E*TRADE BOND INDEX FUND
SEMIANNUAL REPORT
Dear E*TRADE Funds Shareholders,
We're writing to report the performance of the E*TRADE Bond Index Fund (the
"Fund") for the first half of 2000. We'd also like to take this opportunity to
thank all of you for your investment in the Fund.
The Fund's investment objective is to provide investment results that
correspond, before fees and expenses, to the total return performance of
fixed-income securities in the aggregate, as represented by the Lehman Brothers
Government/Corporate Bond Index.* The Bond Index includes approximately 5000
fixed-income securities, including U.S. Government securities and investment
grade corporate bonds, each with an outstanding market value of at least $25
million and remaining maturity of greater than one year.
The Fund seeks to achieve its investment objective by investing all of its
assets in the Bond Index Master Portfolio ("Master Portfolio"). The Fund invests
in a representative sample of the securities that comprise the Index in
proportions that match their Index weight. At the close of the period, the
Fund's portfolio was composed of 48.7% U.S. Treasury Bonds, 35.8% corporate
bonds, and 15.5% U.S. agency securities.
For the first half of the fiscal year, which ended June 30, 2000, the Fund
returned 3.96%, gaining a cumulative 4.73% since inception on August 13, 1999.
In comparison, the Index gained 4.18% for the first half of the fiscal year.
Since September 1, 1999, the Fund has returned 4.42%, while the Index has
returned 4.69% for the same period**. The investment return and principal value
of an investment in the Fund will fluctuate, and your shares, when redeemed, may
be worth more or less than their original cost.
Indicators of an overheated economy resurfaced in the first quarter of 2000. The
annualized GDP growth rate for the fourth quarter of 1999, initially reported at
6.9%, was later revised to 7.3%. The unemployment rate fell to 3.9% in April,
its lowest level in 30 years. In response, the Federal Reserve Board raised the
federal funds target rate three times in the first half of 2000. Combined with a
shortage in supply of long-term bonds, these rate hikes caused Treasury
securities with shorter maturities to carry higher yields than those with longer
maturities. This phenomenon, known as an inverted yield curve, had not been
witnessed since 1990.
Short-term rates move in tandem with the federal funds target rate, which
increased by 1.00% (to 6.50%) in the first half of 2000. However, long bond
yields fell as a result of two significant policy changes instituted by the
Treasury. In January, the Treasury announced that it would buy back its
long-term bonds in an effort to reduce outstanding government debt. This was
followed by a February announcement that the Treasury would curtail further
30-year Treasury bond auctions. In response to the impending reduced supply of
long-term Treasury bonds, long-term yields plunged, as evidenced by the 9.30%
return on the Lehman Brothers 20+ Year Treasury Index in the first quarter.
Bonds languished in April and May amid continued reports of rapid economic
growth. Specifically, the Employment Index, released on April 27, demonstrated a
first quarter rise of 1.4%, well above the anticipated 1.0%. For the month of
April, the Lehman Brothers Government/Corporate Bond Index lost 0.49%. On May16,
the Federal Reserve raised the federal funds rate target by 0.50%, its third and
largest increase in 2000. By month end, economic data demonstrated signs of the
Federal Reserve's intended slowdown. Bonds rallied in response, finishing the
month flat (-0.05%). June found more signs of a slowing economy, to which the
bond market responded favorably. The Lehman Brothers Government/Corporate Bond
Index returned 2.04% to finish the quarter up 1.45%.
You should remember that past performance is no guarantee of future returns and
the Fund may not be able to duplicate its performance. The Fund's unaudited
financial statements for the period ended June 30, 2000 are provided below. We
hope you will find them useful for evaluating and monitoring your investment.
Thank you again for your continued participation in the E*TRADE Bond Index Fund.
Sincerely, E*TRADE Funds
* Lehman Brothers ("Lehman") does not sponsor the Fund or the Master Portfolio,
nor is it affiliated in any way with the Fund or the Master Portfolio or their
respective investment advisors. "Lehman Brothers Government/Corporate Bond
Index(R)" is a trademark of Lehman. The Fund and the Master Portfolio are not
sponsored, endorsed, sold, or promoted by Lehman, and neither Lehman nor the
Bond Index makes any representation or warranty, express or implied, regarding
the advisability of investing in the Fund or the Master Portfolio.
** The Fund began operations on August 13, 1999. Index Comparisons began on
September 1, 1999.
<PAGE>
BOND INDEX MASTER PORTFOLIO
JUNE 30, 2000 (UNAUDITED)
SCHEDULE OF INVESTMENTS
SECURITY PRINCIPAL VALUE
--------------------------------------------------------------------------
CORPORATE BONDS & NOTES--32.11%
AEROSPACE / DEFENSE--0.78%
--------------------------------------------------------------------------
Lockheed Martin Corp.
8.20%, 12/01/09 1,500,000 1,514,256
Raytheon Co.
7.38%, 07/15/25 1,000,000 849,275
United Technologies Corp.
6.63%, 11/15/04 1,000,000 978,128
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3,341,659
--------------------------------------------------------------------------
AUTO MANUFACTURERS--1.34%
--------------------------------------------------------------------------
Chrysler Corp.
7.45%, 03/01/27 1,500,000 1,436,962
Ford Motor Co.
6.38%, 02/01/29 1,000,000 816,214
8.88%, 04/01/06 1,500,000 1,591,153
General Motors Corp.
6.25%, 05/01/05 1,000,000 954,049
7.40%, 09/01/25 1,000,000 936,020
--------------------------------------------------------------------------
5,734,398
--------------------------------------------------------------------------
AUTO PARTS & EQUIPMENT--0.43%
--------------------------------------------------------------------------
Delphi Automotive Systems Corp.
6.50%, 05/01/09 1,000,000 898,612
Goodyear Tire & Rubber Co.
6.63%, 12/01/06 1,000,000 939,357
--------------------------------------------------------------------------
1,837,969
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BANKS--5.13%
--------------------------------------------------------------------------
ABN Amro Bank NV
7.30%, 12/01/26 500,000 440,665
Bank of New York Co. Inc.
6.50%, 12/01/03 1,000,000 968,576
Bank of Tokyo-Mitsubishi Ltd.
8.40%, 04/15/10 1,000,000 1,009,258
Bank One Corp.
6.40%, 08/01/02 1,000,000 981,848
8.10%, 03/01/02 1,000,000 1,010,368
BankAmerica Corp.
6.25%, 04/01/08 1,870,000 1,706,506
Chase Manhattan Corp.
5.75%, 04/15/04 1,000,000 943,821
Dresdner Bank AG
6.63%, 09/15/05 1,000,000 952,590
First Union Capital Corp.
<PAGE>
8.04%, 12/01/26 2,000,000 1,757,366
First Union Corp.
6.63%, 07/15/05 500,000 476,246
International Bank of Reconstruction & Development
6.38%, 07/21/05 1,000,000 972,468
KeyCorp
6.75%, 03/15/06 1,500,000 1,427,616
KFW International Finance Inc.
7.63%, 02/15/04 3,500,000 3,553,105
8.00%, 02/15/10 250,000 263,723
Korea Development Bank
7.13%, 04/22/04 1,000,000 966,942
7.38%, 09/17/04 1,000,000 973,768
Mellon Capital II
8.00%, 01/15/27 1,000,000 904,086
NationsBank Corp.
7.75%, 08/15/15 1,000,000 972,288
Skandinaviska Enskilda Banken
6.88%, 02/15/09 500,000 464,045
Swiss Bank Corp.
7.38%, 07/15/15 1,200,000 1,144,871
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21,890,156
--------------------------------------------------------------------------
BEVERAGES--0.96%
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Anheuser-Busch Companies Inc.
9.00%, 12/01/09 1,500,000 1,659,628
Coca-Cola Enterprises
8.00%, 09/15/22 1,000,000 1,006,749
Diageo PLC
6.13%, 08/15/05 1,000,000 947,168
J Seagram & Sons Ltd.
7.50%, 12/15/18 500,000 471,975
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4,085,520
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CHEMICALS--0.12%
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Dow Chemical Co.
8.63%, 04/01/06 500,000 530,582
--------------------------------------------------------------------------
530,582
--------------------------------------------------------------------------
COMPUTERS--0.67%
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International Business Machines Corp.
5.63%, 04/12/04 3,000,000 2,858,523
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2,858,523
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COSMETICS / PERSONAL CARE--0.23%
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Procter & Gamble Co.
6.88%, 09/15/09 1,000,000 974,525
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974,525
--------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES--6.73%
--------------------------------------------------------------------------
American General Finance Corp.
6.38%, 03/01/03 1,000,000 974,076
Associates Corp. NA
6.25%, 11/01/08 1,500,000 1,344,702
6.95%, 11/01/18 1,000,000 879,737
<PAGE>
Bear Stearns Companies Inc.
6.75%, 04/15/03 1,000,000 976,664
CIT Group Holdings
6.63%, 06/15/05 1,000,000 944,645
Citigroup Inc.
7.88%, 05/15/25 1,000,000 991,369
Countrywide Funding Corp.
6.88%, 09/15/05 1,000,000 948,225
Ford Motor Credit Co.
6.50%, 02/28/02 3,400,000 3,352,359
7.50%, 06/15/03 1,000,000 995,563
General Motors Acceptance Corp.
7.13%, 05/01/03 4,500,000 4,463,856
Household Finance Corp.
6.00%, 05/01/04 2,000,000 1,884,770
6.70%, 06/15/02 1,000,000 981,061
Lehman Brothers Inc.
7.63%, 06/01/06 2,500,000 2,435,450
Merrill Lynch & Co. Inc.
6.00%, 02/17/09 3,000,000 2,654,319
6.38%, 10/15/08 1,000,000 910,705
Morgan Stanley Dean Witter & Co.
7.13%, 01/15/03 1,000,000 993,347
8.00%, 06/15/10 1,000,000 1,009,857
Norwest Financial Inc.
5.38%, 09/30/03 1,000,000 942,224
Pemex Finance Ltd.
9.69%, 08/15/09 1,000,000 1,054,260
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28,737,189
--------------------------------------------------------------------------
ELECTRIC--2.75%
--------------------------------------------------------------------------
Duke Energy Corp.
6.00%, 12/01/28 2,000,000 1,584,084
Enersis SA
7.40%, 12/01/16 1,000,000 865,807
Houston Lighting & Power Co.
6.50%, 04/21/03 4,000,000 3,895,036
Korea Electric Power Corp.
6.38%, 12/01/03 1,000,000 942,709
Niagara Mohawk Power Corp.
7.38%, 07/01/03 756,098 743,943
7.63%, 10/01/05 529,268 520,085
Northern States Power Co.
6.50%, 03/01/28 1,500,000 1,281,182
Texas Utilities Co.
6.38%, 01/01/08 1,000,000 899,864
Virginia Electric & Power Co.
7.38%, 07/01/02 1,000,000 1,002,482
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11,735,192
--------------------------------------------------------------------------
FOOD--0.74%
--------------------------------------------------------------------------
Albertson's Inc.
6.63%, 06/01/28 1,000,000 825,305
Archer-Daniels-Midland Co.
8.38%, 04/15/17 500,000 517,726
<PAGE>
Fred Meyer Inc.
7.45%, 03/01/08 1,000,000 956,417
Kroger Co.
7.00%, 05/01/18 1,000,000 872,229
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3,171,677
--------------------------------------------------------------------------
HEALTH CARE--0.47%
--------------------------------------------------------------------------
Baxter International Inc.
7.63%, 11/15/02 1,000,000 1,008,335
Becton Dickinson & Co.
7.15%, 10/01/09 1,000,000 982,357
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1,990,692
--------------------------------------------------------------------------
INSURANCE--0.22%
--------------------------------------------------------------------------
Aetna Services Inc.
7.13%, 08/15/06 1,000,000 948,474
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948,474
--------------------------------------------------------------------------
MACHINERY-CONSTRUCTION & MINING--0.23%
--------------------------------------------------------------------------
Caterpillar Inc.
7.25%, 09/15/09 1,000,000 980,888
--------------------------------------------------------------------------
980,888
--------------------------------------------------------------------------
MANUFACTURERS--0.20%
--------------------------------------------------------------------------
Tyco International Group
6.88%, 01/15/29 1,000,000 855,130
--------------------------------------------------------------------------
855,130
--------------------------------------------------------------------------
MEDIA--2.45%
--------------------------------------------------------------------------
Comcast Cable Communications
8.38%, 05/01/07 2,000,000 2,038,628
Disney (Walt) Co.
5.13%, 12/15/03 2,000,000 1,874,334
6.75%, 03/30/06 500,000 489,414
Time Warner Entertainment Co.
8.38%, 03/15/23 2,500,000 2,554,110
Viacom Inc.
7.75%, 06/01/05 3,500,000 3,524,392
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10,480,878
--------------------------------------------------------------------------
MULTI-NATIONAL--0.73%
--------------------------------------------------------------------------
African Development Bank
7.75%, 12/15/01 500,000 503,946
Asian Development Bank
6.75%, 06/11/07 1,000,000 977,674
Inter-American Development Bank
5.75%, 02/26/08 1,000,000 918,784
8.40%, 09/01/09 200,000 216,477
8.50%, 03/15/11 450,000 495,393
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3,112,274
--------------------------------------------------------------------------
OIL & GAS PRODUCERS--1.13%
--------------------------------------------------------------------------
Amoco Canada
7.25%, 12/01/02 1,000,000 1,002,726
Conoco Inc.
<PAGE>
5.90%, 04/15/04 2,000,000 1,905,182
Kerr-McGee Corp.
6.63%, 10/15/07 1,120,000 1,042,383
Phillips 66 Capital Trust II
8.00%, 01/15/37 1,000,000 861,060
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4,811,351
--------------------------------------------------------------------------
PHARMACEUTICALS--0.23%
--------------------------------------------------------------------------
American Home Products Corp.
6.50%, 10/15/02 1,000,000 989,941
--------------------------------------------------------------------------
989,941
--------------------------------------------------------------------------
PIPELINES--0.23%
--------------------------------------------------------------------------
Sonat Inc.
7.63%, 07/15/11 1,000,000 977,437
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977,437
--------------------------------------------------------------------------
REAL ESTATE--0.22%
--------------------------------------------------------------------------
EOP Operating LP
6.38%, 02/15/03 1,000,000 960,189
--------------------------------------------------------------------------
960,189
--------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS--0.22%
--------------------------------------------------------------------------
Prologis Trust
7.10%, 04/15/08 1,000,000 917,672
--------------------------------------------------------------------------
917,672
--------------------------------------------------------------------------
RETAIL--0.86%
--------------------------------------------------------------------------
Penney (J.C.) Company Inc.
8.25%, 08/15/22 2,000,000 1,546,500
Wal-Mart Stores Inc.
8.50%, 09/15/24 2,000,000 2,120,314
--------------------------------------------------------------------------
3,666,814
--------------------------------------------------------------------------
TELECOMMUNICATION EQUIPMENT--0.23%
--------------------------------------------------------------------------
Motorola Inc.
7.50%, 05/15/25 1,000,000 993,539
--------------------------------------------------------------------------
993,539
--------------------------------------------------------------------------
TELECOMMUNICATIONS--0.30%
--------------------------------------------------------------------------
Bell Telephone Canada
9.50%, 10/15/10 250,000 282,887
MCI Communications Corp.
6.13%, 04/15/02 1,000,000 976,450
--------------------------------------------------------------------------
1,259,337
--------------------------------------------------------------------------
TELEPHONE--3.46%
--------------------------------------------------------------------------
AT&T Corp.
6.00%, 03/15/09 1,500,000 1,337,459
6.50%, 09/15/02 2,000,000 1,966,454
Deutsche Telekom International Finance
8.25%, 06/15/30 1,000,000 1,016,900
New York Telephone Co.
6.00%, 04/15/08 500,000 446,364
7.00%, 12/01/33 2,305,000 2,013,418
<PAGE>
Sprint Capital Corp.
6.13%, 11/15/08 4,000,000 3,564,100
U.S. West Capital Funding Inc.
6.13%, 07/15/02 1,000,000 978,346
US West Communications Inc.
7.63%, 06/09/03 1,000,000 998,124
WorldCom Inc.
6.25%, 08/15/03 1,000,000 964,058
7.55%, 04/01/04 1,500,000 1,497,951
--------------------------------------------------------------------------
14,783,174
--------------------------------------------------------------------------
TOBACCO--0.10%
--------------------------------------------------------------------------
Imperial Tobacco Group PLC
7.13%, 04/01/09 500,000 444,723
--------------------------------------------------------------------------
444,723
--------------------------------------------------------------------------
TRANSPORTATION--0.95%
--------------------------------------------------------------------------
Canadian National Railway Co.
6.45%, 07/15/00 1,300,000 1,209,667
CSX Corp.
7.90%, 05/01/17 1,000,000 949,723
Norfolk Southern Corp.
7.80%, 05/15/27 1,000,000 961,520
Union Pacific Corp.
6.79%, 11/09/07 1,000,000 934,546
--------------------------------------------------------------------------
4,055,456
--------------------------------------------------------------------------
TOTAL CORPORATE BONDS & NOTES
(Cost: $145,481,917) 137,125,359
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SECURITY PRINCIPAL VALUE
--------------------------------------------------------------------------
FOREIGN GOVERNMENT BONDS & NOTES++--2.91%
--------------------------------------------------------------------------
British Columbia (Province of)
6.50%, 01/15/26 1,000,000 885,352
Chile (Republic of)
6.88%, 04/28/09 1,000,000 923,734
Corp. Andina de Fomento
7.75%, 03/01/04 2,000,000 1,979,770
Hydro Quebec
8.40%, 01/15/22 2,000,000 2,114,198
Mexico Government International Bond
9.88%, 01/15/07 1,000,000 1,030,000
11.50%, 05/15/26 1,000,000 1,202,500
New Brunswick (Province of)
7.63%, 06/29/04 1,200,000 1,211,714
Ontario (Province of)
7.63%, 06/22/04 750,000 758,552
7.75%, 06/04/02 2,300,000 2,323,653
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TOTAL FOREIGN GOVERNMENT BONDS & NOTES
(Cost: $13,073,301) 12,429,473
--------------------------------------------------------------------------
<PAGE>
SECURITY PRINCIPAL VALUE
--------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS--62.08%
U.S. GOVERNMENT AGENCY BONDS AND NOTES--14.93%
--------------------------------------------------------------------------
Federal Home Loan Bank
5.02%, 02/11/02 3,500,000 3,400,470
5.13%, 09/15/03 2,500,000 2,369,662
5.40%, 01/15/03 1,500,000 1,446,433
5.50%, 01/21/03 1,000,000 966,323
5.95%, 07/28/08 3,500,000 3,238,665
6.09%, 06/02/06 2,500,000 2,384,147
6.13%, 08/15/03 1,000,000 975,206
6.61%, 06/09/04 3,000,000 2,930,100
Federal Home Loan Mortgage Corporation
5.00%, 01/15/04 5,000,000 4,684,635
5.13%, 10/15/08 3,400,000 2,960,557
5.50%, 05/15/02 1,000,000 975,654
5.63%, 02/20/04 1,000,000 952,856
5.75%, 04/15/08 1,000,000 916,906
5.75%, 03/15/09 500,000 453,973
5.90%, 05/04/04 3,500,000 3,353,994
6.30%, 06/01/04 1,000,000 968,547
6.75%, 09/15/29 1,000,000 956,254
7.00%, 02/15/03 2,000,000 2,001,206
Federal National Mortgage Association
0.00%, 06/01/17 1,000,000 300,160
5.13%, 02/13/04 3,104,000 2,916,202
5.25%, 01/15/09 1,000,000 877,546
5.38%, 03/15/02 1,000,000 975,727
5.75%, 06/15/05 1,000,000 947,584
5.88%, 04/23/04 600,000 574,733
6.00%, 05/15/08 1,000,000 930,731
6.26%, 02/25/09 5,000,000 4,637,785
6.38%, 06/15/09 394,000 373,382
6.45%, 02/14/02 1,000,000 991,375
6.80%, 01/10/03 1,400,000 1,394,924
7.13%, 03/15/07 1,000,000 1,002,920
7.13%, 01/15/30 887,000 889,193
7.55%, 04/22/02 3,000,000 3,031,776
Financing Corp.
8.60%, 09/26/19 2,150,000 2,461,490
9.65%, 11/02/18 500,000 623,792
9.80%, 04/06/18 1,285,000 1,616,020
Tennessee Valley Authority
6.00%, 03/15/13 1,000,000 898,201
6.13%, 07/15/03 500,000 483,771
6.25%, 12/15/17 600,000 539,140
6.88%, 12/15/43 1,000,000 875,000
7.13%, 05/01/30 450,000 450,540
--------------------------------------------------------------------------
63,727,580
--------------------------------------------------------------------------
<PAGE>
U.S. GOVERNMENT SECURITIES--47.15%
--------------------------------------------------------------------------
U.S. Treasury Bonds
5.25%, 02/15/29 700,000 621,032
5.50%, 08/15/28 2,800,000 2,568,126
6.00%, 02/15/26 1,200,000 1,173,000
6.13%, 11/15/27 1,600,000 1,595,000
6.13%, 08/15/29 800,000 808,500
6.25%, 05/15/30 1,200,000 1,259,626
6.50%, 11/15/26 1,500,000 1,564,687
6.63%, 02/15/27 1,000,000 1,060,313
7.13%, 02/15/23 5,200,000 5,768,750
7.25%, 05/15/16 4,100,000 4,511,283
7.50%, 11/15/16 500,000 563,125
7.63%, 02/15/07 500,000 508,125
7.63%, 02/15/25 5,300,000 6,250,687
7.88%, 02/15/21 2,500,000 2,968,750
8.00%, 11/15/21 7,100,000 8,568,812
8.13%, 08/15/19 5,250,000 6,332,812
8.75%, 05/15/17 1,600,000 2,011,000
8.75%, 05/15/20 3,100,000 3,970,908
8.75%, 08/15/20 2,100,000 2,693,907
9.13%, 05/15/09 1,000,000 1,088,125
9.13%, 05/15/18 1,500,000 1,957,032
9.38%, 02/15/06 1,300,000 1,486,469
9.88%, 11/15/15 1,500,000 2,032,500
10.63%, 11/15/12 2,100,000 2,584,313
11.25%, 02/15/15 1,250,000 1,839,844
11.75%, 11/15/14 500,000 689,375
12.00%, 08/15/13 1,100,000 1,486,375
12.75%, 11/15/10 500,000 640,625
13.25%, 05/15/14 1,500,000 2,190,000
U.S. Treasury Notes
4.25%, 11/15/03 1,500,000 1,407,188
4.75%, 02/15/04 2,100,000 1,996,313
4.75%, 11/15/08 6,700,000 6,084,438
5.25%, 05/15/04 3,700,000 3,569,346
5.38%, 06/30/03 2,250,000 2,191,642
5.50%, 07/31/01 4,100,000 4,057,721
5.50%, 08/31/01 2,000,000 1,976,250
5.50%, 01/31/03 2,100,000 2,056,032
5.50%, 03/31/03 3,000,000 2,932,500
5.50%, 05/31/03 1,450,000 1,417,375
5.50%, 02/15/08 1,200,000 1,149,000
5.50%, 05/15/09 500,000 478,125
5.63%, 09/30/01 2,500,000 2,473,438
5.63%, 05/15/08 3,300,000 3,182,438
5.75%, 06/30/01 3,000,000 2,978,439
5.75%, 11/30/02 1,600,000 1,576,501
5.75%, 04/30/03 1,000,000 984,688
5.75%, 08/15/03 5,000,000 4,914,065
5.88%, 11/30/01 850,000 842,563
5.88%, 09/30/02 1,700,000 1,680,345
5.88%, 02/15/04 1,000,000 986,250
5.88%, 11/15/04 1,000,000 985,000
<PAGE>
5.88%, 11/15/05 2,500,000 2,457,033
6.00%, 08/15/09 2,800,000 2,777,250
6.13%, 12/31/01 1,200,000 1,193,250
6.13%, 08/15/07 3,300,000 3,280,408
6.25%, 10/31/01 2,800,000 2,790,376
6.25%, 01/31/02 1,000,000 996,250
6.25%, 02/28/02 7,000,000 6,973,750
6.25%, 06/30/02 3,000,000 2,989,689
6.25%, 02/15/03 3,800,000 3,789,314
6.38%, 09/30/01 2,000,000 1,996,250
6.38%, 08/15/02 4,700,000 4,692,659
6.50%, 05/15/05 3,000,000 3,032,814
6.50%, 08/15/05 3,000,000 3,031,875
6.50%, 10/15/06 1,400,000 1,415,750
6.50%, 02/15/10 1,800,000 1,861,313
6.63%, 06/30/01 2,000,000 2,003,126
6.63%, 04/30/02 2,800,000 2,807,000
6.63%, 05/15/07 1,000,000 1,020,625
6.88%, 05/15/06 3,000,000 3,087,189
7.00%, 07/15/06 1,900,000 1,968,282
7.25%, 08/15/04 8,950,000 9,249,270
7.50%, 11/15/01 5,200,000 5,266,628
7.50%, 05/15/02 3,000,000 3,055,314
7.50%, 02/15/05 1,300,000 1,363,375
7.88%, 08/15/01 4,300,000 4,363,158
7.88%, 11/15/04 3,000,000 3,175,314
--------------------------------------------------------------------------
201,350,020
--------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(Cost: $272,485,675) 265,077,600
--------------------------------------------------------------------------
SECURITY PRINCIPAL VALUE
--------------------------------------------------------------------------
SHORT TERM INSTRUMENTS--5.17%
--------------------------------------------------------------------------
Federal Home Loan Mortgage Corporation
Discount Note
6.42%, 07/05/00+ 4,247,333 4,247,333
Goldman Sachs Financial
Square Prime Obligation Fund
6.57%, 07/03/00+ 10,834,855 10,834,855
Short Term Investment Company
Liquid Assets Portfolio
6.67%, 07/03/00+ 7,000,000 7,000,000
--------------------------------------------------------------------------
TOTAL SHORT TERM INSTRUMENTS
(Cost: $22,082,188) 22,082,188
--------------------------------------------------------------------------
SECURITY PRINCIPAL VALUE
--------------------------------------------------------------------------
REPURCHASE AGREEMENTS--1.28%
--------------------------------------------------------------------------
<PAGE>
Morgan Stanley Tri Party Repurchase Agreement,
dated 6/30/00, due 7/03/00, with a maturity
value of $5,455,452,562 an effective
yield of 6.30%. 5,452,562 5,452,562
--------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS
(Cost: $5,452,562) 5,452,562
--------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES -- 103.55%
(Cost $458,575,643) 442,167,182
--------------------------------------------------------------------------
Other Assets, Less Liabilities -- (3.55%) (15,164,127)
--------------------------------------------------------------------------
NET ASSETS -- 100.00% $427,003,055
==========================================================================
------------------------------------------------------------------------------
+ Represents investment of collateral received from securities lending
transactions. See Note 4.
++ Investments are denominated in U.S. Dollars.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
<CAPTION>
E*TRADE BOND INDEX FUND
STATEMENTS OF ASSETS AND LIABILITIES
JUNE 30, 2000 (UNAUDITED)
---------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Investments:
In Bond Index Master Portfolio ("Master Portfolio"), at market value (Note 1) $2,944,536
----------
Total Assets 2,944,536
----------
LIABILITIES
Payables:
Accrued administration fee (Note 2) 2,702
Distribution to shareholders 46,445
Due to E*TRADE Asset Management, Inc. (Note 2) 217
----------
Total Liabilities 49,364
----------
NET ASSETS $2,895,172
==========
NET ASSETS CONSIST OF:
Paid-in capital 2,928,704
Distributions in excess of net investment income (4,202)
Undistributed net realized loss on investments (39,364)
Net unrealized appreciation of investments 10,034
----------
NET ASSETS $2,895,172
==========
Shares outstanding 290,247
==========
Net asset value and offering price per share $ 9.97
==========
---------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
<PAGE>
E*TRADE BOND INDEX FUND
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
---------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME ALLOCATED FROM MASTER PORTFOLIO
Interest $ 92,800
Expenses (1,083)
--------
Net investment income allocated from Master Portfolio 91,717
--------
FUND EXPENSES (NOTE 2)
Administration fees 3,369
Advisory fees 270
Trustee fees 133
--------
Total fund expenses 3,772
--------
Less:
Waived Trustee fees (Note 2) (133)
--------
Total Net Expenses 3,639
--------
Net investment income 88,078
--------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS ALLOCATED FROM MASTER PORTFOLIO
Net realized loss on investments (38,435)
Net change in unrealized appreciation of investments 51,088
--------
Net gain on investments allocated from Bond Index Master Portfolio 12,653
--------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $100,731
========
---------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
E*TRADE BOND INDEX FUND
STATEMENTS OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE AUGUST 13, 1999
SIX MONTHS 1999 (COMMENCEMENT OF
ENDED JUNE 30, 2000 OPERATIONS) THROUGH
(UNAUDITED) DECEMBER 31, 1999
------------------- -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income $ 88,078 $ 32,160
Net realized loss (38,435) (917)
Net change in unrealized appreciation (depreciation) 51,088 (41,054)
---------- ----------
Net increase (decrease) in net assets resulting from operations 100,731 (9,811)
---------- ----------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (92,280) (33,085)
---------- ----------
Total distributions to shareholders (92,280) (33,085)
---------- ----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 2,191,838 3,007,179
Net asset value of shares issued in reinvestment of dividends 60,564 3,470
and distributions
Cost of shares redeemed (net of redemption fees of $4,748 and
$1,018, respectively) (1,692,365) (641,069)
---------- ----------
Net increase in net assets resulting from capital share transactions 560,037 2,369,580
---------- ----------
Increase in net assets 568,488 2,326,684
NET ASSETS:
Beginning of period 2,326,684 --
========== ===========
End of period (including distributions in excess of net investment
income and undistributed net investment income of
$4,202 and $0) $ 2,895,172 $ 2,326,684
=========== ===========
SHARES ISSUED AND REDEEMED:
Shares sold 219,664 298,523
Shares issued in reinvestment of dividends and distributions 6,080 346
Shares redeemed (170,293) (64,073)
----------- -----------
Net increase in shares outstanding 55,451 234,796
=========== ===========
</TABLE>
--------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
E*TRADE BOND INDEX FUND
-------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
SIX AUG. 13, 1999
MONTHS ENDED (COMMENCEMENT OF
JUN. 30, 2000 OPERATIONS) TO
(UNAUDITED)++ DEC. 31, 1999++
-------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.91 $10.00
------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.32 0.16
Net realized and unrealized gain 0.05 (0.09)
(loss) on investments
------ ------
TOTAL FROM INVESTMENT OPERATIONS 0.37 0.07
------ ------
LESS DISTRIBUTIONS:
From net investment income (0.33) (0.16)
------ ------
TOTAL DISTRIBUTIONS (0.33) (0.16)
------ ------
REDEMPTION FEES ADDED TO PAID-IN-CAPITAL 0.02 0.00***
------ ------
NET ASSET VALUE, END OF PERIOD $ 9.97 $ 9.91
====== ======
TOTAL RETURN 3.96%** 0.74%*
====== ======
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000s) $2,895 $2,327
Ratio of expenses to average net + 0.35%+++ 0.35%+++
assets
Ratio of net investment income to + 6.52% 6.34%
average net assets
Portfolio turnover rate 1 22.00% 25.00%
-------------------------------------------------------------------------
<FN>
* FOR THE PERIOD AUGUST 13, 1999 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31,
1999 AND NOT INDICATIVE OF A FULL YEAR'S OPERATING RESULTS OR FUTURE
RETURNS.
** FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND NOT INDICATIVE OF A FULL YEAR'S
OPERATING RESULTS OR FUTURE RETURNS.
*** ROUNDS TO LESS THAN $0.01
+ ANNUALIZED.
++ PER SHARE AMOUNTS AND RATIOS REFLECT INCOME AND EXPENSES ASSUMMING
INCLUSION OF THE FUND'S PROPORTIONATE SHARE OF THE INCOME AND EXPENSES OF
THE BOND INDEX MASTER PORTFOLIO.
+++ THE INVESTMENT ADVISER HAS VOLUNTARILY AGREED TO PAY THE NON-AFFILIATED
TRUSTEE EXPENSES FOR THE FUND FOR THE PERIOD JANUARY 1, 2000 THROUGH MAY 9,
2000. EVEN THOUGH SUCH ACTION HAD BEEN TAKEN, TOTAL ANNUALIZED OPERATING
EXPENSES AS A PERCENTAGE OF AVERAGE NET ASSETS WOULD HAVE REMAINED
UNCHANGED.
1 REPRESENTS THE PORTFOLIO TURNOVER RATE OF THE CORRESPONDING MASTER
PORTFOLIO.
</FN>
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
E*TRADE BOND INDEX FUND
NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2000 (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
E*TRADE Bond Index Fund (the "Fund") is a diversified series of E*TRADE
Funds (the "Trust"), an open-end series management investment company
registered under the Investment Company Act of 1940, as amended. The Trust
is organized as a Delaware business trust and was formed on November 4,
1998. As of June 30, 2000 the Trust offered eight series: the E*TRADE Bond
Index Fund, the E*TRADE E-Commerce Index Fund, the E*TRADE Extended Market
Index Fund, the E*TRADE Global Titans Index Fund, the E*TRADE International
Index Fund, the E*TRADE Premier Money Market Fund, the E*TRADE S&P 500
Index Fund, and E*TRADE the Technology Index Fund. These financial
statements contain the E*TRADE Bond Index Fund.
The Fund's investment objective is to provide investment results that
correspond, before fees and expenses, to the total return performance of
fixed-income securities in the aggregate, as represented by the Lehman
Brothers Government/Corporate Bond Index. *
* Lehman Brothers ("Lehman") does not sponsor the Fund or the Master
Portfolio, nor is it affiliated in any way with the Fund or the Master
Portfolio or their respective investment advisors. "Lehman Brothers
Government/Corporate Bond Index (TM) " is a trademark of Lehman. The Fund
and the Master Portfolio are not sponsored, endorsed, sold, or promoted by
Lehman, and neither Lehman nor the Lehman Brothers Government/Corporate
Bond Index makes any representation or warranty, express or implied,
regarding the advisability of investing in the Fund or the Master
Portfolio.
The following is a summary of significant accounting policies which are
consistently followed by the Fund in the preparation of its financial
statements, and which are in conformity with generally accepted accounting
principles for investment companies. The preparation of financial
statements in conformity with accounting principles accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
PRINCIPLES OF ACCOUNTING
The Fund uses the accrual method of accounting for financial reporting
purposes.
INVESTMENT POLICY AND SECURITY VALUATION
The Fund is a "feeder" fund in a "master-feeder" structure. Instead of
investing directly in individual securities, a feeder fund, which is
offered to the public, invests all of its assets in a master portfolio that
has substantially the same investment objective as the feeder fund. It is
the master portfolio that actually invests in the individual securities.
The Fund seeks to achieve its investment objective by investing all of its
assets in the Bond Index Master Portfolio (the "Master Portfolio"), a
separate series of the Master Investment Portfolio ("MIP"), a registered
open-end management investment company. The value of the Fund's investment
in the Master Portfolio reflects the Fund's interest in the net assets of
the Master Portfolio. As of June 30, 2000, the value of the Fund's
investment in the Master Portfolio was 6.9% of the outstanding interests of
the Master Portfolio.
The Fund's investment in the Master Portfolio is valued at the net
asset value of the Master Portfolio's shares held by the Fund. Debt
securities of the Master Portfolio are generally traded in the
<PAGE>
over-the-counter market and are valued at a price deemed best to reflect
fair value as quoted by dealers who make markets in those securities or by
an independent pricing source. U.S. Government obligations are valued at
the last reported bid price. Debt securities maturing in 60 days or less
are valued at amortized cost, which approximates market value. Any
securities, restricted securities or other assets for which market
quotations are not readily available, are valued at fair value as
determined in good faith in accordance with policies approved by MIP's
Board of Trustees.
SECURITY TRANSACTIONS AND INCOME RECOGNITION
Security transactions are accounted for by the Master Portfolio on the
date the securities are purchased or sold (trade date). Revenue is
recognized by the Master Portfolio as follows: dividend income is recorded
on the ex-dividend date and interest income is recognized on a daily
accrual basis. Realized gains and losses are reported on the basis of
identified cost of securities delivered. Original issue discount and
discount on securities purchased are accreted as interest income using a
constant yield to maturity method. Premiums on securities purchased are
amortized as a reduction in interest income using a constant yield to
maturity method. All net investment income and realized and unrealized
capital gains and losses of the Master Portfolio are allocated as required
by the Internal Revenue Code of 1986, as amended (the "Code").
The performance of the Fund is directly affected by the performance of
the Master Portfolio. The financial statements of the Master Portfolio,
including the Portfolio of Investments, are included elsewhere in this
report and should be read in conjunction with the Fund's financial
statements.
DISTRIBUTIONS TO SHAREHOLDERS
Distributions to shareholders from net investment income of the Fund
are declared and distributed quarterly. Dividends to shareholders from any
net realized capital gains are declared and distributed annually, generally
in December. Such distributions to shareholders are recorded on the
ex-dividend date.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for
foreign currency transactions, market discount, losses deferred to wash
sales and excise tax regulations. Permanent book and tax basis differences
relating to shareholder distributions will result in reclassifications to
paid-in capital and may impact net investment income per share.
Undistributed net investment income may include temporary book and tax
basis differences which will reverse in a subsequent period. Any taxable
income or gain remaining at fiscal year end is distributed in the following
year.
FEDERAL INCOME TAXES
The Fund is treated as a separate entity from each other series of the
Trust for federal income tax purposes. The Fund intends to qualify as a
regulated investment company under Subchapter M of the Code. If so
qualified, the Fund must distribute annually all of its investment company
taxable income and any net capital gains (taking into account capital loss
carryforwards) sufficient to relieve it from all, or substantially all,
federal income and excise taxes. Accordingly, no provision for federal
taxes was required at June 30, 2000.
At December 31, 1999, for federal income tax purposes, the Fund had a
capital loss carryforward of $134, expiring in 2007. The Fund will not
distribute any realized capital gains until the capital loss carryforward
has been fully utilized or until it expires. For the year ended December
31, 1999, the Fund has elected to defer $604 of capital losses attributable
to Post-October losses.
<PAGE>
REDEMPTION FEES
For redemptions made after September 30, 2000, shares held in the Fund
for less than four months are subject to a redemption fee of 1.00%,
calculated as a percentage of redemption proceeds. For shares held in the
Fund that are redeemed before October 1, 2000 and within four months from
the date of purchase, the redemption fee is 0.50%. The fee, which is
retained by the Fund, is accounted for as an addition to paid-in capital.
2. AGREEMENTS AND OTHER TRANSACTIONS WITH AFFILIATES
E*TRADE Asset Management, Inc. (the "Investment Advisor"), a wholly
owned subsidiary of E*TRADE Group, Inc. ("E*TRADE Group"), serves as the
investment advisor for the Fund pursuant to an investment advisory
agreement ("Advisory Agreement"). For its service as investment advisor,
the Investment Advisor is paid by the Fund at an annual rate of 0.02% of
the Fund's average daily net assets.
Pursuant to an investment advisory contract with the Master Portfolio,
Barclays Global Fund Advisors ("BGFA") provides investment advisory
services in connection with the management of the Master Portfolio's
assets. For its services, BGFA is entitled to receive 0.08% of the average
daily net assets of the Master Portfolio. The Fund records daily its
proportionate share of the Master Portfolio's advisory fees, described
above, in addition to income, expenses and realized and unrealized gains
and losses.
The Investment Advisor also provides administrative services to the
Fund, pursuant to an administrative services agreement ("Administrative
Agreement"). Services provided by the Investment Advisor acting as
administrator include, but are not limited to: coordinating the services
performed by the transfer and dividend disbursing agent, custodian,
sub-administrator, shareholder servicing agent, independent auditors and
legal counsel; preparing and supervising the preparation of periodic
reports to the Fund's shareholders; generally supervising regulatory
compliance matters; providing, at its own expense, the services of its
personnel to serve as officers of the Trust; monitoring and reviewing the
Fund's contracted services and expenditures; and reporting to the Board of
Trustees concerning its activities pursuant to the Administrative
Agreement. The Fund pays the Investment Advisor a monthly fee calculated at
an annual rate of 0.25% of its average daily net assets for its services as
administrator of the Fund.
PFPC Inc. ("PFPC") serves as the transfer agent and dividend disbursing
agent for the Fund. Investors Bank & Trust Company ("IBT") serves as
sub-administrator, accounting services agent and custodian for the Fund.
E*TRADE Securities, Inc., a wholly owned subsidiary of E*TRADE Group,
serves as the shareholder servicing agent (the "Shareholder Servicing
Agent") for the Fund. The Shareholder Servicing Agent provides personal
services to the Fund's shareholders and maintains the Fund's shareholder
accounts. E*TRADE Securities, Inc. also serves as the principal underwriter
of the Fund. Such services were provided at no cost to the Fund.
Subject to a limitation of 0.0049% of the Fund's average daily net
assets, the Fund records Trustee fees and expenses and certain other direct
expenses of the Fund. The Investment Advisor voluntarily agreed to
reimburse such expenses for the six months ended June 30, 2000. Effective
May 9, 2000, the trustees fees and expenses are no longer a direct expense
of the Fund, but rather those expenses are paid by the Investment Advisor
pursuant to the Administrative Agreement.
3. PORTFOLIO SECURITIES LOANED
As of June 30, 2000, the Master Portfolio had loaned securities, which
were collateralized by cash, money market mutual funds and repurchase
agreements. The Master Portfolio receives transaction
<PAGE>
fees for providing services in connection with the securities lending
program. The risks to the Master Portfolio of securities lending is that
the borrower may not provide additional collateral when required or return
the securities when due. The value of the securities on loan and the value
of the related collateral are disclosed in the Master Portfolio's financial
statements.
<PAGE>
BOND INDEX MASTER PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2000 (UNAUDITED)
--------------------------------------------------------------------------------
ASSETS
Investments at market value (Cost: $458,575,643) (Note 1) $442,167,182
Receivables:
Investment securities sold 1,040,573
Interest 7,003,802
------------
Total Assets 450,211,557
------------
LIABILITIES
Payables:
Investment securities purchased 999,310
Collateral for securities loaned (Note 4) 22,082,188
Due to BGI (Note 2) 127,004
------------
Total Liabilities 23,208,502
Liabilities
------------
NET ASSETS $427,003,055
============
--------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
BOND INDEX MASTER PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
-----------------------------------------------------------------------
NET INVESTMENT INCOME
Interest (Includes securities lending income
of $17,733) $15,090,875
-----------
Total investment income 15,090,875
-----------
EXPENSES (NOTE 2)
Advisory fees 176,216
-----------
Total expenses 176,216
-----------
Net investment income 14,914,659
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on sale of investments (6,196,688)
Net change in unrealized appreciation
(depreciation) of investments 7,643,158
-----------
Net gain on investments 1,446,470
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $16,361,129
===========
-----------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
BOND INDEX MASTER PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED FOR THE FOR THE
JUNE 30, 2000 PERIOD ENDED YEAR ENDED
(UNAUDITED) DECEMBER 31, 1999* FEBRUARY 28, 1999
------------- ----------------- -----------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income $ 14,914,659 $ 22,243,983 $ 7,063,037
Net realized gain (loss) (6,196,688) (2,713,060) 419,676
Net change in unrealized appreciation (depreciation) 7,643,158 (22,407,564) (4,365,016)
------------- ------------- ------------
Net increase (decrease) in net assets resulting
from operations 16,361,129 (2,876,641) 3,117,697
------------- ------------- ------------
INTERESTHOLDER TRANSACTIONS:
Contributions 83,224,962 524,489,703 357,368,335
Withdrawals (117,026,949) (478,897,035) (51,992,277)
------------- ------------- ------------
Net increase (decrease) in net assets resulting from
interestholder transactions (33,801,987) 45,592,668 305,376,058
------------- ------------- ------------
Increase (decrease) in net assets (17,440,858) 42,716,027 308,493,755
NET ASSETS:
Beginning of period 444,443,913 401,727,886 93,234,131
------------- ------------- ------------
End of period $ 427,003,055 $ 444,443,913 $401,727,886
============= ============= ============
---------------------------------------------------------------------------------------------------------------------------------
<FN>
* For the ten months ended December 31, 1999. The Master Portfolio
changed its fiscal year end from February 28 to December 31.
</FN>
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
BOND INDEX MASTER PORTFOLIO
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Master Investment Portfolio ("MIP") is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company. MIP was organized on October 20, 1993 as a Delaware business
trust pursuant to an Agreement and Declaration of Trust dated May 14, 1993, and
had no operations prior to March 1, 1994. MIP currently issues the following
separate portfolios: Asset Allocation, Bond Index, Extended Index, International
Index, LifePath Income, LifePath 2010, LifePath 2020, LifePath 2030, LifePath
2040, Money Market, S&P 500 Index and U.S. Equity Index Master Portfolios.
These financial statements relate to Bond Index Master Portfolio (the
"Master Portfolio").
The following is a summary of significant accounting policies which are
consistently followed by the MIP in the preparation of its financial statements,
and which are in conformity with generally accepted accounting principles for
investment companies. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
SECURITY VALUATION
Debt securities of the Master Portfolio are generally traded in the
over-the-counter market and are valued at a price deemed best to reflect fair
value as quoted by dealers who make markets in those securities or by an
independent pricing source. U.S. Government obligations are valued at the last
reported bid price. Debt securities maturing in 60 days or less are valued at
amortized cost, which approximates market value. Any securities, restricted
securities or other assets for which market quotations are not readily
available, are valued at fair value as determined in good faith in accordance
with policies approved by MIP's Board of Trustees.
SECURITY TRANSACTIONS AND INCOME RECOGNITION
Security transactions are accounted for on the date the securities are
purchased or sold (trade date). Interest income is recognized on a daily accrual
basis. Realized gains or losses are reported on the basis of identified cost of
securities delivered. Bond discounts and premiums are accreted or amortized,
respectively, under provisions of the Internal Revenue Code of 1986, as amended
(the "Code").
FEDERAL INCOME TAXES
MIP believes that the Master Portfolio has and will continue to be operated
in a manner so as to qualify it as a partnership for federal income tax
purposes. Provided that the Master Portfolio so qualifies, it will not be
subject to any federal income tax on its income and gain (if any). However, each
investor in the Master Portfolio will be taxed on its distributive share of the
Master Portfolio's taxable income in determining its federal income tax
liability. As a partnership for federal income tax purposes, the Master
Portfolio will be deemed to have "passed through" to interestholders any
interest, dividends, gains or losses for such purposes. The determination of
such share will be made in accordance with the Code, and regulations promulgated
thereunder.
It is intended that the Master Portfolio's assets, income and distributions
will be managed in such a way that an entity electing and qualifying as a
"regulated investment company" under the Code can continue to so qualify by
investing substantially all of its assets through the Master Portfolio, provided
that the regulated investment company meets other requirements for such
qualifications not within the control of the Master Portfolio (e.g.,
distributing at least 90% of the regulated investment company's "investment
company taxable income" annually).
REPURCHASE AGREEMENTS
Transactions involving purchases of securities under agreements to resell
such securities at a specified price and time ("repurchase agreements") are
treated as collateralized financing transactions and are recorded at their
contracted resale amounts. These repurchase agreements, if any, are detailed in
the Master
<PAGE>
Portfolio's Schedule of Investments. The advisor to the Master Portfolio may
pool the Master Portfolio's cash and invest in repurchase agreements entered
into by the other Master Portfolios. The Master Portfolio's prospectus requires
that the cash investments be fully collateralized based on values that are
marked to market daily. The collateral is generally held by an agent bank under
a tri-party agreement. It is the advisor's responsibility to value collateral
daily and to obtain additional collateral as necessary to maintain the value at
equal to or greater than the repurchase price.
The repurchase agreement entered into on June 30, 2000 by the Master
Portfolio is fully collateralized by U.S. Government obligations with a rate of
6.50%, a maturity date of 08/15/05 and an aggregate market value of $5,565,975.
2. AGREEMENTS AND OTHER TRANSACTIONS WITH AFFILIATES
Pursuant to an Investment Advisory Contract with the Master Portfolio,
Barclays Global Fund Advisors ("BGFA") provides investment guidance and policy
direction in connection with the management of the Master Portfolio's assets.
BGFA is entitled to receive 0.08% of the average daily net assets of the Bond
Index Master Portfolio, as compensation for advisory services. BGFA is an
indirect subsidiary of Barclays Bank PLC.
Investors Bank & Trust Company ("IBT") serves as the custodian to the
Master Portfolio. IBT will not be entitled to receive fees for its custodial
services so long as it is entitled to receive a separate fee from Barclays
Global Investors, N.A. ("BGI") for its services as Sub-Administrator of the
Master Portfolio.
Stephens Inc. ("Stephens"), is the sponsor and placement agent for the
Master Portfolio.
The MIP has entered into administration services arrangements with BGI and
Stephens, as co-administrators, who have agreed jointly to provide general
administration services to the Master Portfolio, such as managing and
coordinating third-party service relationships. BGI and Stephens are not
entitled to compensation for providing administration services to the Master
Portfolio. BGI and Stephens may delegate certain of their administration duties
to sub-administrators.
Certain officers and trustees of MIP are also officers of Stephens. As of
June 30, 2000, these officers of Stephens collectively owned less than 1% of the
Master Portfolio's outstanding beneficial interests.
3. INVESTMENT PORTFOLIO TRANSACTIONS
Purchases and sales of investments, exclusive of short-term securities, for
the Master Portfolio for the six months ended June 30, 2000 were as follows:
U.S. GOVERNMENT OBLIGATIONS:
Purchases at cost $ 52,931,514
Sales proceeds 77,259,287
OTHER SECURITIES:
Purchases at cost $ 42,950,493
Sales proceeds 36,707,378
At June 30, 2000 the Master Portfolio's aggregate unrealized appreciation
and depreciation based on cost for federal income tax purposes were as follows:
<TABLE>
<CAPTION>
TAX UNREALIZED UNREALIZED NET UNREALIZED
COST APPRECIATION DEPRECIATION DEPRECIATION
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$458,575,643 $1,419,317 $(17,827,778) $(16,408,461)
</TABLE>
<PAGE>
4. PORTFOLIO SECURITIES LOANED
As of June 30, 2000, the Master Portfolio had loaned securities which were
collateralized by U.S. Government Agency obligations and money market mutual
funds. The Master Portfolio receives transaction fees for providing services in
connection with the securities lending program. The risks to the Master
Portfolio of securities lending are that the borrower may not provide additional
collateral when required or return the securities when due. The value of the
securities on loan at June 30, 2000 was $21,525,993 and the value of the related
collateral was $22,082,188.
5. FINANCIAL HIGHLIGHTS
The ratios of expenses to average net assets, net investment income to
average net assets and portfolio turnover rates (excluding short-term
securities) for the Master Portfolio are as follows:
<TABLE>
<CAPTION>
SIX MONTH FOR THE FOR THE
ENDED PERIOD ENDED YEAR ENDED
JUNE 30, 2000 DECEMBER 31, FEBRUARY 28,
(UNAUDITED) 1999* 1999
<S> <C> <C> <C>
-------------------------------------------------------------------------------------------
Ratio of expenses to average net 0.08% 0.08% 0.08%
assets +
Ratio of net investment income to 6.77% 6.44% 6.31%
average net assets +
Portfolio turnover rate 22% 25% 28%
-------------------------------------------------------------------------------------------
<FN>
* For the ten months ended December 31,1999. The Master Portfolio changed
its fiscal year-ends from February 28 to December 31.
+ Annualized for period of less than one year.
</FN>
</TABLE>
