy, there can be no assurance that such events will not
occur after the Fund purchases a particular security, in which case the Fund may
experience losses and incur costs.

Junk bonds frequently have call or redemption features that would permit an
issuer to repurchase the security from the Fund. If a call were exercised by the
issuer during a period of declining interest rates, the Fund likely would have
to replace such called security with a lower yielding security, thus decreasing
the net investment income to the Fund and dividends to shareholders.

Junk bonds tend to be more volatile than higher rated fixed-income
securities, so that adverse economic events may have a greater impact on the
prices of junk bonds than on higher rated fixed-income securities. Like higher
rated fixed-income securities, junk bonds are generally purchased and sold
through dealers who make a market in such securities for their own accounts.
However, there are fewer dealers in the junk bond market, which may be less
liquid than the market for higher rated fixed-income securities, even under
normal economic conditions. Also, there may be significant disparities in the
prices quoted for junk bonds by various dealers.

Adverse economic conditions or investor perceptions (whether or not based
on economic fundamentals) may impair the liquidity of this market, and may cause
the prices the Fund receives for its junk bonds to be reduced, or the Fund may
experience difficulty in liquidating a portion of its portfolio when necessary
to meet the Fund's liquidity needs or in response to a specific economic event
such as a deterioration in the creditworthiness of the issuer. Under such
conditions, judgment may play a greater role in valuing certain of the Fund's
portfolio securities than in the case of securities trading in a more liquid
market. Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of junk bonds,
particularly in a thinly traded market. Factors adversely affecting the market
value of such securities are likely to affect adversely the Fund's net asset
value. In addition, the Fund may incur additional expenses to the extent that it
is required to seek recovery upon a default on a portfolio holding or to
participate in the restructuring of the obligation.

Risk Factors in Transactions in Distressed Securities

Investment in Distressed Securities involves significant risk. Distressed
Securities frequently do not produce income while they are outstanding and may
require the Fund to bear certain extraordinary expenses in order to protect and
recover its investment. Therefore, to the extent the Fund pursues its secondary
objective of capital appreciation through investment in Distressed Securities,
the Fund's ability to achieve current income for its shareholders may be
diminished. The Fund will only make such investments when the Investment Adviser

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<PAGE>

believes it is reasonably likely that the issuer of the securities will make an
exchange offer or will be the subject of a bankruptcy plan of reorganization;
however, there can be no assurance that such an exchange offer will be made or
that such a plan of reorganization will be adopted. In addition, a significant
period of time may pass between the time at which the Fund makes its investment
in Distressed Securities and the time that any such exchange offer or plan of
reorganization is completed. During this period, it is unlikely that the Fund
will receive any interest payments on the Distressed Securities, the Fund will
be subject to significant uncertainty as to whether or not the exchange offer or
plan of reorganization will be completed, and the Fund may be required to bear
certain expenses to protect its interest in the course of negotiations
surrounding any potential exchange offer or plan of reorganization. In addition,
even if an exchange offer is made or a plan of reorganization is adopted with
respect to Distressed Securities held by the Fund, there can be no assurance
that the securities or other assets received by the Fund in connection with such
exchange offer or plan of reorganization will not have a lower value or income
potential than anticipated when the investment was made. Moreover, any
securities received by the Fund upon completion of an exchange offer or plan of
reorganization may be restricted as to resale. In addition, as a result of the
Fund's participation in negotiations with respect to any exchange offer or plan
of reorganization with respect to an issue of Distressed Securities, the Fund
may be precluded from disposing of such securities.

Risk Factors in Transactions in Corporate Loans

As in the case of junk bonds, the Corporate Loans in which the Fund may
invest can be expected to provide higher yields than higher-rated fixed income
securities but may be subject to greater risk of loss of principal and income.
There are, however, some significant differences between Corporate Loans and
junk bonds. Corporate Loans are frequently secured by pledges of liens and
security interests in the assets of the borrower, and the holders of Corporate
Loans are frequently the beneficiaries of debt service subordination provisions
imposed on the borrower's bondholders. These arrangements are designed to give
Corporate Loan investors preferential treatment over junk bond investors in the
event of a deterioration in the credit quality of the issuer. Even when these
arrangements exist, however, there can be no assurance that the principal and
interest owed on the Corporate Loans will be repaid in full. Corporate Loans
generally bear interest at rates set at a margin above a generally recognized
base lending rate that may fluctuate on a day-to-day basis, in the case of the
Prime Rate of a U.S. bank, or that may be adjusted on set dates, typically 30
days but generally not more than one year, in the case of the London Interbank
Offered Rate ("LIBOR"). Consequently, the value of Corporate Loans held by the
Fund may be expected to fluctuate significantly less than the value of fixed
rate junk bond instruments as a result of changes in the interest rate
environment. On the other hand, the secondary dealer market for Corporate Loans
is not as well developed as the secondary dealer market for junk bonds, and
therefore presents increased market risk relating to liquidity and pricing
concerns.

The Fund may acquire interests in Corporate Loans by means of a novation,
assignment or participation. In a novation, the Fund would succeed to all the
rights and obligations of the assigning institution and become a contracting
party under the credit agreement with respect to the debt obligation. As an
alternative, the Fund may purchase an assignment, in which case the Fund may be
required to rely on the assigning institution to demand payment and enforce its
rights against the borrower but would otherwise typically be entitled to all of
such assigning institution's rights under the credit agreement. Participation
interests in a portion of a debt obligation typically result in a contractual
relationship only with the institution participating out the interest and not
with the borrower. In purchasing a loan participation, the Fund generally will
have no right to enforce compliance by the borrower with the terms of the loan
agreement, nor any rights of set-off against the borrower, and the Fund may not
directly benefit from the collateral supporting the debt obligation in which it
has purchased the participation. As a result, the Fund will assume the credit
risk of both the borrower and the institution selling the participation to the
Fund.

Risk Factors in Transactions in Foreign Securities

Foreign Markets Risk -- Foreign investments involve special risks not
present in U.S. investments that can increase the chances that the Fund will
lose money. In particular, investment in foreign securities involves the
following risks, which are generally greater for investments in emerging
markets. The economies of certain foreign markets often do not compare favorably
with that of the U.S. in areas such as growth of gross national product,
reinvestment of capital, resources and balance of payments. Some of these
economies may rely heavily

10
<PAGE>

on particular industries or foreign capital and are more vulnerable to
diplomatic developments, the imposition of economic sanctions against a
particular country or countries, changes in international trading patterns,
trade barriers, and other protectionist or retaliatory measures. Investments in
foreign markets may be adversely affected by governmental actions such as the
imposition of capital controls, nationalization of companies or industries,
expropriation of assets, or the imposition of punitive taxes. The governments of
certain countries may prohibit or impose substantial restrictions on foreign
investing in their capital markets or in certain industries. Any of these
actions could severely affect security prices, impair the Fund's ability to
purchase or sell foreign securities or transfer its assets or income back into
the U.S., or otherwise adversely affect the Fund's operations. Other foreign
market risks include foreign exchange controls, difficulties in pricing
securities, defaults on foreign government securities, difficulties in enforcing
favorable legal judgments in foreign courts, and political and social
instability. Legal remedies available to investors in certain foreign countries
may be less extensive than those available to investors in the U.S. or other
foreign countries. Because there are fewer investors in foreign markets and a
smaller number of securities traded each day, it may be difficult for the Fund
to buy and sell securities on those markets. Non-U.S. markets have different
clearance and settlement procedures, and in certain markets settlements may be
unable to keep pace with the volume of securities transactions which may cause
delays. This means that the Fund's assets may be uninvested and not earning
returns. The Fund may miss investment opportunities or be unable to dispose of a
security because of these delays.

Emerging Markets Risk -- The risks of foreign investments are usually much
greater for emerging markets. Investments in emerging markets may be considered
speculative. Emerging markets include those in countries defined as emerging or
developing by the World Bank, the International Finance Corporation, or the
United Nations. Emerging markets are riskier because they develop unevenly and
may never fully develop. They are more likely to experience hyperinflation and
currency devaluations, which adversely affects returns to U.S. investors. In
addition, the securities markets in many of these countries have far lower
trading volumes and less liquidity than developed markets. Since these markets
are so small, they may be more likely to suffer sharp and frequent price changes
or long-term price depression because of adverse publicity, investor
perceptions, or the actions of a few large investors. In addition, traditional
measures of investment value used in the United States, such as price to
earnings ratios, may not apply to certain small markets.

Many emerging markets have histories of political instability and abrupt
changes in policies. As a result, their governments are more likely to take
actions that are hostile or detrimental to private enterprise or foreign
investment than those of more developed countries. Certain emerging markets may
also face other significant internal or external risks, including the risk of
war, and ethnic, religious, and racial conflicts. In addition, governments in
many emerging market countries participate to a significant degree in their
economies and securities markets, which may impair investment and economic
growth.

Sovereign Debt -- The Fund may invest in sovereign debt securities issued
or guaranteed by foreign government entities. Investments in sovereign debt
subjects the Fund to a higher degree of risk that a government entity may delay
or refuse payment of interest or repayment of principal on its sovereign debt. A
government may fail to make payment for many reasons including cash flow
problems, lack of foreign exchange, political constraints, the relative size of
its debt positions to its economy or its failure to put in place economic
reforms required by the International Monetary Fund or other multilateral
agencies as a condition to their contributions to the government entity. If a
government entity fails to make its payments, the Fund may be requested to
extend the period in which the government entity must pay and to make further
loans to the government entity. There is no bankruptcy proceeding by which all
or part of sovereign debt that a government entity has not repaid may be
collected.

Governmental Supervision and Regulation/Accounting Standards -- Many
foreign governments supervise and regulate brokers and the sale of securities
less than the United States does. Other countries may not have laws to protect
investors the way that the U.S. securities laws do. For example, some foreign
countries may have no laws or rules against insider trading. Insider trading
occurs when a person buys or sells a company's securities based on non-public
information about that company. Accounting standards in other countries are not
necessarily the same as in the United States. If the accounting standards in
another country do not require as much detail as U.S. accounting standards, it
may be harder for Fund management to completely and accurately determine a
company's financial condition. Also brokerage commissions and other costs of
buying or selling securities often

11
<PAGE>

are higher in foreign countries than they are in the United States. This reduces
the amount the Fund can earn on its investments.

Settlement and clearance procedures in certain foreign markets differ
significantly from those in the United States. Foreign settlement and clearance
procedures and trade regulations also may involve certain risks (such as delays
in payment for or delivery of securities) not typically involved with the
settlement of U.S. investments. Communications between the United States and
emerging market countries may be unreliable, increasing the risk of delayed
settlements or losses of security certificates. Settlements in certain foreign
countries at times have not kept pace with the number of securities
transactions; these problems may make it difficult for the Fund to carry out
transactions. If the Fund cannot settle or is delayed in settling a purchase of
securities, it may miss attractive investment opportunities and certain of its
assets may be uninvested with no return earned for some period. If the Fund
cannot settle or is delayed in settling a sale of securities, it may lose money
if the value of the security then declines or, if it has contracted to sell the
security to another party, the Fund could be liable to that party for any losses
incurred.

Dividends or interest on, or proceeds from sales of, foreign securities may
be subject to foreign withholding taxes, and special U.S. tax considerations may
apply.

European Economic and Monetary Union ("EMU") -- For a number of years,
certain European countries have been seeking economic unification that would,
among other things, reduce barriers between countries, increase competition
among companies, reduce government subsidies in certain industries, and reduce
or eliminate currency fluctuations among these European countries. The Treaty on
European Union (the "Maastricht Treaty") seeks to set out a framework for the
European Economic and Monetary Union ("EMU") among the countries that comprise
the European Union ("EU"). Among other things, EMU establishes a single common
European currency (the "euro") that was introduced on January 1, 1999 and is
expected to replace the existing national currencies of all EMU participants by
July 1, 2002. EMU took effect for the initial EMU participants as of January 1,
1999. Upon implementation of EMU, certain securities issued in participating EU
countries (beginning with government and corporate bonds) were redenominated in
the euro, and will now be listed, traded, and make dividend and other payments
only in euros.

Because any participating country may opt out of EMU within the first three
years, it is also possible that a significant participant could choose to
abandon EMU, which could diminish its credibility and influence. Any of these
occurrences could have adverse effects on the markets of both participating and
non-participating countries, including sharp appreciation or depreciation of
participants' national currencies and a significant increase in exchange rate
volatility, a resurgence in economic protectionism, an undermining of confidence
in the European markets, an undermining of European economic stability, the
collapse or slowdown of the drive toward European economic unity, and/or
reversion of the attempts to lower government debt and inflation rates that were
introduced in anticipation of EMU. Also, withdrawal from EMU by an initial
participant could cause disruption of the financial markets as securities
redenominated in euros are transferred back into that country's national
currency, particularly if the withdrawing country is a major economic power.
Such developments could have an adverse impact on a Portfolio's investments in
Europe generally or in specific countries participating in EMU. Gains or losses
from euro conversion may be taxable to Portfolio shareholders under foreign or,
in certain limited circumstances, U.S. tax laws.

12
<PAGE>

Risk Factors in Transactions in Futures and Options Thereon

Use of futures and options on futures for hedging purposes involves the
risk of imperfect correlation in movements in the value of the futures contracts
and the value of the fixed-income securities being hedged. An increase or
decrease in the general level of interest rates can generally be expected to
have a broadly similar effect on the market value of government securities on
which futures contracts are based and on the market value of the corporate
fixed-income securities in which the Fund will primarily invest, but it is
unlikely that the changes in value of government securities and corporate
fixed-income securities will be perfectly correlated. In addition, disparities
in the average maturity of the Fund's investments compared to a financial
instrument on which a futures contract is based may also affect the correlation
of price movements. If the value of the futures contract moves more or less than
the value of the hedged corporate fixed-income securities that the Fund owns or
anticipates purchasing, the Fund will experience a gain or loss that will not be
completely offset by movements in the value of the hedged fixed-income
securities. To compensate for imperfect correlations, the Fund may purchase or
sell options or futures contracts in a greater dollar amount than the hedged
securities if the volatility of the hedged securities is historically greater
than the volatility of the futures contracts. Conversely, the Fund may purchase
or sell fewer futures contracts if the volatility of the price of the hedged
securities is historically less than that of the futures contracts, although
such transactions will in any event be entered into solely for hedging purposes.

The Fund may also purchase futures contracts or options thereon to hedge
against a possible increase in the price of securities before the Fund is able
to invest its cash in fixed-income securities. In such instances, it is possible
that the market may instead decline. If the Fund does not then invest in such
securities because of concern as to possible further market decline or for other
reasons, the Fund may realize a loss on the futures or option contract that is
not offset by a reduction in the price of securities purchased.

Because of low initial margin deposits made upon the opening of a futures
position, futures transactions involve substantial leverage. As a result,
relatively small movements in the price of the futures contract can result in
substantial unrealized gains or losses. Because the Fund will engage in the
purchase and sale of financial futures contracts solely for hedging purposes,
however, any losses incurred in connection therewith should, if the hedging
strategy is successful, be offset in whole or in part by increases in the value
of securities held by the Fund or decreases in the price of securities the Fund
intends to acquire.

The anticipated offsetting movements between the price of the futures or
option contracts and the hedged security may be distorted due to differences in
the nature of the markets, such as differences in initial and variation margin
requirements, the liquidity of such markets and the participation of speculators
in such markets.

The amount of risk the Fund assumes when it purchases an option on a
futures contract is the premium paid for the option plus related transaction
costs. In order to profit from an option purchased, however, it may be necessary
to exercise the option and to liquidate the underlying futures contract, subject
to the risks of the availability of a liquid offset market. In addition to the
correlation risks discussed above, the purchase of an option also entails the
risk that changes in the value of the underlying futures contract will not be
fully reflected in the value of the option purchased. The writer of an option on
a futures contract is subject to the risks of commodity futures trading,
including the requirement of variation margin payments, as well as the
additional risk that movements in the price of the option may not correlate with
movements in the price of the underlying security or futures contract.

"Trading Limits" may also be imposed on the maximum number of contracts
which any person may trade on a particular trading day. A contract market may
order the liquidation of positions found to be in violation of these limits and
it may impose other sanctions or restrictions. The Investment Adviser does not
believe that trading limits will have any adverse impact on the portfolio
strategies for hedging the Fund's investments.

The trading of futures contracts and options thereon also is subject to
certain market risks, such as trading halts, suspensions, exchange or clearing
house equipment failures, government intervention, insolvency of a brokerage
firm or clearing corporation or other disruptions of normal trading activity,
which could at times make it difficult or impossible to liquidate existing
positions.

13
<PAGE>

The successful use of transactions in futures contracts and options thereon
also depends on the ability of the management of the Fund correctly to forecast
the direction and extent of interest rate movements within a given time frame.
To the extent interest rates remain stable during the period in which a futures
contract or option is held by the Fund or such rates move in a direction
opposite to that anticipated, the Fund may realize a loss on the hedging
transaction which is not fully or partially offset by an increase in the value
of portfolio securities. As a result, the Fund's total return for such period
may be less than if it had not engaged in the hedging transaction.

The Fund has obtained an order from the Commission exempting it from
certain provisions of the Investment Company Act of 1940 (the "Investment
Company Act") in connection with its transactions in interest rate futures
contracts and related options. In applying for this exemptive order, the Fund
made a number of representations to the Commission regarding the manner in which
such trading will be conducted.

INVESTMENT RESTRICTIONS

The Fund has adopted the following fundamental and non-fundamental
restrictions and policies relating to the investment of its assets and its
activities. The fundamental policies set forth below may not be changed without
the approval of the holders of a majority of the Fund's outstanding voting
securities, (which for this purpose and under the Investment Company Act means
the lesser of (i) 67% of the shares represented at a meeting at which more than
50% of the outstanding shares are represented or (ii) more than 50% of the
outstanding shares).

Under the fundamental investment restrictions, the Fund may not:

1. Make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act.

2. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).

3. Make investments for the purpose of exercising control or management.

4. Purchase or sell real estate, except that, to the extent permitted by
applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.

5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers' acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Fund's Prospectus and
Statement of Additional Information, as they may be amended from time to
time. (For purposes of this restriction, corporate debt securities includes
corporate loans purchased in the secondary market).

6. Issue senior securities to the extent such issuance would violate
applicable law.

7. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its total
assets (including the amount borrowed), (ii) the Fund may borrow up to an
additional 5% of its total assets for temporary purposes, (iii) the Fund may
obtain such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities, and (iv) the Fund may purchase
securities on margin to the extent permitted by applicable law. The Fund may
not pledge its assets other than to secure such borrowings or, to the extent
permitted by the Fund's investment policies as set forth in its Prospectus
and Statement of Additional Information, as they may be amended from time to
time, in connection with hedging transactions, short sales, when-issued and
forward commitment transactions and similar investment strategies.

8. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933, as
amended, (the "Securities Act") in selling portfolio securities.

14
<PAGE>

9. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and the
Fund's Prospectus and Statement of Additional Information, as they may be
amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.

Under the non-fundamental investment restrictions, which may be changed by
the Board of Directors without shareholder approval, the Fund may not:

a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law. As a matter of policy,
however, the Fund will not purchase shares of any registered open-end
investment company or registered unit investment trust, in reliance on
Section 12(d)(1)(F) or (G) (the "fund of funds" provisions) of the Investment
Company Act at any time the Fund's shares are owned by another investment
company that is part of the same group of investment companies as the Fund.

b. Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law. The Fund currently does not intend
to engage in short sales, except short sales "against the box."

c. Invest in securities which cannot be readily resold because of legal
or contractual restrictions or which cannot otherwise be marketed, redeemed
or put to the issuer or a third party, if at the time of acquisition more
than 15% of its total assets would be invested in such securities. This
restriction shall not apply to securities which mature within seven days or
securities which the Board of Directors of the Fund have otherwise determined
to be liquid pursuant to applicable law. Securities purchased in accordance
with Rule 144A under the Securities Act (a "Rule 144A Security") and
determined to be liquid by the Fund's Board of Directors are not subject to
the limitations set forth in this investment restriction.

d. Notwithstanding fundamental investment restriction (7) above, the
Fund will not borrow amounts in excess of 5% of its total assets taken at
market value, and then only from banks as a temporary measure for
extraordinary or emergency purposes such as the redemption of Fund shares. In
addition, the Fund will not purchase securities while borrowings are
outstanding.

In addition, to comply with tax requirements for qualification as a
"regulated investment company," the Fund's investments will be limited in a
manner such that, at the close of each quarter of each fiscal year, (a) no more
than 25% of the Fund's total assets are invested in the securities of a single
issuer, and (b) with regard to at least 50% of the Fund's total assets, no more
than 5% of its total assets are invested in the securities of a single issuer.
These tax-related limitations may be changed by the Board of Directors of the
Fund to the extent necessary to comply with changes to the Federal tax
requirements.

Because of the affiliation of Merrill Lynch with the Investment Adviser,
the Fund is prohibited from engaging in certain transactions involving Merrill
Lynch or its affiliates except for brokerage transactions permitted under the
Investment Company Act involving only usual and customary commissions or
transactions pursuant to an exemptive order under the Investment Company Act.
Included among such prohibited transactions are (i) purchases from and sales to
Merrill Lynch of securities in transactions where Merrill Lynch acts as
principal and (ii) purchases of securities from underwriting syndicates of which
Merrill Lynch is a member. See "Portfolio Transactions and Brokerage."

MANAGEMENT OF THE FUND

Directors and Officers

The Directors of the Fund consist of seven individuals, five of whom are
"non-affiliated" persons of the Fund as defined in the Investment Company Act.
The Directors of the Fund are responsible for the overall supervision of the
operations of the Fund and perform the various duties imposed on the directors
of investment companies by the Investment Company Act. The Board of Directors
elects officers of the Fund annually.

The Directors and officers of the Fund, their ages, principal occupations
for at least the last five years and the public companies for which they serve
as directors are set forth on the next page. Unless otherwise stated, the
address of each director and officer is P.O. Box 9011, Princeton, New Jersey
08540-9011.

15
<PAGE>

TERRY K. GLENN (58) -- President and Director (1)(2) -- Executive Vice
President of the Investment Adviser and MLAM since 1983; Executive Vice
President and Director of Princeton Services since 1993; President of the
Merrill Lynch Funds Distributor, Inc. (the "Distributor") since 1986 and
Director thereof since 1991; President of Princeton Administrators, L.P. since
1988.

RONALD W. FORBES (58) -- Director (2) -- 1400 Washington Avenue, Albany,
New York 12222. Associate Professor of Finance, School of Business, State
University of New York at Albany since 1989. Consultant, Urban Institute,
Washington, D.C. since 1995.

CYNTHIA A. MONTGOMERY (47) -- Director (2) -- Harvard Business School,
Soldiers Field Road, Boston, Massachusetts 02613. Professor, Harvard Business
School, since 1989; Associate Professor, J.L. Kellogg Graduate School of
Management, Northwestern University from 1985 to 1989; Assistant Professor,
Graduate School of Business Administration, The University of Michigan from 1979
to 1985; Director, of UNUM Corporation since 1990 and Director of Newell Co.
since 1995.

CHARLES C. REILLY (68) -- Director (2) -- 9 Hampton Harbor Road, Hampton
Bays, New York 11946. Self-employed financial consultant since 1990; President
and Chief Investment Officer of Verus Capital, Inc. from 1979 to 1990; Senior
Vice President of Arnold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business from 1990 to 1991;
Adjunct Professor, Wharton School, The University of Pennsylvania from 1989 to
1990; Partner, Small Cities Cable Television from 1986 to 1997.

KEVIN A. RYAN (66) -- Director (2) -- 127 Commonwealth Avenue, Chestnut
Hill, Massachusetts 02167. Founder and current Director of The Boston University
Center for Advancement of Ethics and Character; Professor of Education at Boston
University since 1982; formerly taught on the faculties of the University of
Chicago, Stanford University and Ohio State University.

RICHARD R. WEST (61) -- Director (2) -- Box 604, Genoa, Nevada 89411.
Professor of Finance since 1984, and Dean from 1984 to 1993, and currently Dean
Emeritus of New York University, Leonard N. Stern School of Business
Administration; Director of Bowne & Co., Inc., Vornado Realty Trust, Inc. (real
estate holding company), and Alexander's Inc. (real estate company).

ARTHUR ZEIKEL (67) -- Director (1) -- 800 Scudders Mill Road, Plainsboro,
NJ 08536. Chairman of MLAM and FAM from 1997 to 1999; President of MLAM and FAM
from 1977 to 1997; Chairman of Princeton Services from 1997 to 1999 and Director
thereof from 1993 to 1999; President of Princeton Services from 1993 to 1997;
Executive Vice President of ML& Co. from 1990 to 1999.

JOSEPH T. MONAGLE, JR. (51) -- Senior Vice President (1)(2) -- Senior Vice
President of the Investment Adviser and MLAM since 1990; Department Head of the
Global Fixed Income Division of the Investment Adviser and MLAM since 1997;
Senior Vice President of Princeton Services since 1993.

VINCENT T. LATHBURY, III (59) -- Senior Vice President and Portfolio
Manager (1)(2) -- First Vice President of MLAM since 1997; Vice President of
MLAM from 1982 to 1997; Portfolio Manager of the Investment Adviser and MLAM
since 1982.

ALDONA SCHWARTZ (50) -- Vice President and Portfolio Manager (1)(2) -- Vice
President of MLAM since 1990.

DONALD C. BURKE (39) -- Vice President and Treasurer (1)(2) -- Senior Vice
President and Treasurer of MLAM and FAM since 1999; First Vice President of MLAM
from 1997 to 1999; Vice President of MLAM from 1990 to 1997; Director of
Taxation of MLAM since 1990. Senior Vice President and Treasurer of Princeton
Services since 1999; Vice President of PFD since 1999.

WILLIAM E. ZITELLI, JR. (31) -- Secretary (1)(2) -- Attorney with MLAM
since 1998; Attorney associated with Pepper Hamilton, LLP from 1997 to 1998 and
with Reboul, MacMurray, Hewitt, Maynard &Kristol from 1994 to 1997.

- ------------
(1) Interested person, as defined in the Investment Company Act, of the Fund.

(2)The officers of the Fund are officers of certain other investment companies
for which the Investment Adviser or MLAM acts as investment adviser (see
"Investment Advisory Arrangements").

16
<PAGE>

As of June 30, 1999, the Directors and officers of the Fund as a group (12
persons) owned an aggregate of less than 1% of the outstanding shares of Common
Stock of ML & Co., and owned an aggregate of less than 1% of the outstanding
shares of the Fund.

Compensation of Directors

Pursuant to the terms of the Investment Advisory Agreement, the Investment
Adviser pays all compensation of officers and employees of the Fund as well as
the fees of all Directors of the Fund who are affiliated persons of the
Investment Adviser. The Fund pays each Director not affiliated with the
Investment Adviser (each a "non-affiliated Director") an annual fee of $3,000
plus a fee of $300 per meeting attended, together with such Director's actual
out-of-pocket expenses relating to attendance at meetings. The Fund also
compensates members of its Audit and Nominating Committee (the "Committee"),
which consists of all of the non-affiliated Directors, with a fee of $900 per
year. The principal purpose of the Committee is to review the scope of the
annual audit conducted by the Fund's independent auditors and the evaluation by
such auditors of the accounting procedures followed by the Fund. The Committee
will also select and nominate the Directors who are not "interested persons" of
the Fund within the meaning of the Investment Company Act. The Chairman of the
Audit Committee is paid an additional annual fee of $1,000.

The following table sets forth for the period May 1, 1998 (commencement of
operations) through March 31, 1999, compensation paid by the Fund to the
non-interested Directors and for the calendar year ended December 31, 1998, the
aggregate compensation paid by all investment companies (including the Fund)
advised by MLAM and its affiliate, FAM ("MLAM/FAM Advised Funds") to the
non-affiliated Directors:

Aggregate
Compensation
from Fund and
Pension or MLAM/FAM
Aggregate Retirement Benefit Advised Funds
Compensation Accrued as Part of Paid to
Director/Trustee from the Fund Fund Expense Trustee/Director(1)
- -------------- ------------- ----------------- -----------------
<S> <C> <C> <C>
Ronald W. Forbes .......................................... $5,300 None $192,567
Cynthia A. Montgomery ..................................... $5,300 None $192,567
Charles C. Reilly ......................................... $6,300 None $362,858
Kevin A. Ryan ............................................. $5,300 None $192,567
Richard R. West ........................................... $4,900 None $346,125

</TABLE>

- ---------------
(1)The Directors serve on the boards of MLAM/FAM Advised Funds as follows: Mr.
Forbes (38 registered investment companies consisting of 51 portfolios); Ms.
Montgomery (38 registered investment companies consisting of 51 portfolios);
Mr. Reilly (57 registered investment companies consisting of 70 portfolios);
Mr. Ryan (38 registered investment companies consisting of 51 portfolios);
and Mr. West (59 registered investment companies consisting of 83
portfolios).

Investment Advisory Arrangements

The Investment Adviser acts as the investment adviser for the Fund and
provides the Fund with management services. The Investment Adviser (the general
partner of which is Princeton Services, a wholly owned subsidiary of ML & Co.)
is itself a wholly owned affiliate of ML & Co. and has its principal place of
business at 800 Scudders Mill Road, Plainsboro, New Jersey 08536. ML & Co.,
which has its principal place of business at 250 Vesey Street, New York, New
York 10281, is a financial services firm.

The Investment Adviser has entered into a sub-advisory agreement (the
"Sub-Advisory Agreement") with Merrill Lynch Asset Management U.K.("MLAM U.K."),
an indirect, wholly owned subsidiary of ML & Co. and an affiliate of the
Investment Adviser, pursuant to which the Investment Adviser pays MLAM U.K. a
fee for providing investment advisory services to the Investment Adviser with
respect to the Fund in an amount to be determined from time to time by the
Investment Adviser and MLAM U.K. but in no event in excess of the amount that
the Investment Adviser actually receives for providing services to the Fund
pursuant to the Investment Advisory Agreement. The address of MLAM U.K. is
Milton Gate, 1 Moore Lane, London EC2Y 9MA, England.

The Investment Adviser is a limited partnership, the partners of which are
ML & Co. and Princeton Services. ML & Co. and Princeton Services are
"controlling persons" of the Investment Adviser as defined under the Investment
Company Act because of their ownership of its voting securities or their power
to exercise a controlling influence over its management or policies. Similarly,
the following entities may be considered "controlling persons" of MLAM U.K.:
Merrill Lynch Europe Limited (MLAM U.K.'s parent), a subsidiary of ML
International Holdings, a subsidiary of Merrill Lynch International, Inc., a
subsidiary of ML & Co.

17
<PAGE>

Vincent T. Lathbury III and Aldona Schwartz serve as the Portfolio Managers
of the Fund. They are primarily responsible for the day to day management of the
Fund. Mr. Lathbury has served as First Vice President of MLAM since 1997, Vice
President of MLAM from 1982 to 1997 and Portfolio Manager of the Investment
Adviser and MLAM since 1982. Ms. Schwartz has served as a Vice President and
Portfolio Manager of the Investment Adviser and MLAM since 1990.

While the Investment Adviser is at all times subject to the direction of
the Board of Directors of the Fund, the Investment Advisory Agreement provides
that the Investment Adviser, subject to review by the Board of Directors, is
responsible for the actual management of the Fund and has responsibility for
making decisions to buy, sell or hold any particular security. The Investment
Adviser provides the portfolio managers for the Fund, who consider information
from various sources, make the necessary investment decisions and effect
transactions accordingly. The Investment Adviser is also obligated to perform
certain administrative and management services for the Fund and is obligated to
provide all the office space, facilities, equipment and personnel necessary to
perform its duties under the Investment Advisory Agreement.

Securities held by the Fund may also be held by other funds for which the
Investment Adviser or MLAM acts as an adviser or by investment advisory clients
of MLAM. Because of different investment objectives or other factors, a
particular security may be bought for one or more clients when one or more
clients are selling the same security. If purchases or sales of securities for
the Fund or for other funds for which the Investment Adviser or MLAM acts as
investment adviser or for their advisory clients arise for consideration at or
about the same time, transactions in such securities will be made, insofar as
feasible, for the respective funds and clients in a manner deemed equitable to
all. To the extent that transactions on behalf of more than one client of the
Investment Adviser or MLAM during the same period may increase the demand for
securities being purchased or the supply of securities being sold, there may be
an adverse effect on price.

Advisory Fee. As compensation for its services to the Fund, the Investment
Adviser receives at the end of each month a fee at an annual rate equal to 0.60%
of the Fund's average daily net assets. For the period May 1, 1998 (commencement
of operations) to March 31, 1999, FAM received advisory fees from the Fund in
the amount of $2,515,345, of which $1,042,353 was waived voluntarily.

Payment of Expenses. The Investment Advisory Agreement obligates the
Investment Adviser to provide investment advisory services and to pay all
compensation of and furnish office space for officers and employees of the Fund
connected with economic research, investment research, trading and investment
management of the Fund, as well as the fees of all directors of the Fund who are
affiliated persons of ML & Co. or any of its subsidiaries. The Fund pays all
other expenses incurred in its operation and a portion of its general
administrative expenses. Expenses that will be borne directly by the Fund
include redemption expenses, expenses of portfolio transactions, shareholder
servicing costs, expenses of registering the shares under federal and state
securities laws, pricing costs (including the daily calculation of net asset
value), interest, certain taxes, charges of the Custodian and Transfer Agent and
legal expenses, state franchise taxes, auditing services, costs of printing
proxies, stock certificates, shareholder reports and prospectuses and statements
of additional information (except to the extent paid by the Distributor),
Commission fees, accounting costs, fees of the non-affiliated Directors, and
other expenses properly payable by the Fund. Accounting services are provided
for the Fund by the Investment Adviser and the Fund reimburses the Investment
Adviser for its costs in connection with such services. Depending upon the
nature of the lawsuit, litigation costs may be directly applicable to the Fund.
The Board of Directors of the Fund has determined that this is an appropriate
method of allocation of expenses. As required by the Distribution Agreement, the
Distributor will pay certain of the expenses of the Fund incurred in connection
with the offering of its shares including the expenses of printing the
prospectuses and statements of additional information used in connection with
the continuous offering of shares by the Fund.

Duration and Termination

Unless earlier terminated as described below, the Investment Advisory
Agreement will remain in effect for a period of two years from the date of
execution and thereafter will continue in effect from year to year if approved
annually (a) by the Board of Directors of the Fund or by a majority of the
outstanding shares of the Fund and (b) by a majority of the Directors who are
not parties to such contract or interested persons (as defined in the Investment
Company Act) of any such party. The agreement is not assignable and may be
terminated without penalty on 60 days' written notice at the option of either
party or by the vote of the shareholders of the Fund.

18
<PAGE>

Code of Ethics

The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-1 of the Investment Company Act which incorporates the Code of Ethics of the
Investment Adviser Act of 1940 (together, the "Codes"). The Codes significantly
restrict the personal investing activities of all employees of the Investment
Adviser and, as described below, impose additional, more onerous, restrictions
on fund investment personnel.

The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are designed
to identify any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Investment Adviser include a ban on acquiring any securities in a "hot" initial
public offering and a prohibition from profiting on short-term trading in
securities. In addition, no employee may purchase or sell any security which at
the time is being purchased or sold (as the case may be), or to the knowledge of
the employee is being considered for purchase or sale, by any fund advised by
the Investment Adviser. Furthermore, the Codes provide for trading "blackout
periods" which prohibit trading by investment personnel of the Fund within
periods of trading by the Fund in the same (or equivalent) security (15 or 30
days depending upon the transaction).

Transfer Agency Services Arrangements

The Transfer Agent, which is a subsidiary of ML & Co., acts as the Fund's
transfer agent pursuant to a Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement (the "Transfer Agency Agreement").
Pursuant to the Transfer Agency Agreement, the Transfer Agent is responsible for
the issuance, transfer and redemption of shares and the opening and maintenance
of shareholder accounts. Pursuant to the Transfer Agency Agreement, the Transfer
Agent receives an annual fee of $11.00 per Class A or Class D account and $14.00
per Class B or Class C account and is entitled to reimbursement for certain
transaction charges and out-of-pocket expenses incurred by the Transfer Agent
under the Transfer Agency Agreement. Additionally, a $.20 monthly closed account
charge will be assessed on all accounts that close during the calendar
year.Application of this fee will commence the month following the month the
account is closed. At the end of the calendar year, no further fees will be due.
For purposes of the Transfer Agency Agreement, the term "account" includes a
shareholder account maintained directly by the Transfer Agent and any other
account representing the beneficial interest of a person in the relevant share
class on a recordkeeping system, provided the recordkeeping system is maintained
by a subsidiary of ML& Co.

PURCHASE OF SHARES

Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in
the Prospectus. The Fund offers four classes of shares under the Merrill Lynch
Select Pricing(SM) System which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the amount
of the purchase, the length of the time the investor expects to hold the shares
and other relevant circumstances. Investors should determine whether under their
particular circumstances it is more advantageous to incur an initial sales
charge or to have the entire initial purchase price invested in the Fund with
the investment thereafter being subject to ongoing account maintenance and
distribution fees and a possible CDSC if shares are redeemed during the
applicable CDSC period. The shares of each class may be purchased at a price
equal to the next determined net asset value per share subject to the sales
charges and ongoing fee arrangements described below. Class A and Class D shares
are sold to investors choosing the initial sales charge alternatives and Class B
and Class C shares are sold to investors choosing the deferred sales charge
alternatives.

The Distributor, an affiliate of both the Investment Adviser and Merrill
Lynch, acts as the distributor of the shares. Shares may be purchased from the
Distributor or from other securities dealers, including Merrill Lynch, with whom
the Distributor has entered into selected dealer agreements. The minimum initial
purchase in the Fund is $1,000 and the minimum subsequent purchase in the Fund
is $50, except that for (i) retirement plans the minimum initial purchase in the
Fund is $100 and the minimum subsequent purchase is $1, and (ii) for
shareholders, who are participants in a Mutual Funds Adviser ("MFA") program
administered by Merrill Lynch, the minimum initial purchase is $250 and the
minimum subsequent purchase is $50. Merrill Lynch may charge its customers a
processing fee (currently $5.35) to confirm a sale of shares to such customers.
Purchases made directly through the Transfer Agent are not subject to the
processing fee.

19
<PAGE>

Each Class A, Class B, Class C and Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund, and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
contingent deferred sales charges ("CDSCs") and account maintenance fees that
are imposed on Class B and Class C shares, as well as the account maintenance
fees that are imposed on Class D shares, will be imposed directly against those
classes and not against all assets of the Fund, and, accordingly, such charges
will not affect the net asset value of any other class or have any impact on
investors choosing another sales charge option. Dividends paid by the Fund for
each class of shares will be calculated in the same manner at the same time and
will differ only to the extent that account maintenance and distribution fees
and any incremental transfer agency costs relating to a particular class are
borne exclusively by that class. Class B, Class C and Class D shares each have
exclusive voting rights with respect to the Rule 12b-1 distribution plan adopted
with respect to such class pursuant to which the account maintenance and/or
distribution fees are paid (except that Class B shareholders may vote upon any
material changes to expenses charged under the Class D Distribution Plan). Each
class has different exchange privileges. See "Shareholder Services -- Exchange
Privilege."

The Merrill Lynch Select Pricing(SM) System is used by more than 50
registered investment companies advised by MLAM or its affiliate, FAM. Funds
advised by MLAM or FAM that use the Merrill Lynch Select Pricing(SM) System are
referred to herein as "Select Pricing Funds."

Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the CDSC and distribution fees with respect to Class B and Class C shares in
that the sales charges and distribution fees applicable to each class provide
for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
Investors are advised that only Class A and Class D shares may be available for
purchase through securities dealers, other than Merrill Lynch, that are eligible
to sell shares.

The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offering of each class of shares
of the Fund ("the Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the offering
of each class of shares of the fund. After the prospectuses, statements of
additional information and periodic reports have been prepared, set in type and
mailed to shareholders, the Distributor pays for the printing and distribution
of copies thereof used in connection with the offering to dealers and investors.
The Distributor also pays for other supplementary sales literature and
advertising costs. The Distribution Agreements are subject to the same renewal
requirements and termination provision as the Investment Advisory Agreement
described under "Management of the Fund -- Investment Advisory Arrangements."

The Fund or the Distributor may suspend the continuous offering of the
Fund's shares of any class at any time in response to conditions in the
securities markets or otherwise and may thereafter resume such offering from
time to time. Neither the Distributor nor the dealers are permitted to withhold
placing orders to benefit themselves by a price change.

Initial Sales Charge Alternatives -- Class A and Class D Shares

Investors who prefer an initial sales charge alternative may elect to
purchase Class D shares or, if an eligible investor, Class A shares. Investors
choosing the initial sales charge alternative who are eligible to purchase Class
A shares should purchase Class A shares rather than Class D shares because there
is an account maintenance fee imposed on Class D shares. Investors qualifying
for significantly reduced initial sales charges may find the initial sales
charge alternative particularly attractive because similar sales charge
reductions are not available with respect to the deferred sales charges imposed
in connection with purchases of Class B or Class C shares. Investors not
qualifying for reduced initial sales charges who expect to maintain their
investment for an extended period of time also may elect to purchase Class A or
Class D shares, because over time the accumulated

20
<PAGE>

ongoing account maintenance and distribution fees on Class B or Class C shares
may exceed the initial sales charge and, in the case of Class D shares, the
account maintenance fee. Although some investors who previously purchased Class
A shares may no longer be eligible to purchase Class A shares of other Select
Pricing Funds, those previously purchased Class A shares, together with Class B,
Class C and Class D share holdings, will count toward a right of accumulation
which may qualify the investor for reduced initial sales charge on new initial
sales charge purchases. In addition, the ongoing Class B and Class C account
maintenance and distribution fees will cause Class B and Class C shares to have
higher expense ratios, pay lower dividends and have lower total returns than the
initial sales charge shares. The ongoing Class D account maintenance fees will
cause Class D shares to have a higher expense ratio, pay lower dividends and
have a lower total return than Class A shares.

The term "purchase," as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his spouse and their children under the
age of 21 years purchasing shares for his or their own account and to single
purchases by a trustee or other fiduciary purchasing shares for a single trust
estate or single fiduciary account (including a pension, profit-sharing or other
employee benefit trust created pursuant to a plan qualified under Section 401 of
the Code) although more than one beneficiary is involved. The term "purchase"
also includes purchases by any "company," as that term is defined in the
Investment Company Act, but does not include purchases by any such company which
has not been in existence for at least six months or which has no purpose other
than the purchase of shares of the Fund or shares of other registered investment
companies at a discount; provided, however, that it does not include purchases
by any group of individuals whose sole organizational nexus is that the
participants therein are credit cardholders of a company, policyholders of an
insurance company, customers of either a bank or broker-dealer or clients of an
investment adviser.

The term "purchase" also includes purchases by employee benefit plans not
qualified under Section 401 of the Code, including purchases by employees or by
employers on behalf of employees, by means of a payroll deduction plan or
otherwise, of shares of the Fund. Purchases by such a company or non-qualified
employee benefit plan will qualify for the quantity discounts discussed above
only if the Fund and the Distributor are able to realize economies of scale in
sales effort and sales related expense by means of the company, employer or plan
making the Fund's Prospectus available to individual investors or employees and
forwarding investments by such persons to the Fund and by any such employer or
plan bearing the expense of any payroll deduction plan.

Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends from
outstanding Class A shares. Investors who currently own Class A shares in a
shareholder account including participants in the Merrill Lynch Blueprint(SM)
Program, are entitled to purchase additional Class A shares in that account.
Certain employer sponsored retirement or savings plans, including eligible
401(k) plans, may purchase Class A shares at net asset value provided such plans
meet the required minimum number of eligible employees or required amount of
assets advised by FAM or any of its affiliates. Class A shares are available at
net asset value to corporate warranty insurance reserve fund programs provided
that the program has $3 million or more initially invested in Select Pricing
Funds. Also eligible to purchase Class A shares at net asset value are
participants in certain investment programs including TMA(SM) Managed Trusts to
which Merrill Lynch Trust Company provides discretionary trustee services,
collective investment trusts for which Merrill Lynch Trust Company serves as
trustee, certain Merrill Lynch investment programs that offer pricing
alternatives for securities transactions and purchases made in connection with
certain fee-based programs. In addition, Class A shares are offered at net asset
value to Merrill Lynch & Co., Inc. and its subsidiaries and their directors and
employees and to members of the Boards of MLAM-advised investment companies,
including the Fund. Certain persons who acquired shares of certain MLAM-advised
closed-end funds in their initial offerings who wish to reinvest the net
proceeds from a sale of their closed-end fund shares of common stock in shares
of the Fund also may purchase Class A shares of the Fund if certain conditions
are met (for closed-end funds that commenced operations prior to October 21,
1994.) In addition, Class A shares of the Fund and certain other Select Pricing
Funds are offered at net asset value to shareholders of Merrill Lynch Senior
Floating Rate Fund, Inc. and, if certain conditions are met, to shareholders of
Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income
Municipal Bond Fund, Inc. who wish to reinvest the net proceeds from a sale of
certain of their shares of common stock pursuant to a tender offer conducted by
such funds in shares of the Fund and certain other Select Pricing Funds.

21
<PAGE>

Class A and Class D Sales Charge Information

<S> <C> <C> <C> <C>
Class A Shares
- ----------------------------------------------------------------------------------------------------------------
Gross Sales Sales Charges Sales Charges CDSCs Received on
Charges Retained by Paid to Redemption of
For the period Collected Distributor Merrill Lynch Load-Waived Shares
- ------------------------------------------------- ----------- ----------- -------------- ------------------
May 1, 1998 (commencement of operations)
to March 31, 1999 $13,995 $1,288 $12,707 $ 0

Class D Shares
- ----------------------------------------------------------------------------------------------------------------
Gross Sales Sales Charges Sales Charges CDSCs Received on
Charges Retained by Paid to Redemption of
For the period Collected Distributor Merrill Lynch Load-Waived Shares
- ------------------------------------------------- ----------- ----------- -------------- ------------------
May 1, 1998 (commencement of
operations) to March 31, 1999 $489,516 $48,832 $440,684 $ 0

</TABLE>

The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act.

Reduced Initial Sales Charges -- Class A and Class D Shares

Reinvested Dividends. No initial sales charges are imposed upon Class A and
Class D shares issued as a result of the automatic reinvestment of dividends or
capital gains distributions.

Right of Accumulation. Reduced sales charges are applicable through a right
of accumulation under which eligible investors are permitted to purchase Class A
or Class D shares of the Fund subject to an initial sales charge at the offering
price applicable to the total of (a) the public offering price of the shares
then being purchased plus (b) an amount equal to the then current net asset
value or cost, whichever is higher, of the purchaser's combined holdings of all
classes of shares of the Fund and of other Select Pricing Funds. For any such
right of accumulation to be made available, the Distributor must be provided at
the time of purchase, by the purchaser or the purchaser's securities dealer,
with sufficient information to permit confirmation of qualification. Acceptance
of the purchase order is subject to such confirmation. The right of accumulation
may be amended or terminated at any time. Shares held in the name of a nominee
or custodian under pension, profit-sharing or other employee benefit plans may
not be combined with other shares to qualify for the right of accumulation.

Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of Class A or Class D shares of the Fund or any
other Select Pricing Funds made within a 13-month period starting with the first
purchase pursuant to a Letter of Intention in the form provided by the
Distributor. The Letter of Intention is available only to investors whose
accounts are maintained at the Fund's transfer agent. The Letter of Intention is
not available to employee benefit plans for which Merrill Lynch provides
plan-participant recordkeeping services. The Letter of Intention is not a
binding obligation to purchase any amount of Class A or Class D shares; however,
its execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant to
a Letter of Intention may be included under a subsequent Letter of Intention
executed within 90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. The value of Class A and Class
D shares of the Fund and of other Select Pricing Funds presently held, at cost
or maximum offering price (whichever is higher), on the date of the first
purchase under the Letter of Intention, may be included as a credit toward
completion of such Letter, but the reduced sales charge applicable to the amount
covered by such Letter will be applied only to new purchases. If the total
amount of shares purchased does not equal the amount stated in the Letter of
Intention (minimum of $25,000), the investor will be notified and must pay,
within 20 days of the expiration of such Letter, the difference between the
sales charge on the Class A or Class D shares purchased at the reduced rate and
the sales charge applicable to the shares actually purchased through the Letter.
Class A shares or Class D shares equal to 5% of the intended amount will be held
in escrow during the 13-month period (while remaining registered in the name of
the purchaser) for this purpose. The first purchase under the Letter of
Intention must be at least 5% of the dollar

22
<PAGE>

amount of such Letter. If a purchase during the term of such Letter would
otherwise be subject to a further reduced sales charge based on the right of
accumulation, the purchaser will be entitled on that purchase and subsequent
purchases to the reduced percentage sales charge but there will be no
retroactive reduction of the sales charges on any previous purchase. The value
of any shares redeemed or otherwise disposed of by the purchaser prior to
termination or completion of the Letter of Intention will be deducted from the
total purchases made under such Letter. An exchange from a MLAM-advised money
market fund into the Fund that creates a sales charge will count toward
completing a new or existing Letter of Intent for the Fund.

Employee Access(SM) Accounts.Provided applicable threshold requirements are
met, either Class A or Class D shares are offered at net asset value to Employee
AccessSM Accounts available through authorized employers that provide
employer-sponsored retirement or savings plans that are eligible to purchase
such shares at net asset value. The initial minimum for such accounts is $500,
except that the initial minimum for shares purchased for such accounts pursuant
to the Automatic Investment Program is $50.

Purchase Privilege of Certain Persons. Directors of the Fund, members of
the Boards of other MLAM-advised investment companies and ML & Co. and its
subsidiaries (the term "subsidiaries", when used herein with respect to ML &
Co., includes MLAM, FAM and certain other entities directly or indirectly wholly
owned and controlled by ML & Co.) and their directors and employees, and any
trust, pension, profit-sharing or other benefit plan for such persons may
purchase Class A shares of the Fund at net asset value.

Class D shares of the Fund will be offered at net asset value, without a
sales charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor if the following
conditions are satisfied. First, the investor must advise Merrill Lynch that
they will purchase Class D shares of the Fund with proceeds from a redemption of
shares of a mutual fund that was sponsored by the financial consultant's
previous firm and was subject to a sales charge either at the time of purchase
or on a deferred basis. Second, the investor must also establish that such
redemption had been made within 60 days prior to the investment in the Fund, and
the proceeds from the redemption had been maintained in the interim in cash or a
money market fund.

Class D shares of the Fund will be offered at the net asset value, without
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund for which
Merrill Lynch has not served as a selected dealer if the following conditions
are satisfied: First, the investor must advise Merrill Lynch that the investor
will purchase Class D shares of the Fund with proceeds from a redemption of such
shares of other mutual funds that have been outstanding for a period of no less
than six months. Second, the investor must also establish that such purchase of
Class D shares had been made within 60 days after the redemption and the
proceeds from the redemption must have been maintained in the interim in cash or
a money market fund.

Class D shares of the Fund are also offered at net asset value, without a
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated, if the following conditions are satisfied:
First, the investor must purchase Class D shares of the Fund with proceeds from
a redemption of shares of such other mutual fund and such fund was subject to a
sales charge either at the time of purchase or on a deferred basis; Second, such
purchase of Class D shares must be made within 90 days after such notice of
termination.

Closed-End Fund Investment Option. Class A shares of the Fund and other
Select Pricing Funds ("Eligible Class A shares") are offered at net asset value
to shareholders of certain closed-end funds advised by the Investment Adviser or
FAM who purchased such closed-end fund shares prior to October 21, 1994 (the
date Merrill Lynch Select Pricing(SM) System commenced operations) and wish to
reinvest the net proceeds of a sale of their closed-end fund shares of common
stock in Eligible Class A shares of the Fund, if the conditions set forth below
are satisfied. Alternatively, closed-end fund shareholders who purchased such
shares on or after October 21, 1994 and wish to reinvest the net proceeds from a
sale of their closed-end fund shares are offered Class A shares (if eligible to
buy Class A shares) or Class D shares of the Fund and other Select Pricing Funds
("Eligible Class D shares") if the following conditions are met. First, the sale
of closed-end fund shares must be made through Merrill Lynch, and the net
proceeds therefrom must be immediately reinvested in Eligible Class A or

23
<PAGE>

Class D shares. Second, the closed-end fund shares must either have been
acquired in the initial public offering or be shares representing dividends from
shares of common stock acquired in such offering. Third, the closed-end fund
shares must have been continuously maintained in a Merrill Lynch securities
account. Fourth, the shareholder must have purchased a minimum of $250 of
closed-end fund shares to be eligible for the reinvestment option.

Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
will receive Class A shares of the Fund, and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund
Inc. will receive Class D shares of the Fund, except that shareholders already
owning Class A shares of the Fund will be eligible to purchase additional Class
A shares pursuant to this option, if such additional Class A shares will be held
in the same account as the existing Class A shares and the other requirements
pertaining to the reinvestment privilege are met. In order to exercise this
investment option, a shareholder of one of the above-referenced continuously
offered closed-end funds (an "eligible fund") must sell his or her shares of
common stock of the eligible fund (the "eligible shares") back to the fund in
connection with a tender offer conducted by the eligible fund and reinvest the
proceeds immediately in the designated class of shares of the Fund. This
investment option is available only with respect to eligible shares as to which
no Early Withdrawal Charge or CDSC (each as defined in the eligible fund's
prospectus) is applicable. Purchase orders from eligible fund shareholders
wishing to exercise this investment option will be accepted only on the day that
the related tender offer terminates and will be effected at the net asset value
of the designated class of the Fund on such day.

TMA(SM) Managed Trusts.Class A shares are offered to TMA(SM) Managed Trusts
to which Merrill Lynch Trust Company provides discretionary trustee services at
net asset value.

Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation with
a public or private investment company. The value of the assets or company
acquired in a tax-free transaction may be adjusted in appropriate cases to
reduce possible adverse tax consequences to the Fund which might result from an
acquisition of assets having net unrealized appreciation which is
disproportionately higher at the time of acquisition than the realized or
unrealized appreciation of the Fund. The issuance of Class D shares for
consideration other than cash is limited to bona fide reorganizations, statutory
mergers or other acquisitions of portfolio securities which (i) meet the
investment objectives and policies of the Fund; (ii) are acquired for investment
and not for resale (subject to the understanding that the disposition of the
Fund's portfolio securities shall at all times remain within its control); and
(iii) are liquid securities, the value of which is readily ascertainable, which
are not restricted as to transfer either by law or liquidity of market (except
that the Fund may acquire through such transactions restricted or illiquid
securities to the extent the Fund does not exceed the applicable limits on
acquisition of such securities set forth under "Investment Objectives and
Policies" herein).

Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
in obtaining such investments.

Deferred Sales Charges Alternatives -- Class B and Class C Shares

Because no initial sales charges are deducted at the time of purchase,
Class B and Class C shares provide the benefit of putting all of the investor's
dollars to work from the time the investment is made. The deferred sales charge
alternatives may be particularly appealing to investors who do not qualify for a
reduction in initial sales charges.Both Class B and Class C shares are subject
to ongoing account maintenance fees and distribution fees; however, the ongoing
account maintenance and distribution fees potentially may be offset to the
extent any return is realized on the additional funds initially invested in
Class B or Class C shares. In addition, Class B shares of the Fund will be
converted into Class D shares of the Fund after a conversion period of
approximately ten years, and thereafter investors will be subject to lower
ongoing fees.

24
<PAGE>

Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend to
hold their shares for an extended period of time.Investors in Class B shares
should take into account whether they intend to redeem their shares within the
CDSC period and, if not, whether they intend to remain invested until the end of
the conversion period and thereby take advantage of the reduction in ongoing
fees resulting from the conversion into Class D shares. Other investors,
however, may elect to purchase Class C shares if they determine that it is
advantageous to have all their assets invested initially and they are uncertain
as to the length of time they intend to hold their assets in Select Pricing
Funds. Although Class C shareholders are subject to a shorter CDSC period at a
lower rate, they forgo the Class B conversion feature, making their investment
subject to account maintenance and distribution fees for an indefinite period of
time. In addition, while both Class B and Class C distribution fees are subject
to the limitations on asset-based sales charges imposed by the NASD, the Class B
distribution fees are further limited under a voluntary waiver of asset-based
sales charges. See "Purchase of Shares--Limitations on the Payment of Deferred
Sales Charges."

Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.

The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net asset
value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four year CDSC,
while Class C shares are subject only to a one year CDSC. On the other hand,
approximately ten years after Class B shares are issued, such Class B shares,
together with shares issued upon dividend reinvestment with respect to those
shares, are automatically converted into Class D shares of the Fund and
thereafter will be subject to lower continuing fees. See "Conversion of Class B
Shares to Class D Shares" below. Both Class B and Class C shares are subject to
an account maintenance fee of 0.25% of net assets and a distribution fee of
0.50% and 0.55%, respectively, of net assets. See "Distribution Plans." The
proceeds from the account maintenance fees are used to compensate the
Distributor and Merrill Lynch (pursuant to a sub-agreement) for providing
continuing account maintenance activities.

Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans".

Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of the Class B and Class C
shares, such as the payment of compensation to financial consultants for selling
Class B and Class C shares. The combination of the CDSC and the ongoing
distribution fee facilitates the ability of the Fund to sell the Class B and
Class C shares without a sales charge being deducted at the time of purchase.
Approximately ten years after issuance, Class B shares will convert
automatically into Class D shares of the Fund, which are subject to an account
maintenance fee but no distribution fee. Class B shares of certain other Select
Pricing Funds into which exchanges may be made convert into Class D shares
automatically after approximately eight years. If Class B shares of the Fund are
exchanged for Class B shares of another Select Pricing Fund, the conversion
period applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the holding
period for the shares acquired.

Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See "Limitations on
the Payment of Deferred Sales Charges." Class B shareholders of the Fund
exercising the exchange privilege described under "Shareholder Services --
Exchange Privilege" will continue to be subject to the Fund's CDSC schedule if
such schedule is higher than the CDSC schedule relating to the Class B shares
acquired as a result of the exchange.

25
<PAGE>

Class B and Class C Sales Charge Information

Class B Shares*
----------------------------------------------------------------------------------
CDSCs Received CDSCs Paid to
For the Period by Distributor Merrill Lynch
------------- --------------- --------------
<S> <C> <C>
May 1, 1998 (commencement of operations) to March 31, 1999 ............... $535,790 $535,790

- ---------------
* Additional Class B CDSCs payable to the Distributor may have been waived or
converted to a contingent obligation in connection with a shareholder's
participation in certain fee-based programs.

Class C Shares
----------------------------------------------------------------------------------
CDSCs Received CDSCs Paid to
For the Period by Distributor Merrill Lynch
------------- --------------- --------------
May 1, 1998 (commencement of operations) to March 31, 1999 ............... $74,091 $74,091

</TABLE>

Contingent Deferred Sales Charge -- Class B Shares. Class B shares which
are redeemed within four years of purchase may be subject to a CDSC at the rates
set forth below charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. Accordingly, no sales
charge will be imposed on increases in net asset value above the initial
purchase price. In addition, no charge will be assessed on shares derived from
reinvestment of dividends or capital gains distributions.

The following table sets forth the rates of the CDSC on Class B shares:

CDSC as a Percentage
Year Since Purchase of Dollar Amount
Payment Made Subject to Charge
------------------ ----------------
0-1 ....................................... 4.0%
1-2 ....................................... 3.0%
2-3 ....................................... 2.0%
3-4 ....................................... 1.0%
4 and thereafter .......................... 0.0%

In determining whether a contingent deferred sales charge is applicable to
a redemption, the calculation will be determined in the manner that results in
the lowest possible rate being charged. Therefore, it will be assumed that the
redemption is first of shares held for over four years or shares acquired
pursuant to reinvestment of dividends or distributions and then of shares held
longest during the four-year period. The charge will not be applied to dollar
amounts representing an increase in the net asset value since the time of
purchase. A transfer of shares from a shareholder's account to another account
will be assumed to be made in the same order as a redemption.

To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12, and during such time, the investor has acquired 10
additional shares through dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to the charge because of dividend reinvestment. With respect
to the remaining 40 shares, the charge is applied only to the original cost of
$10 per share and not to the increase in net asset value of $2 per share.
Therefore, $400 of the $600 redemption proceeds will be charged at a rate of
2.0% (the applicable rate in the third year after purchase).

The Class B CDSC is waived on redemptions of shares made in connection with
post-retirement withdrawals from an Individual Retirement Account ("IRA") or
other retirement plan or following the death or disability (as defined in the
Code) of a shareholder or involuntary termination of any account in which Fund
shares are held. The Class B CDSC also is waived on redemptions of shares in
connection with certain group plans through the Merrill Lynch Blueprint(SM)
Program or in connection with the Systematic Withdrawal Plan. See "Shareholder
Services-Systematic Withdrawal Plans and--Merrill Lynch Blueprint(SM) Program."
The contingent deferred sales charge is waived on redemption of shares by
certain eligible 401(a) and eligible 401(k) plans. The CDSC is also waived for
any Class B shares that are purchased by an eligible 401(k) or eligible 401(a)
plans and are rolled over into a Merrill Lynch or Merrill Lynch Trust Company
custodied Individual Retirement Account and held in such account at the time of
redemption and for any Class B shares that were acquired and held at the time of
the redemption in an Employee AccessSM Account available through employers
providing eligible 401(k) plans. The Class B CDSC also is waived for any Class B
shares that are purchased within qualifying Employee Access(SM)

26
<PAGE>

Accounts. The terms of the CDSC may be modified for redemptions made in
connection with certain fee-based programs. See "Shareholder Services--Fee-Based
Programs."

Contingent Deferred Sales Charge -- Class C Shares. Class C shares that are
redeemed within one year of purchase may be subject to a 1.0% CDSC charged as a
percentage of the dollar amount subject thereto. The charge will be assessed on
an amount equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed. Accordingly, no Class C CDSC will be imposed on increases
in net asset value above the initial purchase price. In addition, no Class C
CDSC will be assessed on shares derived from reinvestment of dividends or
capital gains distributions. The Class C CDSC may be waived in connection with
involuntary termination of an account in which Fund shares are held and
withdrawals through the Merrill Lynch Systematic Withdrawal Plan. See
"Shareholder Services -- Fee-Based Programs." The Class C CDSC of the Fund and
certain other MLAM-advised mutual funds may be waived with respect to Class C
shares purchased by an investor with the net proceeds of a tender offer made by
certain MLAM-advised closed end funds, including Merrill Lynch Senior Floating
Rate Fund II, Inc. Such waiver is subject to the requirement that the tendered
shares shall have been held by the investor for a minimum of one year, and to
such other conditions as are set forth in the prospectus for the related closed
end fund.

In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over one year or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the one-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of shares
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.

Conversion of Class B Shares to Class D Shares. After approximately ten
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
"Conversion Date") on the basis of the relative net asset values of the shares
of the two classes on the Conversion Date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of the shares for federal income tax purposes.

In addition, shares purchased through reinvestment of dividends on Class B
shares will also convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class D
shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.

Employer-Sponsored Retirement or Savings Plans and Certain Other Arrangements

Certain employer-sponsored retirement or savings plans and certain other
arrangements may purchase Class A or Class D shares at net asset value, based on
the number of employees or numbers of employees eligible to participate in the
plan, the aggregate amount invested by the plan in specified investments and/or
the services provided by Merrill Lynch to the plan. Certain others plans may
purchase Class B shares with a waiver of CDSC upon redemption, based on similar
criteria. Such Class B shares will convert into Class D shares approximately ten
years after the plan purchases the share of any MLAM-advised mutual fund.
Minimum purchase requirements may be waived or varied for such plans. Additional
information regarding purchases by employer-sponsored retirement or savings and
certain other arrangements is available toll-free from Merrill Lynch Business
Financial Services at (800) 237-7777.

Distribution Plans

The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or distribution
fees paid by the Fund to the Distributor with respect to such classes. The Class
B and Class C Distribution Plans provide for the payment of account maintenance
fees and distribution fees, and the Class D Distribution Plan provides for the
payment of account maintenance fees.

The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid

27
<PAGE>

monthly, at the annual rate of 0.25% of the average daily net assets of the Fund
attributable to shares of the relevant class in order to compensate the
Distributor and Merrill Lynch (pursuant to a sub-agreement) in connection with
account maintenance activities.

The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.50% for
Class B shares and 0.55% for Class C shares of the average daily net assets of
the Fund attributable to the shares of the relevant class in order to compensate
the Distributor and Merrill Lynch (pursuant to a sub-agreement) for providing
shareholder and distribution services, and bearing certain distribution-related
expenses of the Fund, including payments to financial consultants for selling
Class B and Class C shares of the Fund. The Distribution Plans relating to Class
B and Class C shares are designed to permit an investor to purchase Class B and
Class C shares through dealers without the assessment of an initial sales charge
and at the same time permit the dealer to compensate its financial consultants
in connection with the sale of the Class B and Class C shares. In this regard,
the purpose and function of the ongoing distribution fees and the CDSC are the
same as those of the initial sales charge with respect to the Class A and Class
D shares of the Fund in that the deferred sales charges provide for the
financing of the distribution of the Fund's Class B and Class C shares.

For the period May 1, 1998 (commencement of operations) to March 31, 1999,
the Fund paid the Distributor $2,177,115 pursuant to the Class B Distribution
Plan (based on average net daily assets subject to such Class B Distribution
Plan of approximately $316.3 million), all of which was paid to Merrill Lynch
for providing account maintenance and distribution-related activities and
services in connection with Class B shares. For the period May 1, 1998
(commencement of operations) to March 31, 1999, the Fund paid the Distributor
$579,024 pursuant to the Class C Distribution Plan (based on average daily net
assets subject to such Class C Distribution Plan of approximately $78.9
million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with
Class C shares. For the period May 1, 1998 to March 31, 1999, the Fund paid the
Distributor $119,401 pursuant to the Class D Distribution Plan (based on average
daily net assets subject to such Class D Distribution Plan of approximately
$52.0 million) all of which was paid to Merrill Lynch for providing account
maintenance activities in connection with Class D shares.

The payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred, and accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Directors for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. This information is presented annually as of December 31 of each year on
a "fully allocated accrual" basis and quarterly on a "direct expenses and
revenue/cash" basis. On the fully allocated accrual basis, revenues consist of
the account maintenance fees, distribution fees, the CDSC and certain other
related revenues, and expenses consist of financial consultant compensation,
branch office and regional operation center selling and transaction processing
expenses, advertising, sales promotion and marketing expenses, corporate
overhead and interest expenses. On the direct expense and revenue/cash basis,
revenues consist of the account maintenance fees, distribution fees and
contingent deferred sales charges, and the expenses consist of financial
consultant compensation.

For the year ended December 31, 1998, direct cash expenses exceeded direct
cash revenues of Class B shares by approximately $3,459,389. For the year ended
December 31, 1998, direct cash revenues exceeded direct cash expenses of Class C
shares by $235,712. For the year ended December 31, 1998, fully allocated
expenses exceeded fully allocated accrual revenues of Class B shares by
approximately $10,505,000. For the year ended December 31, 1998, fully allocated
expenses exceeded fully allocated accrual revenues of Class C shares by
approximately $1,025,000.

The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no assurance
that the Directors of the Fund will approve the continuance of the Distribution
Plans from year to year. However, the Distributor intends to seek annual
continuation of the Distribution Plans. In their review of the Distribution
Plans, the Directors will be asked to take into consideration expenses incurred
in connection with the account maintenance and/or distribution of each class of
shares separately. The initial sales charge, the account maintenance fee, the
distribution fee and/or the CDSCs received with respect to one class will not be
used

28
<PAGE>

to subsidize the sale of shares of another class. Payments of the distribution
fee on Class B shares will terminate upon conversion of those Class B shares
into Class D shares as set forth under "Deferred Sales Charge Alternatives --
Class B and Class C Shares -- Conversion of Class B Shares to Class D Shares."

Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act. See
"Additional Information -- Description of Shares." Among other things, each
Distribution Plan provides that the Distributor will provide and the Directors
will review quarterly reports of the disbursement of the account maintenance
fees and/or distribution fees paid to the Distributor. In their consideration of
each Distribution Plan, the Directors must consider all factors they deem
relevant, including information as to the benefits of the Distribution Plan to
the Fund and to its related class of shareholders. Each

Distribution Plan further provides that, so long as such Distribution Plan
remains in effect, the selection and nomination of Directors who are not
"interested persons" of the Fund, as defined in the Investment Company Act (the
"Independent Directors"), will be committed to the discretion of the Independent
Directors then in office. In approving each Distribution Plan in accordance with
Rule 12b-1, the Independent Directors concluded that there is a reasonable
likelihood that such Distribution Plan will benefit the Fund and its related
class of shareholders. Each Distribution Plan can be terminated at any time,
without penalty, by the vote of a majority of the Independent Directors or by
the vote of the holders of a majority of the outstanding related class of voting
securities of the Fund. A Distribution Plan cannot be amended to increase
materially the amount to be spent by the Fund without the approval of the
related class of shareholders, and all material amendments are required to be
approved by the vote of Directors, including a majority of the Independent
Directors who have no direct or indirect financial interest in such Distribution
Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further
requires that the Fund preserve copies of such Distribution Plan and any reports
made pursuant to such plan for a period of not less than six years from the date
of the Distribution Plan or such reports, the first two years in an easily
accessible place.

Limitations on the Payment of Deferred Sales Charges

The maximum sales charge rule in the Conduct Rules of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on certain
asset-based sales charges, such as the distribution fee and the CDSC borne by
the Class B and Class C shares, but not the account maintenance fee. The maximum
sales charge rule is applied separately to each class. As applicable to the
Fund, the maximum sales charge rule limits the aggregate of distribution fee
payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross sales of
Class B shares and Class C shares, computed separately (defined to exclude
shares issued pursuant to dividend reinvestments and exchanges), plus (2)
interest on the unpaid balance for the respective class, computed separately, at
the prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts received from the payment of the distribution fee and the CDSC).
In connection with the Class B shares, the Distributor has voluntarily agreed to
waive interest charges on the unpaid balance in excess of 0.50% of eligible
gross sales. Consequently, the maximum amount payable to the Distributor
(referred to as the "voluntary maximum") in connection with the Class B shares
is 6.75% of eligible gross sales. The Distributor retains the right to stop
waiving the interest charges at any time. To the extent payments would exceed
the voluntary maximum, the Fund will not make further payments of the
distribution fee with respect to Class B shares, and any CDSCs will be paid to
the Fund rather than to the Distributor; however, the Fund will continue to make
payments of the account maintenance fee. In certain circumstances the amount
payable pursuant to the voluntary maximum may exceed the amount payable under
the NASD formula. In such circumstances payment in excess of the amount payable
under the NASD formula will not be made.

The following tables set forth comparative information as of March 31, 1999
with respect to Class B shares and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales charge
rule and, with respect to the Class B shares, the Distributor's voluntary
maximum.

29
<PAGE>

Data Calculated as of March 31, 1999
---------------------------------------------------------------------------------------
(in thousands)
Annual
Distribution
Allowable Amounts Fee at
Eligible Allowable Interest on Maximum Previously Aggregate Current Net
Gross Aggregate Unpaid Amount Paid to Unpaid Asset
Sales(1) Sales Charges(2) Balance(3) Payable Distributor(4) Balance Level(5)
-------- ---------------- ----------- --------- -------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Class B Shares for the period
May 1, 1998 (commencement of
operations) to March 31, 1999

Under NASD Rule as Adopted ........ $417,340 $26,524 $1,355 $27,879 $ 1,991 $25,888 $2,512
Under Distributor's Voluntary
Waiver .......................... $417,340 $26,524 $1,646 $28,170 $ 1,991 $26,179 $2,512

Class C Shares for the period
May 1, 1998 (commencement of
operations) to March 31, 1999

Under NASD Rule as Adopted ........ $120,176 $ 7,489 $ 387 $ 7,876 $ 472 $ 7,404 $ 656

(footnotes are listed on the following page)

</TABLE>

- ---------------
(1)Purchase price of all eligible Class B or Class C shares sold during the
periods indicated other than shares acquired through dividend reinvestments
and the exchange privilege.

(2)Includes amounts attributable to exchanges from Summit Cash Reserves Fund
("Summit") which are not reflected in Eligible Gross Sales. Shares of Summit
can only be purchased by exchange from another fund (the "redeemed fund").
Upon such an exchange, the maximum allowable sales charge payment to the
redeemed fund is reduced in accordance with the amount of the redemption.
This amount is then added to the maximum allowable sales charge payment with
respect to Summit. Upon an exchange out of Summit, the remaining balance of
this amount is deducted from the maximum allowable sales charge payment to
Summit and added to the maximum allowable sales charge payment to the fund
into which the exchange is made.

(3)Interest is computed on a monthly average prime rate basis based upon the
prime rate, as reported in The Wall Street Journal, plus 1.0%, as permitted
under the NASD Rule.

(4)Consists of CDSC payments, distribution fee payment and accruals. Of the
distribution fee payments made with respect to Class B shares under the
distribution plan in effect at that time, at a .75% rate, 0.50% of average
daily net assets has been treated as a distribution fee and 0.25% of average
daily net assets has been deemed to have been a service fee and not subject
to the NASD maximum sales charge rule. See "Purchase of Shares --
Distribution Plans". This figure may include CDSC's that were deferred when a
shareholder redeemed shares prior to the expiration of the applicable CDSC
period and invested the proceeds, without the imposition of a sales charge,
in Class A shares in conjunction with the shareholder's participation in the
Merrill Lynch Mutual Funds Advisor ("MFA") program. The CDSC is booked as a
contingent obligation that may be payable if the shareholder terminates
participation in the MFA Program.

(5)Provided to illustrate the extent to which the current level of distribution
fee payments (not including any CDSC payments) is amortizing the unpaid
balance. No assurance can be given that payments of the distribution fee will
reach either the voluntary maximum or the NASD maximum.

REDEMPTION OF SHARES

Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in
the Prospectus for certain information as to the redemption and repurchase of
Fund shares. The Fund is required to redeem for cash all shares of the Fund upon
receipt of a written request in proper form. The redemption price is the net
asset value per share next determined after the initial receipt of proper notice
of redemption for Class A and D shares, and is the net asset value per share
next determined after the initial receipt of proper notice of redemption, less
the applicable CDSC, if any, for Class B or Class C shares. Except for any CDSC
which may be applicable to Class B or C shares, there will be no charge for
redemption if the redemption request is sent directly to the Transfer Agent.
Shareholders liquidating their holdings will receive upon redemption all
dividends declared on the shares redeemed. If a shareholder redeems all of the
shares in his account, he will receive, in addition to the net asset value of
the shares redeemed, a separate check representing all dividends declared but
unpaid on the shares redeemed will be distributed on the next dividend payment
date. The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending on the market value of the securities held by the
Fund at such time.

The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for any period during
which trading on the New York Stock Exchange (the "NYSE") is restricted as
determined by the Commission or such Exchange is closed (other than customary
weekend and holiday closings), for any period during which an emergency exists
as defined by the Commission as a result of which disposal of portfolio
securities or determination of the net asset value of the Fund is not reasonably
practicable, and for such other periods as the Commission may by order permit
for the protection of shareholders of the Fund.

30
<PAGE>

Redemption

A shareholder wishing to redeem shares may do so without charge by
tendering the shares directly to the Transfer Agent, Financial Data Services,
Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption requests
delivered other than by mail should be delivered to Financial Data Services,
Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484. Proper notice
of redemption in the case of shares deposited with the Transfer Agent may be
accomplished by a written letter requesting redemption. Proper notice of
redemption in the case of shares for which certificates have been issued may be
accomplished by a written letter as noted above accompanied by certificates for
the shares to be redeemed. The notice in either event requires the signatures of
all persons in whose names the shares are registered, signed exactly as their
names appear on the Transfer Agent's register or on the certificate, as the case
may be. The signature(s) on the notice must be guaranteed by an "eligible
guarantor institution" (including, for example, Merrill Lynch branch offices and
certain other financial institutions) as such term is defined in Rule 17Ad-15
under the Securities Exchange Act of 1934, as amended, the existence and
validity of which may be verified by the Transfer Agent through the use of
industry publications. Notarized signatures are not sufficient. In certain
instances, the Transfer Agent may require additional documents, such as, but not
limited to, trust instruments, death certificates, appointments as executor or
administrator, or certificates of corporate authority. For shareholders
redeeming directly with the Transfer Agent, payment will be mailed within seven
days of receipt of a proper notice of redemption.

At various times the Fund may be requested to redeem shares for which it
has not yet received good payment. The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as good payment (e.g., cash or
certified check drawn on a U.S. bank) has been collected for the purchase of
such shares. Normally, this delay will not exceed 10 days.

Repurchase

The Fund also will repurchase shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase shares by
wire or telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, provided that the request for
repurchase is received by the dealer prior to the close of business on the NYSE
(generally 4:00 p.m., New York time) on the day received and that such request
is received by the Fund from such dealer not later than 30 minutes after the
close of business on the NYSE, on the same day. Dealers have the responsibility
of submitting such repurchase requests to the Fund not later than 30 minutes
after the close of business on the NYSE, in order to obtain that day's closing
price.

The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any applicable
CDSC). Securities firms that do not have selected dealer agreements with the
Distributor, however, may impose a transaction charge on the shareholder for
transmitting the notice of repurchase to the Fund. Merrill Lynch may charge its
customers a processing fee (presently $5.35) to confirm a repurchase of shares
to such customers. Repurchases made directly through the Fund's Transfer Agent
are not subject to the processing fee. The Fund reserves the right to reject any
order for repurchase, which right of rejection might adversely affect
shareholders seeking redemption through the repurchase procedure. A shareholder
whose order for repurchase is rejected by the Fund, however, may redeem shares
as set forth above.

For shareholders submitting their shares for repurchase through listed
securities dealers, payment for fractional shares will be made by the Transfer
Agent directly to the shareholder and payment for full shares will be made by
the securities dealer within seven days of the proper tender of the
certificates, if any, and stock power or letter requesting redemption, in each
instance with signature guaranteed as noted in the Prospectus.

Reinstatement Privilege -- Class A and Class D Shares

Shareholders who have redeemed their Class A or Class D shares, including
through repurchase, have a privilege to reinstate their accounts by purchasing
Class A or Class D shares, as the case may be, of the Fund at net asset value
without a sales charge up to the dollar amount redeemed. The reinstatement
privilege may be exercised by sending a notice of exercise along with a check
for the amount to be reinstated to the Transfer Agent within 30 days after the
date the request for redemption was accepted by the Transfer Agent or the
Distributor. Alternately, the reinstatement privilege may be exercised through
the investor's Merrill Lynch Financial Consultant within 30 days after the date
the request for redemption was accepted by the Transfer Agent or

31
<PAGE>

Distributor. The reinstatement will be made at the net asset value per share
next determined after the notice of reinstatement is received and cannot exceed
the amount of the redemption proceeds.

The reinstatement privilege is a one-time privilege and may be exercised by
the shareholder only the first time such shareholder makes a redemption. A
redemption resulting in a gain is a taxable event whether or not the
reinstatement privilege is exercised. A redemption resulting in a loss will not
be a taxable event to the extent the reinstatement privilege is exercised, and
an adjustment will be made to the shareholder's tax basis in shares acquired
pursuant to the reinstatement to reflect the disallowed loss.

If a shareholder disposes of shares with 90 days of their acquisition and
subsequently reacquires shares of the Fund pursuant to the reinstatement
privilege, then the shareholder's tax basis in those shares disposed of will be
reduced to the extent the load charge paid to the Fund upon the shareholder's
initial purchase reduces any load charge such shareholder would have been
required to pay on the subsequent acquisition in absence of the reinstatement
privilege. Instead, such load charge will be treated as an amount paid for the
subsequently acquired shares and will be included in the shareholder's tax basis
for such shares.

Deferred Sales Charge -- Class B and Class C Shares

As discussed in the Prospectus under "Purchase of Shares -- Alternative
Sale Arrangements -- Deferred Sales Charge Alternative -- Class B and Class C
Shares," while Class B shares of the Fund redeemed within four years of purchase
are subject to a contingent deferred sales charge under most circumstances, the
charge is waived on redemptions of Class B shares in certain instances including
in connection with certain post-retirement withdrawals from an Individual
Retirement Account ("IRA") or other retirement plan or following the death or
disability of a Class B shareholder. Redemptions for which the waiver applies in
the case of such withdrawals are: (a) any partial or complete redemption in
connection with a distribution following retirement under a tax-deferred
retirement plan or attaining age 59 1/2 in the case of an IRA or other
retirement plan, or part of a series of equal periodic payments (not less
frequently than annually) made for the life (or life expectancy) or any
redemption resulting from the tax-free return of an excess contribution to an
IRA; or (b) any partial or complete redemption following the death or disability
(as defined in the Internal Revenue Code) of a Class B shareholder (including
one who owns the Class B shares as joint tenant with his or her spouse),
provided the redemption is requested within one year of the death or initial
determination of disability.

Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.

In general, Class B shares of equity Select Pricing Funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income Select Pricing Funds will convert approximately ten
years after initial purchase. If, during the Conversion Period, a shareholder
exchanges Class B shares with an eight-year Conversion Period for Class B shares
with a ten-year Conversion Period, or vice versa, the Conversion Period
applicable to the Class B shares acquired in the exchange will apply, and the
holding period for the shares exchanged will be tacked onto the holding period
for the shares acquired.

The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans which qualified for a waiver of the CDSC
normally imposed on purchases of Class B shares ("Class B Retirement Plans").
When the first share of any Select Pricing Funds purchased by a Class B
Retirement Plan has been held for ten years (i.e., ten years from the date the
relationship between MLAM-advised mutual funds and the Plan was established),
all Class B shares of all MLAM-advised mutual funds held in that Class B
Retirement Plan will be converted into Class D shares of the appropriate funds.
Subsequent to such conversion, that retirement plan will be sold Class D shares
of the appropriate funds at net asset value per share.

In the event that all Class B shares of the Fund held in a single account
are converted to Class D shares on a Conversion Date, shares representing
reinvestment of declared but unpaid dividends on those Class B shares also will
be converted to Class D shares; otherwise, only Class B shares purchased through
reinvestment of dividends paid will convert to Class D shares on the Conversion
Date.

The Conversion Period also is modified for retirement plan investors which
participate in certain fee-based programs. See "Shareholder Services --
Fee-Based Programs."

32
<PAGE>

PORTFOLIO TRANSACTIONS

Subject to policies established by the Board of Directors of the Fund, the
Investment Adviser is responsible for the execution of the Fund's portfolio
transactions. In executing such transactions, the Investment Adviser seeks to
obtain the best net results for the Fund, taking into account such factors as
price (including the applicable brokerage commission or dealer spread), size of
order, difficulty of execution and operational facilities of the firm involved
and the firm's risk in positioning a block of securities. While the Investment
Adviser generally seeks reasonably competitive commission rates, the Fund will
not necessarily be paying the lowest commission or spread available.

Subject to obtaining the best price and execution, brokers who provide
supplemental investment research to the Investment Adviser may receive orders
for transactions by the Fund. Such supplemental research services ordinarily
consist of assessments and analysis of the business or prospects of a company,
industry, or economic sector. If, in the judgment of the Investment Adviser, the
Fund will be benefited by such supplemental research services, the Investment
Adviser is authorized to pay commissions to brokers furnishings such services
that are in excess of commissions that another broker may charge for the same
transaction. Information so received will be in addition to and not in lieu of
the services required to be performed by the Investment Adviser under its
Investment Advisory Agreement. The expenses of the Investment Adviser will not
necessarily be reduced as a result of the receipt of such supplemental
information. In some cases, the Investment Adviser may use such supplemental
research in providing investment advice to its other investment advisory
accounts. In addition, consistent with the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. and policies established by the
Directors of the Fund, the Investment Adviser may consider sales of shares of
the Fund as a factor in the selection of brokers or dealers to execute portfolio
transactions for the Fund.

The Fund has no obligation to deal with any dealer or group of dealers in
the execution of transactions in portfolio securities. Subject to the policy
established by the Board of Directors, the Investment Adviser is primarily
responsible for the portfolio decisions of the Fund and the placing of its
portfolio transactions. In placing orders, it is the policy of the Fund to
obtain the best price and execution for its transactions. Affiliated persons of
the Fund, including Merrill Lynch, may serve as its broker in over-the-counter
transactions conducted on an agency basis.

Brokerage commissions and other transaction costs on transactions in
foreign securities are generally higher than in the United States, although the
Fund will endeavor to achieve the best net results in effecting its portfolio
transactions. There is generally less governmental supervision and regulation of
foreign securities dealers and brokers than in the United States.

The securities in which the Fund invests are primarily traded in the
over-the-counter market and, where possible, the Fund deals directly with the
dealers who make a market in the securities involved except in those
circumstances in which better prices and execution are available elsewhere. Such
dealers usually act as principals for their own account. On occasion, securities
may be purchased directly from the issuer. Bonds and money market securities are
generally traded on a net basis and do not normally involve either brokerage
commissions or transfer taxes. The cost of portfolio securities transactions of
the Fund will consist primarily of dealer or underwriter spreads. Under the
Investment Company Act, persons affiliated with the Fund and persons who are
affiliated with such affiliated persons are prohibited from dealing with the
Fund as principal in the purchase and sale of securities unless a permissive
order allowing such transactions is obtained from the Commission. Since
transactions in the over-the-counter market usually involve transactions with
dealers acting as principal for their own accounts, affiliated persons of the
Fund, including Merrill Lynch and any of its affiliates, will not serve as the
Fund's dealer in such transactions. However, affiliated persons of the Fund may
serve as its broker in listed or over-the-counter transactions conducted on an
agency basis provided that, among other things, the fee or commission received
by such affiliated broker is reasonable and fair compared to the fee or
commission received by non-affiliated brokers in connection with comparable
transactions.

The Fund may not purchase securities during the existence of any
underwriting syndicate of which Merrill Lynch is a member or in a private
placement in which Merrill Lynch serves as placement agent except pursuant to
procedures approved by the Directors of the Fund that either comply with rules
adopted by the Commission or with interpretations of the Commission Staff.Rule
10f-3 under the Investment Company Act sets forth conditions

33
<PAGE>

under which the Fund may purchase corporate bonds from an underwriting syndicate
of which Merrill Lynch is a member.The rule sets forth requirements relating to,
among other things, the terms of an issue of corporate bonds purchased by the
Fund, the amount of corporate bonds that may be purchased in any one issue and
the assets of the Fund that may be invested in a particular issue.

The Fund's ability and decisions to purchase or sell portfolio securities
may be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are redeemable on a daily
basis in U.S. dollars, the Fund intends to manage its portfolio so as to give
reasonable assurance that it will be able to obtain U.S. dollars to the extent
necessary to meet anticipated redemptions. Under present conditions, it is not
believed that these considerations will have any significant effect on its
portfolio strategy.

Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of the U.S. national securities exchanges from executing
exchange transactions for their affiliates and institutional accounts which they
manage unless the member (i) has obtained prior express authorization from the
account to effect such transactions, (ii) at least annually furnishes the
account with the aggregate compensation received by the member in effecting such
transactions, and (iii) complies with any rules the Commission has prescribed
with respect to the requirements of clauses (i) and (ii). To the extent Section
11(a) would apply to Merrill Lynch acting as a broker for the Fund in any of its
portfolio transactions executed on any such securities exchange of which it is a
member, appropriate consents have been obtained from the Fund and annual
statements as to aggregate compensation will be provided to the Fund. Securities
may be held by, or be appropriate investments for, the Fund as well as other
funds or Investment Advisory Clients of the Investment Adviser and MLAM.

The Directors have considered the possibilities of seeking to recapture for
the benefit of the Fund brokerage commissions and other expenses of possible
portfolio transactions by conducting portfolio transactions through affiliated
entities. For example, brokerage commissions received by affiliated brokers
could be offset against the advisory fee paid by the Fund. After considering all
factors deemed relevant, the Directors made a determination not to seek such
recapture. The Directors will reconsider this matter from time to time.

Information about the brokerage commissions paid by the Fund, including
commissions paid to Merrill Lynch, is set forth in the following table:

<TABLE>
<CAPTION>
Aggregate Brokerage Commissions Paid
Period Commissions Paid to Merrill Lynch
------ ----------------- ---------------
<S> <C> <C>
May 1, 1998 (commencement of operations) to March 31, 1999 ........... $6,250 $6,250

</TABLE>

For the period May 1, 1998 (commencement of operations) to March 31, 1999,
the brokerage commissions paid to Merrill Lynch represented 100% of the
aggregate brokerage commissions paid and involved 100% of the Fund's dollar
amount of transactions involving payment of brokerage commissions.

The rate of portfolio turnover is not a limiting factor when management
deems it appropriate to purchase or sell securities. The Fund expects that its
annual turnover rate should not generally exceed 100%, however, during periods
when interest rates fluctuate significantly, as they have during the past few
years, the Fund's portfolio turnover rate may be substantially higher. In any
particular year, however, market conditions could result in portfolio activity
at a greater or lesser rate than anticipated. High portfolio turnover involves
correspondingly greater transaction costs in the form of commissions and dealer
spreads, which are born directly by the Fund. The calculation of the rate of
portfolio turnover does not include the purchase or sale of money market
securities.

The Fund intends to continue to comply with the various requirements of the
Internal Revenue Code so as to qualify as a "regulated investment company"
thereunder. See "Dividends, Distributions and Taxes." Accordingly, the Fund's
ability to effect certain portfolio transactions may be limited.

DETERMINATION OF NET ASSET VALUE

The net asset value of the shares of the Fund is determined once daily by
the Investment Adviser after the close of business on the NYSE (generally 4:00
p.m. Eastern time) on each day during which the NYSE is open for trading and on
any other day on which there is sufficient trading in the Fund's portfolio
securities that net asset value might be materially affected but only if on any
such day the Fund is required to sell or redeem shares. The NYSE is not open on
New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Any assets or liabilities initially expressed in terms of non-U.S. dollar
currencies are translated into U.S. dollars at the prevailing market rates as

34
<PAGE>

quoted by one or more banks or dealers on the day of valuation. Net asset value
is computed by dividing the value of the securities held by the Fund plus any
cash or other assets (including interest and dividends accrued but not yet
received) minus all liabilities (including accrued expenses) by the total number
of shares outstanding at such time, rounded to the nearest cent. Expenses,
including the fees payable to the Investment Adviser and the Distributor, are
accrued daily.

The per share net asset value of the Class B, Class C and Class D shares
generally will be lower than the per share net asset value of the Class A shares
reflecting the daily expense accruals of the account maintenance, distribution
and higher transfer agency fees applicable with respect to the Class B and Class
C shares and the

daily expense accruals of the account maintenance fees applicable with respect
to Class D shares. Moreover, the per share net asset value of the Class B and
Class C shares generally will be lower than the per share net asset value of its
Class D shares reflecting the daily expense accruals of the distribution fees
and higher transfer agency fees applicable with respect to the Class B and Class
C shares of the Fund. It is expected, however, that the per share net asset
value of the four classes will tend to converge (although not necessarily meet)
immediately after the payment of dividends or distributions, which will differ
by approximately the amount of the expense accrual differential between the
classes.

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 mean between closing bid and asked prices.
Securities traded in the over-the-counter ("OTC") market are valued at the mean
of the most recent bid and ask prices as obtained from one or more dealers that
make markets in the securities. Portfolio securities that are traded both in the
OTC market and on a stock exchange are valued according to the broadest and most
representative market, and it is expected that for debt securities this
ordinarily will be the OTC market. Options on debt securities, which are traded
on exchanges, are valued at the last asked price for options written and the
last bid price for options purchased. Interest rate futures contracts and
options thereon, which are traded on exchanges, are valued at their closing
price at the close of such exchanges. The Fund employs Merrill Lynch Securities
Pricing Service, an affiliate of Merrill Lynch, to provide securities prices for
the Fund. Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or under the
direction of the Board of Directors of the Fund, including valuations furnished
by a pricing service retained by the Fund, which may use a matrix system for
valuations. These procedures of the pricing service and its valuations are
reviewed by the officers of the Fund under the general supervision of the
Directors.

SHAREHOLDER SERVICES

The Fund offers a number of shareholder services described below which are
designed to facilitate investment in its shares. Full details as to each of such
services and copies of the various plans described below can be obtained from
the Fund, the Distributor or Merrill Lynch. Certain of these services are
available only to U.S. investors.

Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income dividends
and long-term capital gains distributions.

The statements will also show any other activity in the account since the
preceding statement. Shareholders will receive separate transaction
confirmations for each purchase or sale transaction other than automatic
investment purchases and the reinvestment of ordinary income dividends and
long-term capital gains distributions. A shareholder may make additions to his
Investment Account at any time by mailing a check directly to the Fund's
Transfer Agent.

Shareholders may also maintain their accounts through MerrillLynch. Upon
the transfer of shares out of a Merrill Lynch brokerage account, an Investment
Account in the transferring shareholder's name will be opened automatically,
without charge, at the Transfer Agent. Shareholders considering transferring
their Class A or Class D shares from MerrillLynch to another brokerage firm or
financial institution should be aware that, if the firm to which the Class A or
Class D shares are to be transferred will not take delivery of shares of the
Fund, a shareholder either must redeem the Class A or Class D shares (paying any
applicable CDSC) so that the cash proceeds can be transferred to the account at
the new firm or such shareholder must continue to maintain an

35
<PAGE>

Investment Account at the Transfer Agent for those Class A or Class D shares.
Shareholders interested in transferring their Class B or Class C shares from
Merrill Lynch and who do not wish to have an Investment Account maintained for
such shares at the Transfer Agent may request their new brokerage firm to
maintain such shares in an account registered in the name of the brokerage firm
for the benefit of the shareholder. If the new brokerage firm is willing to
accommodate the shareholder in this manner, the shareholder must request that he
or she be issued certificates for his shares, and then must turn the
certificates over to the new firm for re-registration as described in the
preceding sentence. Shareholders considering transferring a tax-deferred
retirement account such as an individual retirement account from Merrill Lynch
to another brokerage firm or financial institution should be aware that, if the
firm to which the retirement account is to be transferred will not

take delivery of shares of the Fund, a shareholder must either redeem the shares
(paying any applicable CDSC) so that the cash proceeds can be transferred to the
account at the new firm or such shareholder must continue to maintain a
retirement account at Merrill Lynch for those shares.

Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing all
or only part of the full shares in an Investment Account may be requested by a
shareholder directly from the Transfer Agent.

Automatic Investment Plans

A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if an eligible Class A investor as described herein)
or Class B, Class C or Class D shares at the applicable public offering price
either through the shareholder's securities dealer or by mail directly to the
Transfer Agent, acting as agent for such securities dealer. Voluntary
accumulation also can be made through a service known as the Automatic
Investment Plan whereby the Fund is authorized through pre-authorized checks or
automated clearing house debits of $50 or more to charge the regular bank
account of the shareholder on a regular basis to provide systematic additions to
the Investment Account of such shareholder. An investor whose shares of the Fund
are held within a CMA(R) or CBA(R)account may arrange to have periodic
investments made in the Fund in amounts of $100 or more ($1 for retirement
accounts) through the CMA(R)/CBA(R)Automatic Investment Program.

Fee-Based Programs

Certain Merrill Lynch fee-based programs, including pricing alternatives
for securities transactions (each referred to in this paragraph as a "Program"),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares, which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the conversion period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of such
shares or the automatic exchange thereof to another class at net asset value,
which may be shares of a Money Market Fund. In addition, upon termination of
participation in a Program, shares that have been held for less than specified
periods within such Program may be subject to a fee based upon the current value
of such shares. These Programs also generally prohibit such shares from being
transferred to another account at Merrill Lynch, to another broker-dealer or to
the Transfer Agent. Except in limited circumstances (which may also involve an
exchange as described above), such shares must be redeemed and another class of
shares purchased (which may involve the imposition of initial or deferred sales
charges and distribution and account maintenance fees) in order for the
investment not to be subject to Program fees. Additional information regarding a
specific Program (including charges and limitations on transferability
applicable to shares that may be held in such Program) is available in the
Program's client agreement and from Merrill Lynch Investor Services at (800)
MER-FUND (637-3863).

Automatic Reinvestment of Dividends

Unless specific instructions to the contrary are given as to the method of
payment of dividends and capital gains dividends, dividends and capital gains
distributions will be reinvested automatically in additional shares of the Fund.
Such reinvestment will be at the net asset value of shares of the Fund, without
sales charge, as of the close of business on the ex-dividend date of the
dividend and capital gains distributions. Shareholders may elect in writing to
receive their ordinary income or capital gains dividends, in cash, in which
event payment will be mailed or direct deposited on or about the payment date
except that any dividend or capital gain dividends of less than $10 payable to
an account maintained directly with the Fund's Transfer Agent will not be paid
in cash, but will be reinvested in shares of the Fund.

36
<PAGE>

Shareholders may, at any time, notify Merrill Lynch in writing if the
shareholder's account is maintained with Merrill Lynch or notify the Transfer
Agent in writing or by telephone (1-800-MER-FUND) if their account is maintained
with the Transfer Agent that they no longer wish to have their dividends
reinvested in shares of the Fund or vice versa and, commencing ten days after
the receipt by the Transfer Agent of such notice, those instructions will be
effected. The Fund is not responsible for any failure of delivery to the
shareholder's address of record and no interest will accrue on amounts
represented by uncashed dividend or redemption checks. Cash payments can also be
directly deposited to the shareholder's bank account. No CDSC will be imposed
upon redemption of shares issued as a result of the automatic reinvestment of
dividends.

Systematic Withdrawal Plans

A shareholder may elect to make systematic withdrawals from an Investment
Account of Class A, Class B, Class C or Class D shares in the form of payments
by check or through automatic payment by direct deposit to such shareholders
bank account on either a monthly or quarterly basis as provided below. Quarterly
withdrawals are available for shareholders who have acquired shares of the Fund
having a value, based on cost or the current offering price, of $5,000 or more
and monthly withdrawals are available for shareholders with shares having a
value of $10,000 or more.

At the time of each withdrawal payment, sufficient shares are redeemed from
those on deposit in the shareholder's account to provide the withdrawal payment
specified by the shareholder. The shareholder may specify the dollar amount and
class of shares to be redeemed. Redemptions will be made at net asset value as
determined at the close of business of the NYSE (generally 4:00 p.m., New York
City time) on the 24th day of each month or the 24th day of the last month of
each quarter, whichever is applicable. If the NYSE is not open for business on
such date, the shares will be redeemed at the close of business on the following
business day. The check for the withdrawal payment will be mailed, or the direct
deposit of the withdrawal payment will be made, on the next business day
following redemption. When a shareholder is making systematic withdrawals,
dividends and distributions on all shares in the Investment Account are
reinvested automatically in Fund shares. A shareholder's Systematic Withdrawal
Plan may be terminated at any time, without charge or penalty, by the
shareholder, the Fund, the Fund's Transfer Agent or the Distributor.

Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be reduced
correspondingly. Purchases of additional shares concurrent with withdrawals are
ordinarily disadvantageous to the shareholder because of sales charges and tax
liabilities. The Fund will not knowingly accept purchase orders for shares of
the Fund from investors who maintain a Systematic Withdrawal Plan unless such
purchase is equal to at least one year's scheduled withdrawals or $1,200,
whichever is greater. Periodic investments may not be made into an Investment
Account in which the shareholder has elected to make systematic withdrawals.

Alternatively a shareholder whose shares are held within a CMA(R)/CBA(R) or
Retirement Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the CMA(R)/CBA(R) Systematic
Redemption Program. The minimum fixed dollar amount redeemable is $50. The
proceeds of systematic redemptions will be posted to the shareholder's account
five business days after the date the shares are redeemed. All redemptions are
made at net asset value. A shareholder may elect to have his or her shares
redeemed on the first, second, third or fourth Monday of each month, in the case
of monthly redemptions, or of every other month, in the case of bimonthly
redemptions. For quarterly, semiannual or annual redemptions, the shareholder
may select the month in which the shares are to be redeemed and may designate
whether the redemption is to be made on the first, second, third or fourth
Monday of the month. If the Monday selected is not a business day, the
redemption will be processed at net asset value on the next business day. The
CMA(R)/CBA(R) Systematic Redemption Program is not available if Fund shares are
being purchased within the account pursuant to the Automatic Investment Program.
For more information on the CMA(R)/CBA(R) Systematic Redemption Program,
eligible shareholders should contact their Merrill Lynch Financial Consultant.

With respect to redemptions of Class B and Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares that
can be redeemed from an account annually shall not exceed 10% of the value of
shares of such class in that account at the time the election to join the
Systematic Withdrawal Plan was made. Any CDSC that otherwise might be due on
such redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a Systematic Withdrawal Plan will be redeemed in the same order as

37
<PAGE>

Class B or Class C shares are otherwise redeemed. See "Purchase of Shares --
Deferred Charge Alternatives -- Class B and C Shares." Where the Systematic
Withdrawal Plan is applied to Class B shares, upon conversion of the last Class
B shares in an account to Class D shares, the Systematic Withdrawal Plan will
automatically be applied thereafter to Class D shares. See "Purchase of Shares
- -- Deferred Sales Charge Alternatives -- Class B and Class C Shares --
Conversion of Class B Shares to Class D Shares". If an investor wishes to change
the amount being withdrawn in a Systematic Withdrawal Plan the investor should
contact his or her Financial Consultant.

Exchange Privilege

U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other Select Pricing Funds and Summit Cash Reserves Fund
("Summit"), a series of Financial Institutions Series Trust, which is a Merrill
Lynch-sponsored money market fund specifically designated for exchange by
holders of Class A, Class B, Class C and Class D shares of Select Pricing Funds.
Under the Merrill Lynch Select Pricing(SM) System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second Select
Pricing Fund if the shareholder holds any Class A shares of the second fund in
his or her account in which the exchange is made at the time of the exchange or
is otherwise eligible to purchase Class A shares of the second fund. If the
Class A shareholder wants to exchange Class A shares for shares of a second
Select Pricing Fund, and the shareholder does not hold Class A shares of the
second fund in his or her account at the time of the exchange and is not
otherwise eligible to acquire Class A shares of the second fund, the shareholder
will receive Class D shares of the second fund as a result of the exchange.
Class D shares also may be exchanged for Class A shares of a second Select
Pricing Fund at any time as long as, at the time of the exchange, the
shareholder holds Class A shares of the second fund in the account in which the
exchange is made or is otherwise eligible to purchase Class A shares of the
second fund. Class B, Class C and Class D shares will be exchangeable with
shares of the same class of other Select Pricing Funds. For purposes of
computing the CDSC that may be payable upon a disposition of the shares acquired
in the exchange, the holding period for the previously owned shares of the Fund
is "tacked" to the holding period of the newly acquired shares of the other fund
as more fully described below. Class A, Class B, Class C and Class D shares also
will be exchangeable for shares of certain Select Pricing Funds specifically
designated below as available for exchange by holders of Class A, Class B, Class
C or Class D shares. Shares with a net asset value of at least $100 are required
to qualify for the exchange privilege, and any shares utilized in an exchange
must have been held by the shareholder for at least 15 days. It is contemplated
that the exchange privilege may be applicable to other new mutual funds whose
shares may be distributed by the Distributor.

Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of other Select Pricing Funds or
for Class A shares of Summit ("new Class A or Class D shares") are transacted on
the basis of relative net asset value per Class A or Class D share,
respectively, plus an amount equal to the difference, if any, between the sales
charge previously paid on the outstanding Class A or Class D shares and the
sales charge payable at the time of the exchange on the new Class A or Class D
shares. With respect to outstanding Class A or Class D shares as to which
previous exchanges have taken place, the "sales charge previously paid" shall
include the aggregate of the sales charges paid with respect to such Class A or
Class D shares in the initial purchase and any subsequent exchange. Class A or
Class D shares issued pursuant to dividend reinvestment are sold on a no-load
basis in each of the funds offering Class A or Class D shares. For purposes of
the exchange privilege, Class A or Class D shares acquired through dividend
reinvestment shall be deemed to have been sold with a sales charge equal to the
sales charge previously paid on the Class A or Class D shares on which the
dividend was paid. Based on this formula, Class A and Class D shares of the Fund
generally may be exchanged into the Class A or Class D shares of the other
Select Pricing Funds or into shares of Summit with a reduced or without a sales
charge.

In addition, each MLAM-advised mutual fund with Class B or Class C shares
outstanding ("outstanding Class B or Class C shares") offers to exchange its
Class B or Class C shares for Class B or Class C shares, respectively, of
another Select Pricing Fund or for Class B shares of Summit ("new Class B or
Class C shares") on the basis of relative net asset value per Class B or Class C
share, without the payment of any CDSC that might otherwise be due on redemption
of the outstanding shares. Class B shareholders of the Fund exercising the
exchange privilege will continue to be subject to the Fund's contingent deferred
sales charge schedule if such schedule is higher than the contingent deferred
sales charge schedule relating to the new Class B shares acquired through use of
the exchange privilege. In addition, Class B shares of the Fund acquired through
use of the

38
<PAGE>

exchange privilege will be subject to the Fund's CDSC schedule if such schedule
is higher than the CDSC schedule relating to the Class B shares of the fund from
which the exchange has been made. For purposes of computing the sales charge
that may be payable on a disposition of the new Class B or Class C shares, the
holding period for the outstanding Class B or Class C shares is "tacked" to the
holding period of the new Class B or Class C shares. For example, an investor
may exchange Class B shares of the Fund for those of Merrill Lynch Special Value
Fund, Inc. after having held the Fund's Class B shares for two and a half years.
The 2% sales charge that generally would apply to a redemption would not apply
to the exchange. Two years later the investor may decide to redeem the Class B
shares of Merrill Lynch Special Value Fund, Inc. and receive cash. There will be
no contingent deferred sales charge due on this redemption, since by "tacking"
the two and a half year holding period of the Fund's Class B shares to the two
year holding period for the Merrill Lynch Special Value Fund, Inc. Class B
shares, the investor will be deemed to have held the new Class B shares for more
than four years.

Exchanges for Shares of a Money Market Fund. Class A and Class D shares are
exchangeable for Class A shares of Summit and Class B and Class C shares are
exchangeable for Class B shares of Summit. Class A shares of Summit have an
exchange privilege back into Class A or Class D shares of Select Pricing Funds;
Class B shares of Summit have an exchange privilege back into Class B or Class C
shares of Select Pricing Funds and, in the event of such an exchange, the period
of time that Class B shares of Summit are held will count toward satisfaction of
the holding period requirement for purposes of reducing any CDSC and toward
satisfaction of any Conversion Period with respect to Class B shares. Class B
shares of Summit will be subject to a distribution fee at an annual rate of
0.75% of average daily net assets of such Class B shares. This exchange
privilege does not apply with respect to certain Merrill Lynch fee-based
programs, for which alternative exchange arrangements may exist. Please see your
Merrill Lynch Financial Consultant for further information.

Prior to October 12, 1998, exchanges from the Fund and other Select Pricing
Funds into a money market fund were directed to certain Merrill Lynch-sponsored
money market funds other than Summit. Shareholders who have exchanged Select
Pricing Fund shares for shares of such other market funds and subsequently wish
to exchange those money market fund shares for shares of the Fund will be
subject to the CDSC schedule applicable to such Fund shares, if any. The holding
period for those money market fund shares will not count toward satisfaction of
the holding period requirement for reduction of the CDSC imposed on such shares,
if any, and, with respect to Class B shares, toward satisfaction of the
Conversion Period. However, the holding period for Class B or Class C shares
received in exchange for such money market fund shares will be aggregated with
the holding period for the original Select Pricing Fund shares for purposes of
reducing the CDSC or satisfying the Conversion Period.

Exchanges by Participants in the MFA Program. The exchange privilege is
modified with respect to certain retirement plans which participate in the MFA
Program. Such retirement plans may exchange Class B, Class C or Class D shares
that have been held for at least one year for Class A shares of the same fund on
the basis of relative net asset values in connection with the commencement of
participation in the MFA Program, i.e., no CDSC will apply. The one year holding
period does not apply to shares acquired through reinvestment of dividends. Upon
termination of participation in the MFA Program, Class A shares will be
re-exchanged for the class of shares originally held. For purposes of computing
any CDSC that may be payable upon redemption of Class B or Class C shares so
reacquired, or the Conversion Period for Class B shares so reacquired, the
holding period for the Class A shares will be "tacked" to the holding period for
the Class B or Class C shares originally held. The Fund's exchange privilege is
also modified with respect to purchases of Class A and Class D shares by
non-retirement plan investors under the MFA Program. First, the initial
allocation of assets is made under the MFA Program. Then, any subsequent
exchange under the MFA Program of Class A or Class D shares of a Select Pricing
Fund for Class A or Class D shares of the Fund will be made solely on the basis
of the relative net asset values of the shares being exchanged. Therefore, there
will not be a charge for any difference between the sales charge previously paid
on the shares of the other Select Pricing Fund and the sales charge payable on
the shares of the Fund being acquired in the exchange under the MFA Program.

Exercise of the Exchange Privilege

To exercise the exchange privilege, shareholders should contact their
Merrill Lynch Financial Consultant, who will advise the Fund of the exchange.
Before effecting an exchange, Shareholders should obtain a currently effective
prospectus of the fund into which the exchange is to be made. Shareholders of
the Fund, and

39
<PAGE>

shareholders of the other funds described above with shares for which
certificates have not been issued, may exercise the exchange privilege by wire
through their securities dealers. The Fund reserves the right to require a
properly completed Exchange Application. This exchange privilege may be modified
or terminated in accordance with the rules of the Commission. The Fund reserves
the right to limit the number of times an investor may exercise the exchange
privilege. Certain funds may suspend the continuous offering of their shares at
any time and may thereafter resume such offering from time to time. The exchange
privilege is available only to U.S. shareholders in states where the exchange
legally may be made.

Retirement Plans

Self-directed individual retirement accounts and other retirement plans are
available from Merrill Lynch. Under these plans, investments may be made in the
Fund and certain of the other mutual funds sponsored by Merrill Lynch as well as
in other securities. Merrill Lynch charges an initial establishment fee and an
annual custodial fee for each account. Information with respect to these plans
is available upon request from Merrill Lynch. The minimum initial purchase to
establish any such plan is $100 and the minimum subsequent purchase is $1.

Any Retirement Plan which does not meet the qualifications to purchase
Class A or Class D shares at net asset value may purchase Class B shares with a
waiver of the CDSC upon redemption in the following circumstances. The CDSC is
waived for any Eligible 401(k) Plan redeeming Class B shares. "Eligible 401(k)
Plan" is defined as a retirement plan qualified under section 401(k) of the Code
with a salary reduction feature offering a menu of investments to plan
participants. CDSC is also waived for Class B redemptions from a 401(a) plan
qualified under the Code, provided that each such plan has the same or an
affiliated sponsoring employer as an Eligible 401(k) Plan purchasing Class B
shares ("Eligible 401(a) Plan"). Other tax qualified retirement plans within the
meaning of Section 401(a) and 403(b) of the Code which are provided specialized
services (e.g.., plans whose participants may direct on a daily basis their plan
allocations among a menu of investments) by independent administration firms
contracted through Merrill Lynch may also purchase Class B shares with a waiver
of the CDSC. The CDSC is also waived for any Class B shares which are purchased
by an Eligible 401(k) Plan or Eligible 401(a) Plan and are rolled over into a
Merrill Lynch or Merrill Lynch Trust Company custodied IRA and held in such
account at the time of redemption. The Class B CDSC is also waived for shares
purchased by a Merrill Lynch rollover IRA that was funded by a rollover from a
terminated 401(k) plan managed by the MLAM Private Portfolio Group and held in
such account at the time of redemption. The minimum initial and subsequent
purchase requirements are waived in connection with all the above-referenced
Retirement Plans.

Merrill Lynch Blueprint(SM) Program

Class B shares of the Fund are offered to certain participants in the
Merrill Lynch Blueprint(SM) Program ("Blueprint"). Blueprint is directed to
small investors and participants in certain affinity groups such as trade
associations and credit unions. Class B shares are offered through Blueprint
only to members of certain affinity groups. The contingent deferred sales charge
is waived for shareholders who are members of certain affinity groups at the
time orders to purchase Class B shares are placed through Blueprint. However,
services (including the exchange privilege) available to Class B shareholders
through Blueprint may differ from those available to other Class B investors.
Orders for purchases and redemptions of Class B shares may be grouped for
execution purposes which, in some circumstances, may involve the execution of
such orders two business days following the day such orders are placed. The
minimum initial purchase price is $100 with a $50 minimum for subsequent
purchases through Blueprint. Minimum investment amounts are waived in connection
with automatic investment plans for Blueprint participants. Additional
information concerning these Blueprint programs, including any annual fees or
transaction charges, is available from Merrill Lynch, Pierce, Fenner & Smith
Incorporated, The Blueprint(SM) Program, P.O. Box 30441, New Brunswick, New
Jersey 08989-0441.

DIVIDENDS AND TAXES

Dividends

It is the Fund's intention to distribute substantially all of its net
investment income monthly, if any. The net investment income of the Fund is
declared as dividends daily immediately prior to the determination of the net
asset value of the Fund on that day and is reinvested monthly in additional full
and fractional shares of the Fund at net asset value unless the shareholder
elects to receive such dividends in cash. The net investment income of each
Portfolio for dividend purposes consists of interest and dividends earned on
portfolio securities, less expenses, in each case computed since the most recent
determination of net asset value. Expenses of the Fund,

40
<PAGE>

including the advisory fee and any account maintenance and/or distribution fees
(if applicable), are accrued daily. Shares will accrue dividends as long as they
are issued and outstanding. The per share dividends and distributions on Class B
and Class C shares will be lower than the per share dividends and distributions
on Class A and Class D shares as a result of the account maintenance,
distribution and higher transfer agency fees applicable to the Class B and Class
C shares. Similarly, the per share dividends and distributions on Class D shares
will be lower than the per share dividends and distributions on Class A shares
as a result of the account maintenance fees applicable with respect to the Class
D shares. See "Determination of Net Asset Value" on page 34. Shares are issued
and outstanding as of the settlement date of a purchase order to the settlement
date of a redemption order.

In order to avoid a four percent nondeductible excise tax, a regulated
investment company must distribute to its shareholders during the calendar year
an amount equal to 98 percent of the Fund's investment company income, with
certain adjustments, for such calendar year, plus 98 percent of the Fund's
capital gain net income for the one-year period ending on October 31 of such
calendar year. All net realized long- or short-term capital gains of the Fund,
if any, including gains from option and futures contract transactions, are
declared and distributed to the shareholders of the Fund annually after the
close of the Fund's fiscal year.

See "Shareholder Services -- Automatic Reinvestment of Dividends and
Capital Gain Distributions" on page 36 for information concerning the manner in
which dividends and distributions may be automatically reinvested in shares of
the Fund. Shareholders may elect in writing to receive any such dividends or
distributions, or both, in cash. Dividends and distributions are taxable to
shareholders as discussed below whether they are reinvested in shares of the
Fund or received in cash.

Federal Income Taxes

The Fund intends to elect and to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986 (the "Code"). As long as it so qualifies, the Fund (but not its
shareholders) will not be subject to Federal income tax on the part of its net
ordinary income and net realized capital gains which it distributes to Class A,
Class B, Class C and Class D shareholders (together, the "shareholders"). The
Fund intends to distribute substantially all of such income. If in any taxable
year the Fund does not qualify as a regulated investment company, all of its
taxable income will be taxed to the Portfolio at corporate rates.

The Fund intends to distribute substantially all of its net investment
income. Dividends paid by the Fund from its ordinary income or from an excess of
net short-term capital gains over net long-term capital losses (together
referred to hereafter as "ordinary income dividends") are taxable to
shareholders as ordinary income. Dividends paid from an excess of net long-term
capital gains over net short-term capital losses ("capital gain dividends") are
taxable to shareholders as long-term capital gains, regardless of the length of
time the shareholder has owned Fund shares. Dividends and distributions will be
taxable to shareholders as ordinary income or capital gains, whether received in
cash or reinvested in additional shares of the Fund. The Transfer Agent will
send each shareholder a monthly dividend statement which will include the amount
of dividends paid and identify whether such dividends represent ordinary income
or capital gains.

Upon sale or exchange of shares of the Fund, a shareholder will realize
short- or long-term capital gain or loss, depending upon the shareholder's
holding period in the Fund's shares. However, if a shareholder's holding period
in his shares is six months or less, any capital loss realized from a sale or
exchange of such shares must be treated as long-term capital loss to the extent
of capital gains dividends received with respect to such shares. Dividends in
excess of the Fund's earnings and profits will first reduce the adjusted tax
basis of a holder's shares and, after such adjusted tax basis is reduced to
zero, will constitute capital gains to such holder (assuming the shares are held
as a capital asset).

Shareholders should consult their tax advisors regarding the availability
and effect of a certain tax election to mark-to-market shares of the Fund held
on January 1, 2001. Capital gains or losses recognized by corporate shareholders
are subject to tax at the ordinary income tax rates applicable to corporations.
The new tax rates for capital gains described above apply to distributions of
capital gain dividends by regulated investment companies ("RICs") such as the
Fund as well as to sales and exchanges of shares in RICs such as the Fund.

The Fund will invest in securities rated in the lower rating categories of
nationally recognized rating organizations, in unrated securities of comparable
quality (together with lower-rated securities, "junk bonds") and in high-yield
Corporate Loans, as previously described. Some of these junk bonds and
high-yield Corporate Loans may be purchased at a discount and may therefore
cause the Fund to accrue and distribute income before amounts due under the
obligations are paid. In addition, a portion of the interest payments on junk
bonds and high-yield Corporate

41
<PAGE>

Loans may be treated as dividends for Federal income tax purposes; in such case,
if the issuer of the junk bonds or high-yield Corporate Loans is a domestic
corporation, dividend payments by the Fund will be eligible for the dividends
received deduction to the extent of the deemed dividend portion of such interest
payments.

The Fund may recognize interest attributable to it from holding zero coupon
securities. Current federal law requires that, for most zero coupon securities,
the Fund must accrue a portion of the discount at which the security was
purchased as income each year even though the Fund receives no interest payment
in cash on the security during the year. In addition, the Fund may invest in
pay-in-kind securities on which payments of interest consist of securities
rather than cash. As an investment company, the Fund must pay out substantially
all of its net investment income each year. Accordingly, the Fund may be
required to pay out as an income distribution each year an amount which is
greater than the total amount of cash interest the Fund actually received. Such
distributions will be made from the cash assets of the Fund or by sales of
portfolio securities, if necessary. The Fund may realize a gain or loss from
such sales.

Dividends paid to shareholders who are nonresident aliens or foreign
entities will be subject to a 30% United States withholding tax under existing
provisions of the Code applicable to foreign individuals and entities unless a
reduced rate of withholding or a withholding exemption is provided under
applicable treaty law. Nonresident shareholders are urged to consult their own
tax advisors concerning the applicability of the United States withholding tax.

Some shareholders may be subject to a 31% withholding tax on reportable
ordinary income dividends and capital gains dividends and redemption payments
("backup withholding"). Generally, shareholders subject to backup withholding
will be those for whom a certified taxpayer identification number is not on file
with the Fund or who, to the Fund's knowledge, have furnished an incorrect
number. When establishing an account, an investor must certify under penalties
of perjury that such number is correct and that he is not otherwise subject to
backup withholding.

Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.

No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period of the converted Class B shares.

If a shareholder exercises his exchange privilege within 90 days after the
date such shares were acquired to acquire shares in a second Fund ("New Fund"),
then the loss, if any, recognized on the exchange will be reduced (or the gain,
if any, increased) to the extent the load charge paid to the Fund reduces any
load charge such shareholder would have been required to pay on the acquisition
of the New Fund shares in the absence of the exchange privilege. Instead, such
load charge will be treated as an amount paid for the New Fund shares and will
be included in the shareholder's basis for such shares.

Under another provision of the Code, any dividend declared by the Fund to
shareholders of record in October, November, or December of any year and made
payable to shareholders of record in such a month will be deemed to have been
received on December 31 of such year if actually paid during the following
January.

A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.

As indicated above, the Code imposes a 4% nondeductible excise tax on a
regulated investment company, such as the Fund, if it does not distribute to its
shareholders during the calendar year an amount equal to 98 percent of the
Fund's investment company income, with certain adjustments, for such calendar
year, plus 98 percent of the Fund's capital gain net income for the one-year
period ending on October 31, of such calendar year.

42
<PAGE>

In addition, an amount equal to any undistributed investment company taxable
income or capital gain net income from the previous calendar year must also be
distributed to avoid the excise tax. While the Fund intends to distribute its
income and capital gains in the manner necessary to avoid imposition of the 4%
excise tax, there can be no assurance that sufficient amounts of the Fund's
taxable income and capital gains will be distributed to avoid entirely the
imposition of the tax. The excise tax is imposed on the amount by which the
regulated investment company does not meet the foregoing distribution
requirements.

Only dividends paid by the Fund which are attributable to dividends
received by the Fund will qualify for the 70% dividends-received deduction for
corporations. In addition, corporate shareholders must have held their shares in
the Fund for more than 45 days to qualify for the deduction on dividends paid by
the Fund. Because most of the income of the Fund will be interest income, rather
than dividends on common or preferred stock, it is unlikely that any substantial
proportion of its distributions will be eligible for the dividends-received
deduction available for corporations under the Code.

The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent sections of the
Code and the Treasury Regulations promulgated thereunder. The Code and
Regulations are subject to change by legislative or administrative action.
Investors are urged to consult their attorneys or tax advisers regarding
specific questions as to federal, foreign, state or local taxes.

Ordinary income and capital gains dividends may also be subject to state
and local taxes.

Tax Treatment of Transactions in Options on Debt Securities, Futures Contracts
and Options Thereon

The Fund may purchase and sell interest rate futures contracts and may
write and purchase call and put options on such futures contracts and on certain
debt securities. The Fund may write or purchase options which will be classified
as "nonequity options" under the Code. Generally, gain and loss resulting from
transactions in options on debt securities, as well as gain and loss from
transactions in futures contracts and options thereon, will be treated as
long-term capital gain or loss to the extent of 60 percent thereof and
short-term capital gain or loss to the extent of 40 percent thereof (hereinafter
"blended gain or loss"). In the case of the exercise or assignment of an option
on a debt security, the premium paid or received by the Fund generally will
adjust the gain or loss on disposition of the underlying security.

Any option or futures contract held by the Fund on the last day of a fiscal
year will be treated as sold for market value on that date, and gain or loss
recognized as a result of such deemed sale will be blended gain or loss. The
capital gains and losses of the Fund will be combined in each fiscal year to
determine the capital gains and losses of the Fund, as described above.

In addition, the Fund trading strategies may constitute "straddle"
transactions with futures contracts, options thereon and options on debt
securities. "Straddles" may affect the taxation of futures contracts and
options, and may cause the postponement of recognition of losses incurred in
certain closing transactions.

The requirements for classification as a regulated investment company may
restrict the Fund's ability to engage in certain options and futures contract
transactions. The Fund has obtained a private letter ruling from the Internal
Revenue Service providing the Fund with relief from certain provisions of the
Code which might otherwise affect its ability to engage in such transactions.

PERFORMANCE DATA

From time to time the Fund may include its average annual total return and
other total return data, as well as yield in advertisements or information
furnished to present or prospective shareholders. Total return figures are based
on the Fund's historical performance and are not intended to indicate future
performance. Average annual total return is determined separately for Class A,
Class B, Class C and Class D shares in accordance with a formula specified by
the Commission and take into account the maximum applicable sales charge.

Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any realized or unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return will be computed

43
<PAGE>

assuming all dividends and distributions are reinvested and taking into account
all applicable recurring and nonrecurring expenses, including any CDSC that
would be applicable to a complete redemption of the investment at the end of the
specified period (in the case of Class B and Class C shares) and the maximum
sales charge (in the case of Class A and Class D shares.)

Dividends paid by the Fund with respect to all shares, to the extent any
dividends are paid, will be calculated in the same manner at the same time on
the same day and will be in the same amount, except that account maintenance and
distribution fees and any incremental transfer agency costs relating to each
class of shares will be borne exclusively by that class. The Fund will include
performance data for all classes of shares of the Fund in any advertisement or
information including performance data of the Fund.

The Fund also may quote total return and aggregate total return performance
data, both as a percentage and a dollar amount based on a hypothesized $1,000
investment, for various specified time periods other than those noted below.
Such data will be calculated substantially as described above, except that (1)
the rates of return calculated will not be average annual rates, but rather,
actual annual, annualized or aggregate rates of return, and (2) the maximum
applicable sales charges will not be included with respect to actual annual or
annualized rates of return calculations. Aside from the impact on the
performance data calculations of including or excluding the maximum applicable
sales charges, actual annual or annualized total return data generally will be
lower than average annual total return data since the average annual rates of
return reflect compounding; aggregate total return data generally will be higher
than average annual total return data since the aggregate rates of return
reflect compounding over longer periods of time. In advertisements directed to
investors whose purchases are subject to waiver of the CDSC in the case of Class
B and Class C shares (such as investors in certain retirement plans) or reduced
sales charges in the case of Class A and Class D shares, performance data may
take into account the reduced, and not the maximum, sales charge or may not take
into account the contingent deferred sales charge and therefore may reflect
greater total return since, due to the reduced sales charges or waiver of the
contingent deferred sales charge, a lower amount of expenses may be deducted.

Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield to maturity of each security held during the
period by (b) the average daily number of shares outstanding during the period
that were entitled to receive dividends multiplied by the maximum offering price
per share on the last day of the period. The yield for the 30-day period ending
March 31, 1999 was 9.37 % for Class A shares, 8.82% for Class B shares, 8.78%
for Class C shares, and 8.96% for Class D shares.

Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Fund will fluctuate, and an investor's shares, when redeemed, may be worth more
or less than their original cost.

On occasion, the Fund may compare its performance to the Standard & Poor's
500 Composite Stock Price Index, The Value Line Composite Index, the Dow Jones
Industrial Average, or performance data published by Lipper Analytical Services,
Inc., Morningstar Publications, Inc., Money Magazine, U.S. News & World Report,
Business Week, CDA Investment Technology, Inc., Forbes Magazine, Fortune
Magazine or other industry publications. In addition, from time to time the Fund
may include the Fund's risk-adjusted performance ratings assigned by Morningstar
Publications, Inc. in advertising or supplemental sales literature. As with
other performance data, performance comparisons should not be considered
indicative of the Fund's relative performance for any future period.

44
<PAGE>

Set forth below is total return and yield information for Class A, Class B,
Class C and Class D shares for the Fund.

Class A Shares Class B Shares
------------------------------------ --------------------------------
Expressed as Redeemable Value Expressed as Redeemable Value
a percentage of a hypothetical a percentage of a hypothetical
based on a $1,000 investment based on a $1,000 investment
hypothetical at the end of hypothetical at the end of
Period $1,000 investment the period $1,000 investment the period
- ------ ----------------- ---------------- ----------------- ---------------
Average Annual Total Return
(including maximum applicable sales charges)

<S> <C> <C> <C> <C>
Inception (May 1, 1998) to
March 31, 1999 (1.74)% $ 984.10 (2.17)% $ 980.20
---------------------------------------------------------------------
Annual Total Return
(excluding maximum applicable sales charges)

Inception (May 1, 1998) to
March 31, 1999 2.51% $1,025.10 1.80% $1,018.00
---------------------------------------------------------------------

Aggregate Total Return
(including maximum applicable sales charges)

Inception (May 1, 1998) to
March 31, 1999 (1.59)% $ 984.10 (1.98)% $ 980.20
---------------------------------------------------------------------

Class C Shares Class D Shares
---------------------------------------------------------------------
Expressed as Redeemable Value Expressed as Redeemable Value
a percentage of a hypothetical a percentage of a hypothetical
based on a $1,000 investment based on a $1,000 investment
hypothetical at the end of hypothetical at the end of
Period $1,000 investment the period $1,000 investment the period
- ------ ----------------- ---------------- ----------------- ---------------
Average Annual Total Return
(including maximum applicable sales charges)

Inception (May 1, 1998) to
March 31, 1999 0.88% $1,008.10 (1.98)% $ 981.90
---------------------------------------------------------------------

Annual Total Return
(excluding maximum applicable sales charges)

Inception (May 1, 1998) to
March 31, 1999 1.75% $1,017.50 2.28% $1,022.80
---------------------------------------------------------------------

Aggregate Total Return
(including maximum applicable sales charges)

Inception (May 1, 1998) to
March 31, 1999 0.81% $1,008.10 (1.81)% $ 981.90
---------------------------------------------------------------------

</TABLE>

In order to reflect the reduced sales charges, in the case of Class A or
Class D shares, or the waiver of the contingent deferred sales charge, in the
case of Class B or Class C shares, applicable to certain investors, as described
under "Purchase of Shares" and "Redemption of Shares," respectively, the total
return data quoted by the Fund in advertisements directed to such investors may
take into account the reduced, and not the maximum, sales charge or may not take
into account the contingent deferred sales charge and therefore may reflect
greater total return since, due to the reduced sales charges or the waiver of
sales charges, a lower amount of expenses may be deducted.

ADDITIONAL INFORMATION

Organization of the Fund

The Fund was organized as a Maryland corporation on March 13, 1998 and
commenced operations on May 1, 1998.

Description of Shares

The authorized capital stock of the Fund consists of four hundred million
(400,000,000) shares of Common Stock, having a par value $0.10 per share. The
shares of Common Stock are divided into four classes, each

45
<PAGE>

consisting of one hundred million (100,000,000) shares, as follows: "Class A
Common Stock," "Class B Common Stock," "Class C Common Stock" and "Class D
Common Stock". Each of the Fund's shares has equal dividend, distribution,
liquidation and voting rights, except that Class B, Class C and Class D Shares
bear certain account maintenance expenses and/or expenses related to the
distribution of such shares and have exclusive voting rights with respect to
matters relating to such expenditures (except that Class B Shares have certain
voting rights with respect to the Class D Distribution Plan). Each issued and
outstanding share is entitled to one vote and to participate equally in
dividends and distributions declared by the fund and in the net assets of the
Fund upon liquidation or dissolution remaining after satisfaction of outstanding
liabilities. The shares of the Fund, when issued, will be fully paid and
nonassessable, have no preference, preemptive or similar rights, and will be
freely transferable. Exchange and conversion rights are discussed elsewhere
herein and in the Prospectus. Stock certificates will be issued by the Transfer
Agent only on specific request. Certificates for fractional shares are not
issued in any case. Holders of shares of the fund are entitled to redeem their
shares as set forth under "Redemption of Shares." The Board of Directors of the
Fund may classify and reclassify the unissued shares of the Fund into additional
classes of Common Stock at a future date.

Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matter submitted to a shareholder vote.The Fund does not intend to
held meetings of shareholders unless under the Investment Company Act
shareholders are required to act on any of the following matters:(i) election of
Directors; (ii) approval of an investment advisory agreement; (iii) approval of
a distribution agreement; and (iv) ratification of selection of independent
accountants. Voting rights for Directors are not cumulative. Shares issued are
fully paid and nonassessable and have no preemptive rights. Each share is
entitled to participate equally in dividends and distributions declared by the
Fund and in the net assets of the Fund upon liquidation or dissolution after
satisfaction of outstanding liabilities except that, as noted above, Class B,
Class C and Class D shares bear certain additional expenses.

The Investment Adviser provided the initial capital for the Fund by
purchasing 10,000 shares for $100,000. Such shares were acquired for investment
and can only be disposed of by redemption. The organizational expenses of the
Fund (estimated at approximately $61,000) were paid by the Fund and will be
amortized over a period not exceeding five years. The proceeds realized by the
Investment Adviser upon the redemption of any of the shares initially purchased
by it will be reduced by the proportional amount of the unamortized
organizational expenses that the number of such initial shares being redeemed
bears to the number of shares initially purchased.

Under a separate agreement Merrill Lynch has granted the Fund the right to
use the "Merrill Lynch" name and has reserved the right to withdraw its consent
to the use of such name by the Fund at any time, or to grant the use of such
name to any other company, and the Fund has granted Merrill Lynch, under certain
conditions, the use of any other name it might assume in the future, with
respect to any corporation organized by Merrill Lynch.

Computation of Offering Price Per Share

An illustration of the computation of the offering price for Class A, Class
B, Class C and Class D shares of the Fund, based on the value of the Fund's net
assets and number of shares outstanding on March 31, 1999 is calculated as set
forth below

Class A Class B Class C Class D
-------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
Net Assets ..................................... $12,864,286 $502,377,299 $119,280,762 $74,016,395
============= =============== =============== =============
Number of Shares Outstanding ................... 1,366,349 53,351,298 12,667,899 7,860,261
============= =============== =============== =============
Net Asset Value Per Share (net assets divided
by number of shares outstanding) ............. $ 9.42 $ 9.42 $ 9.42 $ 9.42
Sales Charge (for Class A and Class D shares:
4.00% of offering price (4.17% of net asset
value per share))* ........................... .52 ** ** .52
------------- --------------- --------------- -------------
Offering Price ................................. $ 9.94 $ 9.42 $ 9.42 $ 9.94
============= =============== =============== =============

</TABLE>

- ---------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.

** Class B and Class C shares are not subject to an initial sales charge but may
be subject to a CDSC on redemption. See "Purchase of Shares-- Deferred Sales
Charges Alternatives -- Class B and Class C Shares" herein.

46
<PAGE>

INDEPENDENT AUDITORS

Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540 has
been selected as the independent auditors of the Fund. The independent auditors
are responsible for auditing the annual financial statements of the Fund.

CUSTODIAN

State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, acts as the Custodian of the Fund's assets. Under its
contract with the Fund, the Custodian is authorized to establish separate
accounts in foreign currencies and to cause foreign securities owned by the Fund
to be held in its offices outside the United States and with certain foreign
banks and securities depositories. The Custodian is responsible for safeguarding
and controlling the Fund's cash and securities, handling the receipt and
delivery of securities and collecting interest and dividends on the Fund's
investments.

TRANSFER AGENT

Financial Data Services, Inc. 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, acts as the Fund's Transfer Agent. The Transfer Agent is
responsible for the issuance, transfer and redemption of shares and the opening,
maintenance and servicing of shareholder accounts. See "Management of the
Fund--Transfer Agency Services."

DISTRIBUTOR

Merrill Lynch Funds Distributor, a division of Princeton Funds Distributor
Inc., 800 Scudders Mill Road, Plainsboro, New Jersey 08536 acts as the Fund's
Distributor. The Distributor is responsible for soliciting subscriptions and
purchases of shares of the Fund.

LEGAL COUNSEL

Rogers & Wells LLP, 200 Park Avenue, New York, New York 10168 is counsel
for the Fund.

REPORTS TO SHAREHOLDERS

The fiscal year of the Fund ends on March 31 of each year. The Fund sends
to its shareholders at least quarterly reports showing the investments of the
Fund and other information. An annual report, containing financial statements
audited by independent auditors, is sent to shareholders each year. After the
end of each year shareholders will receive Federal income tax information
regarding dividends and capital gains distributions.

SHAREHOLDER INQUIRIES

Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Statement of Additional
Information.

ADDITIONAL INFORMATION

The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act and the Investment
Company Act, to which reference is hereby made.

To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of a class of the Fund's shares as of July 1, 1999.

FINANCIAL STATEMENTS

The Fund's audited financial statements are incorporated in this Statement
of Additional Information by reference to its 1999 annual report to
shareholders. You may request a copy of the annual reports at no charge by
calling (800) 456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m. on any business
day.

<PAGE>

Interest Rate Futures, Options Thereon and Options on Debt Securities

The Fund may trade options on debt securities, purchase and sell interest
rate, bond and bond index futures contracts ("futures contracts") and purchase
and write call and put options on futures contracts. At the date hereof, futures
contracts (and options thereon) can be purchased and sold with respect to U.S.
Treasury notes and GNMA certificates on the Chicago Board of Trade and with
respect to U.S. Treasury bills on the International Monetary Market at the
Chicago Mercantile Exchange. Options directly on debt securities are currently
traded on the Chicago Board Options Exchange and the American Stock Exchange.

Futures Contracts. A futures contract creates a binding obligation on the
purchaser (the "long") to accept delivery, and the seller (the "short") to make
delivery, of the face amount of the security underlying the futures contract in
a stated delivery month, at a price fixed in the contract or to make a cash
settlement in lieu of actual delivery. A majority of transactions in futures
contracts, however, do not result in actual delivery of the underlying security,
but are settled through liquidation, i.e., by entering into an offsetting
transaction. Futures contracts are traded only on commodity exchanges -- known
as "contract markets" -- approved for such trading by the Commodity Futures
Trading Commission ("CFTC"). Transactions in futures contracts must be executed
through a futures commission merchant ("FCM"), or brokerage firm, which is a
member of the relevant contract market.

The purchase or sale of a futures contract differs from the purchase or
sale of a security in that the total cash value reflected by the futures
contract is not paid. Instead, an amount of cash or securities acceptable to
each Fund's FCM and the relevant contract market, which varies, but may be 5% or
less of the contract amount, must be deposited with the FCM. This amount is
known as "initial margin," and represents a "good faith" deposit assuring the
performance of both the purchaser and the seller under the futures contract.
Subsequent payments to and from the FCM, known as "maintenance" or "variation"
margin, are required to be made on a daily basis as the price of the futures
contract fluctuates, making the long or short positions in the futures contract
more or less valuable, a process known as "marking to the market." Prior to the
settlement date of the futures contract, the position may be closed out by
taking an opposite position which will operate to terminate the position in the
futures contract. A final determination of variation margin is then made,
additional cash is required to be paid to or released by the FCM, and the Fund
realizes a loss or gain. In addition, a commission is paid on each completed
purchase and sale transaction.

Each Fund will deal only in standardized contracts on recognized exchanges.
The clearing members of an exchange's clearing corporation guarantee the
performance of their futures contracts through the clearing corporation, a
nonprofit organization managed by the exchange membership which is also
responsible for handling daily accounting of deposits or withdrawals of margin.

Options on Futures Contracts. An option on a futures contract gives the
purchaser (known as the "holder") the right, but not the obligation, to enter
into a long position in the underlying futures contract (i.e., purchase the
futures contract), in the case of a "call" option, or to enter into a short
position (i.e., sell the futures contract), in the case of a "put" option, at a
fixed price (the "exercise" or "strike" price) up to a stated expiration date.
The holder pays a non-refundable purchase price for the option, known as the
"premium." The maximum amount of risk the purchaser of the option assumes is
equal to the premium, the transaction costs and the unrealized profits, if any,
although this entire amount may be lost. Upon exercise of the option by the
holder, the contract market clearing corporation establishes a corresponding
short position for the seller, or "writer" of the option in the case of a call
option, or a corresponding long position in the case of a put option, at the
strike price. In the event that an option is exercised, the holder will be
subject to all the risks associated with the trading of futures contracts. An
option becomes worthless when it expires.

The writer of an option on a futures contract is required to deposit
initial and variation margin pursuant to requirements similar to those
applicable to futures contracts. Premiums received from the holder of the option
may be included in initial margin. The writing of an option on a futures
contract involves risks similar to those relating to futures contracts, which
are described on page 13.

A-1
<PAGE>

A position in an option may be terminated by the purchaser or seller prior
to its expiration by effecting a closing purchase or sale transaction, which
requires the purchase or writing of an option of the same series (i.e., the same
exercise price and expiration date) as the option previously written or
purchased. The premium received from the holder on the closing transaction may
be more or less than the premium paid for the option, resulting in a gain or
loss on the transactions.

Exercise prices of options are set at specified intervals in relation to
the price of the underlying futures contract by the exchange on which they are
traded. Exercise prices are initially established when a new expiration cycle
commences and additional exercise prices may subsequently be introduced as the
futures contract price fluctuates. The expiration of an option is generally
based on the expiration of the underlying futures contract.

The holder of an option exercises it by notifying his broker of his
intention to exercise. The broker tenders the exercise notice to the clearing
house of the applicable exchange which assigns the notice on a random basis to a
broker with a customer who has written and outstanding an option of the same
series. That broker then assigns the exercise notice to such customer, generally
on a random basis, and the customer is then obligated to enter into the
underlying futures contract upon exercise. At that time, the contract market
clearing house establishes appropriate long and short futures positions for the
holder and writer. A corresponding short position for the writer would be
established in the case of a call option, or a corresponding long position would
be established in the case of a put option. The parties will then be subject to
initial and variation margin requirements with respect to the underlying futures
contract. By interposing itself between options writers and purchasers, the
clearing house in effect guarantees the performance of the other side to each
option purchased or sold.

Options on Debt Securities. An option on a U.S. Government security gives
the holder the right, but not the obligation, to purchase the underlying
security, in the case of a call option, or to sell the underlying security, in
the case of a put option, at the specified strike price up to a stated
expiration date. The holder pays a non-refundable premium upon purchasing the
option. The maximum amount of risk assumed by the holder is equal to the
premium, transaction costs and unrealized profits, if any, although this entire
amount may be lost. Upon exercise of the option, the holder purchases or sells
the underlying security at the strike price. Options on debt instruments to be
traded by the Fund are traded on national securities exchanges regulated by the
Securities and Exchange Commission. The Options Clearing Corporation is
interposed between the clearing members which are the parties to each such
option, thereby assuring the performance of the parties.

If a liquid market exists, a position in an option may be terminated by the
purchaser or seller prior to expiration by entering into an offsetting purchase
or sale transaction in an option of the same series (i.e., the same exercise
price and expiration date) as the option previously purchased or written. The
premium paid or received by the trader on the closing transaction may be more or
less than the premium paid or received for the option, resulting in a gain or
loss on the transaction. If an option is not exercised, it expires worthless to
the holder.

Exercise prices of options are set at specified intervals in relation to
the price of the underlying security by the exchange on which they are traded.
Exercise prices are initially established when a new expiration cycle commences
and additional exercise prices may subsequently be introduced as the price of
the security fluctuates.

The holder of an option exercises it by notifying his broker of his
intention to exercise. The broker tenders the exercise notice to the clearing
house, which assigns the notice on a random basis to a broker with a customer
who has written and outstanding an option of the same series. That broker then
assigns the exercise notice to its customer, generally on a random basis. As a
call or put writer, the customer is obligated to sell or purchase the underlying
security.

A-2
<PAGE>

APPENDIX B

DESCRIPTION OF CORPORATE BOND RATINGS

Ratings of Corporate Bonds

Description of Corporate Bond Ratings of Moody's Investors Service, Inc.:

Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.

Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.

A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors
giving security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
sometime in the future.

Baa Bonds which are rated Baa are considered medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.

Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.

B Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.

Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.

Ca Bonds which are rated Ca represent obligations that are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.

C Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.

The modifier 1 indicates that the bond ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its rating
category.

Description of Corporate Bond Ratings of Standard & Poor's Ratings Group:

AAA Bonds rated AAA have the highest ratings assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.

AA Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree.

B-1
<PAGE>

A Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds
in higher rated categories.

BBB Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than in higher
rated categories.

BB Bonds rated BB, B, CCC and CC are regarded,on balance, as predominantly
B speculative with respect to the issuer's capacity to pay interest and
CCC repay principal in accordance with the terms of the obligation. BB
CC indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties
or major risk exposures to adverse conditions.

C The C rating is reserved for income bonds on which no interest is being
paid.

D Bonds rated D are in default, and payment of interest and/or repayment
of principal is in arrears.

NR Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a
particular type of bond as a matter of policy.

Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.

B-2
<PAGE>

Code #10210-07-99

<PAGE>

PART C. OTHER INFORMATION

Item 23. Exhibits

<TABLE>
<CAPTION>
Exhibit
Number Description
- --------- -----------
<S> <C> <C>
1 -- Articles of Incorporation of the Registrant, dated March 12, 1998.(a)
2 -- By-Laws of the Registrant.(a)
3 -- None.
4(a) -- Portions of Articles of Incorporation and By-laws of the Registrant defining the rights of holders
of shares of common stock of the Registrant.(b)
(b) -- Form of specimen certificate for shares of Common Stock of the Registrant.(e)
5(a) -- Investment Advisory Agreement between the Registrant and Fund Asset Management, L.P. (the
"Investment Adviser").(e)
(b) -- Sub-Advisory Agreement between the Investment Adviser and Merrill Lynch Asset Management U.K.
Limited.(e)
6(a) -- Class A Shares Distribution Agreement between the
Registrant and Merrill Lynch Funds Distributor, a division
of Princeton Funds Distributor, Inc. (the "Distributor")
(including Form of Selected Dealers Agreement).(e)
(b) -- Class B Shares Distribution Agreement between the Registrant and the Distributor (including Form of
Selected Dealers Agreement).(e)
(c) -- Class C Shares Distribution Agreement between the Registrant and the Distributor (including Form of
Selected Dealers Agreement).(e)
(d) -- Class D Shares Distribution Agreement between the Registrant and the Distributor (including Form of
Selected Dealers Agreement).(e)
7 -- None.
8 -- Custodian Contract between the Registrant and State Street Bank and Trust Company.(e)
9(a) -- Transfer Agency, Divided Disbursing Agency and Shareholder Servicing Agency Agreement between the
Registrant and Financial Data Services, Inc. (the "Transfer Agent").(e)
(b) -- Agreement relating to use of name between the Registrant and Merrill Lynch & Co., Inc.(f)
10(a) -- Opinion of Rogers & Wells LLP.(e)
(b) -- Consent of Rogers & Wells LLP.(c)
11 -- Consent of Deloitte & Touche LLP.(c)
12 -- None.
13 -- Certificate of Fund Asset Management, L.P.(e)
14 -- None.
15(a) -- Class B Shares Distribution Plan and Class B Distribution Plan Sub-Agreement of the Registrant.(e)
(b) -- Class C Shares Distribution Plan and Class C Distribution Plan Sub-Agreement of the Registrant.(e)
(c) -- Class D Shares Distribution Plan and Class D Distribution Plan Sub-Agreement of the Registrant.(e)
16 -- None.
17(a) -- Financial Data Schedule for Class A Shares.(f)
(b) -- Financial Data Schedule for Class B Shares.(f)
(c) -- Financial Data Schedule for Class C Shares.(f)
(d) -- Financial Data Schedule for Class D Shares.(f)
18 -- Merrill Lynch Select Pricing System Plan pursuant to Rule 18f-3.(d)

</TABLE>

C-1
<PAGE>

- ------------------
(a) Incorporated by reference to the Registrant's Registration Statement on Form
N-1A (File No. 333-47971) under the Securities Act of 1933, as amended (the
"Securities Act").

(b) Reference is made to Articles IV, V (Sections 3, 5, 6 and 7), VI, VII and IX
of the Registrant's Articles of Incorporation, filed herewith as Exhibit 1
to this Registration Statement on Form N-1A; and to Articles II, III
(Sections 1, 3, 5 and 6), VI, VII, XIII and XIV of the Registrant's By-Laws,
filed herewith as Exhibit 2 of this Registration Statement on Form N-1A.

(d) Incorporated by reference to Exhibit 18 to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A under the Securities Act, filed
on January 25, 1996, relating to shares of Merrill Lynch New York Municipal
Bond Fund Series of Merrill Lynch Multi-State Municipal Series Trust (File
No. 2-99473).

(e) Incorporated by reference to Pre-Effective Amendment No. 2 to the
Registrant's Registration Statement on Form N-1/A (File No. 333-47971) under
the Securities Act of 1933, as amended.

(f) Incorporated by reference to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A (File No. 333-47971) under the
Securities Act of 1933, as amended.

Item 24. Persons Controlled by or under Common Control with Registrant

The Registrant has sold 2,500 Class A shares of its Common Stock, 2,500
Class B shares of its Common Stock, 2,500 shares of its Class C Common Stock and
2,500 Class D shares of its Common Stock to the Investment Adviser for an
aggregate of $100,000. The Investment Adviser is the sole shareholder of the
Fund. The Investment Adviser is organized as a Delaware limited partnership.

Item 25. Indemnification.

Reference is made to Article VI of the Registrant's Articles of
Incorporation, Article VI of the Registrant's By-Laws, Section 2-418 of the
Maryland General Corporation Law and Section 9 of the Class A, Class B, Class C
and Class D Distribution Agreements.

Insofar as the conditional advancing of indemnification monies for actions
based on the Investment Company Act of 1940, as amended (the "Investment Company
Act") may be concerned, Article VI of the Registrant's By-Laws provides that
such payments will be made only on the following conditions: (i) advances may be
made only on receipt of a written affirmation of such person's good faith belief
that the standard of conduct necessary for indemnification has been met and a
written undertaking to repay any such advance if it is ultimately determined
that the standard of conduct has not been met and (ii) (a) such promise must be
secured by a security for the undertaking in form and amount acceptable to the
Registrant, (b) the Registrant is insured against losses arising by receipt of
the advance, or (c) a majority of a quorum of the Registrant's disinterested,
non-party Directors, or an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts, that at the time the
advance is proposed to be made, there is reason to believe that the person
seeking indemnification will ultimately be found to be entitled to
indemnification.

In Section 9 of the Class A, Class B, Class C and Class D Distribution
Agreements relating to the securities being offered hereby, the Registrant
agrees to indemnify the Distributor and each person, if any, who controls the
Distributor within the meaning of the Securities Act against certain types of
civil liabilities arising in connection with the Registration Statement or the
Prospectus and Statement of Additional Information.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to Directors, officers and controlling persons of the
Registrant and the principal underwriter pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a Director, officer or
controlling person of the Registrant and the principal underwriter in connection
with the successful defense of any action, suit or proceeding) is asserted by
such Director, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.

C-2
<PAGE>

Item 26. Business and other Connections of Manager.

Fund Asset Management, L.P. ("FAM" or the "Investment Adviser"), acts as
the investment adviser for the following open-end registered investment
companies: CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA
Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The
Corporate Fund Accumulation Program, Inc., Financial Institutions Series Trust,
Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series
Trust, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Corporate High
Yield Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch
Federal Securities Trust, Merrill Lynch Funds for Institutions Series, Merrill
Lynch Multi-State Limited Maturity Municipal Series Trust, Merrill Lynch
Multi-State Municipal Series Trust, Merrill Lynch Municipal Bond Fund, Inc.,
Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value Fund, Inc.,
Merrill Lynch World Income Fund, Inc. and The Municipal Fund Accumulation
Program, Inc.; and the following closed-end registered investment companies:
Apex Municipal Fund, Inc., Corporate High Yield Fund, Inc., Corporate High Yield
Fund II, Inc., Corporate High Yield Fund III, Inc., Debt Strategies Fund, Inc.,
Debt Strategies Fund II, Inc., Income Opportunities Fund 1999, Inc., Income
Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund, Inc.,
MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniHoldings Fund, Inc.,
MuniHoldings Fund II, Inc., MuniHoldings Insured Fund, MuniHoldings Insured Fund
II, Inc., MuniHoldings Insured Fund III, Inc., MuniHoldings California Insured
Fund, Inc., MuniHoldings California Insured Fund II, Inc., MuniHoldings
California Insured Fund III, Inc., MuniHoldings California Insured Fund IV,
Inc., MuniHoldings California Insured Fund V, Inc., MuniHoldings Florida Insured
Fund, MuniHoldings Florida Insured Fund II, MuniHoldings Florida Insured Fund
III, MuniHoldings Florida Insured Fund IV, MuniHoldings Florida Insured Fund V,
MuniHoldings Michigan Insured Fund, Inc., MuniHoldings New Jersey Insured Fund
Inc., MuniHoldings New Jersey Insured Fund II, Inc., MuniHoldings New Jersey
Insured Fund III, Inc., MuniHoldings New Jersey Insured Fund IV, Inc.,
MuniHoldings New York Fund, Inc., MuniHoldings New York Insured Fund, Inc.,
MuniHoldings New York Insured Fund II, Inc., MuniHoldings New York Insured Fund
III, Inc., MuniHoldings New York Insured Fund IV, Inc., MuniHoldings
Pennsylvania Insured Fund, MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest
Fund II, Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc.,
MuniVest New Jersey Fund, Inc., MuniVest Pennsylvania Insured Fund, Inc.,
MuniYield Arizona Fund, Inc., MuniYield California Fund, Inc., MuniYield
California Insured Fund, Inc., MuniYield California Insured Fund II, Inc.,
MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc.,
MuniYield Insured Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan
Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey
Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New York
Insured Fund II, Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund,
Inc., MuniYield Quality Fund II, Inc., Senior High Income Portfolio, Inc., and
Worldwide DollarVest Fund, Inc.

Merrill Lynch Asset Management, L.P. ("MLAM"), acts as the investment
adviser for the following open-end registered investment companies: Merrill
Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income Fund,
Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch Asset Growth
Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Capital Fund,
Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch
Convertible Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc.,
Merrill Lynch Disciplined Equity Fund, Inc., Merrill Lynch Dragon Fund, Inc.,
Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill
Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for
Investment and Retirement, Merrill Lynch Global Convertible Fund, Inc., Merrill
Lynch Global Growth Fund, Inc., Merrill Lynch Global Holdings, Inc., Merrill
Lynch Global Resources Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill
Lynch Global Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill
Lynch Growth Fund, Merrill Lynch Global Technology Fund, Inc., Merrill Lynch
Healthcare Fund, Inc., Merrill Lynch Intermediate Government Bond Fund, Merrill
Lynch International Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill
Lynch Middle East/Africa Fund, Inc., Merrill Lynch Municipal Series Trust,
Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill
Lynch Real Estate Fund, Inc., Merrill Lynch Retirement Series Trust, Merrill
Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc.,
Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc.,
Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch U.S.A. Government
Reserves, Merrill Lynch Utility Income Fund, Inc., Merrill Lynch Variable Series
Funds, Inc. and Hotchkis and Wiley Funds (advised by Hotchkis and Wiley, a
division of MLAM); and for the following closed-end registered investment
companies: Merrill Lynch High Income Municipal Bond Fund, Inc., Merrill Lynch
Senior Floating Rate Fund, Inc. and Merrill Lynch Senior Floating Rate Fund II,
Inc. MLAM also acts as

C-3
<PAGE>

sub-adviser to Merrill Lynch World Strategy Portfolio and Merrill Lynch Basic
Value Equity Portfolio, two investment portfolios of EQ Advisors Trust.

The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch Funds
for Institutions Series and Merrill Lynch Intermediate Government Bond Fund is
One Financial Center, 23rd Floor, Boston, Massachusetts 02111-2646. The address
of the Manager, FAM and Princeton Services, Inc. ("Princeton Services"), and
Princeton Administrators, L.P. is also P.O. Box 9011, Princeton, New Jersey
08543-9011. The address of Princeton Funds Distributor, Inc. ("PFD") is P.O. Box
9081, Princeton, New Jersey 08543-9081. The address of Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch") and Merrill Lynch & Co., Inc. ("ML
& Co.") is North Tower, World Financial Center, 250 Vesey Street, New York, New
York 10281-1201. The address of the Fund's transfer agent, Financial Data
Services, Inc. ("FDS"), is 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484.

Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or employment
of a substantial nature in which each such person or entity has been engaged
since July 1, 1997, for his or her own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Glenn is President and Mr. Burke
is Vice President and Treasurer of substantially all of the investment companies
described in the first two paragraphs of this Item 28 and Messrs. Giordano and
Monagle are directors or officers of one or more of such companies.

<TABLE>
<CAPTION>
Position with the Other Substantial Business,
Name Investment Adviser Profession, Vocation or Employment
- ----- ------------------ ----------------------------------
<S> <C> <C>

ML & Co ................................ Limited Partner Financial Services Holding Company; Limited
Partner of FAM

Princeton Services ..................... General Partner General Partner of MLAM

Jeffrey M. Peek ........................ President President of MLAM; President and director of
Princeton Services; Executive Vice president
of ML & Co.; Managing Director and Co-Head of
the Investment Banking division of Merrill Lynch
in 1997.

Terry K. Glenn ......................... Executive Vice President Executive Vice President of MLAM; Execuitve
Vice President and Director of Princeton Services;
President and Director of PFD; Director of Financial
Data Services, Inc.; President of Princeton
Administrators, L.P.

Gregory A. Bundy ....................... Chief Operating Officer Chief Operating Officer and Managing Director of FAM;
and Managing Director Chief Operating Officer and Managing Director of
Princeton Services; Co-CEO of Merrill Lynch Australia
from 1997 to 1999

Donald C. Burke ........................ Senior Vice President Senior Vice President and Treasurer of
and Treasurer MLAM; Senior Vice President and Treasurer of
Princeton Services; Vice President and Treasurer
of PFD; First Vice President of MLAM from 1997 to
1999; Vice President of MLAM from 1990 to 1997;
Director of Taxation of MLAM

Michael G. Clark ....................... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services

</TABLE>

C-4
<PAGE>

<TABLE>
<CAPTION>
<S> <C> <C>
Senior Vice President of Princeton Services

Robert C. Doll ......................... Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services; Chief Investment Officer of
Oppenheimer Funds, Inc. in 1999 and Executive Vice
President thereof from 1991 to 1999

Linda L. Federieci ..................... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services

Vincent R. Giordano .................... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services

Elizabeth A. Griffin ................... Senior Vice President Senior Vice President of MLAM;

Michael J. Hennewinkel ................. Senior Vice President, Senior Vice President, General
General Counsel and Counsel and Secretary of MLAM;
Secretary Senior Vice President of Princeton Services

Philip L. Kirstein ..................... Senior Vice President Senior Vice President of MLAM; Senior Vice
President, General Counsel, Director and
Secretary of Princeton Services.

Ronald M. Kloss ........................ Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services

Debra W. Landsman-Yaros ................ Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services; Vice President
of PFD

Stephen M. Miller ...................... Senior Vice President Executive Vice President of Princeton
Administrators, L.P.; Senior Vice President of
Princeton Services

Joseph T. Monagle, Jr. ................. Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services

Brian A. Murdock ....................... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services;

Gregory D. Upah ........................ Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton
Services

</TABLE>

(b) Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as
sub-adviser for the following registered investment companies; Corporate High
Yield Fund, Inc., Corporate High Yield Fund II, Inc., Corporate High Yield Fund
III, Inc., Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000,
Inc., Merrill Lynch Americas Income Fund Inc., Merrill Lynch Asset Builder
Program, Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income
Fund, Inc., Merrill Lynch Basic Value Fund, Inc., Merrill Lynch Capital Fund,
Inc., Merrill Lynch Consults International Portfolio, Merrill Lynch Convertible
Fund, Inc., Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Developing
Capital Markets Fund, Inc., Merrill Lynch Disciplined Equity Fund, Inc., Merrill
Lynch Dragon Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch
EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Global
Allocation Fund, Inc., Merrill Lynch Global Bond Fund for Investment and
Retirement, Merrill Lynch Global Convertible Fund, Inc., Merrill Lynch Global
Holdings, Inc., Merrill Lynch Global Growth Fund, Inc., Merrill Lynch Global
Resources Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill Lynch Global
Technology Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill Lynch
Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch Healthcare

C-5
<PAGE>

Fund, Inc., Merrill Lynch International Equity Fund, Merrill Lynch Latin America
Fund, Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch Pacific
Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Series Trust Fund,
Inc., Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Real
Estate Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch
Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch
Utility Income Fund, Inc., Merrill Lynch Variable Series Funds, Inc., Merrill
Lynch World Income Fund, Inc., and Worldwide DollarVest Fund, Inc. The address
of each of these investment companies is P.O. Box 9011, Princeton, New Jersey
08543-9011. The address of MLAM U.K. is Milton Gate, 1 Moor Lane, London EC2Y
9HA, England.

Set forth on the following page is a list of each executive officer and
director of MLAM U.K. indicating each business, profession, vocation or
employment of a substantial nature in which each such person has been engaged
since July 1, 1997, for his or her own account or in the capacity of director,
officer, partner or trustee. In addition, Messrs. Glenn, Albert and Burke are
officers of one or more of the registered investment companies listed in the
first two paragraphs of this Item 28:

<TABLE>
<CAPTION>
Position with Other Substantial Business,
Name MLAM U.K. Profession, Vocation or Employment
- ----- ----------- --------------------------------
<S> <C> <C>
Terry K.Glenn .......................... Director and Chairman Executive Vice President of MLAM and FAM;
Executive Vice President and Director of
Princeton Services; President and Director
of PFD; President of Princeton Administrators

Alan J. Albert ......................... Senior Managing Director Vice President of the Investment Adviser

Nicholas C.D. Hall ..................... President Director of Merrill Lynch Europe
PLC; General Counsel of Merrill
Lynch International Private
Banking Group

Donald C. Burke ........................ Treasurer Senior Vice President of FAM, Treasurer and
Director of Taxation of MLAM; Senior Vice
President and Treasurer of Princeton Services;
Vice President of PFD; First Vice President of
MLAM from 1997 to 1999; Vice President of MLAM
from 1990 to 1997.

Carol Ann Langham ...................... Company Secretary None

Debra Anne Searle ...................... Assistant Company Secretary None

</TABLE>

Item 27. Principal Underwriters.

(a) MLFD, a division of PFD, acts as the principal underwriter for the
Registrant and for each of the open-end investment companies referred to in the
first two paragraphs of Item 28 except CBA Money Fund, CMA Government Securities
Fund, CMA Money Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt
Fund, CMA Treasury Fund, The Corporate Fund Accumulation Program, Inc. and The
Municipal Fund Accumulation Program, Inc., MLFD also acts as the principal
underwriter for the following closed-end investment companies: Merrill Lynch
High Income Municipal Bond Fund, Inc., Merrill Lynch Municipal Strategy Fund,
Inc., Merrill Lynch Senior Floating Rate Fund, Inc., and Merrill Lynch Senior
Floating Rate Fund II, Inc. A separate division of PFD acts as the principal
underwriter of a number of other investment companies.

C-6
<PAGE>

(b) Set forth below is information concerning each director and officer of
the Distributor. The principal business address of each such person is P.O. Box
9011, Princeton, New Jersey 08543-9081, except that the address of Messrs.
Crook, Aldrich, Brady, Breen, Fatseas, and Wasel is One Financial Center, 23rd
Floor, Boston, Massachusetts 02111-2665.

Positions and Offices Positions and Offices
Name with the Distributor with Registrant
----- -------------------------- --------------------------
<S> <C> <C>
Terry K. Glenn ................................. President and Director President and Director
Thomas J. Verage ............................... Director None
Robert W. Crook ................................ Senior Vice President None
Michael J. Brady ............................... Vice President None
William M. Breen ............................... Vice President None
Michael G. Clark ............................... Vice President None
James T. Fatseas ............................... Vice President None
Debra W. Landsman-Yaros ........................ Vice President None
Michelle T. Lau ................................ Vice President None
Donald C. Burke ................................ Vice President and Vice President and
Treasurer Treasurer
Salvatore Venezia .............................. Vice President None
William Wasel .................................. Vice President None
Robert Harris .................................. Secretary None

</TABLE>
(c) Not Applicable.

Item 28. Location of Accounts and Records.

All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the rules
thereunder are maintained at the offices of the Registrant (800 Scudders Mill
Road, Plainsboro, New Jersey 08536), and its Transfer Agent (4800 Deer Lake
Drive East, Jacksonville, Florida 32246-6484)

Item 29. Management Services.

Other than as set forth under the caption "Investment Adviser" in the
Prospectus constituting Part A of the Registration Statement and under the
caption "Management of the Fund--Investment and Advisory Arrangements" in the
Statement of Additional Information constituting Part B of the Registration
Statement, the Registrant is not a party to any management-related service
contract.

Item 30. Undertakings.

(a) The Registrant undertakes to file a post-effective amendment, using
financial statements which need not be certified, within four to six months from
the effective date of the Registrant's registration statement under the
Securities Act.

(b) The Fund, if requested to do so by the holders of at least 10% of the
Fund's outstanding shares, will call a meeting of shareholders for the purpose
of voting upon the question of removal of a director or directors and will
assist communications with other shareholders as required by Section 16(c) of
the Investment Company Act.

C-7
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, the Registrant certifies that it
meets all requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to rule 485(b) under the Securities Act of 1933
and has caused this Post-Effective Amendment to its Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
Township of Plainsboro, and State of New Jersey on the 27th day of July, 1999.

MERRILL LYNCH CORPORATE HIGH YIELD
FUND, INC.
(Registrant)

By: /s/ Donald C. Burke
------------------------------------
(Donald C. Burke, Vice President and Treasurer)

Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registrant's Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.

Signature Title Date
--------- ---- ----

<S> <C> <C>
* President and
- --------------------------------------------- Director (Principal
(Terry K. Glenn) Executive Officer)

/s/ Donald C. Burke Vice President and Treasurer July 27, 1999
- --------------------------------------------- (Principal Financial and
(Donald C. Burke) Accounting Officer)

* Director
- ---------------------------------------------
(Ronald W. Forbes)

* Director
- ---------------------------------------------
(Cynthia A. Montgomery)

* Director
- ---------------------------------------------
(Charles C. Reilly)

* Director
- ---------------------------------------------
(Kevin A. Ryan)

* Director
- ---------------------------------------------
(Richard R. West)

* Director
- ---------------------------------------------
(Arthur Zeikel)

</TABLE>

*This amendment has been signed by each of the persons so indicated by the
undersigned as Attorney-in-Fact.

*By: /s/ Donald C. Burke July 27, 1999
- ---------------------------------------------
(Donald C. Burke, Attorney-in-Fact)

C-8
<PAGE>

EXHIBIT INDEX

Exhibit
Number Description
- ------- ----------
10(b) Consent of Rogers & Wells, counsel for Registrant.

11 Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.

Rogers & Wells

Rogers & Wells LLP
200 Park Avenue New York, NY 10166-0153
Telephone 212 878 8000 Facsimile 212 878 8375

July 26, 1999

Merrill Lynch Corporate High Yield Fund, Inc.
800 Scudders Mill Road
Plainsboro, NJ 08536

Ladies and Gentlemen:

We have acted as counsel for Merrill Lynch Corporate High Yield Fund, Inc., a
corporation organized under the laws of the State of Maryland (the "Fund"), in
connection with the Fund's registration as an open-end imvestment company under
the Investment Company Act of 1940, as amended. Our opinion, dated April 28,
1998, was included as an exhibit to Pre-Effective Amendment No. 2 to the Fund's
Registration Statement on Form N-1A (File Nos. 333-47971 and 811-08699) (the
"Registration Statement"). We hereby consent to the incorporation by reference
of that opinion as an exhibit in Post-Effective Amendment No. 2 to the
Registration Statement. In giving this consent, we do not admit that we are in
the category of persons whose consent is required under Section 7 of the
Securities Act of 1933 or the rules and regulations of the Securities and
Exchange Commission.

Very truly yours,

/s/ Rogers & Wells LLP

INDEPENDENT AUDITORS' CONSENT

Merrill Lynch Corporate High Yield Fund, Inc.:

We consent to the incorporation by reference in this Post-Effective Amendment
No. 2 to Registration Statement No. 333-47971 of our report dated May 18, 1999
appearing in the annual report to shareholders of Merrill Lynch Corporate High
Yield Fund, Inc. for the year ended March 31, 1999, and to the reference to us
under the caption "Financial Highlights" in the Prospectus, which is a part of
such Registration Statement.

Deloitte & Touche LLP
Princeton,New Jersey
July 26, 1999