MUNIHOLDINGS INSURED FUND IV INC
497, 1999-10-13
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<PAGE>

  This term sheet, taken together with the preliminary prospectus dated
September 30, 1999 (the "Preliminary Prospectus"), pursuant to Rule 434 under
the Securities Act of 1933, as amended, shall be deemed to constitute the
final prospectus for purposes of Section 10(a) of such Act with respect to the
shares of AMPS of MuniHoldings Insured Fund IV, Inc. offered hereby.
Capitalized terms in this term sheet which are not defined herein will have
the meaning defined in the Preliminary Prospectus.

TERM SHEET
Used pursuant to Rule 434 under the Securities Act of 1933, as amended
(Supplement to preliminary prospectus dated September 30, 1999)

                                  $31,650,000

                      MuniHoldings Insured Fund IV, Inc.
                  Auction Market Preferred Stock ["AMPS(R)"]
                            1,266 Shares, Series A
                   Liquidation Preference $25,000 Per Share

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

Terms of the Offering

  This information appearing on the cover page of the Preliminary Prospectus
is supplemented and restated as follows:

<TABLE>
<CAPTION>
                                                         Per Share     Total
                                                         ---------     -----
       <S>                                               <C>        <C>
       Public Offering Price............................ $25,000.00 $31,650,000
       Sales Load.......................................    $187.50    $237,375
       Proceeds, before expenses, to Fund............... $24,812.50 $31,412,625
</TABLE>

  The public offering price per share will be increased by the amount of
accumulated dividends, if any, from the date the shares are first issued.

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

  One certificate for the shares of the AMPS will be ready for delivery to the
nominee of The Depository Trust Company on or about October 18, 1999.

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

  The information appearing in the section captioned "Offering Summary--
Dividends and Dividend Periods" on page 3 of the Preliminary Prospectus is
supplemented and restated as follows:

  Dividends on the shares of AMPS will be cumulative from the date the shares
are first issued and payable beginning on October 28, 1999. Thereafter, in the
case of dividend periods that are not special dividend periods, dividends
generally will be payable on each succeeding Thursday. After the initial
dividend period, each dividend period for the AMPS will generally consist of
seven days; provided, however, that before any auction, the Fund may decide,
subject to certain limitations and only if it gives notice to holders, to
declare a special dividend period of up to five years.

  Dividends for the shares of AMPS will be paid through the securities
depository (The Depository Trust Company) on each dividend payment date.

  The cash dividend rate on the shares of AMPS for the initial dividend period
ending October 27, 1999 will be 3.45% per year. For each subsequent dividend
period, the auction agent (The Bank of New York) will hold an auction to
determine the cash dividend rate on the shares of AMPS.
- --------
(R) Registered trademark of Merrill Lynch & Co. Inc.

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

                              Merrill Lynch & Co.

                               ----------------
               The date of this term sheet is October 13, 1999.
<PAGE>

Underwriting

   The text of the second paragraph under "Underwriting" on page 33 of the
Preliminary Prospectus is supplemented and restated as follows:

   The Underwriter has advised the Fund that it proposes initially to offer
the shares of AMPS to the public at the public offering price set forth on the
cover page of this prospectus, and to certain dealers at such price less a
concession not in excess of $125.00 per share. The Underwriter may allow, and
such dealers may reallow, a discount not in excess of $31.25 per share to
other dealers. After the initial public offering, the public offering price,
concession and discount may be changed. The sales load of $187.50 per share is
equal to .75% of the initial public offering price. Investors must pay for any
AMPS purchased in the initial public offering on or before October 18, 1999.

Statement of Additional Information

   The information appearing in the last sentence on the cover page of the
preliminary statement of additional information dated September 30, 1999 is
supplemented and restated as follows:

     The date of this statement of additional information is October 13,
  1999.

                                       2
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information contained in this prospectus is not complete and may be       +
+changed. We may not sell these securities until the registration statement    +
+filed with the Securities and Exchange Commission is effective. This          +
+prospectus is not an offer to sell these securities and it is not soliciting  +
+an offer to buy these securities in any State where the offer or sale is not  +
+permitted.                                                                    +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
                             SUBJECT TO COMPLETION
                PRELIMINARY PROSPECTUS DATED SEPTEMBER 30, 1999

PROSPECTUS

                                  $31,650,000

                       MuniHoldings Insured Fund IV, Inc.

                   Auction Market Preferred Stock ["AMPS(R)"]
                             1,266 Shares, Series A
                    Liquidation Preference $25,000 Per Share

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

  MuniHoldings Insured Fund IV, Inc. (the "Fund") is a recently organized, non-
diversified, closed-end management investment company that seeks to provide
shareholders with current income exempt from Federal income taxes. The Fund
seeks to achieve its objective by investing primarily in a portfolio of long-
term, investment grade municipal obligations the interest on which, in the
opinion of bond counsel to the issuer, is exempt from Federal income taxes. The
Fund intends to invest in municipal obligations that are rated investment grade
or, if unrated, are considered by the Fund's investment adviser to be of
comparable quality. Under normal circumstances, at least 80% of the Fund's
assets will be invested in municipal obligations with remaining maturities of
one year or more that are covered by insurance guaranteeing the timely payment
of principal at maturity and interest.

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

  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. This 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 or calling the Fund at (800) 637-3863.

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

  Investing in the AMPS involves certain risks, which are described in the
"Risk Factors and Special Considerations" section beginning on page 5 of this
prospectus.

<TABLE>
<CAPTION>
                                                  Per Share     Total
                                                  ---------     -----
       <S>                                        <C>        <C>
       Public Offering Price..................... $25,000.00 $31,650,000
       Sales Load................................     $           $
       Proceeds, before expenses, to Fund........     $           $
</TABLE>

  The public offering price per share will be increased by the amount of
accumulated dividends, if any, from the date the shares are first issued.

  Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.

  One certificate for the shares of the AMPS will be ready for delivery to the
nominee of The Depository Trust Company on or about October   , 1999.
- ------
(R) Registered trademark of Merrill Lynch & Co., Inc.

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

                              Merrill Lynch & Co.

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

                The date of this prospectus is October  , 1999.
<PAGE>

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
Offering Summary...........................................................   3
Risk Factors and Special Considerations....................................   5
The Fund...................................................................   7
Use of Proceeds............................................................   7
Capitalization.............................................................   8
Portfolio Composition......................................................   8
Investment Objective and Policies..........................................   9
Description of AMPS........................................................  15
The Auction................................................................  20
Rating Agency Guidelines...................................................  28
Investment Advisory and Management Arrangements............................  29
Taxes......................................................................  30
Description of Capital Stock...............................................  31
Custodian..................................................................  33
Underwriting...............................................................  33
Transfer Agent, Dividend Disbursing Agent and Registrar....................  33
Legal Opinions.............................................................  33
Experts....................................................................  33
Year 2000 Issues...........................................................  34
Table of Contents of Statement of Additional Information...................  35
Glossary...................................................................  36
</TABLE>

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

  Information about the Fund 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. We have
not, and the underwriter has not, authorized any other person to provide you
with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriter is not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate as of the date on the
front cover of this prospectus only. Our business, financial condition, results
of operations and prospects may have changed since that date.

                                       2
<PAGE>

                                OFFERING SUMMARY

  This summary is qualified in its entirety by reference to the detailed
information included in this prospectus and the statement of additional
information.

The Offering    The Fund is offering a total of 1,266 shares of Auction Market
                Preferred Stock, Series A at a purchase price of $25,000 per
                share plus accumulated dividends, if any, from the date the
                shares are first issued. The shares of AMPS are being offered
                by Merrill Lynch, Pierce, Fenner & Smith Incorporated, as
                underwriter.

                The AMPS will be shares of preferred stock of the Fund that
                entitle their holders to receive cash dividends at an annual
                rate that may vary for the successive dividend periods. In
                general, except as described below, each dividend period
                following the initial dividend period will be seven days. The
                applicable dividend for a particular dividend period will be
                determined by an auction conducted on the business day next
                preceding the start of that dividend period.

                Investors and potential investors in shares of AMPS may
                participate in auctions for the AMPS through their broker-
                dealers.

                Generally, AMPS investors will not receive certificates
                representing ownership of their shares. Ownership of AMPS will
                be maintained in book-entry form by the securities depository
                (The Depository Trust Company) or its nominee for the account
                of the investor's agent member (generally the investor's
                broker-dealer). The investor's agent member, in turn, will
                maintain records of such investor's beneficial ownership of
                AMPS.

Dividends and   Dividends on the shares of AMPS will be cumulative from the
Dividend        date the shares are first issued and payable beginning on
Periods         October   , 1999. Thereafter, in the case of dividend periods
                that are not special dividend periods, dividends generally will
                be payable on each succeeding Thursday. After the initial
                dividend period, each dividend period for the shares of AMPS
                will generally consist of seven days; provided, however, that
                before any auction, the Fund may decide, subject to certain
                limitations and only if it gives notice to holders, to declare
                a special dividend period of up to five years.

                Dividends for the shares of AMPS will be paid through the
                securities depository (The Depository Trust Company) on each
                dividend payment date for each series.

                The cash dividend rate on the shares of AMPS for the initial
                dividend period ending October  , 1999 will be  % annualized.
                For each subsequent dividend period, the auction agent (The
                Bank of New York) will hold an auction to determine the cash
                dividend rate on the shares of AMPS.

Determination   Generally, the applicable dividend rate for any dividend period
of Maximum      for shares of AMPS will be subject to a maximum applicable
Dividend        rate. The maximum applicable rate for shares of AMPS will
Rates           depend on the credit rating assigned to the shares and on the
                length of the dividend period. There is no minimum applicable
                dividend rate for any dividend period.

                                       3
<PAGE>


Asset           Under the Fund's Articles Supplementary creating the AMPS, the
Maintenance     Fund must maintain

                . asset coverage of the AMPS as required by the rating agencies
                  rating the AMPS, and

                . asset coverage of the AMPS of at least 200% as required by
                  the Investment Company Act of 1940.

                The Fund estimates that, based on the composition of its port-
                folio at September 24, 1999, asset coverage of the AMPS as re-
                quired by the Investment Company Act of 1940 would be approxi-
                mately 251% immediately after the Fund issues the shares of
                AMPS offered by this prospectus representing approximately 40%
                of the Fund's capital.

Mandatory
Redemption      If the required asset coverage is not maintained or, when
                necessary, restored, the Fund must redeem shares of AMPS at the
                price of $25,000 per share plus accumulated but unpaid
                dividends thereon (whether or not earned or declared). The
                provisions of the Investment Company Act of 1940 may restrict
                the Fund's ability to make such a mandatory redemption.

Optional        The Fund may, at its option, choose to redeem all or a portion
Redemption      of the shares of AMPS on any dividend payment date at the price
                of $25,000 per share, plus accumulated but unpaid dividends
                thereon (whether or not earned or declared) plus any applicable
                premium.

Liquidation
Preference      The liquidation preference (that is, the amount the Fund must
                pay to AMPS shareholders if the Fund is liquidated) of each
                share of AMPS will be $25,000, plus an amount equal to
                accumulated but unpaid dividends (whether or not earned or
                declared).

Ratings         The AMPS will be issued with a rating of "aaa" from Moody's
                Investors Service, Inc. and AAA from Standard & Poor's.

Voting Rights
                The Investment Company Act of 1940 requires that the holders of
                AMPS and any other preferred stock, voting as a separate class,
                have the right to elect at least two directors at all times and
                to elect a majority of the directors at any time when dividends
                on the AMPS or any other preferred stock are unpaid for two
                full years. The Fund's charter and the Investment Company Act
                of 1940 require holders of AMPS and any other preferred stock
                to vote as a separate class on certain other matters.

                                       4
<PAGE>

                    RISK FACTORS AND SPECIAL CONSIDERATIONS

  Interest Rate and Credit Risk. The Fund invests in municipal bonds, which are
subject to interest rate and credit risk. Interest rate risk is the risk that
prices of municipal bonds 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. Credit risk is the risk that the issuer 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.

  Non-diversification. The Fund is registered as a "non-diversified" investment
company. This means that the Fund may invest a greater percentage of its assets
in a single issuer than a diversified investment company. Even as a non-
diversified fund, the Fund must still meet the diversification requirements of
applicable Federal income tax laws. Since the Fund may invest a relatively high
percentage of its assets in a limited number of issuers, the Fund may be more
exposed to the effects of any single economic, political or regulatory
occurrence than a more widely-diversified fund. Even as a non-diversified fund,
the Fund must still meet the diversification requirements of applicable Federal
income tax laws.

  Rating Categories. The Fund intends to invest in municipal bonds that are
rated investment grade by Standard & Poor's, Moody's Investors Service, Inc. or
Fitch IBCA, Inc. It may also invest in unrated municipal bonds that the Fund's
investment adviser believes are of comparable quality. Obligations rated in the
lowest investment grade category have certain speculative characteristics.

  Private Activity Bonds. The Fund may invest in certain tax-exempt securities
classified as "private activity bonds." These bonds may subject certain
investors in the Fund to the Federal alternative minimum tax.

  Portfolio Insurance. The Fund will be subject to certain investment
restrictions imposed by guidelines of the insurance companies issuing the
portfolio insurance. The Fund does not expect these guidelines to prevent the
Fund's investment adviser from managing the Fund's portfolio in accordance with
the Fund's investment objective and policies.

  Indexed and Inverse Floating Rate Securities. The Fund may invest in
securities whose potential returns are directly related to changes in an
underlying index or interest rate, known as indexed securities. The return on
indexed securities will rise when the underlying index or interest rate rises
and fall when the index or interest rate falls. The Fund may also invest in
securities whose return is inversely related to changes in an interest rate
(inverse floaters). In general, income on inverse floaters will decrease when
short term interest rates increase and increase when short term interest rates
decrease. Investments in inverse floaters may subject the Fund to the risks of
reduced or eliminated interest payments and losses of principal. In addition,
certain indexed securities and inverse floaters may increase or decrease in
value at a greater rate than the underlying interest rate, which effectively
leverages the Fund's investment. As a result, the market value of such
securities will generally be more volatile than that of fixed rate, tax exempt
securities. Both indexed securities and inverse floaters are derivative
securities and can be considered speculative.

  Options and Futures Transactions. The Fund may seek to hedge its portfolio
against changes in interest rates using options and financial futures
contracts. The Fund's hedging transactions are designed to reduce volatility,
but come at some cost. For example, the Fund may try to limit its risk of loss
from a decline in price of a portfolio security by purchasing a put option.
However, the Fund must pay for the option, and the price of the security may
not in fact drop. In large part, the success of the Fund's hedging activities
depends on its ability to forecast movements in securities prices and interest
rates. The Fund does not, however, intend to enter into options and futures
transactions for speculative purposes. The Fund is not required to hedge its
portfolio and may choose not to do so. The Fund cannot guarantee that any
hedging strategies it uses will work.

  Antitakeover Provisions. The Fund's charter includes provisions that could
limit the ability of other entities or persons to acquire control of the Fund
or to change the composition of its Board of Directors. Such provisions could
discourage a third party from seeking to obtain control of the Fund.

                                       5
<PAGE>


  Investment Considerations. Investors in AMPS should consider the following
factors:

  . The credit ratings of the AMPS could be reduced while an investor holds
    the AMPS.

  . Neither broker-dealers nor the Fund are obligated to purchase shares of
    AMPS in an auction or otherwise nor is the Fund required to redeem shares
    of AMPS in the event of a failed auction.

  . If sufficient bids do not exist in an auction, the applicable dividend
    rate will be the maximum applicable dividend rate, and in such event,
    owners of AMPS wishing to sell will not be able to sell all, and may not
    be able to sell any, AMPS in the auction. As a result, investors may not
    have liquidity of investment.

  Secondary Market. The broker-dealers intend to maintain a secondary trading
market in the AMPS outside of auctions; however, they have no obligation to do
so and there can be no assurance that a secondary market for the AMPS will
develop or, if it does develop, that it will provide holders with a liquid
trading market. The AMPS will not be registered on any stock exchange or on any
automated quotation system. An increase in the level of interest rates likely
will have an adverse effect on the secondary market price of the AMPS, and a
selling shareholder may have to sell AMPS between auctions at a price per share
of less than $25,000.

                                       6
<PAGE>

                                    THE FUND

  MuniHoldings Insured Fund IV, Inc. (the "Fund") is a newly organized, non-
diversified, closed-end management investment company. The Fund was
incorporated under the laws of the State of Maryland on August 16, 1999, and
has registered under the 1940 Act. The Fund's principal office is located at
800 Scudders Mill Road, Plainsboro, New Jersey 08536, and its telephone number
is (609) 282-2800.

  The Fund commenced operations on September 24, 1999 upon the closing of an
initial public offering of 3,680,000 shares of its common stock. The proceeds
of such offering were approximately $47,865,000 after the payment of offering
expenses. In connection with the initial public offering of the Fund's common
stock, the underwriter was granted an option to purchase up to an additional
480,000 shares to cover over-allotments.

  The Board of Directors of the Fund may at any time consider a merger,
consolidation or other form of reorganization of the Fund with one or more
other closed-end investment companies advised by the Fund's investment adviser
with similar investment objectives and policies as the Fund. Any such merger,
consolidation or other form of reorganization would require the prior approval
of the Board of Directors and the stockholders of the Fund. See "Description of
Capital Stock--Certain Provisions of the Charter."

                                USE OF PROCEEDS

  The estimated net proceeds of this offering will be $31,279,625 after the
payment of offering expenses (estimated to be $133,000) and the sales load.

  The net proceeds of the offering will be invested in accordance with the
Fund's investment objective and policies during a period estimated not to
exceed three months from the offer and sale of such shares of AMPS depending on
market conditions and the availability of appropriate securities. Pending such
investment, it is anticipated that the proceeds will be invested in short-term
tax-exempt securities. See "Investment Objective and Policies."

                                       7
<PAGE>

                                 CAPITALIZATION

  The following table sets forth the unaudited capitalization of the Fund as of
September 24, 1999 and as adjusted to give effect to the issuance of the shares
of AMPS offered hereby.

<TABLE>
<CAPTION>
                                                          Actual    As Adjusted
                                                        ----------- -----------
<S>                                                     <C>         <C>
Shareholders' equity:
Capital Stock (200,000,000 shares authorized)
  Preferred Stock, par value $.10 per share (no shares
   issued; 1,266 shares of AMPS issued and outstanding,
   as adjusted, at $25,000 per share liquidation
   preference).........................................         --  $31,650,000
  Common Stock, par value $.10 per share (3,206,667
   shares issued and outstanding)...................... $   320,667     320,667
  Capital in excess of par value attributable to Common
   Stock...............................................  47,647,972  47,277,597
  Undistributed investment income--net.................      18,387      18,387
  Unrealized depreciation on investments--net..........     101,097     101,097
                                                        ----------- -----------
  Net assets........................................... $48,088,123 $79,367,748
                                                        =========== ===========
</TABLE>

                             PORTFOLIO COMPOSITION

  As of September 24, 1999, approximately 36% of the market value of the Fund's
portfolio was invested in long-term municipal obligations and approximately 64%
of the market value of the Fund's portfolio was invested in short-term
municipal obligations. The following table sets forth certain information with
respect to the composition of the Fund's investment portfolio as of September
24, 1999.

<TABLE>
<CAPTION>
                                     Number of                   Value
 S&P*         Moody's*                Issues                 (in thousands)               Percent
 ----         --------               ---------               --------------               -------
 <S>          <C>                    <C>                     <C>                          <C>
 AAA            Aaa                       8                     $17,573                      36%
 A-1           VMIG1                     10                      31,900                      64
                                        ---                     -------                     ---
   Total.............                    18                     $49,473                     100%
                                        ===                     =======                     ===
</TABLE>
- --------
* Ratings: Using the higher of Standard & Poor's ("S&P") or Moody's Investors
  Service, Inc. ("Moody's") ratings on the Fund's municipal obligations. See
  "Schedule of Investments." S&P rating categories may be modified further by a
  plus (+) or minus (-) in AA, A, BBB, BB, B and C ratings. Moody's rating
  categories may be modified further by a 1, 2 or 3 in Aa, A, Baa, Ba and B
  ratings.

                                       8
<PAGE>

                       INVESTMENT OBJECTIVE AND POLICIES

  The Fund's investment objective is to provide shareholders with current
income exempt from Federal income taxes. The Fund seeks to achieve its
investment objective by investing primarily in a portfolio of long-term,
investment grade municipal obligations issued by or on behalf of states,
territories and possessions of the United States and their political
subdivisions, agencies or instrumentalities, and other qualifying issuers, each
of which pays interest which, in the opinion of bond counsel to the issuer, is
exempt from Federal income taxes ("Municipal Bonds"). The Fund intends to
invest substantially all (at least 80%) of its assets in Municipal Bonds except
during interim periods pending investment of the net proceeds of public
offerings of the Fund's securities and during temporary defensive periods.
Under normal circumstances, at least 80% of the Fund's assets will be invested
in municipal obligations with remaining maturities of one year or more that are
covered by insurance guaranteeing the timely payment of principal at maturity
and interest. The Fund's investment objective is a fundamental policy that may
not be changed without a vote of a majority of the Fund's outstanding voting
securities, as defined in the statement of additional information under
"Investment Restrictions." There can be no assurance that the investment
objective of the Fund will be realized. At times the Fund may seek to hedge its
portfolio through the use of options and futures transactions to reduce
volatility in the net asset value of its shares of common stock.

  The Fund ordinarily does not intend to realize significant interest income
that is subject to Federal income taxes. The Fund may invest all or a portion
of its assets in certain tax-exempt securities classified as "private activity
bonds" (in general, bonds that benefit non-governmental entities) that may
subject certain investors in the Fund to a Federal alternative minimum tax.

  The Fund also may invest in securities not issued by or on behalf of a state
or territory or by an agency or instrumentality thereof, if the Fund
nevertheless believes such securities pay interest or distributions that are
exempt from Federal income taxation ("Non-Municipal Tax-Exempt Securities").
Non-Municipal Tax-Exempt Securities may include securities issued by other
investment companies that invest in Municipal Bonds, to the extent such
investments are permitted by the Investment Company Act of 1940, as amended
(the "1940 Act"). Other Non-Municipal Tax-Exempt Securities could include trust
certificates or other instruments evidencing interests in one or more long-term
Municipal Bonds. Certain Non-Municipal Tax-Exempt Securities may be
characterized as derivative instruments. Non-Municipal Tax-Exempt Securities
are considered "Municipal Bonds" for purposes of the Fund's investment
objective and policies.

  The investment grade Municipal Bonds in which the Fund will primarily invest
are those Municipal Bonds that are rated at the date of purchase in the four
highest rating categories of S&P, Moody's or Fitch IBCA, Inc. ("Fitch") or, if
unrated, are considered to be of comparable quality by the Investment Adviser.
In the case of long-term debt, the investment grade rating categories are AAA
through BBB for S&P, Aaa through Baa for Moody's and AAA through BBB for Fitch.
In the case of short-term notes, the investment grade rating categories are SP-
l+ through SP-3 for S&P, MIG-1 through MIG-3 for Moody's and F-1+ through F-3
for Fitch. In the case of tax-exempt commercial paper, the investment grade
rating categories are A-1+ through A-3 for S&P, Prime-1 through Prime-3 for
Moody's and F-l+ through F-3 for Fitch. Obligations ranked in the lowest
investment grade rating category (BBB, SP-3 and A-3 for S&P; Baa, MIG-3 and
Prime-3 for Moody's; and BBB and F-3 for Fitch), while considered "investment
grade," may have certain speculative characteristics. There may be sub-
categories or gradations indicating relative standing within the rating
categories set forth above. Appendix A to the statement of additional
information contains a description of S&P's, Moody's and Fitch's ratings of
Municipal Bonds. In assessing the quality of Municipal Bonds with respect to
the foregoing requirements, the Investment Adviser will take into account the
portfolio insurance as well as the nature of any letters of credit or similar
credit enhancement to which particular Municipal Bonds are entitled and the
creditworthiness of the insurance company or financial institution that
provided such insurance or credit enhancement. Consequently, if Municipal Bonds
are covered by insurance policies issued by insurers whose claims-paying
ability is rated AAA by S&P or Fitch or Aaa by Moody's, the Investment Adviser
may consider such municipal obligations to be equivalent to AAA- or Aaa- rated
securities, as the case may be, even though such Municipal Bonds would
generally be assigned a lower rating if the rating were

                                       9
<PAGE>

based primarily upon the credit characteristics of the issuers without regard
to the insurance feature. The insured Municipal Bonds must also comply with the
standards applied by the insurance carriers in determining eligibility for
portfolio insurance.

  The Fund's investments may also include variable rate demand obligations
("VRDOs") and VRDOs in the form of participation interests ("Participating
VRDOs") in variable rate tax-exempt obligations held by a financial
institution, typically a commercial bank. The VRDOs in which the Fund may
invest are tax-exempt obligations, in the opinion of counsel to the issuer,
that contain a floating or variable interest rate adjustment formula and an
unconditional right of demand on the part of the holder thereof to receive
payment of the unpaid principal balance plus accrued interest on a short notice
period not to exceed seven days. Participating VRDOs provide the Fund with a
specified undivided interest (up to 100%) in the underlying obligation and the
right to demand payment of the unpaid principal balance plus accrued interest
on the Participating VRDOs from the financial institution on a specified number
of days' notice, not to exceed seven days. There is, however, the possibility
that because of default or insolvency, the demand feature of VRDOs or
Participating VRDOs may not be honored. The Fund has been advised by its
counsel that the Fund should be entitled to treat the income received on
Participating VRDOs as interest from tax-exempt obligations.

  The average maturity of the Fund's portfolio securities will vary based upon
the Investment Adviser's assessment of economic and market conditions. The net
asset value of the shares of common stock of a closed-end investment company,
such as the Fund, which invests primarily in fixed-income securities, changes
as the general levels of interest rates fluctuate. When interest rates decline,
the value of a fixed-income portfolio generally can be expected to rise.
Conversely, when interest rates rise, the value of a fixed-income portfolio
generally can be expected to decline. Prices of longer-term securities
generally fluctuate more in response to interest rate changes than do short-
term or medium-term securities. These changes in net asset value are likely to
be greater in the case of a fund having a leveraged capital structure, such as
that used by the Fund.

  The Fund intends to invest primarily in long-term Municipal Bonds with a
maturity of more than ten years. Also, the Fund may invest in intermediate-term
Municipal Bonds with a maturity of between three years and ten years. The Fund
may invest in short-term, tax-exempt securities, short-term U.S. Government
securities, repurchase agreements or cash. Such short-term securities or cash
will not exceed 20% of its total assets except during interim periods pending
investment of the net proceeds of public offerings of the Fund's securities or
in anticipation of the repurchase or redemption of the Fund's securities and
temporary periods when, in the opinion of the Investment Adviser, prevailing
market or economic conditions warrant. The Fund does not ordinarily intend to
realize significant interest income that is subject to Federal income taxes.
For a more complete description of Municipal Bonds, see "Investment Objectives
and Policies" in the statement of additional information.

  The Fund is classified as non-diversified within the meaning of the 1940 Act,
which means that the Fund is not limited by the 1940 Act in the proportion of
its assets that it may invest in securities of a single issuer. However, the
Fund's investments will be limited so as to qualify the Fund for special tax
treatment afforded regulated investment companies under the Federal tax laws.
See "Taxes". Requirements for qualification include limiting its investments so
that, at the close of each quarter of the taxable year, (i) not more than 25%
of the market value of the Fund's total assets will be invested in the
securities (other than U.S. Government securities) of a single issuer, and (ii)
with respect to 50% of the market value of its total assets, not more than 5%
of the market value of its total assets will be invested in the securities
(other than U.S. Government securities) of a single issuer. A fund that elects
to be classified as "diversified" under the 1940 Act must satisfy the foregoing
5% requirement with respect to 75% of its total assets. To the extent that the
Fund assumes large positions in the securities of a small number of issuers,
the Fund's yield may fluctuate to a greater extent than that of a diversified
company as a result of changes in the financial condition or in the market's
assessment of the issuers.

                                       10
<PAGE>

Portfolio Insurance

  Under normal circumstances, at least 80% of the Fund's assets will be
invested in Municipal Bonds either (i) insured under an insurance policy
purchased by the Fund or (ii) insured under an insurance policy obtained by the
issuer thereof or any other party. The Fund will seek to limit its investments
to municipal obligations insured under insurance policies issued by insurance
carriers that have total admitted assets (unaudited) of at least $75,000,000
and capital and surplus (unaudited) of at least $50,000,000 and insurance
claims-paying ability ratings of AAA from S&P or Fitch or Aaa from Moody's.
There can be no assurance that insurance from insurance carriers meeting these
criteria will be available. See Appendix B to the statement of additional
information for a brief description of S&P's, Fitch's and Moody's insurance
claims--paying ability ratings. Currently, it is anticipated that a majority of
the insured Municipal Bonds in the Fund's portfolio will be insured by the
following insurance companies that satisfy the foregoing criteria: AMBAC
Assurance Corporation, Financial Guaranty Insurance Company, Financial Security
Assurance and MBIA Corporation. The Fund also may purchase Municipal Bonds
covered by insurance issued by any other insurance company that satisfies the
foregoing criteria. It is anticipated that initially a majority of insured
Municipal Bonds held by the Fund will be insured under policies obtained by
parties other than the Fund.

  The Fund may purchase, but has no obligation to purchase, separate insurance
policies (the "Policies") from insurance companies meeting the criteria set
forth above that guarantee the payment of principal and interest on specified
eligible Municipal Bonds purchased by the Fund. A Municipal Bond will be
eligible for coverage if it meets certain requirements of the insurance company
set forth in a Policy. In the event interest or principal on an insured
Municipal Bond is not paid when due, the insurer will be obligated under its
Policy to make such payment not later than 30 days after it has been notified
by, and provided with documentation from, the Fund that such nonpayment has
occurred.

  The Policies will be effective only as to insured Municipal Bonds
beneficially owned by the Fund. In the event of a sale of any Municipal Bonds
held by the Fund, the issuer of the relevant Policy will be liable only for
those payments of interest and principal that are then due and owing. The
Policies will not guarantee the market value of the insured Municipal Bonds or
the value of the shares of the Fund.

  The insurer will not have the right to withdraw coverage on securities
insured by their Policies and held by the Fund so long as such securities
remain in the Fund's portfolio. In addition, the insurer may not cancel its
Policies for any reason except failure to pay premiums when due. The Board of
Directors of the Fund will reserve the right to terminate any of the Policies
if it determines that the benefits to the Fund of having its portfolio insured
under such policy are not justified by the expense involved.

  The premiums for the Policies are paid by the Fund and the yield on the
Fund's portfolio is reduced thereby. The Investment Adviser estimates that the
cost of the annual premiums for the Policies currently ranges from
approximately .02 of 1% to .15 of 1% of the principal amount of the Municipal
Bonds covered by such Policies. The estimate is based on the expected
composition of the Fund's portfolio of Municipal Bonds. In instances in which
the Fund purchases Municipal Bonds insured under policies obtained by parties
other than the Fund, the Fund does not pay the premiums for such policies;
rather, the cost of such policies may be reflected in the purchase price of the
Municipal Bonds.

  It is the intention of the Investment Adviser to retain any insured
securities that are in default or in significant risk of default and to place a
value on the insurance, which ordinarily will be the difference between the
market value of the defaulted security and the market value of similar
securities which are not in default. In certain circumstances, however, the
Investment Adviser may determine that an alternative value for the insurance,
such as the difference between the market value of the defaulted security and
its par value, is more appropriate. The Investment Adviser will be unable to
manage the portfolio to the extent it holds defaulted securities, which may
limit its ability in certain circumstances to purchase other Municipal Bonds.
See "Net Asset Value" in the statement of additional information for a more
complete description of the Fund's method of valuing defaulted securities and
securities that have a significant risk of default.

                                       11
<PAGE>

  There can be no assurance that insurance with the terms and issued by
insurance carriers meeting the criteria described above will continue to be
available to the Fund. In the event the Board of Directors determines that such
insurance is unavailable or that the cost of such insurance outweighs the
benefits to the Fund, the Fund may modify the criteria for insurance carriers
or the terms of the insurance, or may discontinue its policy of maintaining
insurance for all or any of the Municipal Bonds held in the Fund's portfolio.
Although the Investment Adviser periodically reviews the financial condition of
each insurer, there can be no assurance that the insurers will be able to honor
their obligations under the circumstances.

  The portfolio insurance reduces financial or credit risk (i.e., the
possibility that the owners of the insured Municipal Bonds will not receive
timely scheduled payments of principal or interest). However, the insured
Municipal Bonds are subject to market risk (i.e., fluctuations in market value
as a result of changes in prevailing interest rates and other market
conditions).

Description of Municipal Bonds

  Municipal Bonds include debt obligations issued to obtain funds for various
public purposes, including construction of a wide range of public facilities,
refunding of outstanding obligations and obtaining funds for general operating
expenses and loans to other public institutions and facilities. In addition,
certain types of private activity bonds ("PABs") are issued by or on behalf of
public authorities to finance various privately operated facilities, including
airports, public ports, mass commuting facilities, multifamily housing
projects, as well as facilities for water supply, gas, electricity, sewage or
solid waste disposal. For purposes of this prospectus, such obligations are
Municipal Bonds if the interest paid thereon is exempt from Federal income tax
even though such bonds may be PABs as discussed below. Also, for purposes of
this prospectus, Non-Municipal Tax-Exempt securities as discussed above will be
considered Municipal Bonds.

  The two principal classifications of Municipal Bonds are "general obligation"
bonds and "revenue" bonds, which latter category includes PABs and, for bonds
issued on or before August 15, 1986, industrial development bonds or "IDBs."
General obligations bonds are secured by the issuer's pledge of faith, credit
and taxing power for the repayment of principal and the payment of interest.
Revenue or special obligation bonds are payable only from the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific revenue source such as from
the user of the facility being financed. PABs are in most cases revenue bonds
and do not generally constitute the pledge of the credit or taxing power of the
issuer of such bonds. The repayment of principal and the payment of interest on
revenue bonds depends solely on the ability of the user of the facility
financed by the bonds to meet its financial obligations and the pledge, if any,
of real and personal property so financed as security for such payment.
Municipal Bonds may also include "moral obligation" bonds, which are normally
issued by special purpose public authorities. If an issuer of moral obligation
bonds is unable to meet its obligations, the repayment of such bonds becomes a
moral commitment but not a legal obligation of the state or municipality in
question.

  The Fund may purchase Municipal Bonds classified as PABs. Interest received
on certain PABs is treated as an item of "tax preference" for purposes of the
Federal alternative minimum tax and may impact the overall tax liability of
investors in the Fund. There is no limitation on the percentage of the Fund's
assets that may be invested in Municipal Bonds the interest on which is treated
as an item of "tax preference" for purposes of the Federal alternative minimum
tax. See "Taxes--General."

  Also included within the general category of Municipal Bonds are certificates
of participation ("COPs") executed and delivered for the benefit of government
authorities or entities to finance the acquisition or construction of
equipment, land and/or facilities. COPs represent participations in a lease, an
installment purchase contract or a conditional sales contract (hereinafter
collectively referred to as "lease obligations") relating to such equipment,
land or facilities. Although lease obligations do not constitute general
obligations of the issuer for which the issuer's unlimited tax power is
pledged, a lease obligation frequently is backed by the issuer's covenant to
budget for, appropriate and make the payments due under the lease obligation.
However,

                                       12
<PAGE>

certain lease obligations contain "non-appropriation" clauses, which provide
that the issuer has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. Although "non-appropriation" lease obligations are secured by the
lease property, disposition of the property in the event of foreclosure might
prove difficult.

  Federal tax legislation has limited and may continue to limit the types and
volume of such bonds the interest on which qualifies for a Federal income tax
exemption. As a result, this legislation and legislation that may be enacted in
the future may affect the availability of Municipal Bonds for investment by the
Fund.

Other Investment Policies

  The Fund has adopted certain other policies as set forth below:

  Borrowings. The Fund is authorized to borrow money in amounts of up to 5% of
the value of its total assets at the time of such borrowings; provided,
however, that the Fund is authorized to borrow moneys in amounts of up to 33
1/3% of the value of its total assets at the time of such borrowings to finance
the repurchase of its own common stock pursuant to tender offers or otherwise
to redeem or repurchase shares of preferred stock or for temporary,
extraordinary or emergency purposes. Borrowings by the Fund (commonly known, as
with the issuance of preferred stock, as "leveraging") create an opportunity
for greater total return since the Fund will not be required to sell portfolio
securities to repurchase or redeem shares but, at the same time, increase
exposure to capital risk. In addition, borrowed funds are subject to interest
costs that may offset or exceed the return earned on the borrowed funds.

  When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase or sell Municipal Bonds on a delayed delivery basis or on a when-
issued basis at fixed purchase or sale terms. These transactions arise when
securities are purchased or sold by the Fund with payment and delivery taking
place in the future. The purchase will be recorded on the date the Fund enters
into the commitment, and the value of the obligation will thereafter be
reflected in the calculation of the Fund's net asset value. The value of the
obligation on the delivery day may be more or less than its purchase price. A
separate account of the Fund will be established with its custodian consisting
of cash, cash equivalents or liquid securities having a market value at all
times at least equal to the amount of the commitment.

  Indexed and Inverse Floating Obligations. The Fund may invest in Municipal
Bonds yielding a return based on a particular index of value or interest rates.
For example, the Fund may invest in Municipal Bonds that pay interest based on
an index of Municipal Bond interest rates. The principal amount payable upon
maturity of certain Municipal Bonds also may be based on the value of an index.
To the extent the Fund invests in these types of Municipal Bonds, the Fund's
return on such Municipal Bonds will be subject to risk with respect to the
value of the particular index. Also, the Fund may invest in so-called "inverse
floating obligations" or "residual interest bonds" on which the interest rates
typically vary inversely with a short-term floating rate (which may be reset
periodically by a dutch auction, a remarketing agent, or by reference to a
short-term tax-exempt interest rate index). The Fund may purchase
synthetically-created inverse floating rate bonds evidenced by custodial or
trust receipts. Generally, income on inverse floating rate bonds will decrease
when short-term interest rates increase, and will increase when short-term
interest rates decrease. Such securities have the effect of providing a degree
of investment leverage, since they may increase or decrease in value in
response to changes, as an illustration, in market interest rates at a rate
that is a multiple (typically two) of the rate at which fixed-rate, long-term,
tax-exempt securities increase or decrease in response to such changes. As a
result, the market values of such securities generally will be more volatile
than the market values of fixed-rate tax-exempt securities. To seek to limit
the volatility of these securities, the Fund may purchase inverse floating
obligations with shorter-term maturities or limitations on the extent to which
the interest rate may vary. The Investment Adviser believes that indexed and
inverse floating obligations represent a flexible portfolio management
instrument for the Fund that allows the Investment Adviser to vary the degree
of investment leverage relatively efficiently under different market
conditions.

                                       13
<PAGE>

  Call Rights. The Fund may purchase a Municipal Bond issuer's right to call
all or a portion of such Municipal Bond for mandatory tender for purchase (a
"Call Right"). A holder of a Call Right may exercise such right to require a
mandatory tender for the purchase of related Municipal Bonds, subject to
certain conditions. A Call Right that is not exercised prior to the maturity of
the related Municipal Bond will expire without value. The economic effect of
holding both the Call Right and the related Municipal Bond is identical to
holding a Municipal Bond as a non-callable security.

  Repurchase Agreements. The Fund may invest in Municipal Bonds and U.S.
Government securities pursuant to repurchase agreements. Repurchase agreements
may be entered into only with a member bank of the Federal Reserve System or a
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. The Fund may not invest
in repurchase agreements maturing in more than seven days if such investments,
together with all other illiquid investments, would exceed 15% of the Fund's
net assets. In the event of default by the seller under a repurchase agreement,
the Fund may suffer time delays and incur costs or possible losses in
connection with the disposition of the underlying securities.

  In general, for Federal income tax purposes, repurchase agreements are
treated as collateralized loans secured by the securities "sold." Therefore,
amounts earned under such agreements will not be considered tax-exempt
interest.

Options and Futures Transactions

  The Fund may hedge all or a portion of its portfolio investments against
fluctuations in interest rates through the use of options and certain financial
futures contracts and options thereon. While the Fund's use of hedging
strategies is intended to reduce the volatility of the net asset value of the
common stock, the net asset value of the common stock will fluctuate. There can
be no assurance that the Fund's hedging transactions will be effective. For so
long as the AMPS are rated by Moody's and S&P, the Fund's use of options and
financial futures contracts will be subject to the limitations described under
"Rating Agency Guidelines" herein and in the statement of additional
information. Furthermore, the Fund may only engage in hedging activities from
time to time and may not necessarily be engaging in hedging activities when
movements in interest rates occur. The Fund has no obligation to enter into
hedging transactions and may choose not to do so.

  Certain Federal income tax requirements may limit the Fund's ability to
engage in hedging transactions. Gains from transactions in options and futures
contracts distributed to shareholders will be taxable as ordinary income or, in
certain circumstances, as long-term capital gains to shareholders. See "Taxes--
Tax Treatment of Options and Futures Transactions" in the statement of
additional information. In addition, in order to obtain ratings of the
preferred stock from one or more nationally recognized statistical rating
organizations ("NRSROs"), the Fund may be required to limit its use of hedging
techniques in accordance with the specified guidelines of such rating
organizations.

  For a description of the options and futures transactions in which the Fund
may engage, limitations on the Fund's use of such transactions and risks
associated with these transactions, see "Investment Objective and Policies--
Options and Futures Transactions" in the statement of additional information.
The investment policies with respect to the hedging transactions of the Fund
are not fundamental policies and may be modified by the Board of Directors of
the Fund without the approval of the Fund's shareholders.

                                       14
<PAGE>

                              DESCRIPTION OF AMPS

General

  Certain of the capitalized terms used herein are defined in the Glossary that
appears at the back of this prospectus.

  The AMPS of each series will be shares of preferred stock that entitle their
holders to receive dividends when, as and if declared by the Board of
Directors, out of funds legally available therefor, at a rate per annum that
may vary for the successive Dividend Periods. After the Initial Dividend
Period, each Subsequent Dividend Period for the shares of AMPS generally will
be a 7-Day Dividend Period; provided, however, that prior to any Auction, the
Fund may elect, subject to certain limitations described herein, upon giving
notice to holders thereof, a Special Dividend Period. The Applicable Rate for a
particular Dividend Period will be determined by an Auction conducted on the
Business Day before the start of such Dividend Period. Beneficial Owners and
Potential Beneficial Owners of shares of AMPS may participate in Auctions
therefor, although, except in the case of a Special Dividend Period, Beneficial
Owners desiring to continue to hold all of their shares of AMPS regardless of
the Applicable Rate resulting from Auctions need not participate. For an
explanation of Auctions and the method of determining the Applicable Rate, see
"The Auction" herein and in the statement of additional information.

  The following is a brief description of the terms of the shares of AMPS. This
description does not purport to be complete and is subject to and qualified in
its entirety by reference to the Fund's Articles of Incorporation and Articles
Supplementary, including the provisions thereof establishing the AMPS. The
Fund's Articles of Incorporation and the form of Articles Supplementary
establishing the terms of the AMPS have been filed as exhibits to the
Registration Statement of which this prospectus is a part.

Dividends

  General. The holders of shares of AMPS will be entitled to receive, when, as
and if declared by the Board of Directors of the Fund, out of funds legally
available therefor, cumulative cash dividends on their shares, at the
Applicable Rate determined as set forth below under "Determination of Dividend
Rate," payable on the respective dates set forth below. Dividends on the shares
of AMPS so declared and payable shall be paid (i) in preference to and in
priority over any dividends so declared and payable on the Common Stock, and
(ii) to the extent permitted under the Code and to the extent available, out of
net tax-exempt income earned on the Fund's investments. Generally, dividends on
shares of AMPS, to the extent that they are derived from interest paid on
Municipal Bonds, will be exempt from Federal income taxes, subject to possible
application of the alternative minimum tax. See "Taxes" in the statement of
additional information.

  Dividends on the shares of AMPS will accumulate from the date on which the
Fund originally issues the shares of AMPS (the "Date of Original Issue") and
will be payable on the dates described below. Dividends on shares of AMPS with
respect to the Initial Dividend Period shall be payable on the Initial Dividend
Payment Date. Following the Initial Dividend Payment Date for the shares of
AMPS, dividends on the shares of AMPS will be payable, at the option of the
Fund, either (i) with respect to any 7-Day Dividend Period and any Short Term
Dividend Period of 35 or fewer days, on the day next succeeding the last day
thereof or (ii) with respect to any Short Term Dividend Period of more than 35
days and with respect to any Long Term Dividend Period, monthly on the first
Business Day of each calendar month during such Short Term Dividend Period or
Long Term Dividend Period and on the day next succeeding the last day thereof
(each such date referred to in clause (i) or (ii) being referred to herein as a
"Normal Dividend Payment Date"), except that if such Normal Dividend Payment
Date is not a Business Day, the Dividend Payment Date shall be the first
Business Day next succeeding such Normal Dividend Payment Date. Thus, following
the Initial Dividend Payment Date for the shares of AMPS, dividends generally
will be payable (in the case of Dividend Periods which are not Special Dividend
Periods) on each succeeding Thursday. Although any particular Dividend Payment
Date may not occur on the originally scheduled date because of the exceptions
discussed above, the next succeeding Dividend Payment Date, subject to such
exceptions, will occur on the next following originally scheduled date. If for
any

                                       15
<PAGE>

reason a Dividend Payment Date cannot be fixed as described above, then the
Board of Directors shall fix the Dividend Payment Date. The Board of Directors
by resolution prior to authorization of a dividend by the Board of Directors
may change a Dividend Payment Date if such change does not adversely affect the
contract rights of the holders of shares of AMPS set forth in the Charter. The
Initial Dividend Period, 7-Day Dividend Periods and Special Dividend Periods
are hereinafter sometimes referred to as "Dividend Periods." Each dividend
payment date determined as provided above is hereinafter referred to as a
"Dividend Payment Date."

  Prior to each Dividend Payment Date, the Fund is required to deposit with the
Auction Agent sufficient funds for the payment of declared dividends. The Fund
does not intend to establish any reserves for the payment of dividends.

  Each dividend will be paid to the record holder of the AMPS, which holder is
expected to be the nominee of the Securities Depository. See "The Auction--
Securities Depository." The Securities Depository will credit the accounts of
the Agent Members of the Existing Holders in accordance with the Securities
Depository's normal procedures which provide for payment in same-day funds. The
Agent Member of an Existing Holder will be responsible for holding or
disbursing such payments on the applicable Dividend Payment Date to such
Existing Holder in accordance with the instructions of such Existing Holder.
Dividends in arrears for any past Dividend Period may be declared and paid at
any time, without reference to any regular Dividend Payment Date, to the
nominee of the Securities Depository. Any dividend payment made on shares of
AMPS first shall be credited against the earliest declared but unpaid dividends
accumulated with respect to such shares of AMPS.

  Holders of shares of AMPS will not be entitled to any dividends, whether
payable in cash, property or stock, in excess of full cumulative dividends
except as described under "Additional Dividends" and "Non-Payment Period; Late
Charge." No interest will be payable in respect of any dividend payment or
payments on the shares of AMPS which may be in arrears.

  The amount of cash dividends per share of AMPS payable (if declared) on the
Initial Dividend Payment Date, each dividend payment date of each 7-Day
Dividend Period and each Dividend Payment Date of each Short Term Dividend
Period shall be computed by multiplying the Applicable Rate for such Dividend
Period by a fraction, the numerator of which will be the number of days in such
Dividend Period or part thereof that such share was outstanding and for which
dividends are payable on such Dividend Payment Date and the denominator of
which will be 365, multiplying the amount so obtained by $25,000, and rounding
the amount so obtained to the nearest cent. During any Long Term Dividend
Period, the amount of cash dividends per share of AMPS payable (if declared) on
any Dividend Payment Date shall be computed by multiplying the Applicable Rate
for such Dividend Period by a fraction, the numerator of which will be such
number of days in such part of such Dividend Period that such share was
outstanding and for which dividends are payable on such Dividend Payment Date
and the denominator of which will be 360, multiplying the amount so obtained by
$25,000, and rounding the amount so obtained to the nearest cent.

  Notification of Dividend Period. With respect to each Dividend Period that is
a Special Dividend Period, the Fund, at its sole option and to the extent
permitted by law, by telephonic and written notice (a "Request for Special
Dividend Period") to the Auction Agent and to each Broker-Dealer, may request
that the next succeeding Dividend Period for the shares of AMPS will be a
number of days (other than seven), evenly divisible by seven, and not fewer
than seven nor more than 364 in the case of a Short Term Dividend Period or one
whole year or more but not greater than five years in the case of a Long Term
Dividend Period, specified in such notice, provided that the Fund may not give
a Request for Special Dividend Period (and any such request shall be null and
void) unless, for any Auction occurring after the initial Auction, Sufficient
Clearing Bids were made in the last occurring Auction and unless full
cumulative dividends, any amounts due with respect to redemptions, and any
Additional Dividends payable prior to such date have been paid in full. Such
Request for Special Dividend Period, in the case of a Short Term Dividend
Period, shall be given on or prior to the second Business Day but not more than
seven Business Days prior to an Auction Date for the AMPS and,

                                       16
<PAGE>

in the case of a Long Term Dividend Period, shall be given on or prior to the
second Business Day but not more than 28 days prior to an Auction Date for the
AMPS. Upon receiving such Request for Special Dividend Period, the Broker-
Dealers jointly shall determine whether, given the factors set forth below, it
is advisable that the Fund issue a Notice of Special Dividend Period for a
series of AMPS as contemplated by such Request for Special Dividend Period and
the Optional Redemption Price of the AMPS during such Special Dividend Period
and the Specific Redemption Provisions and shall give the Fund and the Auction
Agent written notice (a "Response") of such determination by no later than the
second Business Day prior to such Auction Date. In the event the Response
indicates that it is advisable that the Fund give a notice of a Special
Dividend Period for the shares of AMPS, the Fund, by no later than the second
Business Day prior to such Auction Date may give a notice (a "Notice of Special
Dividend Period") to the Auction Agent, the Securities Depository and each
Broker-Dealer. See "Description of AMPS--Dividends-- Notification of Dividend
Period" in the statement of additional information for a detailed description
of these procedures.

  Determination of Dividend Rate. The dividend rate on shares of AMPS during
the period from and including the Date of Original Issue to but excluding the
Initial Dividend Payment Date (the "Initial Dividend Period") will be the rate
per annum set forth above under "Offering Summary." Commencing on the Initial
Dividend Payment Date for AMPS, the Applicable Rate on the shares of AMPS for
each Subsequent Dividend Period, which Subsequent Dividend Period shall be a
period commencing on and including a Dividend Payment Date and ending on and
including the calendar day prior to the next Dividend Payment Date (or last
Dividend Payment Date in a Dividend Period if there is more than one Dividend
Payment Date), shall be equal to the rate per annum that results from the
Auction with respect to such Subsequent Dividend Period. The Initial Dividend
Period and Subsequent Dividend Period for AMPS is referred to herein as a
"Dividend Period." Cash dividends shall be calculated as set forth above under
"Dividends--General."

  Restrictions on Dividends and Other Payments. Under the 1940 Act, the Fund
may not declare dividends or make other distributions on shares of Common Stock
or purchase any such shares if, at the time of the declaration, distribution or
purchase, as applicable (and after giving effect thereto), asset coverage (as
defined in the 1940 Act) with respect to the outstanding shares of AMPS would
be less than 200% (or such other percentage as in the future may be required by
law). The Fund estimates that, based on the composition of its portfolio at
September 24, 1999, asset coverage with respect to shares of AMPS would be
approximately 251% immediately after the issuance of the shares of AMPS offered
hereby. Under the Code, the Fund, among other things, must distribute at least
90% of its investment company taxable income each year in order to maintain its
qualification for tax treatment as a regulated investment company. The
foregoing limitations on dividends, distributions and purchases under certain
circumstances may impair the Fund's ability to maintain such qualification. See
"Taxes" in the statement of additional information.

  Upon any failure to pay dividends on shares of AMPS for two years or more,
the holders of the shares of AMPS will acquire certain additional voting
rights. See "Voting Rights" below. Such rights shall be the exclusive remedy of
the holders of shares of AMPS upon any failure to pay dividends on shares of
the Fund.

  Additional Dividends. If the Fund retroactively allocates any net capital
gains or other income subject to regular Federal income taxes to shares of AMPS
without having given advance notice thereof to the Auction Agent as described
under "The Auction--Auction Date; Advance Notice of Allocation of Taxable
Income; Inclusion of Taxable Income in Dividends" below, which may only happen
when such allocation is made as a result of the redemption of all or a portion
of the outstanding shares of AMPS or the liquidation of the Fund (the amount of
such allocation referred to herein as a "Retroactive Taxable Allocation"), the
Fund, within 90 days (and generally within 60 days) after the end of the Fund's
fiscal year for which a Retroactive Taxable Allocation is made, will provide
notice thereof to the Auction Agent and to each holder of shares (initially
Cede as nominee of the Securities Depository) during such fiscal year at such
holder's address as the same appears or last appeared on the stock books of the
Fund. The Fund, within 30 days after such notice is given to the Auction Agent,
will pay to the Auction Agent (who then will distribute to such holders of
shares of AMPS), out of funds legally available therefor, an amount equal to
the aggregate Additional Dividend (as defined below) with respect to all
Retroactive Taxable Allocations made to such holders during the fiscal year in
question. See "Taxes" in the statement of additional information.

                                       17
<PAGE>

  An "Additional Dividend" means payment to a present or former holder of
shares of AMPS of an amount which, when taken together with the aggregate
amount of Retroactive Taxable Allocations made to such holder with respect to
the fiscal year in question, would cause such holder's dividends in dollars
(after Federal income tax consequences) from the aggregate of both the
Retroactive Taxable Allocations and the Additional Dividend to be equal to the
dollar amount of the dividends which would have been received by such holder if
the amount of the aggregate Retroactive Taxable Allocations had been excludable
from the gross income of such holder. Such Additional Dividend shall be
calculated (i) without consideration being given to the time value of money;
(ii) assuming that no holder of shares of AMPS is subject to the Federal
alternative minimum tax with respect to dividends received from the Fund; and
(iii) assuming that each Retroactive Taxable Allocation would be taxable in the
hands of each holder of shares of AMPS at the greater of: (a) the maximum
marginal regular Federal individual income tax rate applicable to ordinary
income or capital gains depending on the taxable character of the distribution
(including any surtax); or (b) the maximum marginal regular Federal corporate
income tax rate applicable to ordinary income or capital gains depending on the
taxable character of the distribution (disregarding in both (a) and (b) the
effect of any state and local taxes and the phase out of, or provision
limiting, personal exemptions, itemized deductions, or the benefit of lower tax
brackets). Although the Fund generally intends to designate any Additional
Dividend as an exempt-interest dividend to the extent permitted by applicable
law, it is possible that all or a portion of any Additional Dividend will be
taxable to the recipient thereof. See "Taxes--Tax Treatment of Additional
Dividends" in the statement of additional information. The Fund will not pay a
further Additional Dividend with respect to any taxable portion of an
Additional Dividend.

  If the Fund does not give advance notice of the amount of taxable income to
be included in a dividend on shares of AMPS in the related Auction, the Fund
may include such taxable income in a dividend on shares of AMPS if it increases
the dividend by an additional amount calculated as if such income were a
Retroactive Taxable Allocation and the additional amount were an Additional
Dividend and notifies the Auction Agent of such inclusion at least five days
prior to the applicable Dividend Payment Date. See "The Auction--Auction
Procedures--Auction Date; Advance Notice of Allocation of Taxable Income;
Inclusion of Taxable Income in Dividends" below.

Asset Maintenance

  The Fund will be required to satisfy two separate asset maintenance
requirements under the terms of the Articles Supplementary. These requirements
are summarized below.

  1940 Act AMPS Asset Coverage. The Fund will be required under the Articles
Supplementary to maintain, with respect to shares of AMPS, as of the last
Business Day of each month in which any shares of AMPS are outstanding, asset
coverage of at least 200% with respect to senior securities which are stock,
including the shares of AMPS (or such other asset coverage as in the future may
be specified in or under the 1940 Act as the minimum asset coverage for senior
securities which are stock of a closed-end investment company as a condition of
paying dividends on its common stock) ("1940 Act AMPS Asset Coverage"). If the
Fund fails to maintain 1940 Act AMPS Asset Coverage and such failure is not
cured as of the last Business Day of the following month (the "1940 Act Cure
Date"), the Fund will be required under certain circumstances to redeem certain
of the shares of AMPS. See "Redemption" below.

  The 1940 Act AMPS Asset Coverage immediately following the issuance of AMPS
offered hereby (after giving effect to the deduction of the sales load and
offering expenses for the shares of AMPS) will be computed as follows:

<TABLE>
           <S>                          <C>       <C>                <C>       <C>
             Value of Fund assets
                     less
               liabilities not
                 constituting
              senior securities           =        $79,367,748         =       251%
           ------------------------               ------------
              Senior securities                    $31,650,000
                 representing
                 indebtedness
            plus liquidation value
                    of the
                shares of AMPS
</TABLE>


                                       18
<PAGE>

  AMPS Basic Maintenance Amount. So long as shares of AMPS are outstanding, the
Fund will be required under the Articles Supplementary to maintain as of each
Business Day (a "Valuation Date") S&P Eligible Assets and Moody's Eligible
Assets each having in the aggregate a Discounted Value at least equal to the
AMPS Basic Maintenance Amount. The AMPS Basic Maintenance Amount includes the
sum of (i) the aggregate liquidation value of AMPS then outstanding and (ii)
certain accrued and projected payment obligations of the Fund. See "Description
of AMPS--Asset Maintenance--AMPS Basic Maintenance Amount" in the statement of
additional information. If the Fund fails to meet such requirement as of any
Valuation Date and such failure is not cured on or before the sixth Business
Day after such Valuation Date (the "AMPS Basic Maintenance Cure Date"), the
Fund will be required under certain circumstances to redeem certain of the
shares of AMPS. Upon any failure to maintain the required Discounted Value, the
Fund will use its best efforts to alter the composition of its portfolio to
reattain a Discounted Value at least equal to the AMPS Basic Maintenance Amount
on or prior to the AMPS Basic Maintenance Cure Date. See "Redemption" herein
and in the statement of additional information.

Redemption

  Optional Redemption. To the extent permitted under the 1940 Act and under
Maryland law, upon giving a Notice of Redemption, as provided in the statement
of additional information, the Fund, at its option, may redeem shares of AMPS,
in whole or in part, out of funds legally available therefor, at the Optional
Redemption Price per share on any Dividend Payment Date; provided that no share
of AMPS may be redeemed at the option of the Fund during (a) the Initial
Dividend Period with respect to the shares of AMPS or (b) a Non-Call Period to
which such share is subject. "Optional Redemption Price" means $25,000 per
share of AMPS plus an amount equal to accumulated but unpaid dividends (whether
or not earned or declared) to the date fixed for redemption plus any applicable
redemption premium, if any, attributable to the designation of a Premium Call
Period. In addition, holders of AMPS may be entitled to receive Additional
Dividends in the event of redemption of such AMPS to the extent provided
herein. See "Dividends--Additional Dividends" above. The Fund has the authority
to redeem the AMPS for any reason and may redeem all or part of the outstanding
shares of AMPS if it anticipates that the Fund's leveraged capital structure
will result in a lower rate of return to holders of common stock for any
significant period of time than that obtainable if the Common Stock were
unleveraged.

  Mandatory Redemption. The Fund will be required to redeem, out of funds
legally available therefor, at the Mandatory Redemption Price per share, shares
of AMPS to the extent permitted under the 1940 Act and Maryland law, on a date
fixed by the Board of Directors, if the Fund fails to maintain S&P Eligible
Assets and Moody's Eligible Assets each with an aggregate Discounted Value
equal to or greater than the AMPS Basic Maintenance Amount or to satisfy the
1940 Act AMPS Asset Coverage and such failure is not cured on or before the
AMPS Basic Maintenance Cure Date or the 1940 Act Cure Date (herein collectively
referred to as a "Cure Date"), as the case may be. "Mandatory Redemption Price"
means $25,000 per share of AMPS plus an amount equal to accumulated but unpaid
dividends (whether or not earned or declared) to the date fixed for redemption.
In addition, holders of AMPS may be entitled to receive Additional Dividends in
the event of redemption of such AMPS to the extent provided herein. See
"Dividends--Additional Dividends" above.

  For a discussion of the allocation procedures to be used if fewer than all of
the outstanding AMPS are to be redeemed and for a discussion of other
redemption procedures, see "Description of AMPS--Redemption" in the statement
of additional information.

Liquidation Rights

  Upon any liquidation, dissolution or winding up of the Fund, whether
voluntary or involuntary, the holders of shares of AMPS will be entitled to
receive, out of the assets of the Fund available for distribution to
shareholders, before any distribution or payment is made upon any shares of
common stock or any other capital stock of the Fund ranking junior in right of
payment upon liquidation of AMPS, $25,000 per share together with the amount of
any dividends accumulated but unpaid (whether or not earned or declared)
thereon to the

                                       19
<PAGE>

date of distribution, and after such payment the holders of AMPS will be
entitled to no other payments except for any Additional Dividends. If such
assets of the Fund shall be insufficient to make the full liquidation payment
on the outstanding shares of AMPS and liquidation payments on any other
outstanding class or series of preferred stock of the Fund ranking on a parity
with the AMPS as to payment upon liquidation, then such assets will be
distributed among the holders of the AMPS and the holders of shares of such
other class or series ratably in proportion to the respective preferential
amounts to which they are entitled. After payment of the full amount of
liquidation distribution to which they are entitled, the holders of AMPS will
not be entitled to any further participation in any distribution of assets by
the Fund except for any Additional Dividends. A consolidation, merger or share
exchange of the Fund with or into any other entity or entities or a sale,
whether for cash, shares of stock, securities or properties, of all or
substantially all or any part of the assets of the Fund shall not be deemed or
construed to be a liquidation, dissolution or winding up of the Fund.

Voting Rights

  Except as otherwise indicated in this prospectus and the statement of
additional information and except as otherwise required by applicable law,
holders of shares of AMPS will be entitled to one vote per share on each matter
submitted to a vote of stockholders and will vote together with holders of
shares of common stock as a single class.

  The 1940 Act and the Articles Supplementary require that the holders of
preferred stock, including the AMPS, voting as a separate class, have the
rights to elect two of the Fund's Directors at all times and to elect a
majority of the Directors at any time that two full years' dividends on the
AMPS are unpaid. The holders of AMPS will vote as a separate class or classes
on certain other matters as required under the Articles Supplementary, the 1940
Act and Maryland law. See "Description of AMPS--Voting Rights" in the statement
of additional information.

                                  THE AUCTION

General

  Holders of the shares of AMPS will be entitled to receive cumulative cash
dividends on their shares when, as and if declared by the Board of Directors of
the Fund, out of funds legally available therefor, on the Initial Dividend
Payment Date with respect to the Initial Dividend Period and, thereafter, on
each Dividend Payment Date with respect to a Subsequent Dividend Period
(generally a period of seven days subject to certain exceptions set forth under
"Description of AMPS--Dividends--General") at the rate per annum equal to the
Applicable Rate for each such Dividend Period.

  The provisions of the Articles Supplementary establishing the terms of the
shares of AMPS offered hereby will provide that the Applicable Rate for the
shares of AMPS for each Dividend Period after the Initial Dividend Period
therefor will be equal to the rate per annum that the Auction Agent advises has
resulted on the Business Day preceding the first day of such Dividend Period
due to implementation of the auction procedures set forth in the Articles
Supplementary (the "Auction Procedures") in which persons determine to hold or
offer to purchase or sell shares of AMPS of such series. The Auction Procedures
are attached as Appendix D to the statement of additional information.

  Each periodic operation of such procedures with respect to the shares of AMPS
is referred to hereinafter as an "Auction." If, however, the Fund should fail
to pay or duly provide for the full amount of any dividend on shares of AMPS or
the redemption price of shares of AMPS called for redemption, the Applicable
Rate for shares of AMPS of such series will be determined as set forth under
"Description of AMPS--Dividends--Non-Payment Period; Late Charge" in the
statement of additional information.

  Auction Agent Agreement. The Fund will enter into an agreement (the "Auction
Agent Agreement") with The Bank of New York, (the "Auction Agent"), which
provides, among other things, that the Auction

                                       20
<PAGE>

Agent will follow the Auction Procedures for the purpose of determining the
Applicable Rate for the AMPS. The Fund will pay the Auction Agent compensation
for its services under the Auction Agent Agreement.

  Broker-Dealer Agreements. The Auction Agent will enter into agreements with
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Goldman,
Sachs & Co., Lehman Government Securities Incorporated and Salomon Smith Barney
Inc. and may enter into similar agreements (collectively, the "Broker-Dealer
Agreements") with one or more other broker-dealers (collectively, the "Broker-
Dealers") selected by the Fund, which provide for the participation of such
Broker-Dealers in Auctions. Merrill Lynch is an affiliate of the Investment
Adviser in that they share a common parent, ML & Co.

  Securities Depository. The Depository Trust Company initially will act as the
Securities Depository for the Agent Members with respect to the shares of AMPS.
One or more registered certificates for all of the shares of AMPS initially
will be registered in the name of Cede, as nominee of the Securities
Depository. The certificate will bear a legend to the effect that such
certificate is issued subject to the provisions restricting transfers of shares
of AMPS contained in the Articles Supplementary. Cede initially will be the
holder of record of all shares of AMPS, and Beneficial Owners will not be
entitled to receive certificates representing their ownership interest in such
shares. The Securities Depository will maintain lists of its participants and
will maintain the positions (ownership interests) of shares of AMPS held by
each Agent Member, whether as the Beneficial Owner thereof for its own account
or as nominee for the Beneficial Owner thereof. Payments made by the Fund to
holders of AMPS will be duly made by making payments to the nominee of the
Securities Depository.

Auction Procedures

  The following is a brief discussion of the procedures to be used in
conducting Auctions. This summary is qualified by reference to the Auction
Procedures set forth in Appendix D to the statement of additional information.
The Settlement Procedures to be used with respect to Auctions are set forth in
Appendix C to the statement of additional information.

  Auction Date; Advance Notice of Allocation of Taxable Income; Inclusion of
Taxable Income in Dividends. An Auction to determine the Applicable Rate for
the shares of AMPS offered hereby for each Dividend Period (other than the
Initial Dividend Period therefor) will be held on the first Business Day (as
hereinafter defined) preceding the first day of such Dividend Period, which
first day is also the Dividend Payment Date for the preceding Dividend Period
(the date of each Auction being referred to herein as an "Auction Date").
"Business Day" means a day on which the New York Stock Exchange is open for
trading and which is not a Saturday, Sunday or other day on which banks in the
City of New York are authorized or obligated by law to close. Auctions for
shares of AMPS for Dividend Periods after the Initial Dividend Period normally
will be held every Wednesday after the preceding Dividend Payment Date, and
each subsequent Dividend Period normally will begin on the following Thursday
(also a Dividend Payment Date). The Auction Date and the first day of the
related Dividend Period (both of which must be Business Days) need not be
consecutive calendar days. For example, in most cases, if the Wednesday that
normally would be an Auction Date for AMPS is not a Business Day, then such
Auction Date will be the preceding Tuesday and the first day of the related
Dividend Period will continue to be the following Thursday. See "Description of
AMPS--Dividends" for information concerning the circumstances under which a
Dividend Payment Date may fall on a date other than the days specified above,
which may affect the Auction Date.

  Except as noted below, whenever the Fund intends to include any net capital
gains or other income subject to regular Federal income taxes in any dividend
on shares of AMPS, the Fund will notify the Auction Agent of the amount to be
so included at least five Business Days prior to the Auction Date on which the
Applicable Rate for such dividend is to be established. Whenever the Auction
Agent receives such notice from the Fund, in turn it will notify each Broker-
Dealer, who, on or prior to such Auction Date, in accordance with its Broker-

                                       21
<PAGE>

Dealer Agreement, will notify its customers who are Beneficial Owners and
Potential Beneficial Owners believed to be interested in submitting an Order in
the Auction to be held on such Auction Date. The Fund also may include such
income in a dividend on shares of AMPS without giving advance notice thereof if
it increases the dividend by an additional amount calculated as if such income
were a Retroactive Taxable Allocation and the additional amount were an
Additional Dividend; provided that the Fund will notify the Auction Agent of
the additional amounts to be included in such dividend at least five Business
Days prior to the applicable Dividend Payment Date. See "Description of AMPS--
Dividends--Additional Dividends" above.

  Orders by Beneficial Owners, Potential Beneficial Owners, Existing Holders
and Potential Holders. On or prior to each Auction Date:

    (a) each Beneficial Owner may submit to its Broker-Dealer by telephone a:

      (i) Hold Order--indicating the number of outstanding shares, if any,
    of AMPS that such Beneficial Owner desires to continue to hold without
    regard to the Applicable Rate for the next Dividend Period for such
    shares;

      (ii) Bid--indicating the number of outstanding shares, if any, of
    AMPS that such Beneficial Owner desires to continue to hold, provided
    that the Applicable Rate for the next Dividend Period for such shares
    is not less than the rate per annum then specified by such Beneficial
    Owner; and/or

      (iii) Sell Order--indicating the number of outstanding shares, if
    any, of AMPS that such Beneficial Owner offers to sell without regard
    to the Applicable Rate for the next Dividend Period for such shares;
    and

    (b) Broker-Dealers will contact customers who are Potential Beneficial
  Owners of shares of AMPS to determine whether such Potential Beneficial
  Owners desire to submit Bids indicating the number of shares of AMPS which
  they offer to purchase provided that the Applicable Rate for the next
  Dividend Period for such shares is not less than the rates per annum
  specified in such Bids.

  The communication by a Beneficial Owner or Potential Beneficial Owner to a
Broker-Dealer and the communication by a Broker-Dealer, whether or not acting
for its own account, to the Auction Agent of the foregoing information is
hereinafter referred to as an "Order" and collectively as "Orders." A
Beneficial Owner or a Potential Beneficial Owner placing an Order, including a
Broker-Dealer acting in such capacity for its own account, is hereinafter
referred to as a "Bidder" and collectively as "Bidders." Any Order submitted by
a Beneficial Owner or a Potential Beneficial Owner to its Broker-Dealer, or by
a Broker-Dealer to the Auction Agent, prior to the Submission Deadline on any
Auction Date shall be irrevocable.

  In an Auction, a Beneficial Owner may submit different types of Orders with
respect to shares of AMPS then held by such Beneficial Owner, as well as Bids
for additional shares of AMPS. For information concerning the priority given to
different types of Orders placed by Beneficial Owners, see "Submission of
Orders by Broker-Dealers to Auction Agent" below.

  The Maximum Applicable Rate for shares of AMPS will be the Applicable
Percentage of the Reference Rate. The Auction Agent will round each applicable
Maximum Applicable Rate to the nearest one-thousandth (0.001) of one percent
per annum, with any such number ending in five ten-thousandths of one percent
being rounded upwards to the nearest one-thousandth (0.001) of one percent. The
Auction Agent will not round the applicable Reference Rate as part of its
calculation of the Maximum Applicable Rate.

  The Maximum Applicable Rate for shares of AMPS will depend on the credit
rating or ratings assigned to such shares. The Applicable Percentage will be
determined based on (i) the lower of the credit rating or ratings assigned on
such date to such shares by Moody's and S&P (or if Moody's or S&P or both shall
not make such rating available, the equivalent of either or both of such
ratings by a Substitute Rating Agency or two Substitute Rating Agencies or, in
the event that only one such rating shall be available, such rating) and (ii)

                                       22
<PAGE>

whether the Fund has provided notification to the Auction Agent prior to the
Auction establishing the Applicable Rate for any dividend that net capital
gains or other taxable income will be included in such dividend on shares of
AMPS as follows:

<TABLE>
<CAPTION>
                                              Applicable           Applicable
              Credit Ratings                Percentage of        Percentage of
     ----------------------------------    Reference Rate--     Reference Rate--
         Moody's              S&P          No Notification        Notification
     ----------------    -------------     ----------------     ----------------
     <S>                 <C>               <C>                  <C>
     "aa3" or higher     AA- or Higher           110%                 150%
       "a3" or "a1"         A- to A              125%                 160%
     "baa3" to "baa1"    BBB- to BBB+            150%                 250%
       Below "baa3"       Below BBB-             200%                 275%
</TABLE>

  There is no minimum Applicable Rate in respect of any Dividend Period.

  The Fund will take all reasonable action necessary to enable S&P and Moody's
to provide a rating for the AMPS. If either S&P or Moody's, or both, shall not
make such a rating available, the Underwriter or its affiliates and successors,
after consultation with the Fund, will select another nationally recognized
statistical rating organization (a "Substitute Rating Agency") or two other
nationally recognized statistical rating organizations ("Substitute Rating
Agencies") to act as a Substitute Rating Agency or Substitute Rating Agencies,
as the case may be.

  Any Bid by a Beneficial Owner specifying a rate per annum higher than the
Maximum Applicable Rate will be treated as a Sell Order, and any Bid by a
Potential Beneficial Owner specifying a rate per annum higher than the Maximum
Applicable Rate will not be considered. See "Determination of Sufficient
Clearing Bids, Winning Bid Rate and Applicable Rate" and "Acceptance and
Rejection of Submitted Bids and Submitted Sell Orders and Allocation of
Shares."

  Neither the Fund nor the Auction Agent will be responsible for a Broker-
Dealer's failure to comply with the foregoing.

  A Broker-Dealer also may hold AMPS in its own account as a Beneficial Owner.
A Broker-Dealer thus may submit Orders to the Auction Agent as a Beneficial
Owner or a Potential Beneficial Owner and therefore participate in an Auction
as an Existing Holder or Potential Holder on behalf of both itself and its
customers. Any Order placed with the Auction Agent by a Broker-Dealer as or on
behalf of a Beneficial Owner or a Potential Beneficial Owner will be treated in
the same manner as an Order placed with a Broker-Dealer by a Beneficial Owner
or a Potential Beneficial Owner. Similarly, any failure by a Broker-Dealer to
submit to the Auction Agent an Order in respect of any AMPS held by it or its
customers who are Beneficial Owners will be treated in the same manner as a
Beneficial Owner's failure to submit to its Broker-Dealer an Order in respect
of AMPS held by it, as described in the next paragraph. Inasmuch as a Broker-
Dealer participates in an Auction as an Existing Holder or a Potential Holder
only to represent the interests of a Beneficial Owner or Potential Beneficial
Owner, whether it be its customers or itself, all discussion herein relating to
the consequences of an Auction for Existing Holders and Potential Holders also
applies to the underlying beneficial ownership interests represented thereby.
For information concerning the priority given to different types of Orders
placed by Existing Holders, see "Submission of Orders by Broker-Dealers to
Auction Agent." Each purchase or sale in an Auction will be settled on the
Business Day next succeeding the Auction Date at a price per share equal to
$25,000. See "Notification of Results; Settlement" below.

  If one or more Orders covering in the aggregate all of the outstanding shares
of AMPS held by a Beneficial Owner are not submitted to the Auction Agent prior
to the Submission Deadline, either because a Broker-Dealer failed to contact
such Beneficial Owner or otherwise, the Auction Agent shall deem a Hold Order
(in the case of an Auction relating to a Dividend Period which is not a Special
Dividend Period of 28 days or more) and a Sell Order (in the case of an Auction
relating to a Special Dividend Period of 28 days or

                                       23
<PAGE>

more) to have been submitted on behalf of such Beneficial Owner covering the
number of outstanding shares of AMPS held by such Beneficial Owner and not
subject to Orders submitted to the Auction Agent.

  If all of the outstanding shares of AMPS are subject to Submitted Hold
Orders, the Dividend Period next succeeding the Auction automatically shall be
the same length as the immediately preceding Dividend Period, and the
Applicable Rate for the next Dividend Period for all shares of AMPS will be 40%
of the Reference Rate on the date of the applicable Auction (or 60% of such
rate if the Fund has provided notification to the Auction Agent prior to the
Auction establishing the Applicable Rate for any dividend that net capital
gains or other taxable income will be included in such dividend on shares of
AMPS).

  For the purposes of an Auction, shares of AMPS for which the Fund shall have
given notice of redemption and deposited moneys therefor with the Auction Agent
in trust or segregated in an account at the Fund's custodian bank for the
benefit of the Auction Agent, as set forth under "Description of AMPS--
Redemption" in the statement of additional information, will not be considered
as outstanding and will not be included in such Auction. Pursuant to the
Articles Supplementary of the Fund, the Fund will be prohibited from reissuing
and its affiliates (other than the Underwriter) will be prohibited from
transferring (other than to the Fund) any shares of AMPS they may acquire.
Neither the Fund nor any affiliate of the Fund (other than the Underwriter) may
submit an Order in any Auction, except that an affiliate of the Fund that is a
Broker-Dealer may submit an Order.

  Submission of Orders by Broker-Dealers to Auction Agent. Prior to 1:00 p.m.,
Eastern time, on each Auction Date, or such other time on the Auction Date as
may be specified by the Auction Agent (the "Submission Deadline"), each Broker-
Dealer will submit to the Auction Agent in writing all Orders obtained by it
for the Auction to be conducted on such Auction Date, designating itself
(unless otherwise permitted by the Fund) as the Existing Holder or Potential
Holder in respect of the shares of AMPS subject to such Orders. Any Order
submitted by a Beneficial Owner or a Potential Beneficial Owner to its Broker-
Dealer, or by a Broker-Dealer to the Auction Agent, prior to the Submission
Deadline on any Auction Date, shall be irrevocable.

  If the rate per annum specified in any Bid contains more than three figures
to the right of the decimal point, the Auction Agent will round such rate per
annum up to the next highest one-thousandth (.001) of 1%.

  If one or more Orders of an Existing Holder are submitted to the Auction
Agent and such Orders cover in the aggregate more than the number of
outstanding shares of AMPS held by such Existing Holder, such Orders will be
considered valid in the following order of priority:

    (i) any Hold Order will be considered valid up to and including the
  number of outstanding shares of AMPS held by such Existing Holder, provided
  that if more than one Hold Order is submitted by such Existing Holder and
  the number of shares of AMPS subject to such Hold Orders exceeds the number
  of outstanding shares of AMPS held by such Existing Holder, the number of
  shares of AMPS subject to each of such Hold Orders will be reduced pro rata
  so that such Hold Orders, in the aggregate, will cover exactly the number
  of outstanding shares of AMPS held by such Existing Holder;

    (ii) any Bids will be considered valid, in the ascending order of their
  respective rates per annum if more than one Bid is submitted by such
  Existing Holder, up to and including the excess of the number of
  outstanding shares of AMPS held by such Existing Holder over the number of
  outstanding shares of AMPS subject to any Hold Order referred to in clause
  (i) above (and if more than one Bid submitted by such Existing Holder
  specifies the same rate per annum and together they cover more than the
  remaining number of shares that can be the subject of valid Bids after
  application of clause (i) above and of the foregoing portion of this clause
  (ii) to any Bid or Bids specifying a lower rate or rates per annum, the
  number of shares subject to each of such Bids will be reduced pro rata so
  that such Bids, in the aggregate, cover exactly such remaining number of
  outstanding shares); and the number of outstanding shares, if any, subject
  to Bids not valid under this clause (ii) shall be treated as the subject of
  a Bid by a Potential Holder; and


                                       24
<PAGE>

    (iii) any Sell Order will be considered valid up to and including the
  excess of the number of outstanding shares of AMPS held by such Existing
  Holder over the sum of the number of shares of AMPS subject to Hold Orders
  referred to in clause (i) above and the number of shares of AMPS subject to
  valid Bids by such Existing Holder referred to in clause (ii) above;
  provided that, if more than one Sell Order is submitted by any Existing
  Holder and the number of shares of AMPS subject to such Sell Orders is
  greater than such excess, the number of shares of AMPS subject to each of
  such Sell Orders will be reduced pro rata so that such Sell Orders, in the
  aggregate, will cover exactly the number of shares of AMPS equal to such
  excess.

  If more than one Bid of any Potential Holder is submitted in any Auction,
each Bid submitted in such Auction will be considered a separate Bid with the
rate per annum and number of shares of AMPS therein specified.

  Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable
Rate. Not earlier than the Submission Deadline for each Auction, the Auction
Agent will assemble all Orders submitted or deemed submitted to it by the
Broker-Dealers (each such "Hold Order," "Bid" or "Sell Order" as submitted or
deemed submitted by a Broker-Dealer hereinafter being referred to as a
"Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the
case may be, or as a "Submitted Order") and will determine the excess of the
number of outstanding shares of AMPS over the number of outstanding shares of
AMPS subject to Submitted Hold Orders (such excess being referred to as the
"Available AMPS") and whether Sufficient Clearing Bids have been made in such
Auction. Sufficient Clearing Bids will have been made if the number of
outstanding shares of AMPS that are the subject of Submitted Bids of Potential
Holders with rates per annum not higher than the Maximum Applicable Rate equals
or exceeds the number of outstanding shares that are the subject of Submitted
Sell Orders (including the number of shares subject to Bids of Existing Holders
specifying rates per annum higher than the Maximum Applicable Rate).

  If Sufficient Clearing Bids have been made, the Auction Agent will determine
the lowest rate per annum specified in the Submitted Bids (the "Winning Bid
Rate") which would result in the number of shares subject to Submitted Bids
specifying such rate per annum or a lower rate per annum being at least equal
to the Available AMPS. If Sufficient Clearing Bids have been made, the Winning
Bid Rate will be the Applicable Rate for the next Dividend Period for all
shares of AMPS then outstanding.

  If Sufficient Clearing Bids have not been made (other than because all
outstanding shares of AMPS are the subject of Submitted Hold Orders), the
Dividend Period next following the Auction automatically will be a 7-Day
Dividend Period, and the Applicable Rate for such Dividend Period will be equal
to the Maximum Applicable Rate. If Sufficient Clearing Bids have not been made,
Beneficial Owners that have Submitted Sell Orders will not be able to sell in
the Auction all, and may not be able to sell any, shares of AMPS subject to
such Submitted Sell Orders. See "Acceptance and Rejection of Submitted Bids and
Submitted Sell Orders and Allocation of Shares." Thus, under some
circumstances, Beneficial Owners may not have liquidity of investment.

  Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation of Shares. Based on the determinations described under
"Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable
Rate" and subject to the discretion of the Auction Agent to round as described
below, Submitted Bids and Submitted Sell Orders will be accepted or rejected in
the order of priority set forth in the Auction Procedures with the result that
Existing Holders and Potential Holders of AMPS will sell, continue to hold
and/or purchase shares of AMPS as set forth below. Existing Holders that submit
or are deemed to have submitted Hold Orders will continue to hold the shares of
AMPS subject to such Hold Orders.

  If Sufficient Clearing Bids have been made:

    (a) each Existing Holder that placed a Submitted Bid specifying a rate
  per annum higher than the Winning Bid Rate or a Submitted Sell Order will
  sell the outstanding shares of AMPS subject to such Submitted Bid or
  Submitted Sell Order;

    (b) each Existing Holder that placed a Submitted Bid specifying a rate
  per annum lower than the Winning Bid Rate will continue to hold the
  outstanding shares of AMPS subject to such Submitted Bid;

                                       25
<PAGE>

    (c) each Potential Holder that placed a Submitted Bid specifying a rate
  per annum lower than the Winning Bid Rate will purchase the number of
  shares of AMPS subject to such Submitted Bid;

    (d) each Existing Holder that placed a Submitted Bid specifying a rate
  per annum equal to the Winning Bid Rate will continue to hold the
  outstanding shares of AMPS subject to such Submitted Bids, unless the
  number of outstanding shares of AMPS subject to all such Submitted Bids of
  Existing Holders is greater than the excess of the Available AMPS over the
  number of shares of AMPS accounted for in clauses (b) and (c) above, in
  which event each Existing Holder with such a Submitted Bid will sell a
  number of outstanding shares of AMPS determined on a pro rata basis based
  on the number of outstanding shares of AMPS subject to all such Submitted
  Bids of such Existing Holders; and

    (e) each Potential Holder that placed a Submitted Bid specifying a rate
  per annum equal to the Winning Bid Rate will purchase any Available AMPS
  not accounted for in clause (b), (c) or (d) above on a pro rata basis based
  on the shares of AMPS subject to all such Submitted Bids of Potential
  Holders.

  If Sufficient Clearing Bids have not been made (other than because all
outstanding shares of AMPS are the subject of Submitted Hold Orders):

    (a) each Existing Holder that placed a Submitted Bid specifying a rate
  per annum equal to or lower than the Maximum Applicable Rate will continue
  to hold the outstanding shares of AMPS subject to such Submitted Bid;

    (b) each Potential Holder that placed a Submitted Bid specifying a rate
  per annum equal to or lower than the Maximum Applicable Rate will purchase
  the number of shares of AMPS subject to such Submitted Bid; and

    (c) each Existing Holder that placed a Submitted Bid specifying a rate
  per annum higher than the Maximum Applicable Rate or a Submitted Sell Order
  will sell a number of outstanding shares of AMPS determined on a pro rata
  basis based on the outstanding shares of AMPS subject to all such Submitted
  Bids and Submitted Sell Orders.

  If as a result of the Auction Procedures described above any Existing Holder
would be entitled or required to sell, or any Potential Holder would be
entitled or required to purchase, a fraction of a share of AMPS, the Auction
Agent, in such manner as, in its sole discretion, it shall determine, will
round up or down the number of shares of AMPS being sold or purchased on such
Auction Date so that each share sold or purchased by each Existing Holder or
Potential Holder will be a whole share of AMPS. If any Potential Holder would
be entitled or required to purchase less than a whole share of AMPS, the
Auction Agent, in such manner as, in its sole discretion, it shall determine,
will allocate shares of AMPS for purchase among Potential Holders so that only
whole shares of AMPS are purchased by any such Potential Holder, even if such
allocation results in one or more of such Potential Holders not purchasing any
shares of AMPS.

  Notification of Results; Settlement. The Auction Agent will advise each
Broker-Dealer who submitted a Bid or Sell Order in an Auction whether such Bid
or Sell Order was accepted or rejected in whole or in part and of the
Applicable Rate for the next Dividend Period for the related shares of AMPS by
telephone at approximately 3:00 P.M., Eastern time, on the Auction Date for
such Auction. Each such Broker-Dealer that submitted an Order for the account
of a customer then will advise such customer whether such Bid or Sell Order was
accepted or rejected, will confirm purchases and sales with each customer
purchasing or selling shares of AMPS as a result of the Auction and will advise
each customer purchasing or selling shares of AMPS to give instructions to its
Agent Member of the Securities Depository to pay the purchase price against
delivery of such shares or to deliver such shares against payment therefor as
appropriate. If a customer selling shares of AMPS as a result of an Auction
shall fail to instruct its Agent Member to deliver such shares, the Broker-
Dealer that submitted such customer's Bid or Sell Order will instruct such
Agent Member to deliver such shares against payment therefor. Each Broker-
Dealer that submitted a Hold Order in an Auction on behalf of a customer also
will advise such customer of the Applicable Rate for the next Dividend Period
for the AMPS. The Auction Agent will record each transfer of shares of AMPS on
the record book of Existing Holders to be maintained by the Auction Agent.

                                       26
<PAGE>

  In accordance with the Securities Depository's normal procedures, on the day
after each Auction Date, the transactions described above will be executed
through the Securities Depository, and the accounts of the respective Agent
Members at the Securities Depository will be debited and credited as necessary
to effect the purchases and sales of shares of AMPS as determined in such
Auction. Purchasers will make payment through their Agent Members in same-day
funds to the Securities Depository against delivery through their Agent
Members; the Securities Depository will make payment in accordance with its
normal procedures, which now provide for payment in same-day funds. If the
procedures of the Securities Depository applicable to AMPS shall be changed to
provide for payment in next-day funds, then purchasers may be required to make
payment in next-day funds. If the certificates for shares of AMPS are not held
by the Securities Depository or its nominee, payment will be made in same-day
funds to the Auction Agent against delivery of such certificates.

  If any Existing Holder selling shares of AMPS in an Auction fails to deliver
such shares, the Broker-Dealer of any person that was to have purchased shares
of AMPS in such Auction may deliver to such person a number of whole shares of
AMPS that is less than the number of shares that otherwise was to be purchased
by such person. In such event, the number of shares of AMPS to be so delivered
will be determined by such Broker-Dealer. Delivery of such lesser number of
shares will constitute good delivery. Each Broker-Dealer Agreement also will
provide that neither the Fund nor the Auction Agent will have responsibility or
liability with respect to the failure of a Potential Beneficial Owner,
Beneficial Owner or their respective Agent Members to deliver shares of AMPS or
to pay for shares of AMPS purchased or sold pursuant to an Auction or
otherwise.

Broker-Dealers

  General. The Broker-Dealer Agreements provide that a Broker-Dealer may submit
Orders in Auctions for its own account, unless the Fund notifies all Broker-
Dealers that they no longer may do so; provided that Broker-Dealers may
continue to submit Hold Orders and Sell Orders. If a Broker-Dealer submits an
Order for its own account in any Auction of any series of AMPS, it may have
knowledge of Orders placed through it in that Auction and therefore have an
advantage over other Bidders, but such Broker-Dealer would not have knowledge
of Orders submitted by other Broker-Dealers in that Auction.

  Fees. The Auction Agent after each Auction will pay a service charge from
funds provided by the Fund to each Broker-Dealer on the basis of the purchase
price of shares of AMPS placed by such Broker-Dealer at such Auction. The
service charge (i) for any 7-Day Dividend Period shall be payable at the annual
rate of 0.25% of the purchase price of the shares of AMPS placed by such
Broker-Dealer in any such Auction and (ii) for any Special Dividend Period
shall be determined by mutual consent of the Fund and any such Broker-Dealer or
Broker-Dealers and shall be based upon a selling concession that would be
applicable to an underwriting of fixed or variable rate preferred shares with a
similar final maturity or variable rate dividend period, respectively, at the
commencement of the Dividend Period with respect to such Auction. For the
purposes of the preceding sentence, shares of AMPS will be placed by a Broker-
Dealer if such shares were (i) the subject of Hold Orders deemed to have been
made by Beneficial Owners that were acquired by such Beneficial Owners through
such Broker-Dealer or (ii) the subject of the following Orders submitted by
such Broker-Dealer: (A) a Submitted Bid of a Beneficial Owner that resulted in
such Beneficial Owner continuing to hold such shares as a result of the
Auction, (B) a Submitted Bid of a Potential Beneficial Owner that resulted in
such Potential Beneficial Owner purchasing such shares as a result of the
Auction or (C) a Submitted Hold Order.

  Secondary Trading Market. The Broker-Dealers intend to maintain a secondary
trading market in the AMPS outside of Auctions; however, they have no
obligation to do so and there can be no assurance that a secondary market for
the AMPS will develop or, if it does develop, that it will provide holders with
a liquid trading market (i.e., trading will depend on the presence of willing
buyers and sellers and the trading price is subject to variables to be
determined at the time of the trade by the Broker-Dealers). The AMPS will not
be registered on any stock exchange or on any automated quotation system. An
increase in the level of interest rates, particularly during any Long-Term
Dividend Period, likely will have an adverse effect on the secondary market
price of the AMPS, and a selling shareholder may sell AMPS between Auctions at
a price per share of less than $25,000.

                                       27
<PAGE>

                            RATING AGENCY GUIDELINES

  Certain of the capitalized terms used herein are defined in the Glossary that
appears at the end of this prospectus.

  The Fund intends that, so long as shares of AMPS are outstanding, the
composition of its portfolio will reflect guidelines established by Moody's and
S&P in connection with the Fund's receipt of a rating for such shares on or
prior to their Date of Original Issue of at least "aaa" from Moody's and AAA
from S&P. Moody's and S&P, which are NRSROs, issue ratings for various
securities reflecting the perceived creditworthiness of such securities. The
guidelines described below have been developed by Moody's and S&P in connection
with issuances of asset-backed and similar securities, including debt
obligations and variable rate preferred stock, generally on a case-by-case
basis through discussions with the issuers of these securities. The guidelines
are designed to ensure that assets underlying outstanding debt or preferred
stock will be varied sufficiently and will be of sufficient quality and amount
to justify investment-grade ratings. The guidelines do not have the force of
law but have been adopted by the Fund in order to satisfy current requirements
necessary for Moody's and S&P to issue the above-described ratings for shares
of AMPS, which ratings generally are relied upon by institutional investors in
purchasing such securities. The guidelines provide a set of tests for portfolio
composition and asset coverage that supplement (and in some cases are more
restrictive than) the applicable requirements under the 1940 Act. See
"Description of AMPS--Asset Maintenance" herein and in the statement of
additional information.

  The Fund intends to maintain a Discounted Value for its portfolio at least
equal to the AMPS Basic Maintenance Amount. Moody's and S&P each has
established separate guidelines for determining Discounted Value. To the extent
any particular portfolio holding does not satisfy the applicable rating
agency's guidelines, all or a portion of such holding's value will not be
included in the calculation of Discounted Value (as defined by such rating
agency). The Moody's and S&P guidelines do not impose any limitations on the
percentage of Fund assets that may be invested in holdings not eligible for
inclusion in the calculation of the Discounted Value of the Fund's portfolio.

  Upon any failure to maintain the required Discounted Value, the Fund will
seek to alter the composition of its portfolio to reattain a Discounted Value
at least equal to the AMPS Basic Maintenance Amount on or prior to the AMPS
Basic Maintenance Cure Date, thereby incurring additional transaction costs and
possible losses and/or gains on dispositions of portfolio securities. To the
extent any such failure is not cured in a timely manner, shares of AMPS will be
subject to redemption. See "Description of AMPS--Asset Maintenance" and
"Description of AMPS--Redemption" herein and in the statement of additional
information.

  The Fund may, but is not required to, adopt any modifications to these
guidelines that hereafter may be established by Moody's or S&P. Failure to
adopt any such modifications, however, may result in a change in the ratings
described above or a withdrawal of ratings altogether. In addition, any rating
agency providing a rating for the shares of AMPS, at any time, may change or
withdraw any such rating. As set forth in the Articles Supplementary, the Board
of Directors, without shareholder approval, may modify certain definitions or
restrictions that have been adopted by the Fund pursuant to the rating agency
guidelines, provided the Board of Directors has obtained written confirmation
from Moody's and S&P that any such change would not impair the ratings then
assigned by Moody's and S&P to the AMPS.

  As described by Moody's and S&P, a preferred stock rating is an assessment of
the capacity and willingness of an issuer to pay preferred stock obligations.
The ratings on the AMPS are not recommendations to purchase, hold or sell
shares of AMPS, inasmuch as the ratings do not comment as to market price or
suitability for a particular investor, nor do the rating agency guidelines
described above address the likelihood that a holder of shares of AMPS will be
able to sell such shares in an Auction. The ratings are based on current
information furnished to Moody's and S&P by the Fund and the Investment Adviser
and information obtained from other sources. The ratings may be changed,
suspended or withdrawn as a result of changes in, or the unavailability of,
such information. The Common Stock has not been rated by a nationally
recognized statistical rating organization.

  For additional information concerning the Moody's and S&P ratings guidelines,
see "Rating Agency Guidelines" in the statement of additional information.

                                       28
<PAGE>

                INVESTMENT ADVISORY AND MANAGEMENT ARRANGEMENTS

  The Investment Adviser, which is owned and controlled by Merrill Lynch & Co.,
Inc. ("ML & Co."), a financial services holding company and the parent of
Merrill Lynch, provides the Fund with investment advisory and management
services. The Asset Management Group of ML & Co. (which includes the Investment
Adviser) acts as the investment adviser to more than 100 other registered
investment companies and offers investment advisory services to individuals and
institutional accounts. As of August 1999, the Asset Management Group had a
total of approximately $520 billion in investment company and other portfolio
assets under management (approximately $40 billion of which were invested in
municipal securities). This amount includes assets managed for certain
affiliates of the Investment Adviser. The Investment Adviser is a limited
partnership, the partners of which are ML & Co. and Princeton Services. The
principal business address of the Investment Adviser is 800 Scudders Mill Road,
Plainsboro, New Jersey 08536.

  The Investment Advisory Agreement provides that, subject to the supervision
of the Board of Directors of the Fund, the Investment Adviser is responsible
for the actual management of the Fund's portfolio. The responsibility for
making decisions to buy, sell or hold a particular security rests with the
Investment Adviser, subject to review by the Board of Directors.

  The Investment Adviser provides the portfolio management for the Fund. Such
portfolio management will consider analyses from various sources (including
brokerage firms with which the Fund does business), make the necessary
investment decisions, and place orders for transactions accordingly. The
Investment Adviser will also be responsible for the performance of certain
administrative and management services for the Fund. William R. Bock is the
portfolio manager of the Fund and is primarily responsible for the Fund's day-
to-day management.

  For the services provided by the Investment Adviser under the Investment
Advisory Agreement, the Fund will pay a monthly fee at an annual rate of 0.55
of 1% of the Fund's average weekly net assets (i.e., the average weekly value
of the total assets of the Fund, including proceeds from the issuance of shares
of preferred stock, minus the sum of accrued liabilities of the Fund and
accumulated dividends on the shares of preferred stock). For purposes of this
calculation, average weekly net assets are determined at the end of each month
on the basis of the average net assets of the Fund for each week during the
month. The assets for each weekly period are determined by averaging the net
assets at the last business day of a week with the net assets at the last
business day of the prior week.

  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 investment and
economic research, trading and investment management of the Fund, as well as
the compensation of all Directors of the Fund who are affiliated persons of the
Investment Adviser or any of its affiliates. The Fund pays all other expenses
incurred in the operation of the Fund, including, among other things, expenses
for legal and auditing services, taxes, costs of printing proxies, listing
fees, if any, stock certificates and shareholder reports, charges of the
custodian and the transfer and dividend disbursing agent and registrar, fees
and expenses with respect to the issuance of preferred stock, Securities and
Exchange Commission fees, fees and expenses of non-interested Directors,
accounting and pricing costs, insurance, interest, brokerage costs, litigation
and other extraordinary or non-recurring expenses, mailing and other expenses
properly payable by the Fund. Accounting services are provided to the Fund by
the Investment Adviser, and the Fund reimburses the Investment Adviser for its
costs in connection with such services.

                                       29
<PAGE>

                                     TAXES

  In general, dividends on the AMPS will be exempt from Federal income tax in
the hands of holders of such AMPS, subject to the possible application of the
Federal alternative minimum tax. However, the Fund is required to allocate net
capital gains and other taxable income, if any, proportionately among the
common stock and each series of AMPS in accordance with the current position of
the Internal Revenue Service ("IRS") described under the heading "Taxes" in the
statement of additional information. The Fund may notify the Auction Agent of
the amount of any net capital gains or other anticipated taxable income to be
included in any dividend on the AMPS prior to the Auction establishing the
Applicable Dividend Rate for such dividend. The Auction Agent will in turn
notify holders of the AMPS and prospective purchasers. The amount of taxable
income allocable to each series of AMPS will depend upon the amount of such
income realized by the Fund and cannot be determined with certainty prior to
the end of the Fund's fiscal year, but it is not generally expected to be
significant.

  Generally, within 60 days after the end of the Fund's taxable year, the Fund
will tell you the amount of exempt-interest dividends and capital gain
dividends you received that year. Capital gain dividends are taxable as long-
term capital gains to you regardless of how long you have held your shares. The
tax treatment of distributions from the Fund is the same whether you choose to
receive distributions in cash or to have them reinvested in shares of the Fund.

  If the Fund makes a Retroactive Taxable Allocation, it will pay Additional
Dividends to holders of AMPS who are subject to the Retroactive Taxable
Allocation. See "Description of AMPS--Dividends--Additional Dividends." The
Federal income tax consequences of Additional Dividends under existing law are
uncertain. The Fund intends to treat a holder as receiving a dividend
distribution in the amount of any Additional Dividend only as and when such
Additional Dividend is paid. An Additional Dividend generally will be
designated by the Fund as an exempt-interest dividend except as otherwise
required by applicable law. However, the IRS may assert that all or part of an
Additional Dividend is a taxable dividend either in the taxable year for which
the Retroactive Taxable Allocation is made or in the taxable year in which the
Additional Dividend is paid.

  Because the Fund may from time to time invest a substantial portion of its
portfolio in municipal securities bearing income that is taxable under the
Federal alternative minimum tax, the Fund would not ordinarily be a suitable
investment for investors who are subject to the alternative minimum tax.

  If at any time when AMPS are outstanding the Fund does not meet the asset
coverage requirements of the 1940 Act, the Fund will be required to suspend
distributions to holders of common stock until the asset coverage is restored.
See "Description of AMPS--Restrictions on Dividends and Other Payments." This
may prevent the Fund from meeting certain distribution requirements for
qualification as a regulated investment company ("RIC"). If the Fund were to
fail to qualify as a RIC, some or all of the distributions paid by the Fund
would be fully taxable for Federal income tax purposes. Upon any failure to
meet the asset coverage requirements of the 1940 Act, the Fund, in its sole
discretion, may, and under certain circumstances will be required to, redeem
AMPS in order to maintain or restore the requisite asset coverage and avoid the
adverse consequences to the Fund and its shareholders of failing to qualify as
a RIC. See "Description of AMPS--Redemption." There can be no assurance,
however, that any such action would achieve such objectives.

  By law, the Fund must withhold 31% of your distributions and proceeds if you
have not provided a taxpayer identification number or social security number.
For more information regarding the tax treatment of an investment in AMPS, see
"Taxes" in the statement of additional information.

  Shareholders are urged to consult their tax advisers regarding the
availability of any exemptions from state or local taxes and with specific
questions as to Federal, foreign, state or local taxes.

                                       30
<PAGE>

                          DESCRIPTION OF CAPITAL STOCK

  The Fund is authorized to issue 200,000,000 shares of capital stock, par
value $.10 per share, all of which shares were initially classified as common
stock. The Board of Directors is authorized, however, to classify or reclassify
any unissued shares of capital stock by setting or changing the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, or terms or conditions of redemption. In this
regard, the Board of Directors has reclassified 1,266 shares of unissued common
stock as AMPS. For a description of the shares of AMPS, see "Description of
AMPS" herein and in the statement of additional information.

  The following table shows the amount of (i) capital stock authorized, (ii)
capital stock held by the Fund for its own account and (iii) capital stock
outstanding for each class of authorized securities of the Fund as of September
24, 1999.

<TABLE>
<CAPTION>
                                                                    Amount
                                                                  Outstanding
                                                    Amount held  (exclusive of
                                                      by Fund     amount held
                                          Amount    for its own by Fund for its
              Title of Class            Authorized    account    own account)
              --------------            ----------- ----------- ---------------
   <S>                                  <C>         <C>         <C>
   Common Stock........................ 199,998,734     -0-        3,206,667
   Auction Market Preferred Stock......       1,266     -0-              -0-
</TABLE>

Common Stock

  Holders of common stock are entitled to share equally in dividends declared
by the Board of Directors payable to holders of common stock and in the net
assets of the Fund available for distribution to holders of common stock after
payment of the preferential amounts payable to holders of any outstanding
preferred stock. Neither holders of common stock nor holders of preferred stock
have pre-emptive or conversion rights and shares of common stock are not
redeemable. The outstanding shares of common stock are fully paid and non-
assessable.

  Holders of common stock are entitled to one vote for each share held and will
vote with the holders of any outstanding shares of AMPS or other preferred
stock on each matter submitted to a vote of holders of common stock, except as
described under "Description of AMPS--Voting Rights" herein and in the
statement of additional information.

  Shareholders are entitled to one vote for each share held. The shares of
common stock, AMPS and any other preferred stock do not have cumulative voting
rights, which means that the holders of more than 50% of the shares of common
stock, AMPS and any other preferred stock voting for the election of Directors
can elect all of the Directors standing for election by such holders, and, in
such event, the holders of the remaining shares of common stock, AMPS and any
other preferred stock will not be able to elect any of such Directors.

  So long as any shares of AMPS or any other preferred stock are outstanding,
holders of common stock will not be entitled to receive any dividends of or
other distributions from the Fund unless all accumulated dividends on
outstanding shares of AMPS and any other preferred stock have been paid, and
unless asset coverage (as defined in the 1940 Act) with respect to such AMPS
and any other preferred stock would be at least 200% after giving effect to
such distributions. See "Description of AMPS--Restrictions on Dividends and
Other Payments" herein and in the statement of additional information.

  The Fund will send unaudited reports at least semi-annually and audited
financial statements annually to all of its shareholders.

  The shares of common stock will commence trading on the American Stock
Exchange on October 4, 1999. At September 24, 1999, the net asset value per
share of common stock was $15.00.

Preferred Stock

  Under the Articles Supplementary, the Fund is authorized to issue an
aggregate of 1,266 shares of AMPS. See "Description of AMPS." Under the 1940
Act, the Fund is permitted to have outstanding more than one

                                       31
<PAGE>

series of preferred stock as long as no single series has priority over
another series as to the distribution of assets of the Fund or the payment of
dividends. Neither holders of common stock nor holders of preferred stock have
pre-emptive rights to purchase any shares of AMPS or any other preferred stock
that might be issued. It is anticipated that the net asset value per share of
the AMPS will equal its original purchase price per share plus accumulated
dividends per share.

Certain Provisions of the Charter

  The Fund's Charter includes provisions that could have the effect of
limiting the ability of other entities or persons to acquire control of the
Fund or to change the composition of its Board of Directors and could have the
effect of depriving shareholders of an opportunity to sell their shares at a
premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the Fund. A director may be removed from office
with or without cause but only by vote of the holders of at least 66 2/3% of
the votes entitled to be voted on the matter. A director elected by all of the
holders of capital stock may be removed only by action of such holders, and a
director elected by the holders of AMPS and any other preferred stock may be
removed only by action of AMPS and any other preferred stock.

  In addition, the Charter requires the favorable vote of the holders of at
least 66 2/3% of the Fund's outstanding shares of capital stock, then entitled
to be voted, voting as a single class, to approve, adopt or authorize the
following:

  . a merger or consolidation or statutory share exchange of the Fund with
    any other corporation,

  . a sale of all or substantially all of the Fund's assets (other than in
    the regular course of the Fund's investment activities), or

  . a liquidation or dissolution of the Fund,

unless such action has been approved, adopted or authorized by the affirmative
vote of at least two-thirds of the total number of Directors fixed in
accordance with the by-laws, in which case the affirmative vote of a majority
of all of the votes entitled to be cast by shareholders of the Fund, voting as
a single class, is required. Such approval, adoption or authorization of the
foregoing would also require the favorable vote of at least a majority of the
Fund's shares of preferred stock then entitled to be voted, including the
AMPS, voting as a separate class.

  In addition, conversion of the Fund to an open-end investment company would
require an amendment to the Fund's Charter. The amendment would have to be
declared advisable by the Board of Directors prior to its submission to
shareholders. Such an amendment would require the favorable vote of the
holders of at least 66 2/3% of the Fund's outstanding shares of capital stock
(including the AMPS and any other preferred stock) entitled to be voted on the
matter, voting as a single class (or a majority of such shares if the
amendment was previously approved, adopted or authorized by at least two-
thirds of the total number of Directors fixed in accordance with the by-laws),
and, the affirmative vote of at least a majority of outstanding shares of
preferred stock of the Fund (including the AMPS), voting as a separate class.
Such a vote also would satisfy a separate requirement in the 1940 Act that the
change be approved by the shareholders. Shareholders of an open-end investment
company may require the company to redeem their shares of common stock at any
time (except in certain circumstances as authorized by or under the 1940 Act)
at their net asset value, less such redemption charge, if any, as might be in
effect at the time of a redemption. All redemptions will be made in cash. If
the Fund is converted to an open-end investment company, it could be required
to liquidate portfolio securities to meet requests for redemption. Conversion
to an open-end investment company would also require redemption of all
outstanding shares of preferred stock (including the AMPS) and would require
changes in certain of the Fund's investment policies and restrictions, such as
those relating to the issuance of senior securities, the borrowing of money
and the purchase of illiquid securities.

  The Board of Directors has determined that the 66 2/3% voting requirements
described above, which are greater than the minimum requirements under
Maryland law or the 1940 Act, are in the best interests of shareholders
generally. Reference should be made to the Charter on file with the Commission
for the full text of these provisions.

                                      32
<PAGE>

                                   CUSTODIAN

  The Fund's securities and cash are held under a custody agreement with The
Bank of New York, 90 Washington Street, New York, New York 10286.

                                  UNDERWRITING

  Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter") has
agreed, subject to the terms and conditions of a Purchase Agreement with the
Fund and the Investment Adviser, to purchase from the Fund all of the shares of
AMPS offered hereby. The Underwriter is committed to purchase all of such
shares if any are purchased.

  The Underwriter has advised the Fund that it proposes initially to offer the
shares of AMPS to the public at the public offering price set forth on the
cover page of this prospectus, and to certain dealers at such price less a
concession not in excess of $   per share. The Underwriter may allow, and such
dealers may reallow, a discount not in excess of $   per share to other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed. The sales load of $   per share is
equal to  % of the initial public offering price. Investors must pay for any
AMPS purchased in the initial public offering on or before October  , 1999.

  The Underwriter will act in Auctions as a Broker-Dealer as set forth under
"The Auction--General--Broker-Dealer Agreements" and will be entitled to fees
for services as a Broker-Dealer as set forth under "The Auction--Broker-
Dealers." The Underwriter also may provide information to be used in
ascertaining the Reference Rate.

  The Fund anticipates that the Underwriter from time to time may act as a
broker in connection with the execution of the Fund's portfolio transactions.
The Fund has obtained exemptive orders permitting it to engage in certain
principal transactions with the Underwriter involving high quality, short-term,
tax-exempt securities, subject to certain conditions. See "Investment
Restrictions" and "Portfolio Transactions" in the statement of additional
information.

  The Underwriter is an affiliate of the Investment Adviser.

  The Fund and the Investment Adviser have agreed to indemnify the Underwriter
against certain liabilities including liabilities under the Securities Act of
1933, as amended.

            TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR

  The transfer agent, dividend disbursing agent and registrar for the shares of
AMPS will be The Bank of New York, 100 Church Street, New York, New York 10048.
The transfer agent, dividend disbursing agent and shareholder servicing agent
for the shares of Common Stock is The Bank of New York, 101 Barclay Street, New
York, New York 10048.

                                 LEGAL OPINIONS

  Certain legal matters in connection with the AMPS offered hereby will be
passed upon for the Fund and the Underwriter by Brown & Wood LLP, One World
Trade Center, New York, New York 10048-0557.

                                    EXPERTS

  Ernst & Young LLP, independent auditors, have audited the statement of
assets, liabilities and capital of the Fund as of September 14, 1999 which is
included in the statement of additional information as set forth in the report
which appears in the statement of additional information. The statement of
assets, liabilities and capital is included in reliance upon their report,
given on their authority as experts in accounting and auditing. The selection
of independent auditors is subject to ratification by shareholders of the Fund.

                                       33
<PAGE>

                                YEAR 2000 ISSUES

  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 Investment Adviser or other Fund
service providers do not properly address this problem before January 1, 2000.
The Investment Adviser 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 Investment Adviser that they
also expect to resolve the Year 2000 Problem, and the Investment Adviser 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 issuers of
securities in which the Fund invests, and this could hurt the Fund's investment
returns.

                                       34
<PAGE>

            TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION

<TABLE>
<S>                                                                          <C>
Investment Objective and Policies...........................................   3
Investment Restrictions.....................................................   7
Description of AMPS.........................................................   8
The Auction.................................................................  16
Rating Agency Guidelines....................................................  17
Directors and Officers......................................................  24
Investment Advisory and Management Arrangements.............................  26
Portfolio Transactions......................................................  27
Taxes.......................................................................  27
Net Asset Value.............................................................  31
Additional Information......................................................  32
Report of Independent Auditors..............................................  33
Statement of Assets, Liabilities and Capital................................  34
Schedule of Investments (Unaudited).........................................  35
Statement of Assets, Liabilities and Capital (Unaudited)....................  37
Notes to Financial Statements (Unaudited)...................................  38
Appendix A--Ratings of Municipal Bonds...................................... A-1
Appendix B--Portfolio Insurance............................................. B-1
Appendix C--Settlement Procedures........................................... C-1
Appendix D--Auction Procedures.............................................. D-1
</TABLE>

                                       35
<PAGE>

                                    GLOSSARY

  "AA' (AA) Composite Commercial Paper Rate," on any Valuation Date, means (i)
the Interest Equivalent of the rate on commercial paper placed on behalf of
issuers whose corporate bonds are rated "AA" by S&P or "Aa" by Moody's or the
equivalent of such rating by another nationally recognized statistical rating
organization, as such rate is made available on a discount basis or otherwise
by the Federal Reserve Bank of New York for the Business Day immediately
preceding such date, or (ii) in the event that the Federal Reserve Bank of New
York does not make available such a rate, then the arithmetic average of the
Interest Equivalent of the rate on commercial paper placed on behalf of such
issuers, as quoted on a discount basis or otherwise by Merrill Lynch, Pierce,
Fenner & Smith Incorporated or its successors that are Commercial Paper
Dealers, to the Auction Agent for the close of business on the Business Day
immediately preceding such date. If one of the Commercial Paper Dealers does
not quote a rate required to determine the "AA" Composite Commercial Paper
Rate, the "AA" Composite Commercial Paper Rate will be determined on the basis
of the quotation or quotations furnished by any Substitute Commercial Paper
Dealer or Substitute Commercial Paper Dealers selected by the Fund to provide
such rate or rates not being supplied by the Commercial Paper Dealer. If the
number of Dividend Period days shall be (i) 7 or more but fewer than 49 days,
such rate shall be the Interest Equivalent of the 30-day rate on such
commercial paper; (ii) 49 or more but fewer than 70 days, such rate shall be
the Interest Equivalent of the 60-day rate on such commercial paper; (iii) 70
or more days but fewer than 85 days, such rate shall be the arithmetic average
of the Interest Equivalent of the 60-day and 90-day rates on such commercial
paper; (iv) 85 or more days but fewer than 99 days, such rate shall be the
Interest Equivalent of the 90-day rate on such commercial paper; (v) 99 or more
days but fewer than 120 days, such rate shall be the arithmetic average of the
Interest Equivalent of the 90-day and 120-day rates on such commercial paper;
(vi) 120 or more days but fewer than 141 days, such rate shall be the Interest
Equivalent of the 120-day rate on such commercial paper; (vii) 141 or more days
but fewer than 162 days, such rate shall be the arithmetic average of the
Interest Equivalent of the 120-day and 180-day rates on such commercial paper;
and (viii) 162 or more days but fewer than 183 days, such rate shall be the
Interest Equivalent of the 180-day rate on such commercial paper.

  "Additional Dividend" has the meaning set forth on page 17 of this
prospectus.

  "Agent Member" means the member of the Securities Depository that will act on
behalf of a Beneficial Owner of one or more shares of AMPS or on behalf of a
Potential Beneficial Owner.

  "AMPS" means the Auction Market Preferred Stock, Series A, with a par value
of $.10 per share and a liquidation preference of $25,000 per share plus an
amount equal to accumulated but unpaid dividends thereon (whether or not earned
or declared), of the Fund.

  "AMPS Basic Maintenance Amount" has the meaning set forth on page 19 of this
prospectus.

  "AMPS Basic Maintenance Cure Date" has the meaning set forth on page 19 of
this prospectus.

  "AMPS Basic Maintenance Report" has the meaning set forth on page 13 of the
statement of additional information.

  "Anticipation Notes" means the following Municipal Bonds: revenue
anticipation notes, tax anticipation notes, tax and revenue anticipation notes,
grant anticipation notes and bond anticipation notes.

  "Applicable Percentage" has the meaning set forth on page 22 of this
prospectus.

  "Applicable Rate" means the rate per annum at which cash dividends are
payable on shares of AMPS for any Dividend Period.

  "Articles Supplementary" means the Articles Supplementary of the Fund
specifying the powers, preferences and rights of the shares of AMPS.

                                       36
<PAGE>

  "Auction" means a periodic operation of the Auction Procedures.

  "Auction Agent" means The Bank of New York unless and until another
commercial bank, trust company or other financial institution appointed by a
resolution of the Board of Directors of the Fund or a duly authorized committee
thereof enters into an agreement with the Fund to follow the Auction Procedures
for the purpose of determining the Applicable Rate and to act as transfer
agent, registrar, dividend disbursing agent and redemption agent for the AMPS.

  "Auction Agent Agreement" means the agreement entered into between the Fund
and the Auction Agent which provides, among other things, that the Auction
Agent will follow the Auction Procedures for the purpose of determining the
Applicable Rate.

  "Auction Date" has the meaning set forth on page 21 of this prospectus.

  "Auction Procedures" means the procedures for conducting Auctions set forth
in Appendix D to the statement of additional information.

  "Available AMPS" has the meaning set forth on page 25 of this prospectus.

  "Beneficial Owner" means a customer of a Broker-Dealer who is listed on the
records of that Broker-Dealer (or if applicable, the Auction Agent) as a holder
of shares of AMPS or a Broker-Dealer that holds AMPS for its own account.

  "Bid" has the meaning set forth on page 22 of this prospectus.

  "Bidder" has the meaning set forth on page 22 of this prospectus.

  "Board of Directors" or "Board" means the Board of Directors of the Fund.

  "Broker-Dealer" means any broker-dealer, or other entity permitted by law to
perform the functions required of a Broker-Dealer in the Auction Procedures,
that has been selected by the Fund and has entered into a Broker-Dealer
Agreement with the Auction Agent that remains effective.

  "Broker-Dealer Agreement" means an agreement entered into between the Auction
Agent and a Broker-Dealer, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated, pursuant to which such Broker-Dealer agrees to follow the Auction
Procedures.

  "Business Day" means a day on which the New York Stock Exchange is open for
trading and which is not a Saturday, Sunday or other day on which banks in The
City of New York are authorized or obligated by law to close.

  "Cede" means Cede & Co., the nominee of DTC, and in whose name the shares of
AMPS initially will be registered.

  "Charter" means the Articles of Incorporation, as amended and supplemented
(including the Articles Supplementary), of the Fund.

  "Code" means the Internal Revenue Code of 1986, as amended.

  "Commercial Paper Dealers" means Merrill Lynch, Pierce, Fenner & Smith
Incorporated and such other commercial paper dealer or dealers as the Fund from
time to time may appoint or, in lieu thereof, their respective affiliates and
successors.

  "Common stock" means the common stock, par value $.10 per share, of the Fund.

                                       37
<PAGE>

  "Date of Original Issue" means, with respect to each share of AMPS, the date
on which such share first is issued by the Fund.

  "Deposit Securities" means cash and Municipal Bonds rated at least A2 (having
a remaining maturity of 12 months or less), P-1, VMIG-1 or MIG-1 by Moody's or
A (having a remaining maturity of 12 months or less), A-1+ or SP-1+ by S&P.

  "Discount Factor" means a Moody's Discount Factor or an S&P Discount Factor,
as the case may be.

  "Discounted Value" of any asset of the Fund means (i) with respect to an S&P
Eligible Asset, the quotient of the market value thereof divided by the
applicable S&P Discount Factor and (ii) with respect to a Moody's Eligible
Asset, the lower of par and the quotient of the market value thereof divided by
the applicable Moody's Discount Factor.

  "Dividend Payment Date" has the meaning set forth on pages 16 of this
prospectus.

  "Dividend Period" has the meaning set forth on page 16 of this prospectus.

  "DTC" means The Depository Trust Company.

  "Eligible Assets" means Moody's Eligible Assets or S&P Eligible Assets, as
the case may be.

  "Existing Holder" means a Broker-Dealer or any such other person as may be
permitted by the Fund that is listed as the holder of record of shares of AMPS
in the records of the Auction Agent.

  "Fitch" means Fitch IBCA, Inc. or its successors.

  "Forward Commitment" has the meaning set forth on page 23 of the statement of
additional information.

  "Fund" means MuniHoldings Insured Fund IV, Inc., a Maryland corporation that
is the issuer of the AMPS.

  "Hold Order" has the meaning set forth on page 22 of this prospectus.

  "Initial Dividend Payment Date" means the first Dividend Payment Date for the
AMPS.

  "Initial Dividend Period" means the period from and including the Date of
Original Issue to but excluding the Initial Dividend Payment Date for each
series of AMPS.

  "Initial Margin" means the amount of cash or securities deposited with a
broker as a margin payment at the time of purchase or sale of a financial
futures contract.

  "Interest Equivalent" means a yield on a 360-day basis of a discount basis
security which is equal to the yield on an equivalent interest-bearing
security.

  "Investment Adviser" means Fund Asset Management, L.P.

  "IRS" means the United States Internal Revenue Service.

  "Long Term Dividend Period" means a dividend period of one year or more but
not greater than five years.

  "Mandatory Redemption Price" has the meaning set forth on page 19 of this
prospectus.


                                       38
<PAGE>

  "Marginal Tax Rate" means the maximum marginal regular Federal individual
income tax rate applicable to ordinary income or the maximum marginal regular
Federal corporate income tax rate, whichever is greater.

  "Maximum Applicable Rate" has the meaning set forth on page 22 of this
prospectus.

  "Maximum Potential Additional Dividend Liability" has the meaning set forth
on page 13 of the statement of additional information.

  "Moody's" means Moody's Investors Service, Inc. or its successors.

  "Moody's Discount Factor" has the meaning set forth on pages 19-20 of the
statement of additional information.

  "Moody's Eligible Assets" has the meaning set forth on page 19 of the
statement of additional information.

  "Moody's Exposure Period" means a period that is the same length or longer
than the number of days used in calculating the cash dividend component of the
AMPS Basic Maintenance Amount and initially shall be the period commencing on
and including a given Valuation Date and ending 48 days thereafter.

  "Moody's Hedging Transactions" has the meaning set forth on page 22 of the
statement of additional information.

  "Moody's Volatility Factor" means 272% as long as there has been no increase
enacted to the Marginal Tax Rate. If such an increase is enacted but not yet
implemented, the Moody's Volatility Factor shall be as follows:

<TABLE>
<CAPTION>
   % Change in                                                      Moody's
Marginal Tax Rate                                              Volatility Factor
- -----------------                                              -----------------
<S>                                                            <C>
             (less than or =) 5%..............................       292%
Greater than 5% but (less than or =) 10% .....................       313%
Greater than 10% but (less than or =) 15%.....................       338%
Greater than 15% but (less than or =) 20%.....................       364%
Greater than 20% but (less than or =) 25%.....................       396%
Greater than 25% but (less than or =) 30%.....................       432%
Greater than 30% but (less than or =) 35%.....................       472%
Greater than 35% but (less than or =) 40%.....................       520%
</TABLE>

  Notwithstanding the foregoing, the Moody's Volatility Factor may mean such
other potential dividend rate increase factor as Moody's advises the Fund in
writing is applicable.

  "Municipal Bonds" has the meaning set forth on page 9 of this prospectus.

  "Municipal Index" has the meaning set forth on page 18 of the statement of
additional information.

  "1940 Act" means the Investment Company Act of 1940, as amended from time to
time.

  "1940 Act AMPS Asset Coverage" has the meaning set forth on page 18 of this
prospectus.

  "1940 Act Cure Date" has the meaning set forth on page 18 of this prospectus.

  "Non-Call Period" has the meaning set forth under "Specific Redemption
Provisions" below.

  "Non-Payment Period" has the meaning set forth on page 10 of the statement of
additional information.

  "Non-Payment Period Rate" has the meaning set forth on page 12 of the
statement of additional information.

                                       39
<PAGE>

  "Notice of Revocation" has the meaning set forth on page 10 of the statement
of additional information.

  "Notice of Special Dividend Period" has the meaning set forth on page 17 of
this prospectus.

  "Optional Redemption Price" has the meaning set forth on page 19 of this
prospectus.

  "Order" has the meaning set forth on page 22 of this prospectus.

  "Policy" means an insurance policy purchased by the Fund which guarantees the
payment of principal and interest on specified Municipal Bonds during the
period in which such Municipal Bonds are owned by the Fund; provided, however,
that, as long as the AMPS are rated by Moody's and S&P, the Fund will not
obtain any Policy unless Moody's and S&P advise the Fund in writing that the
purchase of such Policy will not adversely affect their then-current rating on
the AMPS.

  "Potential Beneficial Owner" means a customer of a Broker-Dealer or a Broker-
Dealer that is not a Beneficial Owner of shares of AMPS but that wishes to
purchase such shares, or that is a Beneficial Owner that wishes to purchase
additional shares of AMPS.

  "Potential Holder" means any Broker-Dealer or any such other person as may be
permitted by the Fund, including any Existing Holder, who may be interested in
acquiring shares of AMPS (or, in the case of an Existing Holder, additional
shares of AMPS).

  "Preferred stock" means preferred stock, par value $.10 per share, of the
Fund.

  "Premium Call Period" has the meaning set forth under "Specific Redemption
Provisions" below.

  "Receivables for Municipal Bonds Sold," for purposes of determining S&P
Eligible Assets, has the meaning set forth on page 17 of the statement of
additional information.

  "Receivables for Municipal Bonds Sold," for purposes of determining Moody's
Eligible Assets, has the meaning set forth on page 20 of the statement of
additional information.

  "Reference Rate" means: (i) with respect to a Dividend Period or a Short Term
Dividend Period having 28 or fewer days, the higher of the applicable "AA"
Composite Commercial Paper Rate and the Taxable Equivalent of the Short Term
Municipal Bond Rate, (ii) with respect to any Short Term Dividend Period,
having more than 28 but fewer than 183 days, the applicable "AA" Composite
Commercial Paper Rate, (iii) with respect to any Short Term Dividend Period
having 183 or more but fewer than 364 days, the applicable U.S. Treasury Bill
Rate and (iv) with respect to any Long Term Dividend Period, the applicable
U.S. Treasury Note Rate.

  "Request for Special Dividend Period" has the meaning set forth on page 16 of
this prospectus.

  "Response" has the meaning set forth on page 17 of this prospectus.

  "Retroactive Taxable Allocation" has the meaning set forth on page 17 of this
prospectus.

  "Series A AMPS" means Auction Market Preferred Stock, Series A, with a par
value of $.10 per share and a liquidation preference of $25,000 per share plus
an amount equal to accumulated but unpaid dividends thereon (whether or not
earned or declared), of the Fund.

  "Series B AMPS" means Auction Market Preferred Stock, Series B, with a par
value of $.10 per share and a liquidation preference of $25,000 per share plus
an amount equal to accumulated but unpaid dividends thereon (whether or not
earned or declared), of the Fund.

  "S&P" means Standard & Poor's, a division of The McGraw-Hill Companies, Inc.,
or its successors.

  "S&P Discount Factor" has the meaning set forth on page 17 of the statement
of additional information.

  "S&P Eligible Assets" has the meaning set forth on page 17 of the statement
of additional information.

  "S&P Exposure Period" means the maximum period of time following a Valuation
Date, including the Valuation Date and the AMPS Basic Maintenance Cure Date,
that the Fund has under the Articles Supplementary to cure any failure to
maintain, as of such Valuation Date, a Discounted Value for its portfolio at
least equal to the AMPS Basic Maintenance Amount.

                                       40
<PAGE>

  "S&P Hedging Transactions" has the meaning set forth on page 18 of the
statement of additional information.

  "S&P Volatility Factor" means 277% or such other potential dividend rate
increase factor as S&P advises the Fund in writing is applicable.

  "Securities Depository" means The Depository Trust Company and its successors
and assigns or any successor securities depository selected by the Fund that
agrees to follow the procedures required to be followed by such securities
depository in connection with shares of AMPS.

  "Sell Order" has the meaning specified in Subsection 10(b)(i) of the Auction
Procedures.

  "7-Day Dividend Period" means a Dividend Period consisting of seven days.

  "Short Term Dividend Period" means a dividend period the number of days in
which are evenly divisible by seven, and not fewer than seven days nor more
than 364 days.

  "Special Dividend Period" has the meaning set forth on page 15 of this
prospectus.

  "Specific Redemption Provisions" means, with respect to a Special Dividend
Period, either, or any combination of, (i) a period (a "Non-Call Period")
determined by the Board of Directors of the Fund, after consultation with the
Auction Agent and the Broker-Dealers, during which the shares of AMPS subject
to such Dividend Period shall not be subject to redemption at the option of the
Fund and (ii) a period (a "Premium Call Period"), consisting of a number of
whole years and determined by the Board of Directors of the Fund, after
consultation with the Auction Agent and the Broker-Dealers, during each year of
which the shares of AMPS subject to such Dividend Period shall be redeemable at
the Fund's option at a price per share equal to $25,000 plus accumulated but
unpaid dividends plus a premium expressed as a percentage of $25,000, as
determined by the Board of Directors of the Fund after consultation with the
Auction Agent and the Broker-Dealers.

  "Submission Deadline" has the meaning set forth on page 24 of this
prospectus.

  "Submitted Bid" has the meaning set forth on page 25 of this prospectus.

  "Submitted Hold Order" has the meaning set forth on page 25 of this
prospectus.

  "Submitted Order" has the meaning set forth on page 25 of this prospectus.

  "Submitted Sell Order" has the meaning set forth on page 25 of this
prospectus.

  "Subsequent Dividend Period" means each Dividend Period after the Initial
Dividend Period.

  "Substitute Rating Agency" and "Substitute Rating Agencies" shall mean a
nationally recognized statistical rating organization or two nationally
recognized statistical rating organizations, respectively, selected by Merrill
Lynch, Pierce, Fenner & Smith Incorporated, or its respective affiliates and
successors, after consultation with the Fund, to act as a substitute rating
agency or substitute rating agencies, as the case may be, to determine the
credit ratings of the AMPS.

  "Sufficient Clearing Bids" has the meaning set forth on page 25 of this
prospectus.

  "Taxable Equivalent of the Short-Term Municipal Bond Rate" on any date means
90% of the quotient of (A) the per annum rate expressed on an interest
equivalent basis equal to the Kenny S&P 30-day High Grade Index (the "Kenny
Index"), or any successor index made available for the Business Day immediately
preceding such date but in any event not later than 8:30 A.M., Eastern time, on
such date by Kenny Information Systems Inc. or any successor thereto, based
upon 30-day yield evaluations at par of bonds the

                                       41
<PAGE>

interest on which is excludable for regular Federal income tax purposes under
the Code of "high grade" component issuers selected by Kenny Information
Systems Inc. or any such successor from time to time in its discretion, which
component issuers shall include, without limitation, issuers of general
obligation bonds but shall exclude any bonds the interest on which constitutes
an item of tax preference under Section 57(a) (5) of the Code, or successor
provisions, for purposes of the "alternative minimum tax," divided by (B) 1.00
minus the Marginal Tax Rate (expressed as a decimal); provided, however, that
if the Kenny Index is not made so available by 8:30 A.M., Eastern time, on such
date by Kenny Information Systems Inc. or any successor, the Taxable Equivalent
of the Short-Term Municipal Bond Rate shall mean the quotient of (A) the per
annum rate expressed on an interest equivalent basis equal to the most recent
Kenny Index so made available for any preceding Business Day, divided by (B)
1.00 minus the Marginal Tax Rate (expressed as a decimal). The Fund may not
utilize a successor index to the Kenny Index unless Moody's and S&P provide the
Fund with written confirmation that the use of such successor index will not
adversely affect the then-current respective Moody's and S&P ratings of the
AMPS.

  "Treasury Bonds" has the meaning set forth on page 18 of the statement of
additional information.

  "U.S. Treasury Bill Rate" on any date means (i) the Interest Equivalent of
the rate on the actively traded Treasury Bill with a maturity most nearly
comparable to the length of the related Dividend Period, as such rate is made
available on a discount basis or otherwise by the Federal Reserve Bank of New
York in its Composite 3:30 P.M. Quotations for U.S. Government Securities
report for such Business Day, or (ii) if such yield as so calculated is not
available, the Alternate Treasury Bill Rate on such date. "Alternate Treasury
Bill Rate" on any date means the Interest Equivalent of the yield as calculated
by reference to the arithmetic average of the bid price quotations of the
actively traded Treasury Bill with a maturity most nearly comparable to the
length of the related Dividend Period, as determined by bid price quotations as
of any time on the Business Day immediately preceding such date, obtained from
at least three recognized primary U.S. Government securities dealers selected
by the Auction Agent.

  "U.S. Treasury Note Rate" on any date means (i) the yield as calculated by
reference to the bid price quotation of the actively traded, current coupon
Treasury Note with a maturity most nearly comparable to the length of the
related Dividend Period, as such bid price quotation is published on the
Business Day immediately preceding such date by the Federal Reserve Bank of New
York in its Composite 3:30 P.M. Quotations for U.S. Government Securities
report for such Business Day, or (ii) if such yield as so calculated is not
available, the Alternate Treasury Note Rate on such date. "Alternate Treasury
Note Rate" on any date means the yield as calculated by reference to the
arithmetic average of the bid price quotations of the actively traded, current
coupon Treasury Note with a maturity most nearly comparable to the length of
the related Dividend Period, as determined by the bid price quotations as of
any time on the Business Day immediately preceding such date, obtained from at
least three recognized primary U.S. Government securities dealers selected by
the Auction Agent.

  "Valuation Date" has the meaning set forth on page 19 of this prospectus.

  "Variation Margin" means, in connection with an outstanding financial futures
contract owned or sold by the Fund, the amount of cash or securities paid to or
received from a broker (subsequent to the Initial Margin payment) from time to
time as the price of such financial futures contract fluctuates.

  "Winning Bid Rate" has the meaning set forth on page 25 of this prospectus.

                                       42
<PAGE>




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<PAGE>




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                                       44
<PAGE>

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

                                  $31,650,000

                       MuniHoldings Insured Fund IV, Inc.

                 Auction Market Preferred Stock(R) ["AMPS(R)"]

                             1,266 Shares, Series A


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

                                   PROSPECTUS

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

                              Merrill Lynch & Co.

                                October  , 1999

(R) Registered trademarks of Merrill Lynch & Co. Inc.

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<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information contained in this statement of additional information is not  +
+complete and may be changed. We may not sell these securities until the       +
+registration statement filed with the Securities and Exchange Commission is   +
+effective. This statement of additional information is not a prospectus.      +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
                             SUBJECT TO COMPLETION
    PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION DATED SEPTEMBER 30, 1999

STATEMENT OF ADDITIONAL INFORMATION

                                  $31,650,000

                       MuniHoldings Insured Fund IV, Inc.

                   Auction Market Preferred Stock ["AMPS(R)"]
                             1,266 Shares, Series A
                    Liquidation Preference $25,000 Per Share

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

  MuniHoldings Insured Fund IV, Inc. (the "Fund") is a recently organized, non-
diversified, closed-end management investment company that seeks to provide
shareholders with current income exempt from Federal income taxes. The Fund
seeks to achieve its objective by investing primarily in a portfolio of long-
term, investment grade municipal obligations the interest on which, in the
opinion of bond counsel to the issuer, is exempt from Federal income taxes. The
Fund intends to invest in municipal obligations that are rated investment grade
or, if unrated, are considered by the Fund's investment adviser to be of
comparable quality. Under normal circumstances, at least 80% of the Fund's
assets will be invested in municipal obligations with remaining maturities of
one year or more that are covered by insurance guaranteeing the timely payment
of principal at maturity and interest. There can be no assurance that the
Fund's investment objective will be realized. For more information on the
Fund's investment objective and policies, see "Investment Objective and
Policies."

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

  Certain capitalized terms not otherwise defined in this statement of
additional information have the meaning provided in the Glossary included as
part of the prospectus.

  This statement of additional information is not a prospectus, but should be
read in conjunction with the prospectus of the Fund which has been filed with
the Securities and Exchange Commission (the "Commission") and can be obtained,
without charge, by calling (800) 637-3863. 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.
- ------
(R) Registered trademark of Merrill Lynch & Co., Inc.

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

                              Merrill Lynch & Co.

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

   The date of this statement of additional information is October   , 1999.
<PAGE>

            TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION

<TABLE>
<S>                                                                          <C>
Investment Objective and Policies...........................................   3
Investment Restrictions.....................................................   7
Description of AMPS.........................................................   8
The Auction.................................................................  16
Rating Agency Guidelines....................................................  17
Directors and Officers......................................................  24
Investment Advisory and Management Arrangements.............................  26
Portfolio Transactions......................................................  27
Taxes.......................................................................  27
Net Asset Value.............................................................  31
Additional Information......................................................  32
Report of Independent Auditors..............................................  33
Statement of Assets, Liabilities and Capital................................  34
Schedule of Investments (Unaudited).........................................  35
Statement of Assets, Liabilities and Capital (unaudited)....................  37
Notes to Financial Statements (Unaudited)...................................  38
Appendix A--Ratings of Municipal Bonds...................................... A-1
Appendix B--Portfolio Insurance............................................. B-1
Appendix C--Settlement Procedures........................................... C-1
Appendix D--Auction Procedures.............................................. D-1
</TABLE>

                                       2
<PAGE>

                       INVESTMENT OBJECTIVE AND POLICIES

  The Fund's investment objective is to provide shareholders with current
income exempt from Federal income taxes. The Fund seeks to achieve its
investment objective by investing primarily in a portfolio of long-term,
investment grade municipal obligations issued by or on behalf of states,
territories and possessions of the United States and their political
subdivisions, agencies and instrumentalities, and other qualifying issuers,
each of which pays interest which, in the opinion of bond counsel to the
issuer, is exempt from Federal income tax ("Municipal Bonds"). The Fund intends
to invest substantially all (at least 80%) of its assets in Municipal Bonds,
except during interim periods pending investment of the net proceeds of public
offerings of the Fund's securities and during temporary defensive periods.
Under normal circumstances, at least 80% of the Fund's assets will be invested
in municipal obligations with remaining maturities of one year or more that are
covered by insurance guaranteeing the timely payment of principal at maturity
and interest. The Fund's investment objective is a fundamental policy that may
not be changed without a vote of a majority of the Fund's outstanding voting
securities, as defined below under "Investment Restrictions." There can be no
assurance that the investment objective of the Fund will be realized. At times
the Fund may seek to hedge its portfolio through the use of options and futures
transactions to reduce volatility in the net asset value of its shares of
common stock.

  The Fund ordinarily does not intend to realize significant interest income
that is subject to Federal income taxes. The Fund may invest all or a portion
of its assets in certain tax-exempt securities classified as "private activity
bonds" (in general, bonds that benefit non-governmental entities) that may
subject certain investors in the Fund to a Federal alternative minimum tax.

  The Fund also may invest in securities not issued by or on behalf of a state
or territory or by an agency or instrumentality thereof, if the Fund
nevertheless believes such securities pay interest or distributions that are
exempt from Federal income taxation ("Non-Municipal Tax-Exempt Securities").
Non-Municipal Tax-Exempt Securities may include securities issued by other
investment companies that invest in Municipal Bonds, to the extent such
investments are permitted by the Investment Company Act of 1940, as amended
(the "1940 Act"). Other Non-Municipal Tax-Exempt Securities could include trust
certificates or other instruments evidencing interests in one or more long-term
Municipal Bonds. Certain Non-Municipal Tax-Exempt Securities may be
characterized as derivative instruments. Non-Municipal Tax-Exempt Securities
are considered "Municipal Bonds" for purposes of the Fund's investment
objective and policies.

Description of Municipal Bonds

  Municipal Bonds include debt obligations issued to obtain funds for various
public purposes, including construction of a wide range of public facilities,
refunding of outstanding obligations and obtaining funds for general operating
expenses and loans to other public institutions and facilities. In addition,
certain types of private activity bonds ("PABs") are issued by or on behalf of
public authorities to finance various privately operated facilities, including,
among other things, airports, public ports, mass commuting facilities,
multifamily housing projects, as well as facilities for water supply, gas,
electricity, sewage or solid waste disposal. For purposes of this statement of
additional information, such obligations are considered Municipal Bonds if the
interest paid thereon is exempt from Federal income tax even though such bonds
may be PABs as discussed below. Also, for purposes of this statement of
additional information, Non-Municipal Tax-Exempt Securities as discussed above
will be considered Municipal Bonds.

  The two principal classifications of Municipal Bonds are "general obligation"
bonds and "revenue" bonds, which latter category includes PABs and, for bonds
issued on or before August 15, 1986, industrial development bonds or "IDBs."
General obligation bonds are typically secured by the issuer's pledge of faith,
credit and taxing power for the repayment of principal and the payment of
interest. Revenue or special obligation bonds are typically payable only from
the revenues derived from a particular facility or class of facilities or, in
some cases, from the proceeds of a special excise tax or other specific revenue
source such as from the user of the facility being financed. PABs are in most
cases revenue bonds and do not generally constitute the pledge of the credit or
taxing power of the issuer of such bonds. The repayment of principal and the
payment of interest on such IDBs depends solely on the ability of the user of
the facility financed by the

                                       3
<PAGE>

bonds to meet its financial obligations and the pledge, if any, of real and
personal property so financed as security for such payment. Municipal Bonds may
also include "moral obligation" bonds, which are normally issued by special
purpose public authorities. If an issuer of moral obligation bonds is unable to
meet its obligations, the repayment of such bonds becomes a moral commitment
but not a legal obligation of the state or municipality in question.

  The Fund may purchase Municipal Bonds classified as PABs. Interest received
on certain PABs is treated as an item of "tax preference" for purposes of the
Federal alternative minimum tax and may impact the overall tax liability of
investors in the Fund. There is no limitation on the percentage of the Fund's
assets that may be invested in Municipal Bonds the interest on which is treated
as an item of "tax preference" for purposes of the Federal alternative minimum
tax. See "Taxes--General."Also included within the general category of
Municipal Bonds are certificates of participation ("COPs") executed and
delivered for the benefit of government authorities or entities to finance the
acquisition or construction of equipment, land and/or facilities. COPs
represent participations in a lease, an installment purchase contract or a
conditional sales contract (hereinafter collectively referred to as "lease
obligations") relating to such equipment, land or facilities. Although lease
obligations typically do not constitute general obligations of the issuer for
which the issuer's unlimited taxing power is pledged, a lease obligation
frequently is backed by the issuer's covenant to budget for, appropriate and
make the payments due under the lease obligation. However, certain lease
obligations contain "non-appropriation" clauses which provide that the issuer
has no obligation to make lease or installment purchase payments in future
years unless money is appropriated for such purpose on a yearly basis. Although
"non-appropriation" lease obligations are secured by the lease property,
disposition of the property in the event of foreclosure might prove difficult.

  Federal tax legislation has limited and may continue to limit the types and
volume of bonds the interest on which is excludable from income for Federal
income tax purposes. Such legislation may affect the availability of Municipal
Bonds for investment by the Fund.

Options and Futures Transactions

  The following is a description of the options and futures transactions in
which the Fund may engage, limitations on the Fund's use of such transactions
and risks associated with these transactions. The investment policies with
respect to the hedging transactions of the Fund are not fundamental policies
and may be modified by the Board of Directors of the Fund without the approval
of the Fund's shareholders.

  Writing Covered Call Options. The Fund may write (i.e., sell) covered call
options with respect to Municipal Bonds it owns, thereby giving the holder of
the option the right to buy the underlying security covered by the option from
the Fund at the stated exercise price until the option expires. The Fund writes
only covered call 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 option. The Fund may not write covered call options on underlying
securities in an amount exceeding 15% of the market value of its total assets.

  The Fund will receive a premium from writing a 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. By writing a call, the Fund limits
its opportunity to profit from an increase in the market value of the
underlying security above the exercise price of the option for as long as the
Fund's obligation as a writer continues. Covered call options may serve as a
partial hedge against a decline in the price of the underlying security. The
Fund may engage in closing transactions in order to terminate outstanding
options that it has written.

  Purchase of Options. The Fund may purchase put options in connection with its
hedging activities. By buying a put the Fund has a right to sell the underlying
security at the exercise price, thus limiting the Fund's risk of loss through a
decline in the market value of the security until the put expires. The amount
of any appreciation in the value of the underlying security will be partially
offset by the amount of the premium paid for the put option and any related
transaction costs. Prior to its expiration, a put option may be sold in a
closing

                                       4
<PAGE>

sale transaction; profit or loss from the sale will depend on whether the
amount received is more or less than the premium paid for the put option plus
the related transaction costs. A closing sale transaction cancels out the
Fund's position as the purchaser of an option by means of an offsetting sale of
an identical option prior to the expiration of the option it has purchased. In
certain circumstances, the Fund may purchase call options on securities held in
its portfolio on which it has written call options or on securities that it
intends to purchase. The Fund will not purchase options on securities if, as a
result of such purchase, the aggregate cost of all outstanding options on
securities held by the Fund would exceed 5% of the market value of the Fund's
total assets.

  Financial Futures Contracts and Options. The Fund is authorized to purchase
and sell certain financial futures contracts and options thereon solely for the
purpose of hedging its investments in Municipal Bonds against declines in value
and hedging against increases in the cost of securities it intends to purchase.
A financial futures contract obligates the seller of a contract to deliver and
the purchaser of a contract to take delivery of the type of financial
instrument covered by the contract or, in the case of index-based financial
futures contracts, to make and accept a cash settlement, at a specific future
time for a specified price. A sale of financial futures contracts may provide a
hedge against a decline in the value of portfolio securities because such
depreciation may be offset, in whole or in part, by an increase in the value of
the position in the financial futures contracts. A purchase of financial
futures contracts may provide a hedge against an increase in the cost of
securities intended to be purchased because such appreciation may be offset, in
whole or in part, by an increase in the value of the position in the financial
futures contracts.

  The purchase or sale of a financial futures contract differs from the
purchase or sale of a security in that no price or premium is paid or received.
Instead, an amount of cash or securities acceptable to the broker equal to
approximately 5% of the contract amount must be deposited with the broker. This
amount is known as initial margin. Subsequent payments to and from the broker,
called variation margin, are made on a daily basis as the price of the
financial futures contract fluctuates making the long and short positions in
the financial futures contract more or less valuable.

  The Fund may purchase and sell financial futures contracts based on The Bond
Buyer Municipal Bond Index, a price-weighted measure of the market value of 40
large tax-exempt issues, and purchase and sell put and call options on such
financial futures contracts for the purpose of hedging Municipal Bonds which
the Fund holds or anticipates purchasing against adverse changes in interest
rates. The Fund also may purchase and sell financial futures contracts on U.S.
Government securities and purchase and sell put and call options on such
financial futures contracts for such hedging purposes. With respect to U.S.
Government securities, currently there are financial futures contracts based on
long-term U.S. Treasury bonds, U.S. Treasury notes, GNMA Certificates and
three-month U.S. Treasury bills.

  Subject to policies adopted by the Board of Directors, the Fund also may
engage in transactions in other financial futures contracts, such as financial
futures contracts on other municipal bond indices that may become available, if
the Investment Adviser should determine that there is normally sufficient
correlation between the prices of such financial futures contracts and the
Municipal Bonds in which the Fund invests to make such hedging appropriate.

  Over-the-Counter Options.  The Fund may engage in options and futures
transactions on exchanges and in the over-the-counter markets. In general,
exchange-traded contracts are third-party contracts (i.e., performance of the
parties' obligations is guaranteed by an exchange or clearing corporation) with
standardized strike prices and expiration dates. Over-the-counter options
transactions ("OTC options") are two-party contracts with prices and terms
negotiated by the buyer and seller. See "Restrictions on OTC Options" below for
information as to restrictions on the use of OTC options.

  Restrictions on OTC Options. The Fund will engage in transactions in OTC
options only with banks or dealers that have capital of at least $50 million or
whose obligations are guaranteed by an entity having capital of at least $50
million. Certain OTC options and assets used to cover OTC options written by
the Fund may be considered to be illiquid. The illiquidity of such options or
assets may prevent a successful sale of such options or assets, result in a
delay of sale, or reduce the amount of proceeds that might otherwise be
realized.

                                       5
<PAGE>

  Risk Factors in Options and Futures Transactions. Utilization of futures
transactions involves the risk of imperfect correlation in movements in the
price of financial futures contracts and movements in the price of the
security that is the subject of the hedge. If the price of the financial
futures contract moves more or less than the price of the security that is the
subject of the hedge, the Fund will experience a gain or loss that will not be
completely offset by movements in the price of such security. There is a risk
of imperfect correlation where the securities underlying financial futures
contracts have different maturities, ratings, geographic compositions or other
characteristics than the security being hedged. In addition, the correlation
may be affected by additions to or deletions from the index that serves as a
basis for a financial futures contract. Finally, in the case of financial
futures contracts on U.S. Government securities and options on such financial
futures contracts, the anticipated correlation of price movements between the
U.S. Government securities underlying the futures or options and Municipal
Bonds may be adversely affected by economic, political, legislative or other
developments which have a disparate impact on the respective markets for such
securities.

  Under regulations of the Commodity Futures Trading Commission (the "CFTC"),
the futures trading activities described herein will not result in the Fund
being deemed a "commodity pool," as defined under such regulations, provided
that the Fund adheres to certain restrictions. In particular, the Fund may
purchase and sell financial futures contracts and options thereon (i) for bona
fide hedging purposes, without regard to the percentage of the Fund's assets
committed to margin and option premiums, and (ii) for non-hedging purposes if,
immediately thereafter, the sum of the amount of initial margin deposits on
the Fund's existing futures positions and option premiums entered into for
non-hedging purposes does not exceed 5% of the market value of the liquidation
value of the Fund's portfolio, after taking into account unrealized profits
and unrealized losses on any such transactions. Margin deposits may consist of
cash or securities acceptable to the broker and the relevant contract market.

  When the Fund purchases a financial futures contract, or writes a put option
or purchases a call option thereon, it will maintain an amount of cash, cash
equivalents (e.g., commercial paper and daily tender adjustable notes) or
liquid securities in a segregated account with the Fund's custodian so that
the amount so segregated plus the amount of initial and variation margin held
in the account of its broker equals the market value of the financial futures
contract, thereby ensuring that the use of such financial futures contract is
unleveraged.

  Certain risks are involved in options and futures transactions. The
Investment Adviser believes, however, that, because the Fund will engage in
options and futures transactions only for hedging purposes, the Fund's options
and futures portfolio strategies will not subject the Fund to those risks
associated with speculation in options and futures transactions.

  The volume of trading in the exchange markets with respect to Municipal Bond
options may be limited, and it is impossible to predict the amount of trading
interest that may exist in such options. In addition, there can be no
assurance that viable exchange markets will continue to be available.

  The Fund intends to enter into options and futures transactions, on an
exchange or in the over-the-counter market, only if there appears to be a
liquid secondary market for such options or futures. There can be no
assurance, however, that a liquid secondary market will exist at any specific
time. Thus, it may not be possible to close an options or futures transaction.
The inability to close options and futures positions also could have an
adverse impact on the Fund's ability to effectively hedge its portfolio. There
is also the risk of loss by the Fund of margin deposits or collateral in the
event of bankruptcy of a broker with which the Fund has an open position in an
option or financial futures contract.

  The liquidity of a secondary market in a financial futures contract may be
adversely affected by "daily price fluctuation limits" established by
commodity exchanges that limit the amount of fluctuation in a financial
futures contract price during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions. Prices
have in the past reached or exceeded the daily limit on a number of
consecutive trading days.

                                       6
<PAGE>

  If it is not possible to close a financial futures position entered into by
the Fund, the Fund would continue to be required to make daily cash payments of
variation margin in the event of adverse price movements. In such a situation,
if the Fund has insufficient cash, it may have to sell portfolio securities to
meet daily variation margin requirements at a time when it may be
disadvantageous to do so.

  The successful use of these transactions also depends on the ability of the
Investment Adviser to forecast correctly the direction and extent of interest
rate movements within a given time frame. To the extent these rates remain
stable during the period in which a financial futures contract is held by the
Fund or move in a direction opposite to that anticipated, the Fund may realize
a loss on the hedging transaction that 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. Furthermore, the Fund will only engage in hedging transactions
from time to time and may not necessarily be engaging in hedging transactions
when movements in interest rates occur. The Fund is not required to enter into
hedging transactions and may not do so.

                            INVESTMENT RESTRICTIONS

  The following are fundamental investment restrictions of the Fund and may not
be changed without the approval of the holders of a majority of the Fund's
outstanding shares of common stock and outstanding shares of AMPS and any other
preferred stock, voting together as a single class, and the majority of the
outstanding shares of AMPS and any other preferred stock, voting as a separate
class (which for this purpose and under the 1940 Act means the lesser of (i)
67% of the shares of each class of capital stock represented at a meeting at
which more than 50% of the outstanding shares of each class of capital stock
are represented or (ii) more than 50% of the outstanding shares of each class
of capital stock). The Fund may not:

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

    2. Purchase or sell real estate, commodities or commodity contracts;
  provided that the Fund may invest in securities secured by real estate or
  interests therein or issued by entities that invest in real estate or
  interest therein, and the Fund may purchase and sell financial futures
  contracts and options thereon.

    3. Issue senior securities or borrow money except as permitted by Section
  18 of the 1940 Act.

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

    5. Make loans to other persons, except that the Fund may purchase
  Municipal Bonds and other debt securities and enter into repurchase
  agreements in accordance with its investment objective, policies and
  limitations.

    6. Invest more than 25% of its total assets (taken at market value at the
  time of each investment) in securities of issuers in a single industry;
  provided that, for purposes of this restriction, states, municipalities and
  their political subdivisions are not considered to be part of any industry.

  Additional investment restrictions adopted by the Fund, which may be changed
by the Board of Directors without shareholder approval, provide that the Fund
may not:

    a. Purchase securities of other investment companies, except to the
  extent that such purchases are permitted by applicable law. Applicable law
  currently prohibits the Fund from purchasing the securities of other
  investment companies except if immediately thereafter not more than (i) 3%
  of the total outstanding voting stock of such company is owned by the Fund,
  (ii) 5% of the Fund's total assets, taken at market value, would be
  invested in any one such company, (iii) 10% of the Fund's total assets,
  taken at market value, would be invested in such securities, and (iv) the
  Fund, together with other investment companies having the same investment
  adviser and companies controlled by such companies, owns not more than 10%
  of the total outstanding stock of any one closed-end investment company.


                                       7
<PAGE>

    b. Mortgage, pledge, hypothecate or in any manner transfer, as security
  for indebtedness, any securities owned or held by the Fund except as may be
  necessary in connection with borrowings mentioned in investment restriction
  (3) above or except as may be necessary in connection with transactions in
  financial futures contracts and options thereon.

    c. Purchase any securities on margin, except that the Fund may obtain
  such short-term credit as may be necessary for the clearance of purchases
  and sales of portfolio securities (the deposit or payment by the Fund of
  initial or variation margin in connection with financial futures contracts
  and options thereon is not considered the purchase of a security on
  margin).

    d. Make short sales of securities or maintain a short position or invest
  in put, call, straddle or spread options, except that the Fund may write,
  purchase and sell options and futures on Municipal Bonds, U.S. Government
  obligations and related indices or otherwise in connection with bona fide
  hedging activities and may purchase and sell Call Rights to require
  mandatory tender for the purchase of related Municipal Bonds.

  If a percentage restriction on the investment or use of assets set forth
above is adhered to at the time a transaction is effected, later changes in
percentages resulting from changing values will not be considered a violation.

  For so long as shares of AMPS are rated by Moody's, the Fund will not change
these additional investment restrictions unless it receives written
confirmation from Moody's that engaging in such transactions would not impair
the rating then assigned to the shares of AMPS by Moody's.

  The Fund has no intention to file a voluntary application for relief under
Federal bankruptcy law or any similar application under state law for so long
as the Fund is solvent and does not foresee becoming insolvent.

  The Investment Adviser of the Fund and Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") are owned and controlled by Merrill Lynch & Co.,
Inc. ("ML & Co."). Because of the affiliation of Merrill Lynch with the
Investment Adviser, the Fund is prohibited from engaging in certain
transactions involving Merrill Lynch except pursuant to an exemptive order or
otherwise in compliance with the provisions of the 1940 Act and the rules and
regulations thereunder. Included among such restricted transactions will be
purchases from or sales to Merrill Lynch of securities in transactions in which
it acts as principal. An exemptive order has been obtained that permits the
Fund to effect principal transactions with Merrill Lynch in high quality,
short-term, tax-exempt securities subject to conditions set forth in such
order. The Fund may consider in the future requesting an order permitting other
principal transactions with Merrill Lynch, but there can be no assurance that
such application will be made and, if made, that such order would be granted.

                              DESCRIPTION OF AMPS

  Certain of the capitalized terms used herein are defined in the Glossary that
appears at the back of the prospectus.

  The AMPS will be shares of preferred stock that entitle their holders to
receive dividends when, as and if declared by the Board of Directors, out of
funds legally available therefor, at a rate per year that may vary for the
successive Dividend Periods. After the Initial Dividend Period, each Subsequent
Dividend Period for the shares of AMPS generally will be a 7-Day Dividend
Period; provided, however, that prior to any Auction, the Fund may elect,
subject to certain limitations described herein, upon giving notice to holders
thereof, a Special Dividend Period. The Applicable Rate for a particular
Dividend Period will be determined by an Auction conducted on the Business Day
before the start of such Dividend Period. Beneficial Owners and Potential
Beneficial Owners of shares of AMPS may participate in Auctions therefor,
although, except in the case of a Special Dividend Period, Beneficial Owners
desiring to continue to hold all of their shares of AMPS regardless of the
Applicable Rate resulting from Auctions need not participate. For an
explanation of Auctions and the method of determining the Applicable Rate, see
Appendix D--"Auction Procedures."

                                       8
<PAGE>

  Except as otherwise required by law or unless there is no Securities
Depository, all outstanding shares of AMPS will be represented by one or more
certificates registered in the name of the nominee of the Securities Depository
(initially expected to be Cede), and no person acquiring shares of AMPS will be
entitled to receive a certificate representing such shares. See Appendix D--
"Auction Procedures." As a result, the nominee of the Securities Depository is
expected to be the sole holder of record of the shares of AMPS. Accordingly,
each purchaser of AMPS must rely on (i) the procedures of the Securities
Depository and, if such purchaser is not a member of the Securities Depository,
such purchaser's Agent Member, to receive dividends, distributions and notices
and to exercise voting rights (if and when applicable) and (ii) the records of
the Securities Depository and, if such purchaser is not a member of the
Securities Depository, such purchaser's Agent Member, to evidence its
beneficial ownership of shares of AMPS.

  When issued and sold, the shares of AMPS will have a liquidation preference
of $25,000 per share plus an amount equal to accumulated but unpaid dividends
(whether or not earned or declared) and will be fully paid and non-assessable.
See "Description of AMPS--Liquidation Rights" in the prospectus. The shares of
AMPS will not be convertible into shares of common stock or other capital stock
of the Fund, and the holders thereof will have no preemptive rights. The shares
of AMPS will not be subject to any sinking fund but will be subject to
redemption at the option of the Fund at the Optional Redemption Price on any
Dividend Payment Date (except during the Initial Dividend Period and during a
Non-Call Period) and, under certain circumstances, will be subject to mandatory
redemption by the Fund at the Mandatory Redemption Price stated in the
prospectus. See "Description of AMPS--Redemption" in the prospectus.

  In addition to serving as the Auction Agent in connection with the Auction
Procedures described in the prospectus, The Bank of New York will be the
transfer agent, registrar, dividend disbursing agent and redemption agent for
the shares of AMPS. The Auction Agent, however, will serve merely as the agent
of the Fund, acting in accordance with the Fund's instructions, and will not be
responsible for any evaluation or verification of any matters certified to it.

  Except in an Auction, the Fund will have the right (to the extent permitted
by applicable law) to purchase or otherwise acquire any shares of AMPS so long
as the Fund is current in the payment of dividends on AMPS and on any other
capital stock of the Fund ranking on a parity with the AMPS with respect to the
payment of dividends or upon liquidation.

  The following supplements the description of the terms of the shares of AMPS
set forth in the prospectus. This description does not purport to be complete
and is subject to and qualified in its entirety by reference to the Fund's
Charter and Articles Supplementary, including the provisions thereof
establishing the AMPS. The Fund's Charter and the form of Articles
Supplementary establishing the terms of the AMPS have been filed as exhibits to
the Registration Statement of which this statement of additional information is
a part.

Dividends

  General. The holders of shares of AMPS will be entitled to receive, when, as
and if declared by the Board of Directors of the Fund, out of funds legally
available therefor, cumulative cash dividends on their shares, at the
Applicable Rate determined as set forth below under "Determination of Dividend
Rate," payable on the respective dates set forth below. Dividends on the shares
of AMPS so declared and payable shall be paid (i) in preference to and in
priority over any dividends so declared and payable on the common stock, and
(ii) to the extent permitted under the Code and to the extent available, out of
net tax-exempt income earned on the Fund's investments. Generally, dividends on
shares of AMPS, to the extent that they are derived from interest paid on
Municipal Bonds, will be exempt from Federal income taxes, subject to possible
application of the Federal alternative minimum tax. See "Taxes."

  Notification of Dividend Period. In determining whether the Fund should issue
a Notice of Special Dividend for the shares of AMPS, the Broker-Dealers will
consider (i) existing short-term and long-term market rates and indices of such
short-term and long-term rates, (ii) existing market supply and demand for

                                       9
<PAGE>

short-term and long-term securities, (iii) existing yield curves for short-term
and long-term securities comparable to the AMPS, (iv) industry and financial
conditions which may affect the AMPS, (v) the investment objective of the Fund
and (vi) the Dividend Periods and dividend rates at which current and potential
beneficial holders of the AMPS would remain or become beneficial holders. If
the Broker-Dealers shall not give the Fund and the Auction Agent a Response by
such second Business Day or if the Response states that given the factors set
forth above it is not advisable that the Fund give a Notice of Special Dividend
Period for the AMPS, the Fund may not give a Notice of Special Dividend Period
in respect of such Request for Special Dividend Period. In the event the
Response indicates that it is advisable that the Fund give a Notice of Special
Dividend Period for the AMPS, the Fund, by no later than the second Business
Day prior to such Auction Date, may give a notice (a "Notice of Special
Dividend Period") to the Auction Agent, the Securities Depository and each
Broker-Dealer, which notice will specify (i) the duration of the Special
Dividend Period, (ii) the Optional Redemption Price as specified in the related
Response and (iii) the Specific Redemption Provisions, if any, as specified in
the related Response. The Fund also shall provide a copy of such Notice of
Special Dividend Period to Moody's and S&P. The Fund shall not give a Notice of
Special Dividend Period, and, if such Notice of Special Dividend Period shall
have been given already, shall give telephonic and written notice of its
revocation (a "Notice of Revocation") to the Auction Agent, each Broker-Dealer,
and the Securities Depository on or prior to the Business Day prior to the
relevant Auction Date if (x) either the 1940 Act AMPS Asset Coverage is not
satisfied or the Fund shall fail to maintain S&P Eligible Assets and Moody's
Eligible Assets each with an aggregate Discounted Value at least equal to the
AMPS Basic Maintenance Amount, in each case on each of the two Valuation Dates
immediately preceding the Business Day prior to the relevant Auction Date on an
actual basis and on a pro forma basis giving effect to the proposed Special
Dividend Period (using as a pro forma dividend rate with respect to such
Special Dividend Period the dividend rate which the Broker-Dealers shall advise
the Fund is an approximately equal rate for securities similar to the AMPS with
an equal dividend period), provided that, in calculating the aggregate
Discounted Value of Moody's Eligible Assets for this purpose, the Moody's
Exposure Period shall be deemed to be one week longer, (y) sufficient funds for
the payment of dividends payable on the immediately succeeding Dividend Payment
Date have not been irrevocably deposited with the Auction Agent by the close of
business on the third Business Day preceding the related Auction Date or (z)
the Broker-Dealers jointly advise the Fund that, after consideration of the
factors listed above, they have concluded that it is advisable to give a Notice
of Revocation. The Fund also shall provide a copy of such Notice of Revocation
to Moody's and S&P. If the Fund is prohibited from giving a Notice of Special
Dividend Period as a result of the factors enumerated in clause (x), (y) or (z)
above or if the Fund gives a Notice of Revocation with respect to a Notice of
Special Dividend Period, the next succeeding Dividend Period for that series
will be a 7-Day Dividend Period. In addition, in the event Sufficient Clearing
Bids are not made in any Auction or an Auction is not held for any reason, the
next succeeding Dividend Period will be a 7-Day Dividend Period, and the Fund
may not again give a Notice of Special Dividend Period (and any such attempted
notice shall be null and void) until Sufficient Clearing Bids have been made in
an Auction with respect to a 7-Day Dividend Period.

  Non-Payment Period; Late Charge. A Non-Payment Period will commence if the
Fund fails to (i) declare, prior to the close of business on the second
Business Day preceding any Dividend Payment Date, for payment on or (to the
extent permitted as described below) within three Business Days after such
Dividend Payment Date to the persons who held such shares as of 12:00 noon,
Eastern time, on the Business Day preceding such Dividend Payment Date, the
full amount of any dividend on shares of AMPS payable on such Dividend Payment
Date or (ii) deposit, irrevocably in trust, in same-day funds, with the Auction
Agent by 12:00 noon, Eastern time, (A) on such Dividend Payment Date the full
amount of any cash dividend on such shares (if declared) payable on such
Dividend Payment Date or (B) on any redemption date for shares of AMPS called
for redemption, the Mandatory Redemption Price per share of such AMPS or, in
the case of an optional redemption, the Optional Redemption Price per share.
Such Non-Payment Period will consist of the period commencing on and including
the aforementioned Dividend Payment Date or redemption date, as the case may
be, and ending on and including the Business Day on which, by 12:00 noon,
Eastern time, all unpaid cash dividends and unpaid redemption prices shall have
been so deposited or otherwise shall have been made available to the applicable
holders in same-day funds, provided that a Non-Payment Period for any series of

                                       10
<PAGE>

AMPS will not end unless the Fund shall have given at least five days' but no
more than 30 days' written notice of such deposit or availability to the
Auction Agent, the Securities Depository and all holders of shares of AMPS.
Notwithstanding the foregoing, the failure by the Fund to deposit funds as
provided for by clause (ii) (A) or (ii) (B) above within three Business Days
after any Dividend Payment Date or redemption date, as the case may be, in each
case to the extent contemplated below, shall not constitute a "Non-Payment
Period."

  The Applicable Rate for each Dividend Period for shares of AMPS, commencing
during a Non-Payment Period, will be equal to the Non-Payment Period Rate; and
each Dividend Period commencing after the first day of, and during, a Non-
Payment Period shall be a 7-Day Dividend Period. Any dividend on shares of AMPS
due on any Dividend Payment Date for such shares (if, prior to the close of
business on the second Business Day preceding such Dividend Payment Date, the
Fund has declared such dividend payable on such Dividend Payment Date to the
persons who held such shares as of 12:00 noon, Eastern time, on the Business
Day preceding such Dividend Payment Date) or redemption price with respect to
such shares not paid to such persons when due may be paid to such persons in
the same form of funds by 12:00 noon, Eastern time, on any of the first three
Business Days after such Dividend Payment Date or due date, as the case may be,
provided that such amount is accompanied by a late charge calculated for such
period of non-payment at the Non-Payment Period Rate applied to the amount of
such non-payment based on the actual number of days comprising such period
divided by 365. In the case of a willful failure of the Fund to pay a dividend
on a Dividend Payment Date or to redeem any shares of AMPS on the date set for
such redemption, the preceding sentence shall not apply and the Applicable Rate
for the Dividend Period commencing during the Non-Payment Period resulting from
such failure shall be the Non-Payment Period Rate. For the purposes of the
foregoing, payment to a person in same-day funds on any Business Day at any
time will be considered equivalent to payment to that person in New York
Clearing House (next-day) funds at the same time on the preceding Business Day,
and any payment made after 12:00 noon, Eastern time, on any Business Day shall
be considered to have been made instead in the same form of funds and to the
same person before 12:00 noon, Eastern time, on the next Business Day.

  The Non-Payment Period Rate initially will be 200% of the applicable
Reference Rate (or 275% of such rate if the Fund has provided notification to
the Auction Agent prior to the Auction establishing the Applicable Rate for any
dividend that net capital gains or other taxable income will be included in
such dividend on shares of AMPS), provided that the Board of Directors of the
Fund shall have the authority to adjust, modify, alter or change from time to
time the initial Non-Payment Period Rate if the Board of Directors of the Fund
determines and Moody's and S&P (and any Substitute Rating Agency in lieu of
Moody's or S&P in the event either of such parties shall not rate the AMPS)
advise the Fund in writing that such adjustment, modification, alteration or
change will not adversely affect their then-current ratings on the AMPS.

  Restrictions on Dividends and Other Payments. For so long as any shares of
AMPS are outstanding, the Fund will not declare, pay or set apart for payment
any dividend or other distribution (other than a dividend or distribution paid
in shares of, or options, warrants or rights to subscribe for or purchase,
common stock or other stock, if any, ranking junior to shares of AMPS as to
dividends or upon liquidation) in respect of common stock or any other stock of
the Fund ranking junior to or on a parity with shares of AMPS as to dividends
or upon liquidation, or call for redemption, redeem, purchase or otherwise
acquire for consideration any shares of common stock or any other such junior
stock (except by conversion into or exchange for stock of the Fund ranking
junior to AMPS as to dividends and upon liquidation) or any such parity stock
(except by conversion into or exchange for stock of the Fund ranking junior to
or on a parity with AMPS as to dividends and upon liquidation), unless (A)
immediately after such transaction, the Fund would have S&P Eligible Assets and
Moody's Eligible Assets each with an aggregate Discounted Value equal to or
greater than the AMPS Basic Maintenance Amount, and the 1940 Act AMPS Asset
Coverage (see "Asset Maintenance" and "Redemption" below) would be satisfied,
(B) full cumulative dividends on shares of AMPS due on or prior to the date of
the transaction have been declared and paid or shall have been declared and
sufficient funds for the payment thereof deposited with the Auction Agent, (C)
any Additional Dividend required to be paid on or before the date of such
declaration or payment has been paid and (D) the Fund has redeemed the full
number of shares of

                                       11
<PAGE>

AMPS required to be redeemed by any provision for mandatory redemption
contained in the Articles Supplementary.

Asset Maintenance

  1940 Act AMPS Asset Coverage. The Fund will be required under the Articles
Supplementary to maintain, with respect to shares of AMPS, as of the last
Business Day of each month in which any shares of AMPS are outstanding, asset
coverage of at least 200% with respect to senior securities which are stock,
including the shares of AMPS (or such other asset coverage as in the future may
be specified in or under the 1940 Act as the minimum asset coverage for senior
securities which are stock of a closed-end investment company as a condition of
paying dividends on its common stock) ("1940 Act AMPS Asset Coverage"). If the
Fund fails to maintain 1940 Act AMPS Asset Coverage and such failure is not
cured as of the last Business Day of the following month (the "1940 Act Cure
Date"), the Fund will be required under certain circumstances to redeem certain
of the shares of AMPS. See "Redemption" in the prospectus and below.

  AMPS Basic Maintenance Amount.  So long as shares of AMPS are outstanding,
the Fund will be required under the Articles Supplementary to maintain as of
each Business Day (a "Valuation Date") S&P Eligible Assets and Moody's Eligible
Assets each having in the aggregate a Discounted Value at least equal to the
AMPS Basic Maintenance Amount. If the Fund fails to meet such requirement as of
any Valuation Date and such failure is not cured on or before the sixth
Business Day after such Valuation Date (the "AMPS Basic Maintenance Cure
Date"), the Fund will be required under certain circumstances to redeem certain
of the shares of AMPS. Upon any failure to maintain the required Discounted
Value, the Fund will use its best efforts to alter the composition of its
portfolio to reattain a Discounted Value at least equal to the AMPS Basic
Maintenance Amount on or prior to the AMPS Basic Maintenance Cure Date. See
"Redemption" in the prospectus and below.

  The AMPS Basic Maintenance Amount as of any Valuation Date is defined as the
dollar amount equal to (i) the sum of (A) the product of the number of shares
of AMPS outstanding on such Valuation Date multiplied by the sum of $25,000 and
any applicable redemption premium attributable to the designation of a Premium
Call Period; (B) the aggregate amount of cash dividends (whether or not earned
or declared) that will have accumulated for each share of AMPS outstanding to
(but not including) the end of the current Dividend Period that follows such
Valuation Date in the event the then-current Dividend Period will end within 49
calendar days of such Valuation Date or through the 49th day after such
Valuation Date in the event the then-current Dividend Period for the shares of
AMPS will not end within 49 calendar days of such Valuation Date; (C) in the
event the then-current Dividend Period will end within 49 calendar days of such
Valuation Date, the aggregate amount of cash dividends that would accumulate at
the Maximum Applicable Rate applicable to a Dividend Period of 28 or fewer days
on any shares of AMPS outstanding from the end of such Dividend Period through
the 49th day after such Valuation Date, multiplied by the larger of the Moody's
Volatility Factor and the S&P Volatility Factor determined from time to time by
Moody's and S&P, respectively (except that if such Valuation Date occurs during
a Non-Payment Period, the cash dividend for purposes of calculation would
accumulate at the then-current Non-Payment Period Rate); (D) the amount of
anticipated Fund expenses for the 90 days subsequent to such Valuation Date
(including any premiums payable with respect to a Policy); (E) the amount of
the Fund's Maximum Potential Additional Dividend Liability as of such Valuation
Date; and (F) any current liabilities as of such Valuation Date to the extent
not reflected in any of (i) (A) through (i) (E) (including, without limitation,
and immediately upon determination, any amounts due and payable by the Fund
pursuant to repurchase agreements, any amounts payable for Municipal Bonds
purchased as of such Valuation Date) less (ii) either (A) the Discounted Value
of any Fund assets, or (B) the face value of any of the Fund's assets if such
assets mature prior to or on the date of redemption of AMPS or payment of a
liability and are either securities issued or guaranteed by the United States
Government or Deposit Securities, in both cases irrevocably deposited by the
Fund for the payment of the amount needed to redeem shares of AMPS subject to
redemption or to satisfy any of (i) (B) through (i) (F). For Moody's and S&P
the Fund shall include as a liability an amount calculated semi-annually equal
to 150% of the estimated cost of obtaining other insurance guaranteeing the
timely payment of interest on a Moody's Eligible Asset or S&P Eligible Asset
and principal

                                       12
<PAGE>

thereof to maturity with respect to Moody's Eligible Assets and S&P Eligible
Assets that (i) are covered by a Policy which provides the Fund with the option
to obtain such other insurance and (ii) are discounted by a Moody's Discount
Factor or S&P Discount Factor, as the case may be, determined by reference to
the insurance claims-paying ability rating of the issuer of such Policy. For
purposes of the foregoing, "Maximum Potential Additional Dividend Liability,"
as of any Valuation Date, means the aggregate amount of Additional Dividends
that would be due if the Fund were to make Retroactive Taxable Allocations,
with respect to any fiscal year, estimated based upon dividends paid and the
amount of undistributed realized net capital gains and other taxable income
earned by the Fund, as of the end of the calendar month immediately preceding
such Valuation Date and assuming such Additional Dividends are fully taxable.

  The Discount Factors and guidelines for determining the market value of the
Fund's portfolio holdings have been based on criteria established in connection
with rating the AMPS. These factors include, but are not limited to, the
sensitivity of the market value of the relevant asset to changes in interest
rates, the liquidity and depth of the market for the relevant asset, the credit
quality of the relevant asset (for example, the lower the rating of a debt
obligation, the higher the related discount factor) and the frequency with
which the relevant asset is marked to market. In no event shall the Discounted
Value of any asset of the Fund exceed its unpaid principal balance or face
amount as of the date of calculation. The Discount Factor relating to any asset
of the Fund and the AMPS Basic Maintenance Amount, the assets eligible for
inclusion in the calculation of the Discounted Value of the Fund's portfolio
and certain definitions and methods of calculation relating thereto may be
changed from time to time by the Fund, without shareholder approval, but only
in the event the Fund receives written confirmation from S&P, Moody's and any
Substitute Rating Agency that any such changes would not impair the ratings
then assigned to the shares of AMPS by S&P or Moody's or any Substitute Rating
Agency.

  On or before the third Business Day after a Valuation Date on which the Fund
fails to maintain S&P Eligible Assets and Moody's Eligible Assets each with an
aggregate Discounted Value equal to or greater than the AMPS Basic Maintenance
Amount, the Fund is required to deliver to the Auction Agent, Moody's and S&P a
report with respect to the calculation of the AMPS Basic Maintenance Amount and
the value of its portfolio holdings as of the date of such failure (an "AMPS
Basic Maintenance Report"). Additionally, on or before the third Business Day
after the first day of a Special Dividend Period, the Fund will deliver an AMPS
Basic Maintenance Report to S&P and the Auction Agent. The Fund also will
deliver an AMPS Basic Maintenance Report as of the twenty-fifth day of the last
month of each fiscal quarter of the Fund (or, if such day is not a Business
Day, the next succeeding Business Day) on or before the third Business Day
after such day. Within ten Business Days after delivery of such report relating
to the twenty-fifth day of the last month of each fiscal quarter of the Fund,
the Fund will deliver a letter prepared by the Fund's independent accountants
regarding the accuracy of the calculations made by the Fund in its most recent
AMPS Basic Maintenance Report. Also, on or before 5:00 p.m., Eastern time, on
the first Business Day after shares of common stock are repurchased by the
Fund, the Fund will complete and deliver to S&P and Moody's an AMPS Basic
Maintenance Report as of the close of business on such date that common stock
is repurchased. If any such letter prepared by the Fund's independent
accountants shows that an error was made in the most recent AMPS Basic
Maintenance Report, the calculation or determination made by the Fund's
independent accountants will be conclusive and binding on the Fund.

Redemption

  Mandatory Redemption. The number of shares of AMPS to be redeemed will be
equal to the lesser of (a) the minimum number of shares of AMPS the redemption
of which, if deemed to have occurred immediately prior to the opening of
business on the Cure Date, together with all other shares of the preferred
stock subject to redemption or retirement, would result in the Fund having S&P
Eligible Assets and Moody's Eligible Assets each with an aggregate Discounted
Value equal to or greater than the AMPS Basic Maintenance Amount or
satisfaction of the 1940 Act AMPS Asset Coverage, as the case may be, on such
Cure Date (provided that, if there is no such minimum number of shares the
redemption of which would have such result, all shares of AMPS then outstanding
will be redeemed), and (b) the maximum number of shares of AMPS, together with
all

                                       13
<PAGE>

other shares of preferred stock subject to redemption or retirement, that can
be redeemed out of funds expected to be legally available therefor on such
redemption date. In determining the number of shares of AMPS required to be
redeemed in accordance with the foregoing, the Fund shall allocate the number
required to be redeemed which would result in the Fund having S&P Eligible
Assets and Moody's Eligible Assets each with an aggregate Discounted Value
equal to or greater than the AMPS Basic Maintenance Amount or satisfaction of
the 1940 Act AMPS Asset Coverage, as the case may be, pro rata among shares of
AMPS and other preferred stock subject to redemption pursuant to provisions
similar to those set forth below; provided that, shares of AMPS which may not
be redeemed at the option of the Fund due to the designation of a Non-Call
Period applicable to such shares (A) will be subject to mandatory redemption
only to the extent that other shares are not available to satisfy the number of
shares required to be redeemed and (B) will be selected for redemption in an
ascending order of outstanding number of days in the Non-Call Period (with
shares with the lowest number of days to be redeemed first) and by lot in the
event of shares having an equal number of days in such Non-Call Period. The
Fund is required to effect such a mandatory redemption not later than 35 days
after such Cure Date, except that if the Fund does not have funds legally
available for the redemption of all of the required number of shares of AMPS
which are subject to mandatory redemption or the Fund otherwise is unable to
effect such redemption on or prior to 35 days after such Cure Date, the Fund
will redeem those shares of AMPS which it was unable to redeem on the earliest
practicable date on which it is able to effect such redemption.

  Notice of Redemption. If shares of AMPS are to be redeemed, a notice of
redemption will be mailed to each record holder of such shares of AMPS
(initially Cede as nominee of the Securities Depository) and to the Auction
Agent not less than 17 nor more than 60 days prior to the date fixed for the
redemption thereof. Each notice of redemption will include a statement setting
forth: (i) the redemption date, (ii) the aggregate number of shares of AMPS to
be redeemed, (iii) the redemption price, (iv) the place or places where shares
of AMPS are to be surrendered for payment of the redemption price, (v) a
statement that dividends on the shares to be redeemed will cease to accumulate
on such redemption date (except that holders may be entitled to Additional
Dividends) and (vi) the provision of the Articles Supplementary pursuant to
which such shares are being redeemed. The notice also will be published in The
Wall Street Journal. No defect in the notice of redemption or in the mailing or
publication thereof will affect the validity of the redemption proceedings,
except as required by applicable law.

  In the event that less than all of the outstanding shares of AMPS are to be
redeemed, the shares to be redeemed will be selected by lot or such other
method as the Fund shall deem fair and equitable, and the results thereof will
be communicated to the Auction Agent. The Auction Agent will give notice to the
Securities Depository, whose nominee will be the record holder of all shares of
AMPS, and the Securities Depository will determine the number of shares to be
redeemed from the account of the Agent Member of each Existing Holder. Each
Agent Member will determine the number of shares to be redeemed from the
account of each Existing Holder for which it acts as agent. An Agent Member may
select for redemption shares from the accounts of some Existing Holders without
selecting for redemption any shares from the accounts of other Existing
Holders. Notwithstanding the foregoing, if neither the Securities Depository
nor its nominee is the record holder of all of the shares, the particular
shares to be redeemed shall be selected by the Fund by lot or by such other
method as the Fund shall deem fair and equitable.

  If the Fund gives notice of redemption, and concurrently or thereafter
deposits in trust with the Auction Agent, or segregates in an account at the
Fund's custodian bank for the benefit of the Auction Agent, Deposit Securities
(with a right of substitution) having an aggregate Discounted Value (utilizing
in the case of S&P and S&P Exposure Period of 22 Business Days) equal to the
redemption payment for the shares of AMPS as to which notice of redemption has
been given, with irrevocable instructions and authority to pay the redemption
price to the record holders thereof, then upon the date of such deposit or, if
no such deposit is made, upon such date fixed for redemption (unless the Fund
shall default in making payment of the redemption price), all rights of the
holders of such shares called for redemption will cease and terminate, except
the right of such holders to receive the redemption price thereof and any
Additional Dividends, but without interest, and such shares no

                                       14
<PAGE>

longer will be deemed to be outstanding. The Fund will be entitled to receive,
from time to time, the interest, if any, earned on such Deposit Securities
deposited with the Auction Agent, and the holders of any shares so redeemed
will have no claim to any such interest. Any funds so deposited which are
unclaimed at the end of one year from such redemption date will be repaid, upon
demand, to the Fund, after which the holders of the shares of AMPS of such
series so called for redemption may look only to the Fund for payment thereof.

  So long as any shares of AMPS are held of record by the nominee of the
Securities Depository (initially Cede), the redemption price for such shares
will be paid on the redemption date to the nominee of the Securities
Depository. The Securities Depository's normal procedures now provide for it to
distribute the amount of the redemption price to Agent Members who, in turn,
are expected to distribute such funds to the persons for whom they are acting
as agent.

  Notwithstanding the provisions for redemption described above, no shares of
AMPS shall be subject to optional redemption (i) unless all dividends in
arrears on the outstanding shares of AMPS, and all capital stock of the Fund
ranking on a parity with the AMPS with respect to the payment of dividends or
upon liquidation, have been or are being contemporaneously paid or declared and
set aside for payment and (ii) if redemption thereof would result in the Fund's
failure to maintain Moody's Eligible Assets or S&P Eligible Assets with an
aggregate Discounted Value equal to or greater than the AMPS Basic Maintenance
Amount.

Voting Rights

  In connection with the election of the Fund's directors, holders of shares of
AMPS and any other preferred stock, voting as a separate class, shall be
entitled at all times to elect two of the Fund's directors, and the remaining
directors will be elected by holders of shares of common stock and shares of
AMPS and any other preferred stock, voting together as a single class. In
addition, if at any time dividends on outstanding shares of AMPS shall be
unpaid in an amount equal to at least two full years' dividends thereon or if
at any time holders of any shares of preferred stock are entitled, together
with the holders of AMPS, to elect a majority of the directors of the Fund
under the 1940 Act, then the number of directors constituting the Board of
Directors automatically shall be increased by the smallest number that, when
added to the two directors elected exclusively by the holders of shares of AMPS
and any other preferred stock as described above, would constitute a majority
of the Board of Directors as so increased by such smallest number, and at a
special meeting of shareholders which will be called and held as soon as
practicable, and at all subsequent meetings at which directors are to be
elected, the holders of shares of AMPS and any other preferred stock, voting as
a separate class, will be entitled to elect the smallest number of additional
directors that, together with the two directors which such holders in any event
will be entitled to elect, constitutes a majority of the total number of
directors of the Fund as so increased. The terms of office of the persons who
are directors at the time of that election will continue. If the Fund
thereafter shall pay, or declare and set apart for payment in full, all
dividends payable on all outstanding shares of AMPS and any other preferred
stock for all past Dividend Periods, the additional voting rights of the
holders of shares of AMPS and any other preferred stock as described above
shall cease, and the terms of office of all of the additional directors elected
by the holders of shares of AMPS and any other preferred stock (but not of the
directors with respect to whose election the holders of common stock were
entitled to vote or the two directors the holders of shares of AMPS and any
other preferred stock have the right to elect in any event) will terminate
automatically.

  The affirmative vote of a majority of the votes entitled to be cast by
holders of outstanding shares of AMPS and any other preferred stock, voting as
a separate class, will be required to (i) authorize, create or issue any class
or series of stock ranking prior to the AMPS or any other series of preferred
stock with respect to the payment of dividends or the distribution of assets on
liquidation, or (ii) amend, alter or repeal the provisions of the Articles of
Incorporation, whether by merger, consolidation or otherwise, so as to
adversely affect any of the contract rights expressly set forth in the Articles
of Incorporation of holders of shares of AMPS or any other preferred stock. To
the extent permitted under the 1940 Act, in the event shares of more than one
series of AMPS are outstanding, the Fund shall not approve any of the actions
set forth in clause (i) or (ii) which adversely affects the contract rights
expressly set forth in the Articles of Incorporation of a holder of shares of

                                       15
<PAGE>

a series of AMPS differently than those of a holder of shares of any other
series of AMPS without the affirmative vote of at least a majority of votes
entitled to be cast by holders of the shares of AMPS of each series adversely
affected and outstanding at such time (each such adversely affected series
voting separately as a class). The Board of Directors, however, without
shareholder approval, may amend, alter or repeal any or all of the various
rating agency guidelines described herein in the event the Fund receives
confirmation from the rating agencies that any such amendment, alteration or
repeal would not impair the ratings then assigned to shares of AMPS. Unless a
higher percentage is provided for under "Description of Capital Stock--Certain
Provisions in the Articles of Incorporation" in the prospectus, the affirmative
vote of a majority of the votes entitled to be cast by holders of outstanding
shares of AMPS and any other preferred stock, voting as a separate class, will
be required to approve any plan of reorganization (including bankruptcy
proceedings) adversely affecting such shares or any action requiring a vote of
security holders under Section 13(a) of the 1940 Act including, among other
things, changes in the Fund's investment objective or changes in the investment
restrictions described as fundamental policies under "Investment Objective and
Policies." The class vote of holders of shares of AMPS and any other preferred
stock described above in each case will be in addition to a separate vote of
the requisite percentage of shares of common stock and shares of AMPS and any
other preferred stock, voting together as a single class, necessary to
authorize the action in question.

  The foregoing voting provisions will not apply to any shares of AMPS if, at
or prior to the time when the act with respect to which such vote otherwise
would be required shall be effected, such shares shall have been (i) redeemed
or (ii) called for redemption and sufficient funds shall have been deposited in
trust to effect such redemption.

                                  THE AUCTION

Auction Agent Agreement

  The Auction Agent will act as agent for the Fund in connection with Auctions.
In the absence of bad faith or negligence on its part, the Auction Agent will
not be liable for any action taken, suffered or omitted, or for any error of
judgment made, by it in the performance of its duties under the Auction Agent
Agreement, and will not be liable for any error of judgment made in good faith
unless the Auction Agent shall have been negligent in ascertaining the
pertinent facts. Pursuant to the Auction Agent Agreement, the Fund is required
to indemnify the Auction Agent for certain losses and liabilities incurred by
the Auction Agent without negligence or bad faith on its part in connection
with the performance of its duties under such agreement.

  The Auction Agent may terminate the Auction Agent Agreement upon notice to
the Fund, which termination may be no earlier than 60 days following delivery
of such notice. If the Auction Agent resigns, the Fund will use its best
efforts to enter into an agreement with a successor Auction Agent containing
substantially the same terms and conditions as the Auction Agent Agreement. The
Fund may terminate the Auction Agent Agreement, provided that prior to such
termination the Fund shall have entered into such an agreement with respect
thereto with a successor Auction Agent.

Broker-Dealer Agreements

  The Auctions require the participation of one or more broker-dealers. A
Broker-Dealer Agreement may be terminated by the Auction Agent or a Broker-
Dealer on five days' notice to the other party, provided that the Broker-Dealer
Agreement with Merrill Lynch may not be terminated without the prior written
consent of the Fund, which consent may not be unreasonably withheld.

Auction Procedures

  The Auction Procedures are set forth in Appendix D to this statement of
additional information. The Settlement Procedures to be used with respect to
Auctions are set forth in Appendix C to this statement of additional
information.

                                       16
<PAGE>

                            RATING AGENCY GUIDELINES

S&P AAA Rating Guidelines

  The Discounted Value of the Fund's S&P Eligible Assets is calculated on each
Valuation Date. See "Description of AMPS--Asset Maintenance--AMPS Basic
Maintenance Amount." S&P Eligible Assets include cash, Receivables for
Municipal Bonds Sold (as defined below) and Municipal Bonds eligible for
consideration under S&P's current guidelines. For purposes of calculating the
Discounted Value of the Fund's portfolio under current S&P guidelines, the fair
market value of Municipal Bonds eligible for consideration under such
guidelines must be discounted by the applicable S&P Discount Factor set forth
in the table below. The Discounted Value of a Municipal Bond eligible for
consideration under S&P guidelines is the fair market value thereof divided by
the S&P Discount Factor. The S&P Discount Factor used to discount a particular
Municipal Bond will be determined by reference to (a)(i) the rating by S&P,
Moody's or Fitch on such Municipal Bond or (ii) in the event the Municipal Bond
is insured under a Policy and the terms of the Policy permit the Fund, at its
option, to obtain other permanent insurance guaranteeing the timely payment of
interest on such Municipal Bond and principal thereof to maturity, the S&P
insurance claims-paying ability rating of the issuer of the Policy or (iii) in
the event the Municipal Bond is insured under an insurance policy which
guarantees the timely payment of interest on such Municipal Bond and principal
thereof to maturity, the S&P insurance claims-paying ability rating of the
issuer of the insurance policy and (b) the S&P Exposure Period. The S&P
Exposure Period is the maximum period of time following a Valuation Date,
including the Valuation Date and the AMPS Basic Maintenance Cure Date, that the
Fund has to cure any failure to maintain, as of such Valuation Date, a
Discounted Value for its portfolio at least equal to the AMPS Basic Maintenance
Amount.

  S&P Discount Factors applicable to Municipal Bonds for a range of S&P
Exposure Periods are set forth below:

<TABLE>
<CAPTION>
                                                              S&P Discount
                                                             Factors Rating
                                                                Category
                                                             ------------------
     Exposure Period                                         AAA  AA    A   BBB
     ---------------                                         ---  ---  ---  ---
     <S>                                                     <C>  <C>  <C>  <C>
     45 Business Days....................................... 190% 195% 210% 250%
     25 Business Days....................................... 170  175  190  230
     10 Business Days....................................... 155  160  175  215
      7 Business Days....................................... 150  155  170  210
      3 Business Days....................................... 130  135  150  190
</TABLE>

  Since the S&P Exposure Period currently applicable to the Fund is seven
Business Days, the S&P Discount Factors currently applicable to Municipal Bonds
eligible for consideration under S&P guidelines will be determined by reference
to the factors set forth opposite the exposure period line entitled "7 Business
Days." Notwithstanding the foregoing, (i) the S&P Discount Factor for short-
term Municipal Bonds will be 115%, so long as such Municipal Bonds are rated A-
1+ or SP-1+ by S&P and mature or have a demand feature exercisable in 30 days
or less, or 120% so long as such Municipal Bonds are rated A-1 or SP-1 by S&P
and mature or have a demand feature exercisable in 30 days or less, or 125% if
such Municipal Bonds are not rated by S&P but are rated VMIG-1, P-1 or MIG-1 by
Moody's or F-1+ by Fitch; provided, however, such short-term Municipal Bonds
rated by Moody's or Fitch but not rated by S&P having a demand feature
exercisable in 30 days or less must be backed by a letter of credit, liquidity
facility or guarantee from a bank or other financial institution having a
short-term rating of at least A-1+ from S&P; and further provided that such
short-term Municipal Bonds rated by Moody's or Fitch but not rated by S&P may
comprise no more than 50% of short-term Municipal Bonds that qualify as S&P
Eligible Assets, (ii) the S&P Discount Factor for Receivables for Municipal
Bonds Sold that are due in more than five Business Days from such Valuation
Date will be the S&P Discount Factor applicable to the Municipal Bonds sold,
and (iii) no S&P Discount Factor will be applied to cash or to Receivables for
Municipal Bonds Sold if such receivables are due within five Business Days of
such Valuation Date. "Receivables for Municipal Bonds Sold," for purposes of
calculating S&P Eligible Assets as of any Valuation Date, means the book value
of receivables for Municipal Bonds sold as of or prior to such Valuation Date.
For purposes of the foregoing, Anticipation Notes rated SP-1 or, if not rated
by

                                       17
<PAGE>

S&P, rated VMIG-1 by Moody's or F-1+ by Fitch, which do not mature or have a
demand feature exercisable in 30 days and which do not have a long-term rating,
shall be considered to be short-term Municipal Bonds.

  The S&P guidelines require certain minimum issue size and geographical
diversification and impose other requirements for purposes of determining S&P
Eligible Assets. In order to be considered S&P Eligible Assets, Municipal Bonds
must:

    (i) be interest bearing and pay interest at least semi-annually;

    (ii) be payable with respect to principal and interest in U.S. dollars;

    (iii) be publicly rated BBB or higher by S&P or, except in the case of
  Anticipation Notes that are grant anticipation notes or bond anticipation
  notes, which must be rated by S&P to be included in S&P Eligible Assets, if
  not rated by S&P but rated by Moody's or Fitch, be rated at least A by
  Moody's or Fitch (provided that such Moody's-rated or Fitch-rated Municipal
  Bonds will be included in S&P Eligible Assets only to the extent the fair
  market value of such Municipal Bonds does not exceed 50% of the aggregate
  fair market value of the S&P Eligible Assets. For purposes of determining
  the S&P Discount Factors applicable to any such Moody's-rated or Fitch-
  rated Municipal Bonds, such Municipal Bonds will be deemed to have an S&P
  rating that is one full rating category lower than its Moody's rating or
  Fitch rating);

    (iv) not be subject to a covered call or covered put option written by
  the Fund;

    (v) except for inverse floating obligations, not be part of a private
  placement of Municipal Bonds; and

    (vi) except for inverse floating obligations, be part of an issue with an
  original issue size of at least $20 million or, if of an issue with an
  original issue size below $20 million (but in no event below $10 million),
  be issued by an issuer with a total of at least $50 million of securities
  outstanding.

  Notwithstanding the foregoing:

    (i) Municipal Bonds of any one issuer or guarantor (excluding bond
  insurers) will be considered S&P Eligible Assets only to the extent the
  fair market value of such Bonds does not exceed 10% of the aggregate fair
  market value of the S&P Eligible Assets, provided that 2% is added to the
  applicable S&P Discount Factor for every 1% by which the fair market value
  of such Municipal Bonds exceeds 5% of the aggregate fair market value of
  the S&P Eligible Assets; and

    (ii) Municipal Bonds issued by issuers in any one state or territory will
  be considered S&P Eligible Assets only to the extent the fair market value
  of such Municipal Bonds does not exceed 25% of the aggregate fair market
  value of S&P Eligible Assets.

  As discussed herein, the Fund may engage in options or futures transactions.
For so long as any shares of AMPS are rated by S&P, the Fund will not purchase
or sell financial futures contracts, write, purchase or sell options on
financial futures contracts or write put options (except covered put options)
or call options (except covered call options) on portfolio securities unless it
receives written confirmation from S&P that engaging in such transactions will
not impair the ratings then assigned to the shares of AMPS by S&P, except that
the Fund may purchase or sell financial futures contracts based on the Bond
Buyer Municipal Bond Index (the "Municipal Index") or United States Treasury
Bonds or Notes ("Treasury Bonds") and write, purchase or sell put and call
options on such contracts (collectively "S&P Hedging Transactions"), subject to
the following limitations:

    (i) the Fund will not engage in any S&P Hedging Transaction based on the
  Municipal Index (other than transactions that terminate a financial futures
  contract or option held by the Fund by the Fund's taking an opposite
  position thereto ("Closing Transactions")), that would cause the Fund at
  the time of such transaction to own or have sold the least of (A) more than
  1,000 outstanding financial futures contracts based on the Municipal Index,
  (B) outstanding financial futures contracts based on the Municipal Index
  exceeding in number 25% of the quotient of the fair market value of the
  Fund's total assets divided

                                       18
<PAGE>

  by $1,000 or (C) outstanding financial futures contracts based on the
  Municipal Index exceeding in number 10% of the average number of daily
  traded financial futures contracts based on the Municipal Index in the 30
  days preceding the time of effecting such transaction as reported by The
  Wall Street Journal;

    (ii) the Fund will not engage in any S&P Hedging Transaction based on
  Treasury Bonds (other than Closing Transactions) that would cause the Fund
  at the time of such transaction to own or have sold the lesser of (A)
  outstanding financial futures contracts based on Treasury Bonds exceeding
  in number 50% of the quotient of the fair market value of the Fund's total
  assets divided by $100,000 ($200,000 in the case of the two-year United
  States Treasury Note) or (B) outstanding financial futures contracts based
  on Treasury Bonds exceeding in number 10% of the average number of daily
  traded financial futures contracts based on Treasury Bonds in the 30 days
  preceding the time of effecting such transaction as reported by The Wall
  Street Journal;

    (iii) the Fund will engage in Closing Transactions to close out any
  outstanding financial futures contract that the Fund owns or has sold or
  any outstanding option thereon owned by the Fund in the event (A) the Fund
  does not have S&P Eligible Assets with an aggregate Discounted Value equal
  to or greater than the AMPS Basic Maintenance Amount on two consecutive
  Valuation Dates and (B) the Fund is required to pay Variation Margin on the
  second such Valuation Date;

    (iv) the Fund will engage in a Closing Transaction to close out any
  outstanding financial futures contract or option thereon in the month prior
  to the delivery month under the terms of such financial futures contract or
  option thereon unless the Fund holds the securities deliverable under such
  terms; and

    (v) when the Fund writes a financial futures contract or an option
  thereon, it will either maintain an amount of cash, cash equivalents or
  high grade (rated A or better by S&P) fixed-income securities in a
  segregated account with the Fund's custodian, so that the amount so
  segregated plus the amount of Initial Margin and Variation Margin held in
  the account of or on behalf of the Fund's broker with respect to such
  financial futures contract or option equals the fair market value of the
  financial futures contract or option, or, in the event the Fund writes a
  financial futures contract or option thereon that requires delivery of an
  underlying security, it shall hold such underlying security in its
  portfolio.

  For purposes of determining whether the Fund has S&P Eligible Assets with a
Discounted Value that equals or exceeds the AMPS Basic Maintenance Amount, the
Discounted Value of cash or securities held for the payment of Initial Margin
or Variation Margin shall be zero and the aggregate Discounted Value of S&P
Eligible Assets shall be reduced by an amount equal to (i) 30% of the aggregate
settlement value, as marked to market, of any outstanding financial futures
contracts based on the Municipal Index that are owned by the Fund plus (ii) 25%
of the aggregate settlement value, as marked to market, of any outstanding
financial futures contracts based on Treasury Bonds which contracts are owned
by the Fund.

Moody's "aaa" Rating Guidelines

  The Discounted Value of the Fund's Moody's Eligible Assets is calculated on
each Valuation Date. See "Description of AMPS--Asset Maintenance--AMPS Basic
Maintenance Amount." Moody's Eligible Assets include cash, Receivables for
Municipal Bonds (as defined below), and Municipal Bonds eligible for
consideration under Moody's guidelines. For purposes of calculating the
Discounted Value of the Fund's portfolio under current Moody's guidelines, the
fair market value of Municipal Bonds eligible for consideration under such
guidelines must be discounted by the applicable Moody's Discount Factor set
forth in the table below. The Discounted Value of a Municipal Bond eligible for
consideration under Moody's guidelines is the lower of par and the quotient of
the fair market value thereof divided by the Moody's Discount Factor. The
Moody's Discount Factor used to discount a particular Municipal Bond will be
determined by reference to (a) (i) the rating by Moody's or S&P on such Bond or
(ii) in the event the Moody's Eligible Asset is insured under a Policy and the
terms of the Policy permit the Fund, at its option, to obtain other insurance
guaranteeing the timely payment of interest on such Moody's Eligible Asset and
principal thereof to maturity, the Moody's insurance claims-paying ability
rating of the issuer of the Policy or (iii) in the event the Moody's Eligible
Asset

                                       19
<PAGE>

is insured under an insurance policy which guarantees the timely payment of
interest on such Moody's Eligible Asset and principal thereof to maturity, the
Moody's insurance claims-paying ability rating of the issuer of the insurance
policy (provided that for purposes of clauses (ii) and (iii) if the insurance
claims-paying ability of an issuer of a Policy or insurance policy is not rated
by Moody's but is rated by S&P, such issuer shall be deemed to have a Moody's
insurance claims-paying ability rating which is two full categories lower than
the S&P insurance claims-paying ability rating) and (b) the Moody's Exposure
Period. Moody's Discount Factors for a range of Moody's Exposure Periods are
set forth below:

<TABLE>
<CAPTION>
                                 Moody's Discount Factors Rating Category
                           -----------------------------------------------------
 Moody's Exposure Period   Aaa(1) Aa(1) A(1)  Baa(1) Other(2) VMIG-1(3) SP-1+(3)
 -----------------------   ------ ----- ----  ------ -------- --------- --------
 <S>                       <C>    <C>   <C>   <C>    <C>      <C>       <C>
 7 weeks or less.........   151%   159% 168%   202%    229%      136%     148%
 8 weeks or less but
  greater than seven
  weeks..................   154    164  173    205     235       137      149
 9 weeks or less but
  greater than eight
  weeks..................   158    169  179    209     242       138      150
</TABLE>
- --------
(1) Moody's rating.
(2) Municipal Bonds not rated by Moody's but rated BBB-, BBB or BBB+ by S&P.
(3) Municipal Bonds rated MIG-1, VMIG-1 or P-1 or, if not rated by Moody's,
    rated SP-1+ or A-1+ by S&P which do not mature or have a demand feature at
    par exercisable within the Moody's Exposure Period and which do not have a
    long-term rating. For the purposes of the definition of Moody's Eligible
    Assets, these securities will have an assumed rating of A by Moody's.

provided, however, in the event a Moody's Discount Factor applicable to a
Moody's Eligible Asset is determined by reference to an insurance claims-paying
ability rating in accordance with clause (a)(ii) or (a)(iii), such Moody's
Discount Factor shall be increased by an amount equal to 50% of the difference
between (a) the percentage set forth in the foregoing table under the
applicable rating category and (b) the percentage set forth in the foregoing
table under the rating category which is one category lower than the applicable
rating category.

  Since the Moody's Exposure Period currently is 49 days, the Moody's Discount
Factors currently applicable to Municipal Bonds eligible for consideration
under Moody's guidelines will be determined by reference to the factors set
forth opposite the exposure period line entitled "7 weeks or less."
Notwithstanding the foregoing, (i) a 102% Moody's Discount Factor will be
applied to short-term Municipal Bonds, so long as such Municipal Bonds are
rated at least MIG-1, VMIG-1 or P-1 by Moody's and mature or have a demand
feature at par exercisable within the Moody's Exposure Period, and the Moody's
Discount Factor for such Bonds will be 125% if such Bonds are not rated by
Moody's but are rated A-1+, SP-1+ or AA by S&P and mature or have a demand
feature at par exercisable within the Moody's Exposure Period, and (ii) no
Moody's Discount Factor will be applied to cash or to Receivables for Municipal
Bonds Sold. "Receivables for Municipal Bonds Sold," for purposes of calculating
Moody's Eligible Assets as of any Valuation Date, means no more than the
aggregate of the following: (i) the book value of receivables for Municipal
Bonds sold as of or prior to such Valuation Date if such receivables are due
within five Business Days of such Valuation Date, and if the trades which
generated such receivables are (A) settled through clearing house firms with
respect to which the Fund has received prior written authorization from Moody's
or (B) with counterparties having a Moody's long-term debt rating of at least
Baa3; and (ii) the Moody's Discounted Value of Municipal Bonds sold as of or
prior to such Valuation Date that generated receivables, if such receivables
are due within five Business Days of such Valuation Date but do not comply with
either of conditions (A) or (B) of the preceding clause (i).


                                       20
<PAGE>

  The Moody's guidelines impose certain requirements as to minimum issue size,
issuer diversification and geographical concentration, as well as other
requirements for purposes of determining whether Municipal Bonds constitute
Moody's Eligible Assets, as set forth in the table below:

<TABLE>
<CAPTION>
                                                                   Maximum
                                    Minimum       Maximum     State or Territory
                                   Issue Size    Underlying     Concentration
Rating                            ($ Millions) Obligor (%)(1)     (%)(1)(3)
- ------                            ------------ -------------- ------------------
<S>                               <C>          <C>            <C>
Aaa..............................      10           100              100
Aa...............................      10            20               60
A................................      10            10               40
Baa..............................      10             6               20
Other(2).........................      10             4               12
</TABLE>
- --------
(1) The referenced percentages represent maximum cumulative totals for the
    related rating category and each lower rating category.
(2) Municipal Bonds not rated by Moody's but rated BBB-, BBB or BBB+ by S&P.
(3) Territorial bonds (other than those issued by Puerto Rico and counted
    collectively) are each limited to 10% of Moody's Eligible Assets. For
    diversification purposes, Puerto Rico will be treated as a state.

  For purposes of the maximum underlying obligor requirement described above,
any Municipal Bond backed by the guaranty, letter of credit or insurance issued
by a third party will be deemed to be issued by such third party if the
issuance of such third party credit is the sole determinant of the rating on
such Municipal Bond.

  Current Moody's guidelines also require that Municipal Bonds constituting
Moody's Eligible Assets pay interest in cash, be publicly rated Baa or higher
by Moody's or, if not rated by Moody's but rated by S&P, that they be rated at
least BBB- by S&P, not have suspended ratings by Moody's and be part of an
issue of Municipal Bonds of at least $10,000,000. For purposes of determining
the Moody's Discount Factors applicable to any such S&P-rated Municipal Bonds,
such Municipal Bonds (excluding any short-term Municipal Bonds) will be deemed
to have a Moody's rating that is one full rating category lower than its S&P
rating. When the Fund sells a Municipal Bond and agrees to repurchase it at a
future date, the Discounted Value of such Municipal Bond will constitute a
Moody's Eligible Asset and the amount the Fund is required to pay upon
repurchase of such bond will count as a liability for purposes of calculating
the AMPS Basic Maintenance Amount. For so long as the AMPS are rated by
Moody's, the Corporation will not enter into any such reverse repurchase
agreements unless it has received written confirmation from Moody's that such
transactions would not impair the rating then assigned the AMPS by Moody's.
When the Fund purchases a Municipal Bond and agrees to sell it at a future date
to another party, cash receivable by the Fund thereby will constitute a Moody's
Eligible Asset if the long-term debt of such other party is rated at least A2
by Moody's and such agreement has a term of 30 days or less; otherwise the
Discounted Value of such Bond will constitute a Moody's Eligible Asset.

  Notwithstanding the foregoing, an asset will not be considered a Moody's
Eligible Asset if it is (i) held in a margin account, (ii) subject to any
material lien, mortgage, pledge, security interest or security agreement of any
kind, (iii) held for the purchase of a security pursuant to a Forward
Commitment or (iv) irrevocably deposited by the Fund for the payment of
dividends or redemption.

  For so long as shares of AMPS are rated by Moody's, in managing the Fund's
portfolio, the Investment Adviser will not alter the composition of the Fund's
portfolio if, in the reasonable belief of the Investment Adviser, the effect of
any such alteration would be to cause the Fund to have Moody's Eligible Assets
with an aggregate Discounted Value, as of the immediately preceding Valuation
Date, less than the AMPS Basic Maintenance Amount as of such Valuation Date;
provided, however, that in the event that, as of the immediately preceding
Valuation Date, the aggregate Discounted Value of Moody's Eligible Assets
exceeded the AMPS Basic Maintenance Amount by five percent or less, the
Investment Adviser will not alter the composition of the Fund's portfolio in a
manner reasonably expected to reduce the aggregate Discounted Value of Moody's
Eligible Assets unless the Fund shall have confirmed that, after giving effect
to such alteration, the aggregate Discounted Value of Moody's Eligible Assets
would exceed the AMPS Basic Maintenance Amount.

                                       21
<PAGE>

  For so long as any shares of AMPS are rated by Moody's, the Fund will not buy
or sell financial futures contracts, write, purchase or sell call options on
financial futures contracts or purchase put options on financial futures
contracts or write call options (except covered call options) on portfolio
securities unless it receives written confirmation from Moody's that engaging
in such transactions would not impair the ratings then assigned to the shares
of AMPS by Moody's, except that the Fund may purchase or sell exchange-traded
financial futures contracts based on the Municipal Index or Treasury Bonds, and
purchase, write or sell exchange-traded put options on such financial futures
contracts, and purchase, write or sell exchange-traded call options on such
financial futures contracts (collectively "Moody's Hedging Transactions"),
subject to the following limitations:

    (i) the Fund will not engage in any Moody's Hedging Transaction based on
  the Municipal Index (other than Closing Transactions) that would cause the
  Fund at the time of such transaction to own or have sold (A) outstanding
  financial futures contracts based on the Municipal Index exceeding in
  number 10% of the average number of daily traded financial futures
  contracts based on the Municipal Index in the 30 days preceding the time of
  effecting such transaction as reported by The Wall Street Journal or (B)
  outstanding financial futures contracts based on the Municipal Index having
  a fair market value exceeding the fair market value of all Municipal Bonds
  constituting Moody's Eligible Assets owned by the Fund (other than Moody's
  Eligible Assets already subject to a Moody's Hedging Transaction);

    (ii) the Fund will not engage in any Moody's Hedging Transaction based on
  Treasury Bonds (other than Closing Transactions) that would cause the Fund
  at the time of such transaction to own or have sold (A) outstanding
  financial futures contracts based on Treasury Bonds having an aggregate
  Market Value exceeding 40% of the aggregate Market Value of Moody's
  Eligible Assets owned by the Fund and rated Aa by Moody's (or, if not rated
  by Moody's but rated by S&P, rated AAA by S&P) or (B) outstanding financial
  futures contracts based on Treasury Bonds having an aggregate fair market
  value exceeding 80% of the aggregate fair market value of all Municipal
  Bonds constituting Moody's Eligible Assets owned by the Fund (other than
  Moody's Eligible Assets already subject to a Moody's Hedging Transaction)
  and rated Baa or A by Moody's (or, if not rated by Moody's but rated by
  S&P, rated A or AA by S&P) (for purposes of the foregoing clauses (i) and
  (ii), the Fund shall be deemed to own the number of financial futures
  contracts that underlie any outstanding options written by the Fund);

    (iii) the Fund will engage in Closing Transactions to close out any
  outstanding financial futures contract based on the Municipal Index if the
  amount of open interest in the Municipal Index as reported by The Wall
  Street Journal is less than 5,000;

    (iv) the Fund will engage in a Closing Transaction to close out any
  outstanding financial futures contract by no later than the fifth Business
  Day of the month in which such contract expires and will engage in a
  Closing Transaction to close out any outstanding option on a financial
  futures contract by no later than the first Business Day of the month in
  which such option expires;

    (v) the Fund will engage in Moody's Hedging Transactions only with
  respect to financial futures contracts or options thereon having the next
  settlement date or the settlement date immediately thereafter;

    (vi) the Fund will not engage in options and futures transactions for
  leveraging or speculative purposes and will not write any call options or
  sell any financial futures contracts for the purpose of hedging the
  anticipated purchase of an asset prior to completion of such purchase; and

    (vii) the Fund will not enter into an option or futures transaction
  unless, after giving effect thereto, the Fund would continue to have
  Moody's Eligible Assets with an aggregate Discounted Value equal to or
  greater than the AMPS Basic Maintenance Amount.

  For purposes of determining whether the Fund has Moody's Eligible Assets with
an aggregate Discounted Value that equals or exceeds the AMPS Basic Maintenance
Amount, the Discounted Value of Moody's Eligible Assets that the Fund is
obligated to deliver or receive pursuant to an outstanding futures contract or
option shall be as follows: (i) assets subject to call options written by the
Fund that are either exchange-traded and "readily reversible" or that expire
within 49 days after the date as of which such valuation is made shall be
valued at the lesser of (A) Discounted Value and (B) the exercise price of the
call option written by the Fund; (ii) assets

                                       22
<PAGE>

subject to call options written by the Fund not meeting the requirements of
clause (i) of this sentence shall have no value; (iii) assets subject to put
options written by the Fund shall be valued at the lesser of (A) the exercise
price and (B) the Discounted Value of the subject security; (iv) futures
contracts shall be valued at the lesser of (A) settlement price and (B) the
Discounted Value of the subject security, provided that, if a contract matures
within 49 days after the date as of which such valuation is made, where the
Fund is the seller the contract may be valued at the settlement price and where
the Fund is the buyer the contract may be valued at the Discounted Value of the
subject securities; and (v) where delivery may be made to the Fund with any
security of a class of securities, the Fund shall assume that it will take
delivery of the security with the lowest Discounted Value.

  For purposes of determining whether the Fund has Moody's Eligible Assets with
an aggregate Discounted Value that equals or exceeds the AMPS Basic Maintenance
Amount, the following amounts shall be subtracted from the aggregate Discounted
Value of the Moody's Eligible Assets held by the Fund: 10% of the exercise
price of a written call option; (ii) the exercise price of any written put
option; (iii) where the Fund is the seller under a financial futures contract,
10% of the settlement price of the financial futures contract; (iv) where the
Fund is the purchaser under a financial futures contract, the settlement price
of assets purchased under such financial futures contract; (v) the settlement
price of the underlying financial futures contract if the Fund writes put
options on a financial futures contract; and (vi) 105% of the fair market value
of the underlying financial futures contracts if the Fund writes call options
on a financial futures contract and does not own the underlying contract.

  For so long as any shares of AMPS are rated by Moody's, the Fund will not
enter into any contract to purchase securities for a fixed price at a future
date beyond customary settlement time (other than such contracts that
constitute Moody's Hedging Transactions), except that the Fund may enter into
such contracts to purchase newly-issued securities on the date such securities
are issued ("Forward Commitments"), subject to the following limitations:

    (i) the Fund will maintain in a segregated account with its custodian
  cash, cash equivalents or short term, fixed-income securities rated P-1,
  MIG-1 or VMIG-1 by Moody's and maturing prior to the date of the Forward
  Commitment with a fair market value that equals or exceeds the amount of
  the Fund's obligations under any Forward Commitments to which it is from
  time to time a party or long-term, fixed income securities with a
  Discounted Value that equals or exceeds the amount of the Fund's
  obligations under any Forward Commitment to which it is from time to time a
  party, and

    (ii) the Fund will not enter into a Forward Commitment unless, after
  giving effect thereto, the Fund would continue to have Moody's Eligible
  Assets with an aggregate Discounted Value equal to or greater than the AMPS
  Basic Maintenance Amount.

  For purposes of determining whether the Fund has Moody's Eligible Assets with
an aggregate Discounted Value that equals or exceeds the AMPS Basic Maintenance
Amount, the Discounted Value of all Forward Commitments to which the Fund is a
party and of all securities deliverable to the Fund pursuant to such Forward
Commitments shall be zero.

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

  For so long as shares of AMPS are rated by S&P or Moody's, the Fund, unless
it has received written confirmation from S&P and/or Moody's, as the case may
be, that such action would not impair the ratings then assigned to the AMPS by
S&P and/or Moody's, as the case may be, will not (i) borrow money except for
the purpose of clearing transactions in portfolio securities (which borrowings
under any circumstances shall be limited to the lesser of $10 million and an
amount equal to 5% of the fair market value of the Fund's assets at the time of
such borrowings and which borrowings shall be repaid within 60 days and not be
extended or renewed and shall not cause the aggregate Discounted Value of
Moody's Eligible Assets and S&P Eligible Assets to be less than the AMPS Basic
Maintenance Amount), (ii) engage in short sales of securities, (iii) lend any
securities, (iv) issue any class or series of stock ranking prior to or on a
parity with the AMPS with respect to the payment of dividends or the
distribution of assets upon dissolution, liquidation or winding up of the Fund,
(v) reissue any AMPS previously purchased or redeemed by the Fund, (vi) merge
or consolidate into or with any other corporation or entity, (vii) change the
Fund's pricing service or (viii) engage in reverse repurchase agreements.

                                       23
<PAGE>

                             DIRECTORS AND OFFICERS

  Information about the Directors, executive officers and the portfolio
managers of the Fund, including their ages and their principal occupations
during the last five years is set forth below. Unless otherwise noted, the
address of each Director, executive officer and portfolio manager is 800
Scudders Mill Road, Plainsboro, New Jersey 08536.

  Terry K. Glenn (58)--President and Director (1)(2)--Executive Vice President
of the Investment Adviser and Merrill Lynch Asset Management, L.P. ("MLAM")
(which terms as used herein include their corporate predecessors) since 1983;
Executive Vice President and Director of Princeton Services, Inc. ("Princeton
Services") since 1993; President of Princeton Funds Distributor, Inc. ("PFD")
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. 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 (46)--Director (2)--Harvard Business School, Soldiers
Field Road, Boston, Massachusetts 02163. 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, UNUM Corporation since 1990 and Director of Newell Co. since 1995.

  Charles C. Reilly (67)--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.

  Kevin A. Ryan (66)--Director (2)--127 Commonwealth Avenue, Chestnut Hill,
Massachusetts 02167. Founder and current Emeritus Director and Professor
Emeritus of The Boston University Center for the 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., Vornado Operating
Company and Alexander's Inc.

  Arthur Zeikel (67)--Director (1)(2)--Chairman of the Investment Adviser and
MLAM from 1997 to 1999; President of the Investment Adviser and MLAM from 1977
to 1997; Chairman of Princeton Services from 1997 to 1999, Director thereof
from 1993 to 1999 and President thereof from 1993 to 1997; Executive Vice
President of ML & Co., Inc. from 1990 to 1999.

  Vincent R. Giordano (54)--Senior Vice President (1)(2)--Senior Vice President
of the Investment Adviser and MLAM since 1984; Senior Vice President of
Princeton Services since 1993.

  Kenneth A. Jacob (48)--Vice President (1)(2)--First Vice President of MLAM
since 1997; Vice President of MLAM from 1984 to 1997; Vice President of the
Investment Adviser since 1984.

  Robert A. DiMella, CFA (32)--Vice President (1)(2)--Vice President of MLAM
since 1997; Assistant Vice President of MLAM from 1995 to 1997; Assistant
Portfolio Manager of MLAM from 1993 to 1995.

                                       24
<PAGE>

  William R. Bock (63)--Vice President and Portfolio Manager (1)(2)--Vice
President of MLAM since 1989.

  Donald C. Burke (39)--Vice President and Treasurer (1)(2)--Senior Vice
President and Treasurer of the Investment Adviser and MLAM since 1999; Senior
Vice President and Treasurer of Princeton Services since 1999; Vice President
of PFD since 1999; First Vice President of Investment Adviser and MLAM from
1997 to 1999; Vice President of MLAM from 1990 to 1997 and Director of
Taxation of MLAM since 1990.

  William E. Zitelli, Jr. (31)--Secretary (1)(2)--Attorney associated with the
Investment Adviser since 1998; Attorney associated with Pepper Hamilton LLP
from 1997 to 1998; Attorney associated with Reboul, MacMurray, Hewitt, Maynard
and Kristol from 1994 to 1997.
- --------
(1) Interested person, as defined in the 1940 Act, of the Fund.
(2) Such Director or officer is a director, trustee or officer of one or more
    additional investment companies for which the Investment Adviser or its
    affiliate, MLAM, acts as investment adviser or manager.

  In connection with the election of the Fund's Directors, holders of shares
of AMPS and other preferred stock, voting as a separate class, are entitled to
elect two of the Fund's Directors, and the remaining Directors will be elected
by holders of common stock and preferred stock voting together as a single
class. Messrs. Mintz and Seiden have been designated as the Directors to be
elected by holders of the preferred stock. See "Description of Capital Stock"
in the prospectus.

Compensation of Directors

  Pursuant to an Investment Advisory Agreement with the Fund, the Investment
Adviser pays all compensation of officers and employees of the Fund as well as
the fees of all Directors who are affiliated persons of ML & Co. or its
subsidiaries.

  The Fund pays each Director not affiliated with the Investment Adviser (each
a "non-affiliated Director") a fee of $2,000 per year plus $200 per meeting
attended, and pays all Director's out-of-pocket expenses relating to
attendance at meetings. The Fund also pays members of the Board's audit and
nominating committee (the "Committee"), which consists of all the non-
affiliated Directors, an annual fee of $800. The Chairman of the Committee
receives an additional annual fee of $1,000 per year.

  The following table sets forth compensation to be paid by the Fund to the
non-affiliated Directors projected through the end of the Fund's first full
fiscal year and for the calendar year ended December 31, 1998 the aggregate
compensation paid by all investment companies advised by the Investment
Adviser and its affiliate, MLAM ("FAM/MLAM Advised Funds"), to the non-
affiliated Directors.

<TABLE>
<CAPTION>
                                                            Total Compensation
                                            Pension or        from Fund and
                            Aggregate   Retirement Benefits  FAM/MLAM Advised
                           Compensation Accrued as Part of    Funds Paid to
Name of Director            from Fund      Fund Expense         Directors
- ----------------           ------------ ------------------- ------------------
<S>                        <C>          <C>                 <C>
Ronald W. Forbes(/1/).....    3,600            None              $192,567
Cynthia A.
 Montgomery(/1/)..........    3,600            None              $192,567
Charles C. Reilly(/1/)....    4,600            None              $362,858
Kevin A. Ryan(/1/)........    3,600            None              $192,567
Richard R. West(/1/)......    3,600            None              $334,125
</TABLE>
- --------
(1) In addition to the Fund, the Directors serve on the boards of other
    FAM/MLAM Advised Funds as follows: Mr. Forbes (43 registered investment
    companies consisting of 56 portfolios); Ms. Montgomery (43 registered
    investment companies consisting of 56 portfolios); Mr. Reilly (62
    registered investment companies consisting of 75 portfolios); Mr. Ryan (43
    registered investment companies consisting of 56 portfolios); and Mr. West
    (64 registered investment companies consisting of 89 portfolios).

                                      25
<PAGE>

                INVESTMENT ADVISORY AND MANAGEMENT ARRANGEMENTS

  The Fund has entered into an Investment Advisory Agreement with the
Investment Adviser. The Fund pays the Investment Adviser a monthly fee at an
annual rate of 0.55 of 1% of the Fund's average weekly net assets (i.e., the
average weekly value of the total assets of the Fund, including proceeds from
the issuance of shares of preferred stock, minus the sum of accrued liabilities
of the Fund and accumulated dividends on the shares of preferred stock).

  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 investment and
economic research, trading and investment management of the Fund, as well as
the compensation of all Directors of the Fund who are affiliated persons of the
Investment Adviser or any of its affiliates. The Fund pays all other expenses
incurred in the operation of the Fund, including, among other things, expenses
for legal and auditing services, taxes, costs of printing proxies, listing
fees, if any, stock certificates and shareholder reports, charges of the
custodian and the transfer and dividend disbursing agent and registrar, fees
and expenses with respect to the issuance of preferred stock, Securities and
Exchange Commission fees, fees and expenses of non-interested Directors,
accounting and pricing costs, insurance, interest, brokerage costs, litigation
and other extraordinary or non-recurring expenses, mailing and other expenses
properly payable by the Fund. Accounting services are provided to the Fund by
the Investment Adviser, and the Fund reimburses the Investment Adviser for its
costs in connection with such services.

  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 will remain in effect from year to year thereafter 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 1940 Act)
of any such party. Such contract is not assignable and may be terminated
without penalty on 60 days' written notice at the option of either party
thereto or by the vote of the shareholders of the Fund.

  Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Investment Adviser or its affiliates act as an adviser. Because of different
objectives or other factors, a particular security may be bought for an
advisory client when other clients are selling the same security. If purchases
or sales of securities by the Investment Adviser for the Fund or other funds
for which it acts as investment adviser or for other 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. Transactions effected by the Investment Adviser (or
its affiliates) on behalf of more than one of its clients during the same
period may increase the demand for securities being purchased or the supply of
securities being sold, causing an adverse effect on price.

Code of Ethics

  The Board of Directors of the Fund has adopted a Code of Ethics pursuant to
Rule 17j-1 under the 1940 Act that incorporates the Code of Ethics of the
Investment Adviser (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 U.S.
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 securities. In addition, no employee may purchase or sell any
security that 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" that 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).

                                       26
<PAGE>

                             PORTFOLIO TRANSACTIONS

  Subject to policies established by the Board of Directors of the Fund, the
Investment Adviser is primarily responsible for the execution of the Fund's
portfolio transactions. In executing such transactions, the Investment Adviser
seeks to obtain the best 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 does not necessarily pay the lowest commission or spread available.

  The Fund has no obligation to deal with any broker or dealer in the execution
of transactions in portfolio securities. Subject to providing the best price
and execution, securities firms that provide investment research to the
Investment Adviser, including Merrill Lynch, may receive orders for
transactions by the Fund. Research information provided to the Investment
Adviser by securities firms is supplemental. It does not replace or reduce the
level of service performed by the Investment Adviser and the expenses of the
Investment Adviser will not necessarily be reduced because it receives
supplemental research information.

  The Fund invests in securities traded in the over-the-counter markets, and
the Fund intends to deal directly with dealers who make markets in the
securities involved, except in those circumstances where better prices and
execution are available elsewhere. Under the 1940 Act, except as permitted by
exemptive order, persons affiliated with the Fund, including Merrill Lynch, are
prohibited from dealing with the Fund as principal in the purchase and sale of
securities. Since transactions in the over-the-counter market usually involve
transactions with dealers acting as principals for their own accounts, the Fund
does not deal with Merrill Lynch and its affiliates in connection with such
transactions except that, pursuant to exemptive orders obtained by the
Investment Adviser, the Fund may engage in principal transactions with the
Underwriter in high quality, short-term, tax-exempt securities. See "Investment
Restrictions." However, affiliated persons of the Fund, including Merrill
Lynch, may serve as its brokers in certain over-the-counter transactions
conducted on an agency basis.

  The Fund also may purchase tax-exempt debt instruments in individually
negotiated transactions with the issuer. Because an active trading market may
not exist for such securities, the prices that the Fund may pay for these
securities or receive on their resale may be lower than that for similar
securities with a more liquid market.

Portfolio Turnover

  The Fund may dispose of securities without regard to the time they have been
held when such action, for defensive or other reasons, appears advisable to the
Investment Adviser. While it is not possible to predict turnover rates with any
certainty, presently it is anticipated that the Fund's annual portfolio
turnover rate, under normal circumstances should be less than 100%. (The
portfolio turnover rate is calculated by dividing the lesser of purchases or
sales of portfolio securities for the particular fiscal year by the monthly
average of the value of the portfolio securities owned by the Fund during the
particular fiscal year. For purposes of determining this rate, all securities
whose maturities at the time of acquisition are one year or less are excluded.)
A high portfolio turnover rate results in greater transaction costs, which are
borne directly by the Fund and also has certain tax consequences for
shareholders.

                                     TAXES

General

  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, as amended (the "Code"). As long as it so qualifies, in any
taxable year in which it distributes at least 90% of its taxable net income and
90% of its tax-exempt net income (see below), the Fund (but not its
shareholders) will not be subject to Federal income tax to the extent that it
distributes its net investment income and net realized capital gains. The Fund
intends to distribute substantially all of such income.

                                       27
<PAGE>

  The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year-end, plus certain undistributed
amounts from previous years. The required distributions, however, are based
only on the taxable income of a RIC. The excise tax, therefore, generally will
not apply to the tax-exempt income of a RIC, such as the Fund, that pays
exempt-interest dividends.

  The Internal Revenue Service (the "IRS"), in a revenue ruling, held that
certain auction rate preferred stock would be treated as stock for Federal
income tax purposes. The terms of the AMPS are substantially similar, but not
identical, to the auction rate preferred stock discussed in the revenue ruling,
and in the opinion of Brown & Wood LLP, counsel to the Fund, the shares of AMPS
will constitute stock of the Fund and distributions with respect to shares of
AMPS (other than distributions in redemption of shares of AMPS subject to
Section 302(b) of the Code) will constitute dividends to the extent of the
Fund's current and accumulated earnings and profits as calculated for Federal
income tax purposes. Nevertheless, it is possible that the IRS might take a
contrary position, asserting, for example, that the shares of AMPS constitute
debt of the Fund. If this position were upheld, the discussion of the treatment
of distributions below would not apply. Instead, distributions by the Fund to
holders of shares of AMPS would constitute interest, whether or not they
exceeded the earnings and profits of the Fund, would be included in full in the
income of the recipient and would be taxed as ordinary income. Counsel believes
that such a position, if asserted by the IRS, would be unlikely to prevail.

  The Fund intends to qualify to pay "exempt-interest dividends" as defined in
Section 852(b)(5) of the Code. Under such section if, at the close of each
quarter of its taxable year, at least 50% of the value of its total assets
consists of obligations the interest on which is excludable from gross income
for Federal income tax purposes ("tax-exempt obligations") under Section 103(a)
of the Code (relating generally to obligations of a state or local governmental
unit), the Fund shall be qualified to pay exempt-interest dividends to its
shareholders. Exempt-interest dividends are dividends or any part thereof paid
by the Fund which are attributable to interest on tax-exempt obligations and
designated by the Fund as exempt-interest dividends in a written notice mailed
to the Fund's shareholders within 60 days after the close of its taxable year.
To the extent that the dividends distributed to the Fund's shareholders are
derived from interest income excludable from gross income for Federal income
tax purposes under Code Section 103(a) and are properly designated as exempt-
interest dividends, they will be excludable from a shareholder's gross income
for Federal tax purposes. Exempt-interest dividends are included, however, in
determining the portion, if any, of a person's social security and railroad
retirement benefits subject to Federal income taxes. Each shareholder is
advised to consult a tax adviser with respect to whether exempt-interest
dividends retain the exclusion under Code Section 103(a) if such shareholder
would be treated as a "substantial user" or "related person" under Code Section
147(a) with respect to property financed with the proceeds of an issue of PABs
or IDBs, if any, held by the Fund.

  To the extent that the Fund's distributions are derived from interest on its
taxable investments or from an excess of net short-term capital gains over net
long-term capital losses ("ordinary income dividends"), such distributions are
considered ordinary income for Federal income tax purposes. Distributions, if
any, from an excess of net long-term capital gains over net short-term capital
losses derived from the sale of securities or from certain transactions in
futures or options ("capital gain dividends") are taxable as long-term capital
gains for Federal income tax purposes, regardless of the length of time the
shareholder has owned Fund shares. Certain categories of capital gains are
taxable at different rates. Generally not later than 60 days after the close of
its taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any exempt-interest dividends and capital gain
dividends, as well as any amount of capital gain dividends in the different
categories of capital gain referred to above. Distributions by the Fund,
whether from exempt-interest dividends or capital gains, are not eligible for
the dividends received deduction allowed to corporations under the Code.

  All or a portion of the Fund's gain from the sale or redemption of tax-exempt
obligations purchased at a market discount will be treated as ordinary income
rather than capital gain. This rule may increase the amount

                                       28
<PAGE>

of ordinary income dividends received by shareholders. Distributions 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). Any loss upon the sale or exchange of Fund shares held for six
months or less will be disallowed to the extent of any exempt-interest
dividends received by the shareholder. In addition, any such loss that is not
disallowed under the rule stated above will be treated as long-term capital
loss to the extent of any capital gain dividends received by the shareholder.
If the Fund pays a dividend in January which was declared in the previous
October, November or December to shareholders of record on a specified date in
one of such months, then such dividend will be treated for tax purposes as
being paid by the Fund and received by its shareholders on December 31 of the
year in which such dividend was declared.

  The IRS has taken the position in a revenue ruling that if a RIC has two or
more classes of shares, it may designate distributions made to each class in
any year as consisting of no more than such class's proportionate share of
particular types of income, including exempt interest and net long-term capital
gains. A class's proportionate share of a particular type of income is
determined according to the percentage of total dividends paid by the RIC
during such year that was paid to such class. Thus, the Fund is required to
allocate a portion of its net capital gains and other taxable income to the
shares of AMPS. The Fund generally will notify the Auction Agent of the amount
of any net capital gains and other taxable income to be included in any
dividend on shares of AMPS prior to the Auction establishing the Applicable
Rate for such dividend. Except for the portion of any dividend that it informs
the Auction Agent will be treated as capital gains or other taxable income, the
Fund anticipates that the dividends paid on the shares of AMPS will constitute
exempt-interest dividends. The amount of net capital gains and ordinary income
allocable to shares of AMPS (the "taxable distribution") will depend upon the
amount of such gains and income realized by the Fund and the total dividends
paid by the Fund on shares of Common Stock and shares of AMPS during a taxable
year, but the taxable distribution generally is not expected to be significant.

  In the opinion of Brown & Wood LLP, counsel to the Fund, under current law
the manner in which the Fund intends to allocate items of tax-exempt income,
net capital gains and other taxable income, if any, among shares of Common
Stock and shares of AMPS will be respected for Federal income tax purposes.
However, the tax treatment of Additional Dividends may affect the Fund's
calculation of each class' allocable share of capital gains and other taxable
income. See "Tax Treatment of Additional Dividends." In addition, there is
currently no direct guidance from the IRS or other sources specifically
addressing whether the Fund's method for allocating tax-exempt income, net
capital gains and other taxable income among shares of Common Stock and shares
of AMPS will be respected for Federal income tax purposes, and it is possible
that the IRS could disagree with counsel's opinion and attempt to reallocate
the Fund's net capital gains or other taxable income. In the event of a
reallocation, some of the dividends identified by the Fund as exempt-interest
dividends to holders of shares of AMPS may be recharacterized as additional
capital gains or other taxable income. In the event of such recharacterization,
the Fund would not be required to make payments to such shareholders to offset
the tax effect of such reallocation. In addition, a reallocation may cause the
Fund to be liable for income tax and excise tax on any reallocated taxable
income. Brown & Wood LLP has advised the Fund that, in its opinion, if the IRS
were to challenge in court the Fund's allocations of income and gain, the IRS
would be unlikely to prevail. A holder should be aware, however, that the
opinion of Brown & Wood LLP represents only its best legal judgment and is not
binding on the IRS or the courts.

  The Code subjects interest received on certain otherwise tax-exempt
securities to a Federal alternative minimum tax. The Federal alternative
minimum tax applies to interest received on "private activity bonds" issued
after August 7, 1986. Private activity bonds are bonds which, although tax-
exempt, are used for purposes other than those performed by governmental units
and which benefit non-governmental entities (e.g., bonds used for industrial
development or housing purposes). Income received on such bonds is classified
as an item of "tax preference" which could subject certain investors in such
bonds, including shareholders of the Fund, to an increased Federal alternative
minimum tax. The Fund intends to purchase such "private activity bonds" and
will report to shareholders within 60 days after calendar year-end the portion
of its dividends declared during

                                       29
<PAGE>

the year which constitutes an item of tax preference for Federal alternative
minimum tax purposes. The Code further provides that corporations are subject
to a Federal alternative minimum tax based, in part, on certain differences
between taxable income as adjusted for other tax preferences and the
corporation's "adjusted current earnings", which more closely reflect a
corporation's economic income. Because an exempt-interest dividend paid by the
Fund will be included in adjusted current earnings, a corporate shareholder may
be required to pay a Federal alternative minimum tax on exempt-interest
dividends paid by the Fund.

  The Fund may invest in instruments the return on which includes
nontraditional features such as indexed principal or interest payments
("nontraditional instruments"). These instruments may be subject to special tax
rules under which the Fund may be required to accrue and distribute income
before amounts due under the obligations are paid. In addition, it is possible
that all or a portion of the interest payments on such nontraditional
instruments could be recharacterized as taxable ordinary income.

  If at any time when shares of AMPS are outstanding the Fund does not meet the
asset coverage requirements of the 1940 Act, the Fund will be required to
suspend distributions to holders of Common Stock until the asset coverage is
restored. See "Description of AMPS--Dividends--Restrictions on Dividends and
Other Payments." This may prevent the Fund from distributing at least 90% of
its net income, and may, therefore, jeopardize the Fund's qualification for
taxation as a RIC. If the Fund were to fail to qualify as a RIC, some or all of
the distributions paid by the Fund would be fully taxable for Federal income
tax purposes. Upon any failure to meet the asset coverage requirements of the
1940 Act, the Fund, in its sole discretion, may, and under certain
circumstances will be required to, redeem shares of AMPS in order to maintain
or restore the requisite asset coverage and avoid the adverse consequences to
the Fund and its shareholders of failing to qualify as a RIC. See "Description
of AMPS--Redemption." There can be no assurance, however, that any such action
would achieve such objectives.

  As noted above, the Fund must distribute annually at least 90% of its net
taxable and tax-exempt interest income. A distribution will only be counted for
this purpose if it qualifies for the dividends paid deduction under the Code.
Some types of preferred stock that the Fund currently contemplates issuing may
raise an issue as to whether distributions on such preferred stock are
"preferential" under the Code and therefore not eligible for the dividends paid
deduction. The Fund intends to issue preferred stock that counsel advises will
not result in the payment of a preferential dividend and may seek a private
letter ruling from the IRS to that effect. If the Fund ultimately relies solely
on a legal opinion when it issues such preferred stock, there is no assurance
that the IRS would agree that dividends on the preferred stock are not
preferential. If the IRS successfully disallowed the dividends paid deduction
for dividends on the preferred stock, the Fund could lose the benefit of the
special treatment afforded RICs under the Code. In this case, dividends paid by
the Fund would not be exempt from Federal income taxes. Additionally, the Fund
would be subject to the alternative minimum tax.

  Under certain Code provisions, some taxpayers may be subject to a 31%
withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is 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 penalty of perjury that such number is correct and
that such investor is not otherwise subject to backup withholding.

  Ordinary income 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 advisers concerning the applicability of the United States
withholding tax.

  The Code provides that every shareholder required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Fund) during the taxable
year.

                                       30
<PAGE>

Tax Treatment of Additional Dividends

  If the Fund makes a Retroactive Taxable Allocation, it will pay Additional
Dividends to holders of shares of AMPS who are subject to the Retroactive
Taxable Allocation. See "Description of AMPS--Dividends--Additional Dividends"
in the prospectus. The Federal income tax consequences of Additional Dividends
under existing law are uncertain. The Fund intends to treat a holder as
receiving a dividend distribution in the amount of any Additional Dividend only
as and when such Additional Dividend is paid. An Additional Dividend generally
will be designated by the Fund as an exempt-interest divided except as
otherwise required by applicable law. However, the IRS may assert that all or
part of an Additional Dividend is a taxable dividend either in the taxable year
for which the Retroactive Taxable Allocation is made or in the taxable year in
which the Additional Dividend is paid.

Tax Treatment of Options and Futures Transactions

  The Fund may purchase or sell municipal bond index financial futures
contracts and interest rate financial futures contracts on U.S. Government
securities. The Fund may also purchase and write call and put options on such
financial futures contracts. In general, unless an election is available to the
Fund or an exception applies, such options and financial futures contracts that
are "Section 1256 contracts" will be "marked to market" for Federal income tax
purposes at the end of each taxable year, i.e., each such option or financial
futures contract will be treated as sold for its fair market value on the last
day of the taxable year, and any gain or loss attributable to Section 1256
contracts will be 60% long-term and 40% short-term capital gain or loss.
Application of these rules to Section 1256 contracts held by the Fund may alter
the timing and character of distributions to shareholders. The mark-to-market
rules outlined above, however, will not apply to certain transactions entered
into by the Fund solely to reduce the risk of changes in price or interest
rates with respect to its investments.

  Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and transactions in financial
futures contracts and related options. Under Section 1092, the Fund may be
required to postpone recognition for tax purposes of losses incurred in certain
sales of securities and certain closing transactions in financial futures
contracts or the related options.

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

  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 Code sections,
the Treasury Regulations promulgated thereunder. The Code and the Treasury
Regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.

  Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes.

                                NET ASSET VALUE

  Net asset value per share of common stock is determined after the close of
business on the New York Stock Exchange (the "NYSE") (generally, the NYSE
closes at 4:00 p.m. Eastern time) on the last Business Day of each week. For
purposes of determining the net asset value of a share of common stock, the
value of the securities held by the Fund plus any cash or other assets
(including interest accrued but not yet received) minus all liabilities
(including accrued expenses) and the aggregate liquidation value of the
outstanding shares of AMPS is divided by the total number of shares of common
stock outstanding at such time. Expenses, including the fees payable to the
Investment Adviser, are accrued daily.

  The Municipal Bonds in which the Fund invests are traded primarily in the
over-the-counter markets. In determining net asset value, the Fund utilizes the
valuations of portfolio securities furnished by a pricing service approved by
the Board of Directors. The pricing service typically values portfolio
securities at the bid

                                       31
<PAGE>

price or the yield equivalent when quotations are readily available. Municipal
Bonds for which quotations are not readily available are valued at fair market
value on a consistent basis as determined by the pricing service using a matrix
system to determine valuations. The procedures of the pricing service and its
valuations are reviewed by the officers of the Fund under the general
supervision of the Board of Directors. The Board of Directors has determined in
good faith that the use of a pricing service is a fair method of determining
the valuation of portfolio securities. Positions in futures contracts are
valued at closing prices for such contracts established by the exchange on
which they are traded, or if market quotations are not readily available, are
valued at fair value on a consistent basis using methods determined in good
faith by the Board of Directors.

  The Fund determines and makes available for publication the net asset value
of its common stock weekly. Currently, the net asset values of shares of
publicly traded closed-end investment companies investing in debt securities
are published in Barron's, the Monday edition of The Wall Street Journal, and
the Monday and Saturday editions of The New York Times.

                             ADDITIONAL INFORMATION

  The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act and in accordance therewith is required
to file reports, proxy statements and other information with the Commission.
Any such reports, proxy statements and other information can be inspected and
copied at the public reference facilities of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following regional offices of the Commission: Regional Office, at Seven World
Trade Center, Suite 1300, New York, New York 10048; Pacific Regional Office, at
5670 Wilshire Boulevard, 11th Floor, Los Angeles, California 90036; and Midwest
Regional Office, at Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies of such materials can be obtained
from the public reference section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission maintains a Web
site at http://www.sec.gov containing reports, proxy and information statements
and other information regarding registrants, including the Fund, that file
electronically with the Commission. Reports, proxy statements and other
information concerning the Fund can also be inspected at the offices of the New
York Stock Exchange, 20 Broad Street, New York, New York 10005.

  Additional information regarding the Fund and the shares of AMPS is contained
in the Registration Statement on Form N-2, including amendments, exhibits and
schedules thereto, relating to such shares filed by the Fund with the
Commission in Washington, D.C. This statement of additional information and the
prospectus do not contain all of the information set forth in the Registration
Statement, including any amendments, exhibits and schedules thereto. For
further information with respect to the Fund and the shares offered hereby,
reference is made to the Registration Statement. Statements contained in this
statement of additional information and the prospectus as to the contents of
any contract or other document referred to are not necessarily complete and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. A copy of the Registration
Statement may be inspected without charge at the Commission's principal office
in Washington, D.C., and copies of all or any part thereof may be obtained from
the Commission upon the payment of certain fees prescribed by the Commission.

                                       32
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholder of
 MuniHoldings Insured Fund IV, Inc.:

We have audited the accompanying statement of assets, liabilities and capital
of MuniHoldings Insured Fund IV, Inc. as of September 14, 1999. This statement
of assets, liabilities and capital is the responsibility of the Fund's
management. Our responsibility is to express an opinion on this statement of
assets, liabilities and capital based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of assets, liabilities and
capital is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the statement of
assets, liabilities and capital. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall statement of assets, liabilities and capital
presentation. We believe that our audit provides a reasonable basis for our
opinion.

In our opinion, the statement of assets, liabilities and capital referred to
above presents fairly, in all material respects, the financial position of
MuniHoldings Insured Fund IV, Inc. at September 14, 1999 in conformity with
generally accepted accounting principles.

                                          Ernst & Young LLP

MetroPark, New Jersey
September 20, 1999


                                       33
<PAGE>

                       MUNIHOLDINGS INSURED FUND IV, INC.

                  Statement of Assets, Liabilities and Capital

                               September 14, 1999
                                 (in Thousands)
<TABLE>
<S>                                                                    <C>
Assets
  Cash................................................................ $100,005
  Offering costs (Note 1).............................................  130,000
                                                                       --------
    Total assets......................................................  230,005
                                                                       --------
Liabilities
  Liabilities and accrued expenses (Note 1)...........................  130,000
                                                                       --------
Net Assets............................................................ $100,005
                                                                       ========
Capital
  Common Stock, par value $.10 per share; 200,000,000 shares
   authorized; 6,667 shares issued and outstanding (Note 1)........... $    667
  Paid-in Capital in excess of par....................................   99,338
                                                                       --------
  Total Capital-Equivalent to $15.00 net asset value per share of
   Common Stock (Note 1).............................................. $100,005
                                                                       ========
</TABLE>


             Notes to Statement of Assets, Liabilities and Capital

Note 1. Organization

  The Fund was incorporated under the laws of the State of Maryland on August
16, 1999 as a closed-end, non-diversified management investment company and has
had no operations other than the sale to Fund Asset Management, L.P. (the
"Investment Adviser") of an aggregate of 6,667 shares of Common Stock for
$100,005 on September 14, 1999. The General Partner of the Investment Adviser
is an indirectly wholly-owned subsidiary of Merrill Lynch & Co., Inc.

  The Investment Adviser, on behalf of the Fund, will incur organization costs
estimated at $30,250. Direct costs relating to the public offering of the
Fund's shares will be charged to capital at the time of issuance of shares.

Note 2. Management Arrangements

  The Fund has engaged the Investment Adviser to provide investment advisory
and management services to the Fund. The Investment Adviser will receive a
monthly fee for advisory services, at the annual rate of 0.55 of 1% of the
average weekly net assets of the Fund, including any proceeds from the issuance
of Preferred Stock. The Investment Adviser or an affiliate will pay Merrill
Lynch, Pierce, Fenner & Smith Incorporated a commission in the amount of 2.00%
of the price to the public in connection with the initial public offering of
the Fund's Common Stock.

Note 3. Federal Income Taxes

  The Fund intends to qualify as a "regulated investment company" and as such
(and by complying with the applicable provisions of the Internal Revenue Code
of 1986, as amended) will not be subject to Federal income tax on taxable
income (including realized capital gains) that is distributed to shareholders.

                                       34
<PAGE>

                       MUNIHOLDINGS INSURED FUND IV, INC.

                      SCHEDULE OF INVESTMENTS (Unaudited)

                               September 24, 1999
                                 (in Thousands)

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                              Value
                              S&P   Moody's  Face                             (Note
                            Ratings Ratings Amount      Issue                  1a)
                            ------- ------- ------ ------------------------   ------
 <C>                        <C>     <C>     <C>    <S>                        <C>
 Alabama--4.1%                AAA   Aaa     $2,000 Jefferson County,
                                                   Alabama, Sewer Revenue
                                                   Bonds, Series D, 5.75%
                                                   due 2/01/2027              $1,978
- --------------------------------------------------------------------------------
 California--10.0%           A-1+   VMIG1+   4,800 California State
                                                   Economic Development
                                                   Financing Authority
                                                   Revenue Bonds
                                                   (California Independent
                                                   Systems Project), VRDN,
                                                   Series A, 4.20% due
                                                   4/01/2008(e)                4,800
- --------------------------------------------------------------------------------
 Colorado--5.2%              A-1+   VMIG1+   2,500 Moffat County, Colorado,
                                                   PCR, Refunding
                                                   (Pacificorp Projects),
                                                   VRDN, 4.25% due
                                                   5/01/2013(a)(e)             2,500
- --------------------------------------------------------------------------------
 District of Columbia--4.4%  A-1+   VMIG1+   2,100 District of Columbia,
                                                   GO, General Fund
                                                   Recovery, VRDN, Series
                                                   B-3, 4.25%
                                                   due 6/01/2003(e)            2,100
- --------------------------------------------------------------------------------
 Florida--7.5%               A-1+   VMIG1+   3,600 Pinellas County,
                                                   Florida, Health
                                                   Facilities Authority,
                                                   Revenue Refunding Bonds
                                                   (Pooled Hospital Loan
                                                   Program), DATES, 4.20%
                                                   due 12/01/2015(a)(e)        3,600
- --------------------------------------------------------------------------------
 Illinois--12.0%              AAA   Aaa      2,345 Chicago, Illinois, Sales
                                                   Tax Revenue Bonds,
                                                   5.375% due 1/01/2027        2,194
                              AAA   Aaa      1,725 Chicago, Illinois, Water
                                                   Revenue Refunding Bonds,
                                                   5.50% due 11/01/2022(b)     1,657
                              AAA   Aaa      2,000 Metropolitan Pier and
                                                   Exposition Authority,
                                                   Illinois, Dedicated
                                                   State Tax Revenue
                                                   Refunding Bonds
                                                   (McCormick Plant
                                                   Expansion Project),
                                                   5.50% due 12/15/2024        1,913
- --------------------------------------------------------------------------------
 New York--32.0%             A-1+   VMIG1+   4,900 Long Island Power
                                                   Authority, New York,
                                                   Electric System Revenue
                                                   Bonds, VRDN, Sub-Series
                                                   7, 4.25% due
                                                   4/01/2025(d)(e)             4,900
                             A-1+   VMIG1+   1,000 New York City, New York,
                                                   GO, VRDN, Sub-Series A-
                                                   4, 4.20% due
                                                   8/01/2023(e)                1,000
                              AAA   Aaa      3,115 New York State Dormitory
                                                   Authority Revenue Bonds
                                                   (Mental Health Services
                                                   Facilities), Series B,
                                                   5.375% due 2/15/2026(c)     2,953
                              AAA   Aaa      2,480 New York State Urban
                                                   Development Corporation
                                                   Revenue Bonds
                                                   (Correctional Capital
                                                   Facilities), Series 6,
                                                   5.375% due 1/01/2025(a)     2,357
                             A-1+   VMIG1+   4,200 Port Authority of New
                                                   York and New Jersey,
                                                   Special Obligation
                                                   Revenue Refunding Bonds
                                                   (Versatile Structure
                                                   Obligation), VRDN,
                                                   Series 3, 4.15% due
                                                   6/01/2020(e)                4,200
</TABLE>

                                       35
<PAGE>

                       MUNIHOLDINGS INSURED FUND IV, INC.

                SCHEDULE OF INVESTMENTS (Unaudited) (concluded)

                               September 24, 1999
                                 (in Thousands)

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                         Value
                       S&P   Moody's  Face                               (Note
                     Ratings Ratings Amount      Issue                    1a)
                     ------- ------- ------ --------------------------   ------
 <C>                 <C>     <C>     <C>    <S>                          <C>
 Ohio--5.8%           A-1+   VMIG1+  2,800  Cuyahoga County, Ohio,
                                            Hospital Revenue Bonds
                                            (The Cleveland Clinic),
                                            VRDN, Series D, 4.20% due
                                            1/01/2026(e)                 $2,800
- -------------------------------------------------------------------------------
 Pennsylvania--12.5%  A-1+   NR*     1,000  Pennsylvania State Higher
                                            Educational Facilities
                                            Authority, Revenue
                                            Refunding Bonds (Carnegie
                                            Mellon University), VRDN,
                                            Series B, 4.20% due
                                            11/01/2027(e)                 1,000
                      A-1+   VMIG1+  5,000  Philadelphia,
                                            Pennsylvania, Hospitals
                                            and Higher Education
                                            Facilities Authority,
                                            Hospital Revenue Bonds
                                            (Children's Hospital of
                                            Philadelphia Project),
                                            4.20% due 3/01/2027(e)        5,000
- -------------------------------------------------------------------------------
 Texas--5.5%           AAA   Aaa     2,835  Houston, Texas, Water and
                                            Sewer System Revenue
                                            Bonds, Junior Lien, Series
                                            C,
                                            5.25% due 12/01/2022          2,641
- -------------------------------------------------------------------------------
 Washington--3.9%      AAA   Aaa     2,000  Snohomish County,
                                            Washington, Public Utility
                                            District Number 001,
                                            Electric Revenue Refunding
                                            Bonds, 5.375% due
                                            12/01/2024(c)                 1,880
</TABLE>
- --------------------------------------------------------------------------------

<TABLE>
       <S>                                            <C>
       Total Investments (Cost--$49,372)--102.9%       49,473
       Liabilities in Excess of other Assets--(2.9)%   (1,385)
                                                      -------
       Net Assets--100%                               $48,088
                                                      =======
</TABLE>

(a) AMBAC Insured.
(b) FGIC Insured.
(c) FSA Insured.
(d) MBIA Insured.
(e) The interest rate is subject to change periodically based upon prevailing
    market rates. The interest rate shown is the rate in effect at September
    24, 1999.
+  Highest short-term rating by Moody's Investors Service, Inc.
*  Not Rated.
See Notes to Financial Statements.

Portfolio
Abbreviations
             To simplify the listings of MuniHoldings Insured Fund IV's
             portfolio holdings
             in the Schedule of Investments, we have abbreviated the names of
             many of the
             securities according to the list below.

<TABLE>
    <C>   <S>                                      <C>
    DATES Daily Adjustable Tax-Exempt Securities
    GO    General Obligation Bonds
    PCR   Pollution Control Revenue Bonds
    VRDN  Variable Rate Demand Notes
</TABLE>

                       See Notes to Financial Statements.

                                       36
<PAGE>

                       MUNIHOLDINGS INSURED FUND IV, INC.

                  STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
                      As of September 24, 1999 (Unaudited)

Assets:
<TABLE>
<S>                                                      <C>         <C>
Investments, at value (identified cost--$49,372,338)
 (Note 1a).............................................              $49,473,435
Cash...................................................                  100,005
Receivables:
  Capital shares sold..................................  $48,000,000
  Interest.............................................      296,350  48,296,350
                                                         -----------
Other assets...........................................                    1,113
                                                                     -----------
Total assets...........................................               97,870,903
                                                                     -----------
Liabilities:
Payables:
  Securities pruchased.................................   49,650,301
  Investment adviser (Note 2)..........................        1,113  49,651,414
                                                         -----------
Accrued expenses and other liabilities.................                  131,366
                                                                     -----------
Total liabilities......................................               49,782,780
                                                                     -----------
Net Assets:
Net assets.............................................              $48,088,123
                                                                     ===========
Capital:
Capital Stock (200,000,000 shares authorized) (Note 4):
  Common Stock, par value $.10 per share (3,206,667
   shares issued and outstanding)......................              $   320,667
Paid-in capital in excess of par.......................               47,647,972
Undistributed investment income--net...................                   18,387
Unrealized appreciation on investments--net............                  101,097
                                                                     -----------
Total capital--Equivalent to $15.00 net asset value per
 share of Common Stock.................................              $48,088,123
                                                                     ===========
</TABLE>

                                       37
<PAGE>

                       MUNIHOLDINGS INSURED FUND IV, INC.

                   Notes to Financial Statements (Unaudited)

1. Significant Accounting Policies:

  MuniHoldings Insured Fund IV, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a non-diversified, closed-end management
investment company. Prior to commencement of operations on September 24, 1999,
the Fund had no operations other than those relating to organizational matters
and the sale of 6,667 shares of Common Stock on September 14, 1999, to Fund
Asset Management, L.P. ("FAM") for $100,005. The Fund's financial statements
are prepared in accordance with generally accepted accounting principles which
may require the use of management accruals and estimates. The Fund determines
and makes available for publication the net asset value of its Common Stock on
a weekly basis. The Fund's Common Stock is listed on the New York Stock
Exchange under the symbol MOU. The following is a summary of significant
accounting policies followed by the Fund.

  (a) Valuation of investments--Municipal bonds are traded primarily in the
over-the-counter markets and are valued at the most recent bid price or yield
equivalent as obtained by the Fund's pricing service from dealers that make
markets in such securities. Financial futures contracts and options thereon,
which are traded on exchanges, are valued at their closing prices as of the
close of such exchanges. Options written or purchased are valued at the last
sale price in the case of exchange-traded options. In the case of options
traded in the over-the-counter market, valuation is the last asked price
(options written) or the last bid price (options purchased). Securities with
remaining maturities of sixty days or less are valued at amortized cost, which
approximates market value. 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
utilize a matrix system for valuations. The procedures of the pricing service
and its valuations are reviewed by the officers of the Fund under the general
supervision of the Board of Directors.

  (b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its portfolio
against adverse movements in the debt markets. Losses may arise due to changes
in the value of the contract or if the counterparty does not perform under the
contract.

  . Financial futures contracts--The Fund may purchase or sell financial
   futures contracts and options on such futures contracts for the purpose of
   hedging the market risk on existing securities or the intended purchase of
   securities. Futures contracts are contracts for delayed delivery of
   securities at a specific future date and at a specific price or yield.
   Upon entering into a contract, the Fund deposits and maintains as
   collateral such initial margin as required by the exchange on which the
   transaction is effected. Pursuant to the contract, the Fund agrees to
   receive from or pay to the broker an amount of cash equal to the daily
   fluctuation in value of the contract. Such receipts or payments are known
   as variation margin and are recorded by the Fund as unrealized gains or
   losses. When the contract is closed, the Fund records a realized gain or
   loss equal to the difference between the value of the contract at the time
   it was opened and the value at the time it was closed.

  . Options--The Fund is authorized to write covered call options and
   purchase put options. When the Fund writes an option, an amount equal to
   the premium received by the Fund is reflected as an asset and an
   equivalent liability. The amount of the liability is subsequently marked
   to market to reflect the current market value of the option written. When
   a security is purchased or sold through an exercise of an option, the
   related premium paid (or received) is added to (or deducted from) the
   basis of the security acquired or deducted from (or added to) the proceeds
   of the security sold. When an option expires (or the Fund enters into a
   closing transaction), the Fund realizes a gain or loss on the option to
   the extent of the premiums received or paid (or gain or loss to the extent
   the cost of the closing transaction exceeds the premium paid or received).

   Written and purchased options are non-income producing investments.


                                       38
<PAGE>

                       MUNIHOLDINGS INSURED FUND IV, INC.

             Notes to Financial Statements (Unaudited)--(Continued)

  (c) Income taxes--It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.

  (d) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Interest income is recognized on the accrual basis. Discounts and market
premiums are amortized into interest income. Realized gains and losses on
security transactions are determined on the identified cost basis.

  (e) Dividends and distributions--Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on the
ex-dividend dates.

2. Investment Advisory Agreement and Transactions with Affiliates:

  The Fund has entered into an Investment Advisory Agreement with FAM. The
general partner of FAM is Princeton Services, Inc. ("PSI"), an indirect wholly-
owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner.

  FAM is responsible for the management of the Fund's portfolio and provides
the necessary personnel, facilities, equipment and certain other services
necessary to the operations of the Fund. For such services, the Fund pays a
monthly fee at an annual rate of 0.55% of the Fund's average weekly net assets.
For the period ended September 24, 1999, FAM earned fees of $2,168, all of
which were voluntarily waived. FAM also reimbursed the Fund additional expenses
of $1,113.

  Accounting services are provided to the Fund by FAM at cost.

  Certain officers and/or directors of the Fund are officers and/or directors
of FAM, PSI, and/or ML & Co.

3. Investments:

  Purchases of investments, excluding short-term securities, for the period
ended September 24, 1999 were $17,472,338. There were no long term sales.

  Net unrealized gains for the period ended September 24, 1999 were as follows:

<TABLE>
<CAPTION>
                                                                     Unrealized
                                                                       Gains
                                                                     ----------
      <S>                                                            <C>
      Long-term investments.........................................  $101,097
                                                                      --------
      Total.........................................................  $101,097
                                                                      ========
</TABLE>

  As of September 24, 1999, net unrealized appreciation for Federal income tax
purposes aggregated $101,097, all of which related to appreciated securities.
The aggregate cost of investments at September 24, 1999 for Federal income tax
purposes was $49,372,338.

4. Capital Stock Transactions:

  The Fund is authorized to issue 200,000,000 shares of capital stock,
including Preferred Stock, par value $.10 per share, all of which were
initially classified as Common Stock. The Board of Directors is authorized,
however, to reclassify any unissued shares of capital stock without approval of
holders of Common Stock.

 Common Stock

  Shares issued and outstanding during the period ended September 24, 1999
increased by 3,200,000 as a result of the initial offering.

                                       39
<PAGE>

                       MUNIHOLDINGS INSURED FUND IV, INC.

             Notes to Financial Statements (Unaudited)--(Concluded)


5. General:

  As of September 24, 1999, the Fund had only one day of investment operations
and had not yet declared dividends (whereas it will ordinarily do so on a
monthly basis). As a result, the Fund believes that more extensive interim
financial statements would not be indicative of the Fund's current and ongoing
operations. The Fund believes that such financial statements may be misleading
to potential investors and, accordingly, believes that inclusion of such
financial statements would be inappropriate. For the period ended September 24,
1999, the Fund had net investment income of $18,387. FAM voluntarily waived all
expenses.

                                       40
<PAGE>




                      [THIS PAGE INTENTIONALLY LEFT BLANK]

                                       41
<PAGE>

                                   APPENDIX A

                           RATINGS OF MUNICIPAL BONDS

Description of Moody's Investors Service, Inc.'s ("Moody's") Municipal Bond
Ratings

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 as 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 the
     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 which 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.

  Note: These bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
Al, Baal, Bal and B1.

  Short-term Notes: The three ratings of Moody's for short-term notes are MIG
1/VMIG 1, MIG 2/VMIG 2, and MIG 3/VMIG 3; MIG 1/VMIG 1 denotes "best quality,
enjoying strong protection from established cash flows"; MIG 2/VMIG 2 denotes
"high quality" with "ample margins of protection"; MIG 3/VMIG 3 instruments are
of "favorable quality . . . but . . . lacking the undeniable strength of the
preceding grades."

                                      A-1
<PAGE>

Description of Moody's Commercial Paper Ratings

  Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:

  Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of short-term promissory obligations. Prime-l repayment capacity
will often be evidenced by the following characteristics: leading market
positions in well established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on debt
and ample asset protection; broad margins in earning coverage of fixed
financial charges and high internal cash generation; and with established
access to a range of financial markets and assured sources of alternate
liquidity.

  Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of short-term promissory obligations. This will normally be evidenced
by many of the characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected
by external conditions. Ample alternate liquidity is maintained.

  Issuers rated Prime-3 (or supporting institutions) have an acceptable ability
for repayment of short-term promissory obligations. The effects of industry
characteristics and market composition may be more pronounced. Variability in
earnings and profitability may result in changes to the level of debt
protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.

  Issuers rated Not Prime do not fall within any of the Prime rating
categories.

Description of Standard & Poor's, a Division of The McGraw-Hill Companies, Inc.
("Standard & Poor's"), Municipal Debt Ratings

  A Standard & Poor's municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations or a specific program. It takes into
consideration the creditworthiness of guarantors, insurers, or other forms of
credit enhancement on the obligation.

  The debt rating is not a recommendation to purchase, sell or hold a financial
obligation, inasmuch as it does not comment as to market price or suitability
for a particular investor.

  The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.

  The ratings are based, in varying degrees, on the following considerations:

    I. Likelihood of default--capacity and willingness of the obligor as to
  the timely payment of interest and repayment of principal in accordance
  with the terms of the obligation;

    II. Nature of and provisions of the obligation;

    III. Protection afforded to, and relative position of, the obligation in
  the event of bankruptcy, reorganization or other arrangement under the laws
  of bankruptcy and other laws affecting creditors' rights.

  AAA      Debt rated "AAA" has the highest rating assigned by Standard &
           Poor's. Capacity of the obligor to meet its financial commitment on
           the obligation is extremely strong.

           Debt rated "AA" differs from the highest-rated issues only in small
  AA       degree. The obligor's capacity to meet its financial commitment on
           the obligation is very strong.

                                      A-2
<PAGE>

  A
           Debt rated "A" is somewhat more susceptible to the adverse effects
           of changes in circumstances and economic conditions than debt in
           higher-rated categories. However, the obligor's capacity to meet
           its financial commitment on the obligation is still strong.

  BBB      Debt rated "BBB" exhibits adequate protection parameters. However,
           adverse economic conditions or changing circumstances are more
           likely to lead to a weakened capacity of the obligor to meet its
           financial commitment on the obligation.

  BB       Debt rated "BB," "B," "CCC," "CC" and "C" are regarded as having
  B        significant speculative characteristics. "BB" indicates the least
  CCC      degree of speculation and "C" the highest degree of speculation.
  CC       While such debt will likely have some quality and protective
  C        characteristics, these may be outweighed by large uncertainties or
           major risk exposures to adverse conditions.

  D        Debt rated "D" is in payment default. The "D" rating category is
           used when payments on an obligation are not made on the date due
           even if the applicable grace period has not expired, unless
           Standard & Poor's believes that such payments will be made during
           such grace period. The "D" rating also will be used upon the filing
           of a bankruptcy petition or the taking of similar action if
           payments on an obligation are jeopardized.

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

Description of Standard & Poor's Commercial Paper Ratings

  A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into several categories, ranging from "A-l"
for the highest quality obligations to "D" for the lowest. These categories are
as follows:

  A-1      This designation indicates that the degree of safety regarding
           timely payment is strong. Those issues determined to possess
           extremely strong safety characteristics are denoted with a plus
           sign (+) designation.

  A-2      Capacity for timely payment on issues with this designation is
           satisfactory. However, the relative degree of safety is not as high
           as for issues designated "A-1."

  A-3      Issues carrying this designation have adequate capacity for timely
           payment. They are, however, more vulnerable to the adverse effects
           of changes in circumstances than obligations carrying the higher
           designations.

  B        Issues rated "B" are regarded as having only speculative capacity
           for timely payment.

  C        This rating is assigned to short-term debt obligations with a
           doubtful capacity for payment.

  D        Debt rated "D" is in payment default. The "D" rating category is
           used when interest payments or principal payments are not made on
           the date due, even if the applicable grace period has not expired
           unless Standard & Poor's believes that such payments will be made
           during such grace period.

  A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.

  A Standard & Poor's note rating reflects the liquidity factors and market
access risks unique to such notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.

  --Amortization schedule--the larger the final maturity relative to other
    maturities, the more likely it will be treated as a note.

  --Source of payment--the more dependent the issue is on the market for its
    refinancing, the more likely it will be treated as a note.

                                      A-3
<PAGE>

  Note rating symbols are as follows:

  SP-1     Strong capacity to pay principal and interest. An issue determined
           to possess a very strong capacity to pay debt service is given a
           plus (+) designation.

  SP-2     Satisfactory capacity to pay principal and interest with some
           vulnerability to adverse financial and economic changes over the
           term of the notes.

  SP-3     Speculative capacity to pay principal and interest.

  c        The "c" subscript is used to provide additional information to
           investors, that the bank may terminate its obligation to purchase
           tendered bonds if the long-term credit rating of the issuer is
           below an investment-grade level and/or the issuer's bonds are
           deemed taxable.

  p        The letter "p" indicates that the rating is provisional. A
           provisional rating assumes the successful completion of the project
           financed by the debt being rated and indicates that payment of debt
           service requirements is largely or entirely dependent upon the
           successful, timely completion of the project. This rating, however,
           while addressing credit quality subsequent to completion of the
           project, makes no comment on the likelihood of or the risk of
           default upon failure of such completion. The investor should
           exercise his own judgment with respect to such likelihood and risk.

  *        Continuance of the ratings is contingent upon Standard & Poor's
           receipt of an executed copy of the escrow agreement or closing
           documentation confirming investments and cash flows.

  r        The "r" highlights derivative, hybrid, and certain other
           obligations that Standard & Poor's believes may experience high
           volatility or high variability in expected returns as a result of
           noncredit risks. Examples of such obligations are securities with
           principal or interest return indexed to equities, commodities, or
           currencies; certain swaps and options; and interest-only and
           principal-only mortgage securities. The absence of an "r" symbol
           should not be taken as an indication that an obligation will
           exhibit no volatility or variability in total return.

Description of Fitch IBCA, Inc.'s ("Fitch") Investment Grade Bond Ratings

  Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The rating
represents Fitch's assessment of the issuer's ability to meet the obligations
of a specific debt issue or class of debt in a timely manner.

  The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength and credit quality.

  Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guarantees unless otherwise indicated.

  Bonds that have the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.

  Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.

  Fitch ratings are based on information obtained from issuers, other obligors,
underwriters, their experts, and other sources Fitch believes to be reliable.
Fitch does not audit or verify the truth or accuracy of such information.
Ratings may be changed, suspended, or withdrawn as a result of changes in, or
the unavailability of, information or for other reasons.

                                      A-4
<PAGE>

AAA
     Bonds considered to be investment grade and of the highest credit
     quality. The obligor has an exceptionally strong ability to pay
     interest and repay principal, which is unlikely to be affected by
     reasonably foreseeable events.

AA   Bonds considered to be investment grade and of very high credit
     quality. The obligor's ability to pay interest and repay principal is
     very strong, although not quite as strong as bonds rated "AAA."
     Because bonds rated in the "AAA" and "AA" categories are not
     significantly vulnerable to foreseeable future developments, short-
     term debt of these issuers is generally rated "F-1+."

A    Bonds considered to be investment grade and of high credit quality.
     The obligor's ability to pay interest and repay principal is
     considered to be strong, but may be more vulnerable to adverse changes
     in economic conditions and circumstances than bonds with higher
     ratings.

BBB  Bonds considered to be investment grade and of satisfactory credit
     quality. The obligor's ability to pay interest and repay principal is
     considered to be adequate. Adverse changes in economic conditions and
     circumstances, however, are more likely to have adverse impact on
     these bonds, and therefore impair timely payment. The likelihood that
     the ratings of these bonds will fall below investment grade is higher
     than for bonds with higher ratings.

  Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA" category.

NR            Indicates that Fitch does not rate the specific issue.

Conditional   A conditional rating is premised on the successful completion of
              a project or the occurrence of a specific event.

Suspended     A rating is suspended when Fitch deems the amount of information
              available from the issuer to be inadequate for rating purposes.

Withdrawn     A rating will be withdrawn when an issue matures or is called or
              refinanced and, at Fitch's discretion, when an issuer fails to
              furnish proper and timely information.

FitchAlert    Ratings are placed on FitchAlert to notify investors of an
              occurrence that is likely to result in a rating change and the
              likely direction of such change. These are designated as
              "Positive," indicating a potential upgrade, "Negative," for
              potential downgrade, or "Evolving," where ratings may be raised
              or lowered. FitchAlert is relatively short-term, and should be
              resolved within three to 12 months.

Ratings       An outlook is used to describe the most likely direction of any
Outlook       rating change over the intermediate term. It is described as
              "Positive" or "Negative." The absence of a designation indicates
              a stable outlook.

Description of Fitch's Speculative Grade Bond Ratings

  Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or
liquidation.

  The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength.

  Bonds that have the rating are of similar but not necessarily identical
credit quality since rating categories cannot fully reflect the differences in
degrees of credit risk.

                                      A-5
<PAGE>

BB
              Bonds are considered speculative. The obligor's ability to pay
              interest and repay principal may be affected over time by
              adverse economic changes. However, business and financial
              alternatives can be identified which could assist the obligor in
              satisfying its debt service requirements.

B             Bonds are considered highly speculative. While bonds in this
              class are currently meeting debt service requirements, the
              probability of continued timely payment of principal and
              interest reflects the obligor's limited margin of safety and the
              need for reasonable business and economic activity throughout
              the life of the issue.

CCC           Bonds have certain identifiable characteristics which, if not
              remedied, may lead to default. The ability to meet obligations
              requires an advantageous business and economic environment.

CC            Bonds are minimally protected. Default in payment of interest
              and/or principal seems probable over time.

C             Bonds are in imminent default in payment of interest or
              principal.

DDD           Bonds are in default on interest and/or principal payments. Such
DD            bonds are extremely speculative and should be valued on the
D             basis of their ultimate recovery value in liquidation or
              reorganization of the obligor. "DDD" represents the highest
              potential for recovery on these bonds, and "D" represents the
              lowest potential for recovery.

  Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "DDD," "DD," or "D" categories.

Description of Fitch's Short-Term Ratings

  Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.

  The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.

  Fitch short-term ratings are as follows:

  F-1+     Exceptionally Strong Credit Quality. Issues assigned this rating
           are regarded as having the strongest degree of assurance for timely
           payment.

  F-1      Very Strong Credit Quality. Issues assigned this rating reflect an
           assurance of timely payment only slightly less in degree than
           issues rated "F-1+."

  F-2      Good Credit Quality. Issues assigned this rating have a
           satisfactory degree of assurance for timely payment, but the margin
           of safety is not as great as for issues assigned "F-1+" and "F-1"
           ratings.

  F-3      Fair Credit Quality. Issues assigned this rating have
           characteristics suggesting that the degree of assurance for timely
           payment is adequate; however, near-term adverse changes could cause
           these securities to be rated below investment grade.

  F-S      Weak Credit Quality. Issues assigned this rating have
           characteristics suggesting a minimal degree of assurance for timely
           payment and are vulnerable to near-term adverse changes in
           financial and economic conditions.

  D        Default. Issues assigned this rating are in actual or imminent
           payment default.

           The symbol "LOC" indicates that the rating is based on a letter of
  LOC      credit issued by a commercial bank.

                                      A-6
<PAGE>

                                   APPENDIX B

                              PORTFOLIO INSURANCE

  Set forth below is further information with respect to the insurance policies
(the "Policies") that the Fund may obtain from several insurance companies with
respect to insured Municipal Bonds held by the Fund. The Fund has no obligation
to obtain any such Policies, and the terms of any Policies actually obtained
may vary significantly from the terms discussed below.

  In determining eligibility for insurance, insurance companies will apply
their own standards. These standards correspond generally to the standards such
companies normally use in establishing the insurability of new issues of
Municipal Bonds and are not necessarily the criteria that would be used in
regard to the purchase of such bonds by the Fund. The Policies do not insure
(i) municipal securities ineligible for insurance and (ii) municipal securities
no longer owned by the Fund.

  The Policies do not guarantee the market value of the insured Municipal Bonds
or the value of the shares of the Fund. In addition, if the provider of an
original issuance insurance policy is unable to meet its obligations under such
policy or if the rating assigned to the insurance claims-paying ability of any
such insurer deteriorates, the insurance company will not have any obligation
to insure any issue held by the Fund that is aversely affected by either of the
above described events. In addition to the payment of premium, the policies may
require that the Fund notify the insurance company as to all New York Municipal
Bonds and Municipal Bonds in the Fund's portfolio and permit the insurance
company to audit their records. The insurance premiums will be payable monthly
by the Fund in accordance with a premium schedule to be furnished by the
insurance company at the time the Policies are issued. Premiums are based upon
the amounts covered and the composition of the portfolio.

  The Fund will seek to utilize insurance companies that have insurance claims-
paying ability ratings of AAA from Standard & Poor's ("S&P") or Fitch IBCA,
Inc. ("Fitch") or Aaa from Moody's Investors Service ("Moody's"). There can be
no assurance however, that insurance from insurance carriers meeting these
criteria will be at all times available.

  An S&P insurance claims-paying ability rating is an assessment of an
operating insurance company's financial capacity to meet obligations under an
insurance policy in accordance with the terms. An insurer with an insurance
claims-paying ability rating of AAA has the highest rating assigned by S&P.
Capacity to honor insurance contracts is considered by S&P to be extremely
strong and highly likely to remain so over a long period of time. A Fitch
insurance claims-paying ability rating provides an assessment of an insurance
company's financial strength and, therefore, its ability to pay policy and
contract claims under the terms indicated. An insurer with an insurance claims-
paying ability rating of AAA has the highest rating assigned by Fitch. The
ability to pay claims is adjudged by Fitch to be extremely strong for insurance
companies with this highest rating. In the opinion of Fitch, foreseeable
business and economic risk factors should not have any material adverse impact
on the ability of these insurers to pay claims. In Fitch's opinion,
profitability, overall balance sheet strength, capitalization and liquidity are
all at very secure levels and are unlikely to be affected by potential adverse
underwriting, investment or cyclical events. A Moody's insurance claims-paying
ability rating is an opinion of the ability of an insurance company to repay
punctually senior policyholder obligations and claims. An insurer with an
insurance claims-paying ability rating of Aaa is considered by Moody's to be of
the best quality. In the opinion of Moody's, the policy obligations of an
insurance company with an insurance claims-paying ability rating of Aaa carry
the smallest degree of credit risk and, while the financial strength of these
companies is likely to change, such changes as can be visualized are most
unlikely to impair the company's fundamentally strong position.

  An insurance claims-paying ability rating of S&P, Fitch or Moody's does not
constitute an opinion on any specific contract in that such an opinion can only
be rendered upon the review of the specific insurance contract. Furthermore, an
insurance claims-paying ability rating does not take into account deductibles,

                                      B-1
<PAGE>

surrender or cancellation penalties or the timeliness of payment; nor does it
address the ability of a company to meet nonpolicy obligations (i.e., debt
contracts).

  The assignment of ratings by S&P, Fitch or Moody's to debt issues that are
fully or partially supported by insurance policies, contracts or guarantees is
a separate process from the determination of claims-paying ability ratings. The
likelihood of a timely flow of funds from the insurer to the trustee for the
bondholders is a key element in the rating determination for such debt issues.


                                      B-2
<PAGE>

                                  APPENDIX C

                             SETTLEMENT PROCEDURES

  The following summary of Settlement Procedures sets forth the procedures
expected to be followed in connection with the settlement of each Auction and
will be incorporated by reference in the Auction Agent Agreement and each
Broker-Dealer Agreement. Nothing contained in this Appendix D constitutes a
representation by the Fund that in each Auction each party referred to herein
actually will perform the procedures described herein to be performed by such
party. Capitalized terms used herein shall have the respective meanings
specified in the glossary of this Prospectus or Appendix D hereto, as the case
may be.

  (a) On each Auction Date, the Auction Agent shall notify by telephone or
through the Auction Agent's Processing System the Broker-Dealers that
participated in the Auction held on such Auction Date and submitted an Order
on behalf of any Beneficial Owner or Potential Beneficial Owner of:

    (i) the Applicable Rate fixed for the next succeeding Dividend Period;

    (ii) whether Sufficient Clearing Bids existed for the determination of
  the Applicable Rate;

    (iii) if such Broker-Dealer (a "Seller's Broker-Dealer") submitted a Bid
  or a Sell Order on behalf of a Beneficial Owner, the number of shares, if
  any, of AMPS to be sold by such Beneficial Owner;

    (iv) if such Broker-Dealer (a "Buyer's Broker-Dealer") submitted a Bid on
  behalf of a Potential Beneficial Owner, the number of shares, if any, of
  AMPS to be purchased by such Potential Beneficial Owner;

    (v) if the aggregate number of shares of AMPS to be sold by all
  Beneficial Owners on whose behalf such Broker-Dealer submitted a Bid or a
  Sell Order exceeds the aggregate number of shares of AMPS to be purchased
  by all Potential Beneficial Owners on whose behalf such Broker-Dealer
  submitted a Bid, the name or names of one or more Buyer's Broker-Dealers
  (and the name of the Agent Member, if any, of each such Buyer's Broker-
  Dealer) acting for one or more purchasers of such excess number of shares
  of AMPS and the number of such shares to be purchased from one or more
  Beneficial Owners on whose behalf such Broker-Dealer acted by one or more
  Potential Beneficial Owners on whose behalf each of such Buyer's Broker-
  Dealers acted;

    (vi) if the aggregate number of shares of AMPS to be purchased by all
  Potential Beneficial Owners on whose behalf such Broker-Dealer submitted a
  Bid exceeds the aggregate number of shares of AMPS to be sold by all
  Beneficial Owners on whose behalf such Broker-Dealer submitted a Bid or a
  Sell Order, the name or names of one or more Seller's Broker-Dealers (and
  the name of the Agent Member, if any, of each such Seller's Broker-Dealer)
  acting for one or more sellers of such excess number of shares of AMPS and
  the number of such shares to be sold to one or more Potential Beneficial
  Owners on whose behalf such Broker-Dealer acted by one or more Beneficial
  Owners on whose behalf each of such Seller's Broker-Dealers acted; and

    (vii) the Auction Date of the next succeeding Auction with respect to the
  AMPS.

  (b) On each Auction Date, each Broker-Dealer that submitted an Order on
behalf of any Beneficial Owner or Potential Beneficial Owner shall:

    (i) in the case of a Broker-Dealer that is a Buyer's Broker-Dealer,
  instruct each Potential Beneficial Owner on whose behalf such Broker-Dealer
  submitted a Bid that was accepted, in whole or in part, to instruct such
  Potential Beneficial Owner's Agent Member to pay to such Broker-Dealer (or
  its Agent Member) through the Securities Depository the amount necessary to
  purchase the number of shares of AMPS to be purchased pursuant to such Bid
  against receipt of such shares and advise such Potential Beneficial Owner
  of the Applicable Rate for the next succeeding Dividend Period;

    (ii) in the case of a Broker-Dealer that is a Seller's Broker-Dealer,
  instruct each Beneficial Owner on whose behalf such Broker-Dealer submitted
  a Sell Order that was accepted, in whole or in part, or a Bid that was
  accepted, in whole or in part, to instruct such Beneficial Owner's Agent
  Member to deliver to such Broker-Dealer (or its Agent Member) through the
  Securities Depository the number of shares of AMPS to be sold pursuant to
  such Order against payment therefor and advise any such Beneficial Owner
  that will continue to hold shares of AMPS of the Applicable Rate for the
  next succeeding Dividend Period;

                                      C-1
<PAGE>

    (iii) advise each Beneficial Owner on whose behalf such Broker-Dealer
  submitted a Hold Order of the Applicable Rate for the next succeeding
  Dividend Period;

    (iv) advise each Beneficial Owner on whose behalf such Broker-Dealer
  submitted an Order of the Auction Date for the next succeeding Auction; and

    (v) advise each Potential Beneficial Owner on whose behalf such Broker-
  Dealer submitted a Bid that was accepted, in whole or in part, of the
  Auction Date for the next succeeding Auction.

  (c) On the basis of the information provided to it pursuant to (a) above,
each Broker-Dealer that submitted a Bid or a Sell Order on behalf of a
Potential Beneficial Owner or a Beneficial Owner shall, in such manner and at
such time or times as in its sole discretion it may determine, allocate any
funds received by it pursuant to (b)(i) above and any shares of AMPS received
by it pursuant to (b)(ii) above among the Potential Beneficial Owners, if any,
on whose behalf such Broker-Dealer submitted Bids, the Beneficial Owners, if
any, on whose behalf such Broker-Dealer submitted Bids that were accepted or
Sell Orders, and any Broker-Dealer or Broker-Dealers identified to it by the
Auction Agent pursuant to (a)(v) or (a)(vi) above.

  (d) On each Auction Date:

    (i) each Potential Beneficial Owner and Beneficial Owner shall instruct
  its Agent Member as provided in (b)(i) or (ii) above, as the case may be;

    (ii) each Seller's Broker-Dealer which is not an Agent Member of the
  Securities Depository shall instruct its Agent Member to (A) pay through
  the Securities Depository to the Agent Member of the Beneficial Owner
  delivering shares to such Broker-Dealer pursuant to (b)(ii) above the
  amount necessary to purchase such shares against receipt of such shares,
  and (B) deliver such shares through the Securities Depository to a Buyer's
  Broker-Dealer (or its Agent Member) identified to such Seller's Broker-
  Dealer pursuant to (a)(v) above against payment therefor; and

    (iii) each Buyer's Broker-Dealer which is not an Agent Member of the
  Securities Depository shall instruct its Agent Member to (A) pay through
  the Securities Depository to a Seller's Broker-Dealer (or its Agent Member)
  identified pursuant to (a)(vi) above the amount necessary to purchase the
  shares to be purchased pursuant to (b)(i) above against receipt of such
  shares, and (B) deliver such shares through the Securities Depository to
  the Agent Member of the purchaser thereof against payment therefor.

  (e) On the day after the Auction Date:

    (i) each Bidder's Agent Member referred to in (d)(i) above shall instruct
  the Securities Depository to execute the transactions described in (b)(i)
  or (ii) above, and the Securities Depository shall execute such
  transactions;

    (ii) each Seller's Broker-Dealer or its Agent Member shall instruct the
  Securities Depository to execute the transactions described in (d)(ii)
  above, and the Securities Depository shall execute such transactions; and

    (iii) each Buyer's Broker-Dealer or its Agent Member shall instruct the
  Securities Depository to execute the transactions described in (d)(iii)
  above, and the Securities Depository shall execute such transactions.

  (f) If a Beneficial Owner selling shares of AMPS in an Auction fails to
deliver such shares (by authorized book-entry), a Broker-Dealer may deliver to
the Potential Beneficial Owner on behalf of which it submitted a Bid that was
accepted a number of whole shares of AMPS that is less than the number of
shares that otherwise was to be purchased by such Potential Beneficial Owner.
In such event, the number of shares of AMPS to be so delivered shall be
determined solely by such Broker-Dealer. Delivery of such lesser number of
shares shall constitute good delivery. Notwithstanding the foregoing terms of
this paragraph (f), any delivery or non-delivery of shares which shall
represent any departure from the results of an Auction, as determined by the
Auction Agent, shall be of no effect unless and until the Auction Agent shall
have been notified of such delivery or non-delivery in accordance with the
provisions of the Auction Agent Agreement and the Broker-Dealer Agreements.

                                      C-2
<PAGE>

                                   APPENDIX D

                               AUCTION PROCEDURES

  The following procedures will be set forth in provisions of the Articles
Supplementary relating to the AMPS, and will be incorporated by reference in
the Auction Agent Agreement and each Broker-Dealer Agreement. The terms not
defined below are defined in the forepart of this Prospectus. Nothing contained
in this Appendix E constitutes a representation by the Fund that in each
Auction each party referred to herein actually will perform the procedures
described herein to be performed by such party.

Paragraph 10(a) Certain Definitions.

  As used in this Paragraph 10, the following terms shall have the following
meanings, unless the context otherwise requires:

    (i) "AMPS" shall mean the shares of AMPS being auctioned pursuant to this
  Paragraph 10.

    (ii) "Auction Date" shall mean the first Business Day preceding the first
  day of a Dividend Period.

    (iii) "Available AMPS" shall have the meaning specified in Paragraph
  10(d)(i) below.

    (iv) "Bid" shall have the meaning specified in Paragraph 10(b)(i) below.

    (v) "Bidder" shall have the meaning specified in Paragraph 10(b)(i)
  below.

    (vi) "Hold Order" shall have the meaning specified in Paragraph 10(b)(i)
  below.

    (vii) "Maximum Applicable Rate" for any Dividend Period will be the
  Applicable Percentage of the Reference Rate. The Applicable Percentage will
  be determined based on (i) the lower of the credit rating or ratings
  assigned on such date to such shares by Moody's and S&P (or if Moody's or
  S&P or both shall not make such rating available, the equivalent of either
  or both of such ratings by a Substitute Rating Agency or two Substitute
  Rating Agencies or, in the event that only one such rating shall be
  available, such rating) and (ii) whether the Fund has provided modification
  to the Auction Agent prior to the Auction establishing the Applicable Rate
  for any dividend that net capital gains or other taxable income will be
  included in such dividend on shares of AMPS as follows:

<TABLE>
<CAPTION>
                                              Applicable
                                            Percentage of          Applicable
              Credit Ratings               Reference Rate--      Percentage of
     ----------------------------------           No            Reference Rate--
         Moody's              S&P            Notification         Notification
     ----------------    -------------     ----------------     ----------------
     <S>                 <C>               <C>                  <C>
     "aa3" or higher     AA- or Higher           110%                 150%
       "a3" or "a1"        A- to A+              125%                 160%
     "baa3" to "baa1"    BBB- to BBB+            150%                 250%
       Below "baa3"       Below BBB-             200%                 275%
</TABLE>

  The Fund shall take all reasonable action necessary to enable S&P and Moody's
to provide a rating for the AMPS. If either S&P or Moody's shall not make such
a rating available, or if neither S&P nor Moody's shall make such a rating
available, Merrill Lynch, Pierce, Fenner & Smith Incorporated or its affiliates
and successors, after consultation with the Fund, shall select a nationally
recognized statistical rating organization or two nationally recognized
statistical rating organizations to act as a Substitute Rating Agency or
Substitute Rating Agencies, as the case may be.

    (viii) "Order" shall have the meaning specified in Paragraph 10(b)(i)
  below.

    (ix) "Sell Order" shall have the meaning specified in Paragraph 10(b)(i)
  below.

    (x) "Submission Deadline" shall mean 1:00 p.m., Eastern time, on any
  Auction Date or such other time on any Auction Date as may be specified by
  the Auction Agent from time to time as the time by which each Broker-Dealer
  must submit to the Auction Agent in writing all Orders obtained by it for
  the Auction to be conducted on such Auction Date.

    (xi) "Submitted Bid" shall have the meaning specified in Paragraph
  10(d)(i) below.

                                      D-1
<PAGE>

    (xii) "Submitted Hold Order" shall have the meaning specified in
  Paragraph 10(d)(i) below.

    (xiii) "Submitted Order" shall have the meaning specified in Paragraph
  10(d)(i) below.

    (xiv) "Submitted Sell Order" shall have the meaning specified in
  Paragraph 10(d)(i) below.

    (xv) "Sufficient Clearing Bids" shall have the meaning specified in
  Paragraph 10(d)(i) below.

    (xvi) "Winning Bid Rate" shall have the meaning specified in Paragraph
  10(d)(i) below.

Paragraph 10(b) Orders by Beneficial Owners, Potential Beneficial Owners,
Existing Holders and Potential Holders.

  (i) Unless otherwise permitted by the Fund, Beneficial Owners and Potential
Beneficial Owners may only participate in Auctions through their Broker-
Dealers. Broker-Dealers will submit the Orders of their respective customers
who are Beneficial Owners and Potential Beneficial Owners to the Auction Agent,
designating themselves as Existing Holders in respect of shares subject to
Orders submitted or deemed submitted to them by Beneficial Owners and as
Potential Holders in respect of shares subject to Orders submitted to them by
Potential Beneficial Owners. A Broker-Dealer may also hold shares of AMPS in
its own account as a Beneficial Owner. A Broker-Dealer may thus submit Orders
to the Auction Agent as a Beneficial Owner or a Potential Beneficial Owner and
therefore participate in an Auction as an Existing Holder or Potential Holder
on behalf of both itself and its customers. On or prior to the Submission
Deadline on each Auction Date:

    (A) each Beneficial Owner may submit to its Broker-Dealer information as
  to:

      (1) the number of outstanding shares, if any, of AMPS held by such
    Beneficial Owner which such Beneficial Owner desires to continue to
    hold without regard to the Applicable Rate for the next succeeding
    Dividend Period;

      (2) the number of outstanding shares, if any, of AMPS held by such
    Beneficial Owner which such Beneficial Owner desires to continue to
    hold, provided that the Applicable Rate for the next succeeding
    Dividend Period shall not be less than the rate per annum specified by
    such Beneficial Owner, and/or

      (3) the number of outstanding shares, if any, of AMPS held by such
    Beneficial Owner which such Beneficial Owner offers to sell without
    regard to the Applicable Rate for the next succeeding Dividend Period;
    and

    (B) each Broker-Dealer, using a list of Potential Beneficial Owners that
  shall be maintained in good faith for the purpose of conducting a
  competitive Auction, shall contact Potential Beneficial Owners, including
  Persons that are not Beneficial Owners, on such list to determine the
  number of outstanding shares, if any, of AMPS which each such Potential
  Beneficial Owner offers to purchase, provided that the Applicable Rate for
  the next succeeding Dividend Period shall not be less than the rate per
  annum specified by such Potential Beneficial Owner.

  For the purposes hereof, the communication by a Beneficial Owner or Potential
Beneficial Owner to a Broker-Dealer, or the communication by a Broker-Dealer
acting for its own account to the Auction Agent, of information referred to in
clause (A) or (B) of this Paragraph 10(b)(i) is hereinafter referred to as an
"Order" and each Beneficial Owner and each Potential Beneficial Owner placing
an Order, including a Broker-Dealer acting in such capacity for its own
account, is hereinafter referred to as a "Bidder"; an Order containing the
information referred to in clause (A)(1) of this Paragraph 10(b)(i) is
hereinafter referred to as a "Hold Order"; an Order containing the information
referred to in clause (A)(2) or (B) of this Paragraph 10(b)(i) is hereinafter
referred to as a "Bid"; and an Order containing the information referred to in
clause (A)(3) of this Paragraph 10(b)(i) is hereinafter referred to as a "Sell
Order." Inasmuch as a Broker-Dealer participates in an Auction as an Existing
Holder or a Potential Holder only to represent the interests of a Beneficial
Owner or Potential Beneficial Owner, whether it be its customers or itself, all
discussion herein relating to the consequences of an Auction for Existing
Holders and Potential Holders also applies to the underlying beneficial
ownership interests represented.

                                      D-2
<PAGE>

  (ii) (A) A Bid by an Existing Holder shall constitute an irrevocable offer to
sell:

    (1) the number of outstanding shares of AMPS specified in such Bid if the
  Applicable Rate determined on such Auction Date shall be less than the rate
  per annum specified in such Bid; or

    (2) such number or a lesser number of outstanding shares of AMPS to be
  determined as set forth in Paragraph 10(e)(i)(D) if the Applicable Rate
  determined on such Auction Date shall be equal to the rate per annum
  specified therein; or

    (3) a lesser number of outstanding shares of AMPS to be determined as set
  forth in Paragraph 10(e)(ii)(C) if such specified rate per annum shall be
  higher than the Maximum Applicable Rate and Sufficient Clearing Bids do not
  exist.

  (B) A Sell Order by an Existing Holder shall constitute an irrevocable offer
to sell:

    (1) the number of outstanding shares of AMPS specified in such Sell
  Order, or

    (2) such number or a lesser number of outstanding shares of AMPS to be
  determined as set forth in Paragraph 10(e)(ii)(C) if Sufficient Clearing
  Bids do not exist.

  (C) A Bid by a Potential Holder shall constitute an irrevocable offer to
purchase:

    (1) the number of outstanding shares of AMPS specified in such Bid if the
  Applicable Rate determined on such Auction Date shall be higher than the
  rate per annum specified in such Bid; or

    (2) such number or a lesser number of outstanding shares of AMPS to be
  determined as set forth in Paragraph 10(e)(i)(E) if the Applicable Rate
  determined on such Auction Date shall be equal to the rate per annum
  specified therein.

Paragraph 10(c) Submission of Orders By Broker-Dealers to Auction Agent.

  (i) Each Broker-Dealer shall submit in writing or through the Auction Agent's
Auction Processing System to the Auction Agent prior to the Submission Deadline
on each Auction Date all Orders obtained by such Broker-Dealer, designating
itself (unless otherwise permitted by the Fund) as an Existing Holder in
respect of shares subject to Orders submitted or deemed submitted to it by
Beneficial Owners and as a Potential Holder in respect of shares subject to
Orders submitted to it by Potential Beneficial Owners, and specifying with
respect to each Order:

    (A) the name of the Bidder placing such Order (which shall be the Broker-
  Dealer unless otherwise permitted by the Fund);

    (B) the aggregate number of outstanding shares of AMPS that are the
  subject of such Order;

    (C) to the extent that such Bidder is an Existing Holder

      (1) the number of outstanding shares, if any, of AMPS subject to any
    Hold Order placed by such Existing Holder;

      (2) the number of outstanding shares, if any, of AMPS subject to any
    Bid placed by such Existing Holder and the rate per annum specified in
    such Bid; and

      (3) the number of outstanding shares, if any, of AMPS subject to any
    Sell Order placed by such Existing Holder; and

    (D) to the extent such Bidder is a Potential Holder, the rate per annum
  specified in such Potential Holder's Bid.

  (ii) If any rate per annum specified in any Bid contains more than three
figures to the right of the decimal point, the Auction Agent shall round such
rate up to the next highest one-thousandth (.001) of 1%.

  (iii) If an Order or Orders covering all of the outstanding shares of AMPS
held by an Existing Holder are not submitted to the Auction Agent prior to the
Submission Deadline, the Auction Agent shall deem a Hold

                                      D-3
<PAGE>

Order (in the case of an Auction relating to a Dividend Period which is not a
Special Dividend Period of 28 days or more) and a Sell Order (in the case of an
Auction relating to a Special Dividend Period of 28 days or more) to have been
submitted on behalf of such Existing Holder covering the number of outstanding
shares of AMPS held by such Existing Holder and not subject to Orders submitted
to the Auction Agent.

  (iv) If one or more Orders on behalf of an Existing Holder covering in the
aggregate more than the number of outstanding shares of AMPS held by such
Existing Holder are submitted to the Auction Agent, such Orders shall be
considered valid as follows and in the following order of priority:

    (A) any Hold Order submitted on behalf of such Existing Holder shall be
  considered valid up to and including the number of outstanding shares of
  AMPS held by such Existing Holder; provided that if more than one Hold
  Order is submitted on behalf of such Existing Holder and the number of
  shares of AMPS subject to such Hold Orders exceeds the number of
  outstanding shares of AMPS held by such Existing Holder, the number of
  shares of AMPS subject to each of such Hold Orders shall be reduced pro
  rata so that such Hold Orders, in the aggregate, cover exactly the number
  of outstanding shares of AMPS held by such Existing Holder;

    (B) any Bids submitted on behalf of such Existing Holder shall be
  considered valid, in the ascending order of their respective rates per
  annum if more than one Bid is submitted on behalf of such Existing Holder,
  up to and including the excess of the number of outstanding shares of AMPS
  held by such Existing Holder over the number of shares of AMPS subject to
  any Hold Order referred to in Paragraph 10(c)(iv)(A) above (and if more
  than one Bid submitted on behalf of such Existing Holder specifies the same
  rate per annum and together they cover more than the remaining number of
  shares that can be the subject of valid Bids after application of Paragraph
  10(c)(iv)(A) above and of the foregoing portion of this Paragraph
  10(c)(iv)(B) to any Bid or Bids specifying a lower rate or rates per annum,
  the number of shares subject to each of such Bids shall be reduced pro rata
  so that such Bids, in the aggregate, cover exactly such remaining number of
  shares); and the number of shares, if any, subject to Bids not valid under
  this Paragraph 10(c)(iv)(B) shall be treated as the subject of a Bid by a
  Potential Holder; and

    (C) any Sell Order shall be considered valid up to and including the
  excess of the number of outstanding shares of AMPS held by such Existing
  Holder over the number of shares of AMPS subject to Hold Orders referred to
  in Paragraph 10(c)(iv)(A) and Bids referred to in Paragraph 10(c)(iv)(B);
  provided that if more than one Sell Order is submitted on behalf of any
  Existing Holder and the number of shares of AMPS subject to such Sell
  Orders is greater than such excess, the number of shares of AMPS subject to
  each of such Sell Orders shall be reduced pro rata so that such Sell
  Orders, in the aggregate, cover exactly the number of shares of AMPS equal
  to such excess.

  (v) If more than one Bid is submitted on behalf of any Potential Holder, each
Bid submitted shall be a separate Bid with the rate per annum and number of
shares of AMPS therein specified.

  (vi) Any Order submitted by a Beneficial Owner or a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior
to the Submission Deadline on any Auction Date shall be irrevocable.

Paragraph 10(d) Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate.

  (i) Not earlier than the Submission Deadline on each Auction Date, the
Auction Agent shall assemble all Orders submitted or deemed submitted to it by
the Broker-Dealers (each such Order as submitted or deemed submitted by a
Broker-Dealer being hereinafter referred to individually as a "Submitted Hold
Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may be, or
as a "Submitted Order") and shall determine:

    (A) the excess of the total number of outstanding shares of AMPS over the
  number of outstanding shares of AMPS that are the subject of Submitted Hold
  Orders (such excess being hereinafter referred to as the "Available AMPS");

                                      D-4
<PAGE>

    (B) from the Submitted Orders whether the number of outstanding shares of
  AMPS that are the subject of Submitted Bids by Potential Holders specifying
  one or more rates per annum equal to or lower than the Maximum Applicable
  Rate exceeds or is equal to the sum of:

      (1) the number of outstanding shares of AMPS that are the subject of
    Submitted Bids by Existing Holders specifying one or more rates per
    annum higher than the Maximum Applicable Rate, and

      (2) the number of outstanding shares of AMPS that are subject to
    Submitted Sell Orders (if such excess or such equality exists (other
    than because the number of outstanding shares of AMPS in clauses (1)
    and (2) above are each zero because all of the outstanding shares of
    AMPS are the subject of Submitted Hold Orders), such Submitted Bids by
    Potential Holders hereinafter being referred to collectively as
    "Sufficient Clearing Bids"); and

    (C) if Sufficient Clearing Bids exist, the lowest rate per annum
  specified in the Submitted Bids (the "Winning Bid Rate") that if:

      (1) each Submitted Bid from Existing Holders specifying the Winning
    Bid Rate and all other submitted Bids from Existing Holders specifying
    lower rates per annum were rejected, thus entitling such Existing
    Holders to continue to hold the shares of AMPS that are the subject of
    such Submitted Bids, and

      (2) each Submitted Bid from Potential Holders specifying the Winning
    Bid Rate and all other Submitted Bids from Potential Holders specifying
    lower rates per annum were accepted, thus entitling the Potential
    Holders to purchase the shares of AMPS that are the subject of such
    Submitted Bids, would result in the number of shares subject to all
    Submitted Bids specifying the Winning Bid Rate or a lower rate per
    annum being at least equal to the Available AMPS.

  (ii) Promptly after the Auction Agent has made the determinations pursuant to
Paragraph 10(d)(i), the Auction Agent shall advise the Fund of the Maximum
Applicable Rate and, based on such determinations, the Applicable Rate for the
next succeeding Dividend Period as follows:

    (A) if Sufficient Clearing Bids exist, that the Applicable Rate for the
  next succeeding Dividend Period shall be equal to the Winning Bid Rate;

    (B) if Sufficient Clearing Bids do not exist (other than because all of
  the outstanding shares of AMPS are the subject of Submitted Hold Orders),
  that the Applicable Rate for the next succeeding Dividend Period shall be
  equal to the Maximum Applicable Rate; or

    (C) if all of the outstanding shares of AMPS are the subject of Submitted
  Hold Orders, that the Dividend Period next succeeding the Auction
  automatically shall be the same length as the immediately preceding
  Dividend Period and the Applicable Rate for the next succeeding Dividend
  Period shall be equal to 40% of the Reference Rate (or 60% of such rate if
  the Fund has provided notification to the Auction Agent prior to the
  Auction establishing the Applicable Rate for any dividend that net capital
  gains or other taxable income will be included in such dividend on shares
  of AMPS) on the date of the Auction.

Paragraph 10(e) Acceptance and Rejection of Submitted Bids and Submitted Sell
Orders And Allocation of Shares.

  Based on the determinations made pursuant to Paragraph 10(d)(i), the
Submitted Bids and Submitted Sell Orders shall be accepted or rejected and the
Auction Agent shall take such other action as set forth below:

    (i) If Sufficient Clearing Bids have been made, subject to the provisions
  of Paragraph 10(e)(iii) and Paragraph 10(e)(iv), Submitted Bids and
  Submitted Sell Orders shall be accepted or rejected in the following order
  of priority and all other Submitted Bids shall be rejected:

      (A) the Submitted Sell Orders of Existing Holders shall be accepted
    and the Submitted Bid of each of the Existing Holders specifying any
    rate per annum that is higher than the Winning Bid Rate shall be
    accepted, thus requiring each such Existing Holder to sell the
    outstanding shares of AMPS that are the subject of such Submitted Sell
    Order or Submitted Bid;

                                      D-5
<PAGE>

      (B) the Submitted Bid of each of the Existing Holder specifying any
    rate per annum that is lower than the Winning Bid Rate shall be
    rejected, thus entitling each such Existing Holder to continue to hold
    the outstanding shares of AMPS that are the subject of such Submitted
    Bid;

      (C) the Submitted Bid of each of the Potential Holders specifying any
    rate per annum that is lower than the Winning Bid Rate shall be
    accepted;

      (D) the Submitted Bid of each of the Existing Holders specifying a
    rate per annum that is equal to the Winning Bid Rate shall be rejected,
    thus entitling each such Existing Holder to continue to hold the
    outstanding shares of AMPS that are the subject of such Submitted Bid,
    unless the number of outstanding shares of AMPS subject to all such
    Submitted Bids shall be greater than the number of outstanding shares
    of AMPS ("Remaining Shares") equal to the excess of the Available AMPS
    over the number of outstanding shares of AMPS subject to Submitted Bids
    described in Paragraph 10(e)(i)(B) and Paragraph 10(e)(i)(C), in which
    event the Submitted Bids of each such Existing Holder shall be
    accepted, and each such Existing Holder shall be required to sell
    outstanding shares of AMPS, but only in an amount equal to the
    difference between (1) the number of outstanding shares of AMPS then
    held by such Existing Holder subject to such Submitted Bid and (2) the
    number of shares of AMPS obtained by multiplying (x) the number of
    Remaining Shares by (y) a fraction the numerator of which shall be the
    number of outstanding shares of AMPS held by such Existing Holder
    subject to such Submitted Bid and the denominator of which shall be the
    sum of the numbers of outstanding shares of AMPS subject to such
    Submitted Bids made by all such Existing Holders that specified a rate
    per annum equal to the Winning Bid Rate; and

      (E) the Submitted Bid of each of the Potential Holders specifying a
    rate per annum that is equal to the Winning Bid Rate shall be accepted
    but only in an amount equal to the number of outstanding shares of AMPS
    obtained by multiplying (x) the difference between the Available AMPS
    and the number of outstanding shares of AMPS subject to Submitted Bids
    described in Paragraph 10(e)(i)(B), Paragraph 10(e)(i)(C) and Paragraph
    10(e)(i)(D) by (y) a fraction the numerator of which shall be the
    number of outstanding shares of AMPS subject to such Submitted Bid and
    the denominator of which shall be the sum of the number of outstanding
    shares of AMPS subject to such Submitted Bids made by all such
    Potential Holders that specified rates per annum equal to the Winning
    Bid Rate.

    (ii) If Sufficient Clearing Bids have not been made (other than because
  all of the outstanding shares of AMPS are subject to Submitted Hold
  Orders), subject to the provisions of Paragraph 10(e)(iii), Submitted
  Orders shall be accepted or rejected as follows in the following order of
  priority and all other Submitted Bids shall be rejected:

      (A) the Submitted Bid of each Existing Holder specifying any rate per
    annum that is equal to or lower than the Maximum Applicable Rate shall
    be rejected, thus entitling such Existing Holder to continue to hold
    the outstanding shares of AMPS that are the subject of such Submitted
    Bid;

      (B) the Submitted Bid of each Potential Holder specifying any rate
    per annum that is equal to or lower than the Maximum Applicable Rate
    shall be accepted, thus requiring such Potential Holder to purchase the
    outstanding shares of AMPS that are the subject of such Submitted Bid;
    and

      (C) the Submitted Bids of each Existing Holder specifying any rate
    per annum that is higher than the Maximum Applicable Rate shall be
    accepted and the Submitted Sell Orders of each Existing Holder shall be
    accepted, in both cases only in an amount equal to the difference
    between (1) the number of outstanding shares of AMPS then held by such
    Existing Holder subject to such Submitted Bid or Submitted Sell Order
    and (2) the number of shares of AMPS obtained by multiplying (x) the
    difference between the Available AMPS and the aggregate number of
    outstanding shares of AMPS subject to Submitted Bids described in
    Paragraph 10(e)(ii)(A) and Paragraph 10(e)(ii)(B) by (y) a fraction the
    numerator of which shall be the number of outstanding shares of AMPS
    held by such Existing Holder subject to such Submitted Bid or Submitted
    Sell Order and the denominator of which shall be the number of
    outstanding shares of AMPS subject to all such Submitted Bids and
    Submitted Sell Orders.

                                      D-6
<PAGE>

    (iii) If, as a result of the procedures described in Paragraph 10(e)(i)
  or Paragraph 10(e)(ii), any Existing Holder would be entitled or required
  to sell, or any Potential Holder would be entitled or required to purchase,
  a fraction of a share of AMPS on any Auction Date, the Auction Agent shall,
  in such manner as in its sole discretion it shall determine, round up or
  down the number of shares of AMPS to be purchased or sold by any Existing
  Holder or Potential Holder on such Auction Date so that each outstanding
  share of AMPS purchased or sold by each Existing Holder or Potential Holder
  on such Auction Date shall be a whole share of AMPS.

    (iv) If, as a result of the procedures described in Paragraph 10(e)(i),
  any Potential Holder would be entitled or required to purchase less than a
  whole share of AMPS on any Auction Date, the Auction Agent, in such manner
  as in its sole discretion it shall determine, shall allocate shares of AMPS
  for purchase among Potential Holders so that only whole shares of AMPS are
  purchased on such Auction Date by any Potential Holder, even if such
  allocation results in one or more of such Potential Holders not purchasing
  any shares of AMPS on such Auction Date.

    (v) Based on the results of each Auction, the Auction Agent shall
  determine, with respect to each Broker-Dealer that submitted Bids or Sell
  Orders on behalf of Existing Holders or Potential Holders, the aggregate
  number of the outstanding shares of AMPS to be purchased and the aggregate
  number of outstanding shares of AMPS to be sold by such Potential Holders
  and Existing Holders and, to the extent that such aggregate number of
  outstanding shares to be purchased and such aggregate number of outstanding
  shares to be sold differ, the Auction Agent shall determine to which other
  Broker-Dealer or Broker-Dealers acting for one or more purchasers such
  Broker-Dealer shall deliver, or from which other Broker-Dealer or Broker-
  Dealers acting for one or more sellers such Broker-Dealer shall receive, as
  the case may be, outstanding shares of AMPS.

Paragraph 10(f) Miscellaneous.

  The Fund may interpret the provisions of this Paragraph 10 to resolve any
inconsistency or ambiguity, remedy any formal defect or make any other change
or modification that does not substantially adversely affect the rights of
Beneficial Owners of AMPS. A Beneficial Owner or an Existing Holder (A) may
sell, transfer or otherwise dispose of shares of AMPS only pursuant to a Bid or
Sell Order in accordance with the procedures described in this Paragraph 10 or
to or through a Broker-Dealer, provided that in the case of all transfers other
than pursuant to Auctions such Beneficial Owner or Existing Holder, its Broker-
Dealer, if applicable, or its Agent Member advises the Auction Agent of such
transfer and (B) except as otherwise required by law, shall have the ownership
of the shares of AMPS held by it maintained in book entry form by the
Securities Depository in the account of its Agent Member, which in turn will
maintain records of such Beneficial Owner's beneficial ownership. Neither the
Fund nor any Affiliate (other than Merrill Lynch, Pierce, Fenner & Smith
Incorporated) shall submit an Order in any Auction. Any Beneficial Owner that
is an Affiliate (other than Merrill Lynch, Pierce, Fenner & Smith Incorporated)
shall not sell, transfer or otherwise dispose of shares of AMPS to any Person
other than the Fund. All of the outstanding shares of AMPS of a Series shall be
represented by a single certificate registered in the name of the nominee of
the Securities Depository unless otherwise required by law or unless there is
no Securities Depository. If there is no Securities Depository, at the Fund's
option and upon its receipt of such documents as it deems appropriate, any
shares of AMPS may be registered in the Stock Register in the name of the
Beneficial Owner thereof and such Beneficial Owner thereupon will be entitled
to receive certificates therefor and required to deliver certificates thereof
or upon transfer or exchange thereof.

                                      D-7


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