<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 7, 1997
FILE NO. 2-57354
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
POST-EFFECTIVE AMENDMENT NO. 22 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 21 [X]
(CHECK APPROPRIATE BOX OR BOXES)
------------------------
MERRILL LYNCH MUNICIPAL BOND FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
P.O. BOX 9011 08543-9011
PRINCETON, NEW JERSEY (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH MUNICIPAL BOND FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
<TABLE>
<S> <C>
PHILIP L. KIRSTEIN, ESQ. LEONARD B. MACKEY, JR., ESQ.
FUND ASSET MANAGEMENT ROGERS & WELLS
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 200 PARK AVENUE, NEW YORK, N.Y. 10166
</TABLE>
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
[X] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
------------------------
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF CLASS A SHARES, CLASS
B SHARES, CLASS C SHARES AND CLASS D SHARES OF THE INSURED PORTFOLIO SERIES, THE
LIMITED MATURITY PORTFOLIO SERIES, AND THE HIGH YIELD PORTFOLIO SERIES COMMON
STOCK UNDER THE SECURITIES ACT OF 1933 PURSUANT TO RULE 24f-2 UNDER THE
INVESTMENT COMPANY ACT OF 1940. THE NOTICE REQUIRED BY SUCH RULE FOR THE
REGISTRANT'S MOST RECENT YEAR WAS FILED ON AUGUST 25, 1997.
================================================================================
<PAGE> 2
MERRILL LYNCH MUNICIPAL BOND FUND, INC.
------------------------
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A
ITEM NO. LOCATION
- -------- -----------------------------------------
<C> <S> <C>
PART A
1. Cover Page............................... Cover Page
2. Synopsis................................. Fee Tables
3. Financial Highlights..................... Financial Highlights; Additional
Information-Performance Data
4. General Description of Registrant........ Investment Objective and Policies;
Investment Policies of the Portfolios
5. Management of the Fund................... Fee Tables; Management of the Fund;
Portfolio Transactions; Additional
Information
5A. Management's Discussion of Fund
Performance............................ *
6. Capital Stock and Other Securities....... Cover Page; Additional Information
7. Purchase of Securities Being Offered..... Cover Page; Merrill Lynch Select
Pricing(SM)System; Fee Table; Purchase
of Shares; Net Asset Value
8. Redemption or Repurchase................. Merrill Lynch Select Pricing(SM) System;
Fee Tables; Redemption of Shares;
Shareholder Services
9. Pending Legal Proceedings................ *
PART B
10. Cover Page............................... Cover Page
11. Table of Contents........................ Table of Contents
12. General Information and History.......... Additional Information
13. Investment Objectives and Policies....... Investment Objective and Policies;
Investment Restrictions
14. Management of the Fund................... Management of the Fund
15. Control Persons and Principal Holders of
Securities............................. Management of the Fund
16. Investment Advisory and Other Services... Management of the Fund; Purchase of
Shares
17. Brokerage Allocation and Other
Practices.............................. Portfolio Transactions and Brokerage
Commissions; Financial Statements
18. Capital Stock and Other Securities....... Additional Information
19. Purchase, Redemption and Pricing of
Securities Being Offered............... Purchase of Shares; Net Asset Value,
Redemption of Shares; Systematic
Withdrawal Plans; Exchange Privilege;
Additional Information
20. Tax Status............................... Dividends, Distributions and Taxes
21. Underwriters............................. Purchase of Shares
22. Calculations of Performance Data......... Performance Data
23. Financial Statements..................... Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
- ---------------
* Item inapplicable or answer negative.
<PAGE> 3
PROSPECTUS
OCTOBER 7, 1997
MERRILL LYNCH MUNICIPAL BOND FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
------------------------
Merrill Lynch Municipal Bond Fund, Inc. (the "Fund") is a professionally
managed, diversified, open-end investment company that seeks to provide
shareholders with as high a level of income exempt from Federal income taxes as
is consistent with the investment policies of each of its Portfolios and prudent
investment management. The Fund is a series fund and is comprised of three
separate Portfolios, each of which invests primarily in a diversified portfolio
of tax-exempt Municipal Bonds, principally consisting of state, municipal and
public authority securities. Each of the Portfolios pursues its investment
objective through the separate investment policies described below:
Insured Portfolio invests primarily in long-term, investment grade Municipal
Bonds, each of which is covered by portfolio insurance guaranteeing the timely
payment of principal at maturity and interest.
National Portfolio invests primarily in long-term medium to lower grade
Municipal Bonds offering higher yields than the Insured Portfolio but also
subject to greater risks than investment grade Municipal Bonds.
Limited Maturity Portfolio invests primarily in investment grade Municipal
Bonds with a maximum maturity not to exceed four years and, depending on market
conditions, an average maturity of less than two years is anticipated. The
Limited Maturity Portfolio can be expected to offer the lowest yield of the
three Portfolios, but it will be subject to less market risk than the
longer-term Portfolios.
For more information on the Fund's investment objective and policies, please
see "Investment Objective and Policies" on page 19.
------------------------
Each Portfolio is, in effect, a separate fund issuing its own shares.
Pursuant to the Merrill Lynch Select Pricing(SM) System, each Portfolio of the
Fund offers four classes of shares, each with a different combination of sales
charges, ongoing fees and other features. Class C shares of the Limited Maturity
Portfolio are available only through the Exchange Privilege. The Merrill Lynch
Select Pricing(SM) System permits an investor to choose the method of purchasing
shares that the investor believes is most beneficial given the amount of the
purchase, the length of time the investor expects to hold the shares and other
relevant circumstances. See "Merrill Lynch Select Pricing(SM) System" on page 8.
Class A and Class D shares of the Fund's Portfolios may be purchased
directly from Merrill Lynch Funds Distributor, Inc. (the "Distributor"), P.O.
Box 9081, Princeton, New Jersey 08543-9081 ((609) 282-2800), or from securities
dealers that have entered into selected dealer agreements with the Distributor,
including Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch").
Class B and Class C shares of the Fund's Portfolios may only be purchased either
directly from the Distributor or Merrill Lynch. See "Purchase of Shares" below.
The minimum initial purchase for shares of each Portfolio is $1,000, and the
minimum subsequent purchase in each Portfolio is $50 except that for
participants in certain fee-based programs the minimum initial purchase is $500
and the minimum subsequent purchase is $50. Merrill Lynch may charge its
customers a processing fee (presently $5.35) for confirming purchases and
repurchases. Purchases and redemptions made directly through the Fund's transfer
agent are not subject to the processing fee. See "Purchase of Shares" and
"Redemption of Shares." The net investment income of each Portfolio is declared
daily and paid monthly.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
This Prospectus sets forth in concise form the information about the Fund
that a prospective investor should know before investing in the Fund. Investors
should read and retain this Prospectus for future reference. Additional
information about the Fund has been filed with the Securities and Exchange
Commission (the "Commission") in a Statement of Additional Information, dated
October 7, 1997, and is available upon request and without charge, by calling or
writing the Fund at the address and telephone number set forth above. The
Commission maintains a Web site (http://www.sec.gov) that contains the Statement
of Additional Information, material incorporated by reference and other
information regarding the Fund. The Statement of Additional Information is
hereby incorporated by reference into this Prospectus.
------------------------
FUND ASSET MANAGEMENT--INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE> 4
INSURED PORTFOLIO
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(a) CLASS B(b) CLASS C CLASS D
----------- ----------------------- -------------- ---------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)...... 4.00%(c) None None 4.00%(c)
Sales Charge Imposed on Dividend
Reinvestments............................ None None None None
Deferred Sales Charge (as a percentage of
original purchase price or redemption
proceeds, whichever is lower)............ None(d) 4.00% during the first 1.00% for one None(d)
year, decreasing 1.00% year(f)
annually thereafter to
0.0% after the fourth
year(e)
Exchange Fee............................... None None None None
ANNUAL FUND OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS):
Investment Advisory Fees(g)................ 0.36% 0.36% 0.36% 0.36%
12b-1 Fees(h):
Account Maintenance Fees................... None 0.25% 0.25% 0.25%
Distribution Fees.......................... None 0.50% 0.55% None
(Class B shares convert
to
Class D shares
automatically after
approximately ten years
and cease being subject
to
distribution fees)
Other Expenses:
Custodial Fees........................... 0.01% 0.01% 0.01% 0.01%
Shareholder Servicing Costs(i)........... 0.03% 0.04% 0.05% 0.03%
Other.................................... 0.04% 0.03% 0.03% 0.04%
------ ----- ----- -----
Total Other Expenses................... 0.08% 0.08% 0.09% 0.08%
------ ----- ----- -----
Total Fund Operating Expenses.............. 0.44% 1.19% 1.25% 0.69%
====== ===== ===== =====
</TABLE>
- ---------------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders and participants in certain fee-based programs. See
"Purchase of Shares -- Initial Sales Charge Alternatives -- Class A and
Class D Shares" -- page 33.
(b) Class B shares convert to Class D shares automatically approximately ten
years after initial purchase. See "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares" -- page 36.
(c) Reduced for purchases of $25,000 and over and waived for purchases of Class
A shares in connection with certain fee-based programs. Class A or Class D
purchases of $1,000,000 or more may not be subject to an initial sales
charge. See "Purchase of Shares -- Initial Sales Charge
Alternatives -- Class A and Class D Shares" -- page 33.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more that
are not subject to an initial sales charge may instead be subject to a CDSC
of 1.00% of amounts redeemed within the first year after purchase. Such CDSC
may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 45.
(e) The CDSC may be modified in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 45.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 45.
(g) See "Management of the Fund -- Management and Advisory
Arrangements" -- page 28.
(h) See "Purchase of Shares -- Distribution Plans" -- page 39.
(i) See "Management of the Fund -- Transfer Agency Services" -- page 29.
2
<PAGE> 5
INSURED PORTFOLIO
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID
FOR THE PERIOD OF:
-------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment including the maximum $40 initial sales charge
(Class A and Class D shares only) and assuming (1) the Total
Fund Operating Expenses for each class set forth on page 2,
(2) a 5% annual return throughout the periods and (3)
redemption at the end of the period (including any applicable
CDSC for Class B and Class C shares):
Class A................................................... $ 44 $ 54 $ 64 $ 93
Class B................................................... $ 52 $ 58 $ 65 $144
Class C................................................... $ 23 $ 40 $ 69 $151
Class D................................................... $ 47 $ 61 $ 77 $122
An investor would pay the following expenses on the same $1,000
investment assuming no redemption at the end of the period:
Class A................................................... $ 44 $ 54 $ 64 $ 93
Class B................................................... $ 12 $ 38 $ 65 $144
Class C................................................... $ 13 $ 40 $ 69 $151
Class D................................................... $ 47 $ 61 $ 77 $122
</TABLE>
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund investing in the Insured
Portfolio will bear directly or indirectly. The Example set forth above assumes
reinvestment of all dividends and distributions and utilizes a 5% annual rate of
return as mandated by Commission regulations. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF
RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN
THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. Class B and Class C shareholders who
hold their shares for an extended period of time may pay more in Rule 12b-1
distribution fees than the economic equivalent of the maximum front-end sales
charge permitted under the Conduct Rules of the National Association of
Securities Dealers, Inc. ("NASD"). Merrill Lynch may charge its customers a
processing fee (presently $5.35) for confirming purchases and redemptions.
Purchases and redemptions made directly through the Fund's transfer agent are
not subject to the processing fee. See "Purchase of Shares" and "Redemption of
Shares."
3
<PAGE> 6
NATIONAL PORTFOLIO
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(a) CLASS B(b) CLASS C CLASS D
---------- ----------------------- -------------- ---------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)....... 4.00%(c) None None 4.00%(c)
Sales Charge Imposed on Dividend
Reinvestments............................. None None None None
Deferred Sales Charge (as a percentage of
original purchase price or redemption
proceeds, whichever is lower)............. None(d) 4.00% during the first 1.0% for one None(d)
year, decreasing 1.00% year(f)
annually thereafter to
0.0% after the fourth
year(e)
Exchange Fee................................ None None None None
ANNUAL FUND OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS):
Investment Advisory Fees(g)................. 0.48% 0.48% 0.48% 0.48%
12b-1 Fees(h):
Account Maintenance Fees.................. None 0.25% 0.25% 0.25%
Distribution Fees......................... None 0.50% 0.55% None
(Class B shares convert
to Class D shares
automatically after
approximately ten years
and cease being subject
to distribution fees)
Other Expenses:
Custodial Fees............................ 0.01% 0.01% 0.01% 0.01%
Shareholder Servicing Costs(i)............ 0.04% 0.05% 0.05% 0.04%
Other..................................... 0.02% 0.02% 0.02% 0.02%
------ ----- ----- -----
Total Other Expenses.................... 0.07% 0.08% 0.08% 0.07%
------ ----- ----- -----
Total Fund Operating Expenses............. 0.55% 1.31% 1.36% 0.80%
====== ===== ===== =====
</TABLE>
- ---------------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders and participants in certain fee-based programs. See
"Purchase of Shares -- Initial Sales Charge Alternatives -- Class A and
Class D Shares" -- page 33.
(b) Class B shares convert to Class D shares automatically approximately ten
years after initial purchase. See "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares" -- page 36.
(c) Reduced for purchases of $25,000 and over and waived for purchases of Class
A shares in connection with certain fee-based programs. Class A and Class D
purchases of $1,000,000 or more may not be subject to an initial sales
charge. See "Purchases of Shares -- Initial Sales Charge Alternatives
-- Class A and Class D Shares" -- page 33.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more that
are not subject to an initial sales charge may instead be subject to a CDSC
of 1.0% of amounts redeemed within the first year after purchase. Such CDSC
may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 45.
(e) The CDSC may be modified in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 45.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 45.
(g) See "Management of the Fund -- Management and Advisory Arrangements" -- page
28.
(h) See "Purchase of Shares -- Distribution Plans" -- page 39.
(i) See "Management of the Fund -- Transfer Agency Services" -- page 29.
4
<PAGE> 7
NATIONAL PORTFOLIO
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID
FOR THE PERIOD OF:
-------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment including the maximum $40 initial sales charge
(Class A and Class D shares only) and assuming (1) the Total
Fund Operating Expenses for each class set forth on page 4,
(2) a 5% annual return throughout the periods and (3)
redemption at the end of the period (including any applicable
CDSC for Class B and Class C shares):
Class A................................................... $ 45 $ 57 $ 70 $106
Class B................................................... $ 53 $ 62 $ 72 $158
Class C................................................... $ 24 $ 43 $ 74 $164
Class D................................................... $ 48 $ 65 $ 83 $135
An investor would pay the following expenses on the same $1,000
investment assuming no redemption at the end of the period:
Class A................................................... $ 45 $ 57 $ 70 $106
Class B................................................... $ 13 $ 42 $ 72 $158
Class C................................................... $ 14 $ 43 $ 74 $164
Class D................................................... $ 48 $ 65 $ 83 $135
</TABLE>
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund investing in the National
Portfolio will bear directly or indirectly. The Example set forth above assumes
reinvestment of all dividends and distributions and utilizes a 5% annual rate of
return as mandated by Commission regulations. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF
RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN
THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. Class B and Class C shareholders who
hold their shares for an extended period of time may pay more in Rule 12b-1
distribution fees than the economic equivalent of the maximum front-end sales
charge permitted under the Conduct Rules of the NASD. Merrill Lynch may charge
its customers a processing fee (presently $5.35) for confirming purchases and
redemptions. Purchases and redemptions made directly through the Fund's transfer
agent are not subject to the processing fee. See "Purchase of Shares" and
"Redemption of Shares."
5
<PAGE> 8
LIMITED MATURITY PORTFOLIO
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(a) CLASS B(b) CLASS C* CLASS D
----------- ----------------------- -------------- ---------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)...... 1.00%(c) None None 1.00%(c)
Sales Charge Imposed on Dividend
Reinvestments............................ None None None None
Deferred Sales Charge (as a percentage of
original purchase price or redemption
proceeds, whichever is lower)............ None(d) 1.00% during the first 1.00% for one None(d)
year, decreasing to year(f)
0.0% after the first
year(e)
Exchange Fee............................... None None None None
ANNUAL FUND OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS):
Investment Advisory Fee(g)................. 0.33% 0.33% 0.33% 0.33%
12b-1 Fees(h):
Account Maintenance Fees................. None 0.15% 0.15% 0.10%
Distribution Fees(g)..................... None 0.20% 0.20% None
(Class B shares convert
to Class D shares
automatically after
approximately ten years
and cease being subject
to distribution fees)
Other Expenses:
Custodial Fees........................... 0.01% 0.01% 0.01% 0.01%
Shareholder Servicing Costs(i)........... 0.02% 0.03% 0.04% 0.02%
Other.................................... 0.03% 0.03% 0.02% 0.02%
------ ----- ----- -----
Total Other Expenses................... 0.06% 0.07% 0.07% 0.05%
------ ----- ----- -----
Total Fund Operating Expenses.............. 0.39% 0.75% 0.75% 0.48%
====== ===== ===== =====
</TABLE>
- ---------------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders and participants in certain fee-based programs. See
"Purchase of Shares -- Initial Sales Charge Alternatives -- Class A and
Class D Shares" -- page 33.
(b) Class B shares convert to Class D shares automatically approximately ten
years after initial purchase. See "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares" -- page 36.
(c) Reduced for purchases of $100,000 and over and waived for purchases of
Class A shares in connection with certain fee-based programs. Class A and
Class D purchases of $100,000,000 or more may not be subject to an initial
sales charge. See "Purchases of Shares -- Initial Sales Charge
Alternatives -- Class A and Class D Shares" -- page 33.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more that
are not subject to an initial sales charge may instead be subject to a CDSC
of 0.20% of amounts redeemed within the first year after purchase. Such CDSC
may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 45.
(e) The CDSC may be modified in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 45.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 45.
(g) See "Management of the Fund -- Management and Advisory
Arrangements" -- page 28.
(h) See "Purchase of Shares -- Distribution Plans" -- page 39.
(i) See "Management of the Fund -- Transfer Agency Services" -- page 29.
* Class C shares of the Limited Maturity Portfolio are available only through
the Exchange Privilege. See page 46.
6
<PAGE> 9
LIMITED MATURITY PORTFOLIO
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID
FOR THE PERIOD OF:
-------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment including the maximum $10 initial sales charge
(Class A and Class D shares only) and assuming (1) the Total
Fund Operating Expenses for each class set forth on page 6,
(2) a 5% annual return throughout the periods and (3)
redemption at the end of the period (including any applicable
CDSC for Class B and Class C shares):
Class A................................................... $ 14 $ 22 $ 32 $ 59
Class B................................................... $ 18 $ 24 $ 42 $ 93
Class C*.................................................. $ 18 $ 24 $ 42 $ 93
Class D................................................... $ 15 $ 25 $ 37 $ 70
An investor would pay the following expenses on the same $1,000
investment assuming no redemption at the end of the period:
Class A................................................... $ 14 $ 22 $ 32 $ 59
Class B................................................... $ 8 $ 24 $ 42 $ 93
Class C*.................................................. $ 8 $ 24 $ 42 $ 93
Class D................................................... $ 15 $ 25 $ 37 $ 70
</TABLE>
- ---------------
* Class C shares of the Limited Maturity Portfolio are available only through
the Exchange Privilege.
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund investing in the Limited
Maturity Portfolio will bear directly or indirectly. The Example set forth above
assumes reinvestment of all dividends and distributions and utilizes a 5% annual
rate of return as mandated by Commission regulations. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF
RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN
THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. Class B and Class C shareholders who
hold their shares for an extended period of time may pay more in Rule 12b-1
distribution fees than the economic equivalent of the maximum front-end sales
charge permitted under the Conduct Rules of the NASD. Merrill Lynch may charge
its customers a processing fee (presently $5.35) for confirming purchases and
redemptions. Purchases and redemptions made directly through the Fund's transfer
agent are not subject to the processing fee. See "Purchase of Shares" and
"Redemption of Shares."
7
<PAGE> 10
MERRILL LYNCH SELECT PRICING(SM) SYSTEM
Each Portfolio of the Fund offers four classes of shares under the Merrill
Lynch Select Pricing(SM) System. The shares of each class may be purchased at a
price equal to the next determined net asset value per share subject to the
sales charges and ongoing fee arrangements described below. Shares of Class A
and Class D are sold to investors choosing the initial sales charge
alternatives, and shares of Class B, and for the Insured Portfolio and National
Portfolio only, shares of Class C are sold to investors choosing the deferred
sales charge alternatives. Class C shares of the Limited Maturity Portfolio are
offered only through the exchange privilege and may not be purchased except
through exchange of Class C shares of another Portfolio or another Fund. The
Merrill Lynch Select Pricing(SM) System is used by more than 50 registered
investment companies advised by Merrill Lynch Asset Management, L.P. ("MLAM") or
Fund Asset Management, L.P. ("FAM" or the "Investment Adviser"), an affiliate of
MLAM. Funds advised by MLAM or FAM that utilize the Merrill Lynch Select
Pricing(SM) System are referred to herein as "MLAM-advised mutual funds."
Each Class A, Class B, Class C or Class D share of the Fund's Portfolios
represents an identical interest in the investment portfolio of the applicable
Portfolio and has the same rights, except that Class B, Class C and Class D
shares bear the expenses of the ongoing account maintenance fees and Class B and
Class C shares bear the expenses of the ongoing distribution fees and the
additional incremental transfer agency costs resulting from the deferred sales
charge arrangements. The CDSCs, distribution fees and account maintenance fees
that are imposed on Class B and Class C shares of a Portfolio, as well as the
account maintenance fees that are imposed on the Class D shares, will be imposed
directly against those classes and not against all assets of the relevant
Portfolio and, accordingly, such charges will not affect the net asset value of
any other class or have any impact on investors choosing another sales charge
option. Dividends paid by a Portfolio for each class of shares will be
calculated in the same manner at the same time and will differ only to the
extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Each class has different exchange privileges. See "Shareholder
Services -- Exchange Privileges."
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the CDSCs and distribution fees with respect to the Class B and Class C
shares in that the sales charges and distribution fees applicable to each class
provide for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select Pricing(SM) System that the investor
believes is most beneficial under his or her particular circumstances. More
detailed information as to each class of shares is set forth under "Purchase of
Shares."
8
<PAGE> 11
INSURED AND NATIONAL PORTFOLIOS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
A Maximum 4.00% initial No No No
sales charge(2)(3)
- -------------------------------------------------------------------------------------------------
B CDSC for a period of 4 0.25% 0.50% B shares convert to D shares
years, automatically after
at a rate of 4.00% during approximately ten years(5)
the
first year, decreasing 1.00%
annually to 0.0%(4)
- -------------------------------------------------------------------------------------------------
C 1.00% CDSC for one year 0.25% 0.55% No
decreasing to 0.0% after
the first year(6)
- -------------------------------------------------------------------------------------------------
D Maximum 4.00% initial 0.25% No No
sales charge(3)
- -------------------------------------------------------------------------------------------------
</TABLE>
LIMITED MATURITY PORTFOLIO
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
A Maximum 1.00% initial No No No
sales charge(2)(3)
- -------------------------------------------------------------------------------------------------
B CDSC at a rate of 1.00% 0.15% 0.20% B shares convert to
during the first year, D shares automatically
decreasing to 0.0% after after approximately
the first year(4) ten years(5)
- -------------------------------------------------------------------------------------------------
C* 1.00% CDSC for one year 0.15% 0.20% No
decreasing to 0.0% after
the first year(6)
- -------------------------------------------------------------------------------------------------
D Maximum 1.00% initial 0.10% No No
sales charge(3)
- -------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs are imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares -- Initial Sales
Charge Alternatives -- Class A and Class D Shares -- Eligible Class A
Investors."
(3) Reduced for purchases of $25,000 or more for the Insured and National
Portfolios and $100,000 or more for the Limited Maturity Portfolio and
waived for purchases of Class A shares in connection with certain fee-based
programs. Class A and Class D share purchases of $1,000,000 or more may not
be subject to an initial sales charge but instead may be subject to a 1.0%
CDSC for the Insured and National Portfolios and a 0.20% CDSC for the
Limited Maturity Portfolio, if redeemed within one year. See "Class A" and
"Class D" below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans was modified. Also, Class B
shares of certain other MLAM-advised mutual funds into which exchanges may
be made have an eight year conversion period. If Class B shares of the Fund
are exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked
onto the holding period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
* Class C shares of the Limited Maturity Portfolio are available only through
the Exchange Privilege. See page 46.
9
<PAGE> 12
Class A:Class A shares incur an initial sales charge when they are purchased and
bear no ongoing distribution or account maintenance fees. Class A shares
are offered to a limited group of investors and also will be issued upon
reinvestment of dividends on outstanding Class A shares. Investors who
currently own Class A shares of a Portfolio in a shareholder account are
entitled to purchase additional Class A shares of that Portfolio in that
account. Other eligible investors include participants in certain
fee-based programs. In addition, Class A shares will be offered at net
asset value to Merrill Lynch & Co., Inc. ("ML & Co.") and its
subsidiaries (the term "subsidiaries," when used herein with respect to
ML & Co., includes MLAM, FAM and certain other entities directly or
indirectly wholly owned and controlled by ML & Co.) and their directors
and employees and to members of the Boards of MLAM-advised mutual funds.
The maximum initial sales charge is 4.00% for the Insured and National
Portfolios and 1.00% for the Limited Maturity Portfolio and is reduced
for purchases of $25,000 and over for the Insured and National
Portfolios and of $100,000 or over for the Limited Maturity Portfolio,
and waived for purchases by participants in certain fee-based programs.
Purchases of $1,000,000 or more may not be subject to an initial sales
charge but such purchases may be subject to a CDSC of 1.00% (for the
Insured and National Portfolios) or 0.20% (for the Limited Maturity
Portfolio) if the shares are redeemed within one year after purchase.
Such CDSC may be waived in connection with certain fee-based programs.
Sales charges also are reduced under a right of accumulation that takes
into account the investors's holdings of all classes of all MLAM-advised
mutual funds. See "Purchase of Shares -- Initial Sales Charge
Alternatives -- Class A and Class D Shares."
Class B:Class B shares do not incur a sales charge when they are purchased, but
they are subject to an ongoing account maintenance fee of 0.25% (in the
case of the Insured Portfolio and the National Portfolio) and 0.15% (in
the case of the Limited Maturity Portfolio) of the Portfolio's average
net assets attributable to the Class B shares and an ongoing
distribution fee of 0.50% (in the case of the Insured Portfolio and the
National Portfolio) and 0.20% (in the case of the Limited Maturity
Portfolio) of the Portfolio's average net assets attributable to Class B
shares. Class B shares are also subject to a CDSC if they are redeemed
within four years of purchase (in the case of the Insured Portfolio and
National Portfolio) or within one year of purchase (in the case of the
Limited Maturity Portfolio). Such CDSC may be modified in connection
with certain fee-based programs. Approximately ten years after issuance,
Class B shares of the Portfolio will convert automatically into Class D
shares of the Portfolio, which are subject to an account maintenance fee
but no distribution fee; Class B shares of certain other MLAM-advised
mutual funds into which exchanges may be made convert into Class D
shares automatically after approximately eight years. If Class B shares
of a Portfolio are exchanged for Class B shares of another MLAM-advised
mutual fund, the conversion period applicable to the Class B shares
acquired in the exchange will apply, and the holding period for the
shares exchanged will be tacked onto the holding period for the shares
acquired. Automatic conversion of Class B shares into Class D shares
will occur at least once a month on the basis of the relative net asset
values of the shares of the two classes on the conversion date, without
the imposition of any sales load, fee or other charge. Conversion of
Class B shares to Class D shares will not be deemed a purchase or sale
of the shares for Federal income tax purposes. Shares purchased through
reinvestment of dividends on Class B shares also will convert
automatically to Class D shares. The conversion period for dividend
reinvestment shares is modified as
10
<PAGE> 13
described under "Purchase of Shares -- Deferred Sales Charge
Alternatives -- Class B and Class C Shares -- Conversion of Class B
Shares to Class D Shares."
Class C:Class C shares do not incur a sales charge when they are purchased, but
they are subject to an ongoing account maintenance fee of 0.25% (in the
case of the Insured Portfolio and the National Portfolio) and 0.15% (in
the case of the Limited Maturity Portfolio) of average net assets and an
ongoing distribution fee of 0.55% (in the case of the Insured Portfolio
and the National Portfolio) and 0.20% (in the case of the Limited
Maturity Portfolio) of average net assets. Class C shares are also
subject to a 1.00% CDSC if they are redeemed within one year of
purchase. Such CDSC may be waived in connection with certain fee-based
programs. Although Class C shares are subject to a CDSC for only one
year (as compared to four years for Class B of the Insured Portfolio and
National Portfolio), Class C shares have no conversion feature and,
accordingly, an investor who purchases Class C shares will be subject to
account maintenance fees and higher distribution fees that will be
imposed on Class C shares for an indefinite period subject to annual
approval by the Fund's Board of Directors and regulatory limitations.
Class C shares of the Limited Maturity Portfolio are available only
through the Exchange Privilege. See "Shareholder Services -- Exchange
Privileges."
Class D:Class D shares incur an initial sales charge when they are purchased and
are subject to an ongoing account maintenance fee of 0.25% (in the case
of the Insured Portfolio and the National Portfolio) and 0.10% (in the
case of the Limited Maturity Portfolio) of average net assets. The
maximum initial sales charge is 4.00% (for the Insured Portfolio and the
National Portfolio) and 1.00% (for the Limited Maturity Portfolio) and
is reduced for purchases of $25,000 or more for the Insured Portfolio or
for the National Portfolio, and is reduced for purchases of $100,000 or
more for the Limited Maturity Portfolio. Class D shares are not subject
to an ongoing distribution fee or any CDSC when they are redeemed.
Purchases of $1,000,000 or more may not be subject to an initial sales
charge but such purchase may be subject to a CDSC of 1.00% (for the
Insured and National Portfolios) or 0.20% (for the Limited Maturity
Portfolio) if the shares are redeemed within one year after purchase.
Such CDSC may be waived in connection with certain fee-based programs.
The schedule of initial sales charges and reductions for Class D shares
is the same as the schedule for Class A shares, except that there is no
waiver for purchases in connection with certain fee-based programs.
Class D shares also will be issued upon conversion of Class B shares as
described above under "Class B." See "Purchase of Shares -- Initial
Sales Charge Alternatives -- Class A and Class D Shares."
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing(SM) System that the investor believes is most beneficial under his or
her particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because of the account maintenance fee imposed
on Class D shares. Investors qualifying for significantly reduced initial sales
charges may find the initial sales charge alternative particularly attractive
because similar sales charge reductions are not available with respect to the
deferred sales charges imposed in connection with purchases of Class B or Class
C shares. Investors not qualifying for reduced initial sales charges who expect
to maintain their investment for an extended period of time also may elect to
purchase
11
<PAGE> 14
Class A or Class D shares, because over time the accumulated ongoing account
maintenance and distribution fees on Class B or Class C shares may exceed the
initial sales charge and, in the case of Class D shares, the account maintenance
fee. Although some investors who previously purchased Class A shares may no
longer be eligible to purchase Class A shares of other MLAM-advised mutual
funds, those previously purchased Class A shares, together with Class B, Class C
and Class D share holdings, will count toward a right of accumulation that may
qualify the investor for reduced initial sales charges on new initial sales
charge purchases. In addition, the ongoing Class B and Class C account
maintenance and distribution fees will cause Class B and Class C shares to have
higher expense ratios, pay lower dividends and have lower total returns than the
initial sales charge shares. The ongoing Class D account maintenance fees will
cause Class D shares to have a higher expense ratio, pay lower dividends and
have a lower total return than Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the benefit
of putting all of the investor's dollars to work from the time the investment is
made. The deferred sales charge alternatives may be particularly appealing to
investors who do not qualify for a reduction in initial sales charges. Both
Class B and Class C shares are subject to ongoing account maintenance fees and
distribution fees; however, the ongoing account maintenance and distribution
fees potentially may be offset to the extent any return is realized on the
additional funds initially invested in Class B or Class C shares. In addition,
Class B shares of a Portfolio will be converted into Class D shares of that
Portfolio after a conversion period of approximately ten years, and thereafter
investors will be subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend to
hold their shares for an extended period of time. Investors in Class B shares
should take into account whether they intend to redeem their shares within the
CDSC period and, if not, whether they intend to remain invested until the end of
the conversion period and thereby take advantage of the reduction in ongoing
fees resulting from the conversion into Class D shares. Other investors,
however, may elect to purchase Class C shares if they determine that it is
advantageous to have all their assets invested initially and they are uncertain
as to the length of time they intend to hold their assets in MLAM-advised mutual
funds. Although Class C shareholders are subject to a shorter CDSC period at a
lower rate, they forgo the Class B conversion feature, making their investment
subject to account maintenance and distribution fees for an indefinite period of
time. In addition, while both Class B and Class C distribution fees are subject
to the limitations on asset-based sales charges imposed by the NASD, the Class B
distribution fees are further limited under a voluntary waiver of asset-based
sales charges. See "Purchase of Shares -- Limitations on the Payment of Deferred
Sales Charges."
12
<PAGE> 15
FINANCIAL HIGHLIGHTS
The financial information in the table below in connection with shares of the
Insured Portfolio, National Portfolio and the Limited Maturity Portfolio has
been audited in conjunction with the annual audits of the financial statements
of the Portfolios by Deloitte & Touche LLP, independent auditors. Financial
statements for the fiscal year ended June 30, 1997 and the independent auditors'
report thereon are included in the Statement of Additional Information. Further
information about the performance of the Fund is contained in the Fund's most
recent annual report to shareholders, which may be obtained, without charge, by
calling or by writing the Fund at the telephone number or address on the front
cover of this Prospectus.
The following per share data and ratios have been derived from information
provided in the financial statements:
<TABLE>
<CAPTION>
INSURED PORTFOLIO
----------------------------------------------------------------------------------------
CLASS A
----------------------------------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30,
----------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year....... $ 7.91 $ 7.92 $ 7.88 $ 8.64 $ 8.26 $ 7.92 $ 7.86
---------- ---------- ---------- ---------- ---------- ---------- ----------
Investment income -- net................ .45 .44 .46 .47 .50 .52 .54
Realized and unrealized gain (loss) on
investments -- net.................... .15 (.01) .18 (.53) .49 .41 .12
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total from investment operations......... .60 .43 .64 (.06) .99 .93 .66
---------- ---------- ---------- ---------- ---------- ---------- ----------
LESS DIVIDENDS AND DISTRIBUTIONS:
Investment income -- net................ (.45) (.44) (.46) (.47) (.50) (.52) (.54)
Realized gain on investments -- net..... -- -- (.14) (.23) (.11) (.07) (.06)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total dividends and distributions........ (.45) (.44) (.60) (.70) (.61) (.59) (.60)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of year............. $ 8.06 $ 7.91 $ 7.92 $ 7.88 $ 8.64 $ 8.26 $ 7.92
========== ========== ========== ========== ========== ========== ==========
TOTAL INVESTMENT RETURN:*
Based on net asset value per share....... 7.72% 5.51% 8.60% (1.08%) 12.41% 12.11% 8.84%
========== ========== ========== ========== ========== ========== ==========
RATIOS TO AVERAGE NET ASSETS:
Expenses................................. .44% .43% .43% .42% .42% .44% .45%
========== ========== ========== ========== ========== ========== ==========
Investment income -- net................. 5.58% 5.55% 5.78% 5.53% 5.94% 6.44% 6.90%
========== ========== ========== ========== ========== ========== ==========
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands)... $1,441,785 $1,572,835 $1,706,064 $1,941,741 $2,225,188 $2,062,591 $1,984,307
========== ========== ========== ========== ========== ========== ==========
Portfolio turnover....................... 74.40% 78.49% 35.61% 28.34% 43.86% 22.50% 33.12%
========== ========== ========== ========== ========== ========== ==========
<CAPTION>
1990 1989 1988
---------- ---------- ----------
<S> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year....... $ 7.97 $ 7.69 $ 7.79
---------- ---------- ----------
Investment income -- net................ .55 .58 .57
Realized and unrealized gain (loss) on
investments -- net.................... (.11) .28 .00
---------- ---------- ----------
Total from investment operations......... .44 .86 .57
---------- ---------- ----------
LESS DIVIDENDS AND DISTRIBUTIONS:
Investment income -- net................ (.55) (.58) (.57)
Realized gain on investments -- net..... -- -- (.10)
---------- ---------- ----------
Total dividends and distributions........ (.55) (.58) (.67)
---------- ---------- ----------
Net asset value, end of year............. $ 7.86 $ 7.97 $ 7.69
========== ========== ==========
TOTAL INVESTMENT RETURN:*
Based on net asset value per share....... 5.76% 11.62% 7.75%
========== ========== ==========
RATIOS TO AVERAGE NET ASSETS:
Expenses................................. .46% .49% .52%
========== ========== ==========
Investment income -- net................. 7.03% 7.46% 7.55%
========== ========== ==========
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands)... $2,019,166 $2,013,219 $1,982,997
========== ========== ==========
Portfolio turnover....................... 23.20% 45.49% 33.98%
========== ========== ==========
</TABLE>
- ---------------
* Total investment returns exclude the effects of sales loads.
13
<PAGE> 16
FINANCIAL HIGHLIGHTS (CONTINUED)
The following per share data and ratios have been derived from information
provided in the financial statements:
<TABLE>
<CAPTION>
INSURED PORTFOLIO
----------------------------------------------------------------------------------------------
CLASS B
----------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30, FOR THE PERIOD
------------------------------------------------------------------------------ OCT. 21, 1988+
TO JUNE 30,
1997 1996 1995 1994 1993 1992 1991 1990 1989
-------- -------- -------- -------- -------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net
Asset Value:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period................. $ 7.91 $ 7.92 $ 7.87 $ 8.63 $ 8.26 $ 7.92 $ 7.86 $ 7.97 $ 7.81
-------- -------- -------- -------- -------- -------- -------- -------- ------
Investment
income -- net........... .39 .38 .40 .40 .44 .46 .48 .49 .36
Realized and unrealized
gain (loss) on
investments -- net...... .14 (.01) .19 (.53) .48 .41 .12 (.11) .16
-------- -------- -------- -------- -------- -------- -------- -------- ------
Total from investment
operations................ .53 .37 .59 (.13) .92 .87 .60 .38 .52
-------- -------- -------- -------- -------- -------- -------- -------- ------
LESS DIVIDENDS AND
DISTRIBUTIONS:
Investment
income -- net........... (.39) (.38) (.40) (.40) (.44) (.46) (.48) (.49) (.36)
Realized gain on
investments -- net...... -- -- (.14) (.23) (.11) (.07) (.06) -- --
-------- -------- -------- -------- -------- -------- -------- -------- ------
Total dividends and
distributions............. (.39) (.38) (.54) (.63) (.55) (.53) (.54) (.49) (.36)
-------- -------- -------- -------- -------- -------- -------- -------- ------
Net asset value, end of
period.................... $ 8.05 $ 7.91 $ 7.92 $ 7.87 $ 8.63 $ 8.26 $ 7.92 $ 7.86 $ 7.97
======== ======== ======== ======== ======== ======== ======== ======== =============
TOTAL INVESTMENT RETURN:**
Based on net asset value
per share................. 6.78% 4.71% 7.91% (1.81%) 11.44% 11.27% 8.02% 4.98% 6.88%#
======== ======== ======== ======== ======== ======== ======== ======== =============
RATIOS TO AVERAGE NET
ASSETS:
Expenses................... 1.19% 1.19% 1.19% 1.17% 1.18% 1.19% 1.20% 1.22% 1.23%*
======== ======== ======== ======== ======== ======== ======== ======== =============
Investment income -- net... 4.82% 4.80% 5.03% 4.78% 5.17% 5.69% 6.13% 6.27% 6.58%*
======== ======== ======== ======== ======== ======== ======== ======== =============
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)............ $560,105 $723,090 $782,748 $866,193 $911,307 $706,016 $537,755 $408,641 $175,707
======== ======== ======== ======== ======== ======== ======== ======== =============
Portfolio turnover......... 74.40% 78.49% 35.61% 28.34% 43.86% 22.50% 33.12% 23.20% 45.49%
======== ======== ======== ======== ======== ======== ======== ======== =============
<CAPTION>
CLASS C CLASS D
-------------------------------------- --------------------------------------
FOR THE FOR THE FOR THE PERIOD FOR THE FOR THE FOR THE PERIOD
YEAR ENDED YEAR ENDED OCT. 21, 1994+ YEAR ENDED YEAR ENDED OCT. 21, 1994+
JUNE 30, JUNE 30, TO JUNE 30, JUNE 30, JUNE 30, TO JUNE 30,
1997 1996 1995 1997 1996 1995
---------- ---------- -------------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net
Asset Value:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period................. $ 7.91 $ 7.92 $ 7.68 $ 7.91 $ 7.92 $ 7.68
----- ----- ----- ----- ----- -----
Investment
income -- net........... .38 .38 .27 .43 .42 .29
Realized and unrealized
gain (loss) on
investments -- net...... .15 (.01) .38 .15 (.01) .38
----- ----- ----- ----- ----- -----
Total from investment
operations................ .53 .37 .65 .58 .41 .67
----- ----- ----- ----- ----- -----
LESS DIVIDENDS AND
DISTRIBUTIONS:
Investment
income -- net........... (.38) (.38) (.27) (.43) (.42) (.29)
Realized gain on
investments -- net...... -- -- (.14) -- -- (.14)
----- ----- ----- ----- ----- -----
Total dividends and
distributions............. (.38) (.38) (.41) (.43) (.42) (.43)
----- ----- ----- ----- ----- -----
Net asset value, end of
period.................... $ 8.06 $ 7.91 $ 7.92 $ 8.06 $ 7.91 $ 7.92
========== ========== ============= ========== ========== =============
TOTAL INVESTMENT RETURN:**
Based on net asset value
per share................. 6.86% 4.65% 8.83%# 7.46% 5.25% 9.24%#
========== ========== ============= ========== ========== =============
RATIOS TO AVERAGE NET
ASSETS:
Expenses................... 1.25% 1.24% 1.23%* 69% .68% .68%*
========== ========== ============= ========== ========== =============
Investment income -- net... 4.77% 4.75% 4.93% 5.33% 5.31% 5.50%*
========== ========== ============= ========== ========== =============
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)............ $ 11,922 $ 18,936 $7,756 $ 38,422 $ 51,772 $ 26,015
========== ========== ============= ========== ========== =============
Portfolio turnover......... 74.40% 78.49% 35.61% 74.40% 78.49% 35.61%
========== ========== ============= ========== ========== =============
</TABLE>
- ---------------
<TABLE>
<C> <S>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
# Aggregate total investment return.
</TABLE>
14
<PAGE> 17
FINANCIAL HIGHLIGHTS (CONTINUED)
The following per share data and ratios have been derived from information
provided in the financial statements:
<TABLE>
<CAPTION>
NATIONAL PORTFOLIO
------------------------------------------------------------------------------------
CLASS A
------------------------------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30,
------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991
-------- -------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.......... $ 10.11 $ 10.02 $ 10.08 $ 11.02 $ 10.64 $ 10.17 $ 10.12
-------- -------- ---------- ---------- ---------- ---------- ----------
Investment income -- net................... .60 .60 .60 .62 .67 .71 .73
Realized and unrealized gain(loss) on
investments -- net....................... .27 .09 .15 (.64) .57 .58 .05
-------- -------- ---------- ---------- ---------- ---------- ----------
TOTAL FROM INVESTMENT OPERATIONS............ .87 .69 .75 (.02) 1.24 1.29 .78
-------- -------- ---------- ---------- ---------- ---------- ----------
LESS DIVIDENDS AND DISTRIBUTIONS:
Investment income -- net................... (.60) (.60) (.60) (.62) .67 .71 .73
Realized gain on investments -- net........ -- -- (.19) (.30) (.19) (.11) --
In excess of realized gain on
investments -- net....................... -- -- (.02) -- -- -- --
-------- -------- ---------- ---------- ---------- ---------- ----------
Total dividends and distributions........... (.60) (.60) (.81) (.92) (.86) (.82) (.73)
-------- -------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of year................ $ 10.38 $ 10.11 $ 10.02 $ 10.08 $ 11.02 $ 10.64 $ 10.17
======== ======== ========== ========== ========== ========== ==========
TOTAL INVESTMENT RETURN:*
Based on net asset value per share.......... 8.84% 6.98% 7.89% (.47)% 12.19% 13.09% 7.94%
======== ======== ========== ========== ========== ========== ==========
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................... .55% .56% .56% .55% .55% .55% .55%
======== ======== ========== ========== ========== ========== ==========
Investment income -- net.................... 5.86% 5.89% 6.01% 5.72% 6.23% 6.80% 7.20%
======== ======== ========== ========== ========== ========== ==========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).... $983,650 $983,550 $1,059,440 $1,203,181 $1,353,805 $1,278,055 $1,255,820
======== ======== ========== ========== ========== ========== ==========
Portfolio turnover.......................... 99.52% 95.09% 103.65% 73.33% 65.43% 50.94% 75.25%
======== ======== ========== ========== ========== ========== ==========
<CAPTION>
1990 1989 1988
---------- ---------- ----------
<S> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.......... $ 10.31 $ 9.94 $ 10.12
---------- ---------- ----------
Investment income -- net................... .74 .77 .76
Realized and unrealized gain(loss) on
investments -- net....................... (.19) .37 (.11)
---------- ---------- ----------
TOTAL FROM INVESTMENT OPERATIONS............ .55 1.14 .65
---------- ---------- ----------
LESS DIVIDENDS AND DISTRIBUTIONS:
Investment income -- net................... .74 .77 .76
Realized gain on investments -- net........ -- -- (.07)
In excess of realized gain on
investments -- net....................... -- -- --
---------- ---------- ----------
Total dividends and distributions........... (.74) (.77) (.83)
---------- ---------- ----------
Net asset value, end of year................ $ 10.12 $ 10.31 $ 9.94
========== ========== ==========
TOTAL INVESTMENT RETURN:*
Based on net asset value per share.......... 5.53% 11.89% 6.89%
========== ========== ==========
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................... .55% .55% .55%
========== ========== ==========
Investment income -- net.................... 7.27% 7.63% 7.79%
========== ========== ==========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).... $1,365,541 $1,445,116 $1,467,982
========== ========== ==========
Portfolio turnover.......................... 48.80% 76.73% 72.77%
========== ========== ==========
</TABLE>
- ---------------
* Total investment returns exclude the effects of sales loads.
15
<PAGE> 18
FINANCIAL HIGHLIGHTS (CONTINUED)
The following per share data and ratios have been derived from information
provided in the financial statements:
<TABLE>
<CAPTION>
NATIONAL PORTFOLIO
----------------------------------------------------------------------------------------------
CLASS B
----------------------------------------------------------------------------------------------
FOR THE
FOR THE YEAR ENDED JUNE 30, PERIOD
------------------------------------------------------------------------------ OCT. 21, 1988+
TO JUNE 30,
1997 1996 1995 1994 1993 1992 1991 1990 1989
-------- -------- -------- -------- -------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset
Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period.............................. $ 10.11 $ 10.02 $ 10.07 $ 11.02 $ 10.63 $ 10.16 $ 10.11 $ 10.30 $ 10.14
-------- -------- -------- -------- -------- -------- -------- -------- -------
Investment income -- net............ .52 .52 .52 .54 .59 .63 .65 .66 .48
Realized and unrealized gain (loss)
on investments -- net............. .26 .09 .16 (.65) .58 .58 .05 (.19) .16
-------- -------- -------- -------- -------- -------- -------- -------- -------
Total from investment operations..... .78 .61 .68 (.11) 1.17 1.21 .70 .47 .64
-------- -------- -------- -------- -------- -------- -------- -------- -------
LESS DIVIDENDS AND DISTRIBUTIONS:
Investment income -- net............ (.52) (.52) (.52) (.54) (.59) (.63) (.65) (.66) (.48)
Realized gain on
investments -- net................ -- -- (.19) (.30) (.19) (.11) -- -- --
In excess of realized gain on
investments -- net................ -- -- (.02) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- -------
Total dividends and distributions.... (.52) (.52) (.73) (.84) (.78) (.74) (.65) (.66) (.48)
-------- -------- -------- -------- -------- -------- -------- -------- -------
Net asset value, end of period....... $ 10.37 $ 10.11 $ 10.02 $ 10.07 $ 11.02 $ 10.63 $ 10.16 $ 10.11 $ 10.30
======== ======== ======== ======== ======== ======== ======== ======== =======
TOTAL INVESTMENT RETURN:**
Based on net asset value per share... 7.92% 6.17% 7.28% (1.39%) 11.45% 12.25% 7.14% 4.74% 6.48%#
======== ======== ======== ======== ======== ======== ======== ======== =======
RATIOS TO AVERAGE NET ASSETS:
Expenses............................. 1.31% 1.32% 1.32% 1.30% 1.31% 1.31% 1.31% 1.31% 1.31%*
======== ======== ======== ======== ======== ======== ======== ======== =======
Investment income -- net............. 5.10% 5.13% 5.25% 4.97% 5.46% 6.03% 6.43% 6.52% 6.74%*
======== ======== ======== ======== ======== ======== ======== ======== =======
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).......................... $415,103 $399,341 $419,933 $459,169 $424,071 $286,375 $213,581 $179,362 $ 97,196
======== ======== ======== ======== ======== ======== ======== ======== =======
Portfolio turnover................... 99.52% 95.09% 103.65% 73.33% 65.43% 50.94% 75.25% 48.80% 76.73%
======== ======== ======== ======== ======== ======== ======== ======== =======
<CAPTION>
CLASS C CLASS D
-------------------------------------- --------------------------------------
FOR THE FOR THE
FOR THE FOR THE PERIOD FOR THE FOR THE PERIOD
YEAR ENDED YEAR ENDED OCT. 21, 1994+ YEAR ENDED YEAR ENDED OCT. 21, 1994+
JUNE 30, JUNE 30, TO JUNE 30, JUNE 30, JUNE 30, TO JUNE 30,
1997 1996 1995 1997 1996 1995
---------- ---------- -------------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset
Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period.............................. $ 10.11 $ 10.03 $ 9.85 $ 10.12 $ 10.03 $ 9.85
------- ------- ------ ------- ------- -------
Investment income -- net............ .52 .52 .36 .58 .57 .40
Realized and unrealized gain (loss)
on investments -- net............. .27 .08 .39 .27 .09 .39
------- ------- ------ ------- ------- -------
Total from investment operations..... .79 .60 .75 .85 .66 .79
------- ------- ------ ------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS:
Investment income -- net............ (.52) (.52) (.36) (.58) (.57) (.40)
Realized gain on
investments -- net................ -- -- (.19) -- -- (.19)
In excess of realized gain on
investments -- net................ -- -- (.02) -- -- (.02)
------- ------- ------ ------- ------- -------
Total dividends and distributions.... (.52) (.52) (.57) (.58) (.57) (.61)
------- ------- ------ ------- ------- -------
Net asset value, end of period....... $ 10.38 $ 10.11 $ 10.03 $ 10.39 $ 10.12 $ 10.03
======= ======= ====== ======= ======= =======
TOTAL INVESTMENT RETURN:**
Based on net asset value per share... 7.97% 6.01% 7.97%# 8.57% 6.71% 8.37%#
======= ======= ====== ======= ======= =======
RATIOS TO AVERAGE NET ASSETS:
Expenses............................. 1.36% 1.37% 1.37%* .80% .81% .81%*
======= ======= ====== ======= ======= =======
Investment income -- net............. 5.04% 5.08% 5.21%* 5.60% 5.64% 5.78%*
======= ======= ====== ======= ======= =======
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).......................... $ 28,096 $ 13,291 $ 5,195 $ 51,038 $ 43,884 $ 19,656
======= ======= ====== ======= ======= =======
Portfolio turnover................... 99.52% 95.09% 103.65% 99.52% 95.09% 103.65%
======= ======= ====== ======= ======= =======
</TABLE>
- ---------------
<TABLE>
<C> <S>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
# Aggregate total investment return.
</TABLE>
16
<PAGE> 19
FINANCIAL HIGHLIGHTS (CONTINUED)
The following per share data and ratios have been derived from information
provided in the financial statements:
<TABLE>
<CAPTION>
LIMITED MATURITY PORTFOLIO
-------------------------------------------------------------------------------------
CLASS A
-------------------------------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30,
-------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year...... $ 9.91 $ 9.92 $ 9.87 $ 10.01 $ 9.91 $ 9.75 $ 9.71 $ 9.73
-------- -------- -------- -------- -------- -------- -------- --------
Investment income -- net............... .39 .38 .38 .37 .41 .50 .57 .60
Realized and unrealized gain (loss) on
investments -- net................... .04 (.01) .05 (.14) .10 .16 .04 (.02)
-------- -------- -------- -------- -------- -------- -------- --------
Total from investment operations........ .43 .37 .43 .23 .51 .66 .61 .58
-------- -------- -------- -------- -------- -------- -------- --------
LESS DIVIDENDS AND DISTRIBUTIONS:
Investment income -- net............... (.39) (.38) (.38) (.37) (.41) (.50) (.57) (.60)
Realized gain on investments -- net.... (.02) -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total dividends and distributions:...... (.41) (.38) (.38) (.37) (.41) (.50) (.57) (.60)
-------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of year............ $ 9.93 $ 9.91 $ 9.92 $ 9.87 $ 10.01 $ 9.91 $ 9.75 $ 9.71
======== ======== ======== ======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN:*
Based on net asset value per share...... 4.40% 3.75% 4.53% 2.30% 5.28% 6.93% 6.45% 6.16%
======== ======== ======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses................................ .39% .44% .41% .40% .41% .40% .40% .40%
======== ======== ======== ======== ======== ======== ======== ========
Investment income -- net................ 3.93% 3.83% 3.86% 3.68% 4.13% 5.02% 5.88% 6.21%
======== ======== ======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of year (in
thousands)............................. $343,641 $417,097 $536,474 $790,142 $846,736 $613,407 $350,549 $352,005
======== ======== ======== ======== ======== ======== ======== ========
Portfolio turnover...................... 61.90% 88.32% 37.33% 45.67% 65.43% 96.32% 93.06% 106.44%
======== ======== ======== ======== ======== ======== ======== ========
<CAPTION>
1989 1988
-------- --------
<S> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year...... $ 9.75 $ 9.83
-------- --------
Investment income -- net............... .58 .53
Realized and unrealized gain (loss) on
investments -- net................... (.02) (.07)
-------- --------
Total from investment operations........ .56 .46
-------- --------
LESS DIVIDENDS AND DISTRIBUTIONS:
Investment income -- net............... (.58) (.53)
Realized gain on investments -- net.... -- (.01)
-------- --------
Total dividends and distributions:...... (.58) (.54)
-------- --------
Net asset value, end of year............ $ 9.73 $ 9.75
======== ========
TOTAL INVESTMENT RETURN:*
Based on net asset value per share...... 5.96% 4.83%
======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses................................ .41% .40%
======== ========
Investment income -- net................ 6.00% 5.42%
======== ========
SUPPLEMENTAL DATA:
Net assets, end of year (in
thousands)............................. $385,794 $567,158
======== ========
Portfolio turnover...................... 228.78% 146.01%
======== ========
</TABLE>
- ---------------
* Total investment returns exclude the effects of sales loads.
17
<PAGE> 20
FINANCIAL HIGHLIGHTS (CONTINUED)
The following per share data and ratios have been deferred from the
information provided in the financial statements.
<TABLE>
<CAPTION>
LIMITED MATURITY PORTFOLIO
---------------------------------------------------------------------------------
CLASS B CLASS C
------------------------------------------------------- -----------------------
FOR THE
FOR THE YEAR ENDED JUNE 30, PERIOD FOR THE FOR THE
--------------------------------------- NOV. 2, 1992+ YEAR ENDED YEAR ENDED
TO JUNE 30, JUNE 30, JUNE 30,
1997 1996 1995 1994 1993 1997 1996
------- ------- -------- -------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............. $ 9.91 $ 9.92 $ 9.87 $ 10.01 $ 9.93 9.88 $ 9.92
----- ------- -------- -------- ------- ------- -----
Investment income -- net......................... .36 .35 .35 .33 .24 .35 .34
Realized and unrealized gain (loss) on
investments -- net.............................. .05 (.01) .05 (.14) .08 .05 (.04)
----- ------- -------- -------- ------- ------- -----
Total from investment operations................. .41 .34 .40 .19 .32 .40 .30
----- ------- -------- -------- ------- ------- -----
LESS DIVIDENDS AND DISTRIBUTIONS:
Investment income -- net........................ (.36) (.35) (.35) (.33) (.24) (.35) (.34)
Realized gain on investments -- net............. (.02) -- -- -- -- (.02) --
----- ------- -------- -------- ------- ------- -----
Total dividends and distributions................ (.38) (.35) (.35) (.33) (.24) (.37) (.34)
----- ------- -------- -------- ------- ------- -----
Net asset value, end of period................... $ 9.94 $ 9.91 $ 9.92 $ 9.87 $ 10.01 $ 9.91 $ 9.88
===== ======= ======== ======== ======= ======= =====
TOTAL INVESTMENT RETURN:**
Based on net asset value per share............... 4.13% 3.37% 4.14% 1.98% 3.26%# 4.11% 2.97%
===== ======= ======== ======== ======= ======= =====
RATIOS TO AVERAGE NET ASSETS:
Expenses........................................ .75% .80% .78% .76% .76%# .75% .80%
===== ======= ======== ======== ======= ======= =====
Investment income -- net......................... 3.58% 3.46% 3.50% 3.33% 3.60%* 3.57% 3.41%
===== ======= ======== ======== ======= ======= =====
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)......... $54,275 $71,075 $129,581 $145,534 $95,179 $ 108 $ 94
===== ======= ======== ======== ======= ======= =====
Portfolio turnover............................... 61.90% 88.32% 37.33% 45.67% 65.43% 61.90% 88.32%
===== ======= ======== ======== ======= ======= =====
<CAPTION>
CLASS D
----------------------------------------
FOR THE FOR THE
PERIOD FOR THE FOR THE PERIOD
OCT. 21, 1994+ YEAR ENDED YEAR ENDED OCT. 21, 1994+
TO JUNE 30, JUNE 30, JUNE 30, TO JUNE 30,
1995 1997 1996 1995
-------------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............. $ 9.83 $ 9.91 $ 9.93 $ 9.83
------ ----- ------- -------
Investment income -- net......................... .25 .38 .37 .26
Realized and unrealized gain (loss) on
investments -- net.............................. .09 .05 (.02) .10
------ ----- ------- -------
Total from investment operations................. .34 .43 .35 .36
------ ----- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS:
Investment income -- net........................ (.25) (.38) (.37) (.26)
Realized gain on investments -- net............. -- (.02) -- --
------ ----- ------- -------
Total dividends and distributions................ (.25) (.40) (.37) (.26)
------ ----- ------- -------
Net asset value, end of period................... $ 9.92 $ 9.94 $ 9.91 $ 9.93
====== ===== ======= =======
TOTAL INVESTMENT RETURN:**
Based on net asset value per share............... 3.52%# 4.40% 3.55% 3.73%#
====== ===== ======= =======
RATIOS TO AVERAGE NET ASSETS:
Expenses........................................ .70%* .48% .54% .53%*
====== ===== ======= =======
Investment income -- net......................... 3.61%* 3.84% 3.71% 3.78%*
====== ===== ======= =======
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)......... $3,965 $ 20,383 $ 15,886 $ 11,258
====== ===== ======= =======
Portfolio turnover............................... 37.33% 61.90% 88.32% 37.33%
====== ===== ======= =======
</TABLE>
- ---------------
*Annualized.
**Total investment returns exclude the effects of sales loads.
+Commencement of Operations.
#Aggregate total investment return.
18
<PAGE> 21
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with as
high a level of income exempt from Federal income taxes as is consistent with
the investment policies of each Portfolio and prudent investment management. The
Fund is comprised of three separate portfolios, Insured Portfolio, National
Portfolio and Limited Maturity Portfolio (collectively, the "Portfolios" and
each, a "Portfolio"), each of which is, in effect, a separate fund issuing its
own shares. Each Portfolio seeks to achieve its objective by investing in a
diversified portfolio of obligations issued by or on behalf of states,
territories and possessions of the United States and their political
subdivisions, agencies and instrumentalities, the interest on which is exempt
from Federal income tax (such obligations are herein referred to as "Municipal
Bonds"). Municipal Bonds include general obligations bonds, revenue or special
obligation bonds, industrial development bonds, variable rate demand notes, and
short-term tax-exempt municipal obligations such as tax anticipation notes. Each
Portfolio at all times, except during temporary defensive periods, maintains at
least 80% of its net assets invested in Municipal Bonds. In addition, each
Portfolio may not purchase securities other than Municipal Bonds and Temporary
Investments described below. These are fundamental policies of each Portfolio
and may not be changed without a vote of the majority of the outstanding shares
of the Portfolio. Each Portfolio currently contemplates that it will not invest
more than 25% of its total assets (taken at market value) in Municipal Bonds
whose issuers are located in the same state. There can be no assurance that the
objective of any Portfolio can be attained.
While the Fund does not intend to realize taxable investment income, each
Portfolio has the authority to invest as much as 20% of its net assets on a
temporary basis in taxable money market securities with remaining maturities not
in excess of one year from the date of purchase ("Temporary Investments") for
liquidity purposes or as a temporary investment of cash pending investment of
such cash in Municipal Bonds. In addition, the Fund reserves the right to invest
temporarily a greater portion of its assets in Temporary Investments for
defensive purposes, when, in the judgment of the Investment Adviser, market
conditions warrant. Temporary Investments consist of U.S. Government securities,
U.S. Government agency securities, domestic bank certificates of deposit and
bankers' acceptances, short-term corporate debt securities such as commercial
paper, and repurchase agreements. From time to time, the Fund may realize
capital gains that will constitute taxable income. In addition, the Fund may
invest in certain tax-exempt securities that are classified as "private activity
bonds," which may subject certain investors to an alternative minimum tax. (At
June 30, 1997, approximately 16.9% of the Insured Portfolio's, approximately
14.4% of the National Portfolio's and approximately 7.47% of the Limited
Maturity Portfolio's net assets were invested in "private activity bonds.")
These figures should not be considered representative of the respective
Portfolio's private activity bond positions for any future period. See
"Dividends, Distributions and Taxes."
Certain instruments in which the Fund may invest may be characterized as
derivative instruments. The Insured Portfolio, the National Portfolio and the
Limited Maturity Portfolio are authorized to engage in transactions in financial
futures contracts only for hedging purposes. For a more complete description of
futures transactions, see "Financial Futures Contracts and Derivatives" below
and the Statement of Additional Information.
Investment in the Fund offers several benefits. The Fund offers investors
the opportunity to receive income exempt from Federal income taxes from a
diversified, professionally managed portfolio of Municipal Bonds. The Fund also
provides liquidity because of its redemption features and relieves the investor
of the burdensome administrative details involved in managing a portfolio of
tax-exempt securities. The benefits are at least partially offset by the fact
that there are expenses in operating an investment company. Such expenses
19
<PAGE> 22
consist primarily of the investment advisory fee and operational expenses,
including, in the case of the Insured Portfolio, premiums for insurance on
portfolio securities.
INVESTMENT POLICIES OF THE PORTFOLIOS
Each Portfolio pursues its investment objective through the separate
investment policies described below. These policies differ with respect to the
maturity and quality of portfolio securities in which a Portfolio may invest,
and these policies can be expected to affect the yield on each Portfolio and the
degree of market, financial and interest rate risk to which the Portfolio is
subject. Generally, Municipal Bonds with longer maturities tend to produce
higher yields and are subject to greater market fluctuations as a result of
changes in interest rates ("market risk") than are Municipal Bonds with shorter
maturities. In addition, lower rated Municipal Bonds generally will provide a
higher yield than higher rated Municipal Bonds of similar maturity but are
subject to greater market risk and are also subject to a greater degree of risk
with respect to the ability of the issuer to meet its principal and interest
obligations ("financial risk"). A Portfolio's net asset value may fall when
interest rates rise and rise when interest rates fall. In general, Municipal
Bonds with longer maturities will be subject to greater volatility resulting
from interest rate fluctuation than will Municipal Bonds with shorter maturities
("interest rate risk"). See "Appendix -- Description of Ratings" for information
with respect to ratings assigned to Municipal Bonds and Temporary Investments by
rating agencies.
INSURED PORTFOLIO
The Insured Portfolio may invest in investment grade Municipal Bonds
covered by portfolio insurance guaranteeing the timely payment of principal at
maturity and interest. Investment grade Municipal Bonds are those rated at the
date of purchase in the four highest rating categories of Standard & Poor's
Ratings Services ("S&P") (AAA, AA, A and BBB) or Moody's Investors Service, Inc.
("Moody's") (Aaa, Aa, A and Baa) in the case of long-term debt, rated MIG 1
through MIG 4 by Moody's or in the four highest bond ratings of, or rated SP-1+
through SP-2 by, S&P in the case of short-term notes, and rated P-1 or P-2 in
the case of Moody's or A-1+ through A-2 by S&P in the case of tax-exempt
commercial paper. Depending on market conditions, it is expected that Municipal
Bonds with maturities beyond five years will comprise a major portion of this
Portfolio.
The Insured Portfolio may invest only in Municipal Bonds that, at the time
of purchase, either (1) are insured under an insurance policy purchased by the
Fund or (2) are insured under an insurance policy obtained by the issuer thereof
or any other party from an insurance carrier meeting the criteria of the Fund
set forth below. The Fund has purchased from AMBAC Indemnity Corporation
("AMBAC"), Municipal Bond Investors Assurance Corporation ("MBIA") and Financial
Security Assurance Inc. ("FSA"), separate Mutual Fund Insurance Policies (the
"Policies"), each of which guarantees the payment of principal and interest on
specified eligible Municipal Bonds purchased by the Insured Portfolio ("Insured
Municipal Bonds"). Consequently, some of the Insured Municipal Bonds in the
Insured Portfolio may be insured by AMBAC, while others may be insured by MBIA
or FSA. The Policies generally have the same characteristics and features. A
Municipal Bond is eligible for coverage if it meets certain requirements of the
insurance company set forth in a Policy. Additional information regarding these
eligibility requirements is set forth in the Statement of Additional
Information. In the event interest or principal on an Insured Municipal Bond is
not paid when due, AMBAC or MBIA or FSA (depending on which Policy covers the
bond) is obligated under its Policy to make 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 insurance feature reduces financial
20
<PAGE> 23
risk, but the cost thereof and the restrictions on investments imposed by the
guidelines in the insurance policy reduce the yield to shareholders.
The Policies will be effective only as to Insured Municipal Bonds
beneficially owned by the Insured Portfolio. In the event of a sale of any
Municipal Bonds held by the Insured Portfolio, the issuer of the relevant Policy
is liable only for those payments of interest and principal that are then due
and owing. The Policies do not guarantee the market value of the Insured
Municipal Bonds or the value of the shares of the Insured Portfolio. It is the
intention of the Insured Portfolio, however, 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 that are
not in default. In certain circumstances, however, the Fund's management 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. As the result of the value placed on the insurance with respect to
securities held in the Insured Portfolio that were in default at the end of the
Fund's last fiscal year, such securities were effectively valued at par. The
Insured Portfolio's ability to manage its portfolio will be limited 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
Insured Portfolio's method of valuing defaulted securities and securities that
have a significant risk of default. Further information with respect to
portfolio insurance is also set forth in the Statement of Additional
Information.
AMBAC, MBIA and FSA may not withdraw coverage on securities insured by
their Policies and held by the Insured Portfolio so long as they remain in the
Insured Portfolio. AMBAC, MBIA and FSA may not cancel their Policies for any
reason except failure to pay premiums when due. AMBAC and FSA have reserved the
right at any time upon written notice to the Fund to refuse to insure any
additional municipal securities purchased by the Insured Portfolio after the
effective date of such notice. The Board of Directors of the Fund has reserved
the right to terminate any of the Policies if it determines that the benefits to
the Insured Portfolio of having its portfolio insured are not justified by the
expense involved.
The premiums for the Policies are paid by the Insured Portfolio and the
yield on the Portfolio is reduced thereby. The Investment Adviser estimates that
the current cost of the annual premiums will range from approximately 0.08% to
0.20% of the average net assets of the Insured Portfolio. The estimate is based
on the expected composition of the Portfolio.
NATIONAL PORTFOLIO
The National Portfolio invests primarily in a portfolio of medium to lower
grade Municipal Bonds with maturities beyond five years. This Portfolio normally
can be expected to offer the highest yields of the three Portfolios, but also be
subject to the highest market and financial risks. Because an investment in the
National Portfolio entails relatively greater risks, it may not be an
appropriate investment for all investors.
Although the investment policies of the National Portfolio are not governed
by specific rating categories, the Fund will seek to invest primarily in medium
and lower grade Municipal Bonds, including short-term tax-exempt notes,
tax-exempt commercial paper and variable rate tax-exempt demand notes. Medium
grade long-term debt obligations are those rated A and BBB by S&P or A and Baa
by Moody's, and unrated obligations that the Investment Adviser believes are of
comparable quality. Lower grade obligations (commonly known as "junk bonds") are
those rated below BBB or Baa, and unrated obligations that the Investment
Adviser believes are of comparable quality. Lower grade obligations will
generally be more speculative with respect to
21
<PAGE> 24
the capacity of the issuer to make interest and principal payments. Because
issuers of Municipal Bonds having these characteristics may choose not to have
their obligations rated, it is possible that a substantial portion of the
National Portfolio's portfolio may consist of obligations that are not rated.
Unrated bonds are not necessarily of lower quality than rated bonds, but the
market for rated bonds is often broader. It is not the present intention of the
National Portfolio to invest over 35% of its assets in securities rated below
Baa by Moody's or in securities rated below BBB by S&P.
Junk bonds are generally considered to have varying degrees of speculative
characteristics. Consequently, although junk bonds can be expected to provide
higher yields, such securities may be subject to greater market price
fluctuations and risk of loss of principal than lower yielding, higher rated
debt securities. Investments in junk bonds will be made only when, in the
judgment of the Fund's management, such securities provide attractive total
return potential relative to the risk of such securities, as compared to higher
quality debt securities. The National Portfolio will not invest in debt
securities in the lowest rating categories (those rated CC or lower by S&P or Ca
or lower by Moody's) unless the Fund's management believes that the financial
condition of the issuer or the protection afforded the particular securities is
stronger than would otherwise be indicated by such low ratings. The National
Portfolio does not intend to purchase debt securities that are in default or
that the Fund's management believes will be in default. The Statement of
Additional Information contains a more detailed description of the risks
involved in purchasing junk bonds.
The table below shows the market value, by S&P rating category, of the
securities held by the National Portfolio at June 30, 1997:
<TABLE>
<CAPTION>
% NET
RATING ASSETS
--------------------------------------------------------------------- -----
<S> <C>
AAA.................................................................. 43.9
AA................................................................... 13.1
A.................................................................... 12.2
BBB.................................................................. 13.2
BB................................................................... 3.3
NR*.................................................................. 9.6
----
95.3
====
</TABLE>
- ---------------
* Bonds that are not rated by S&P. Such bonds may be rated by nationally
recognized statistical rating organizations other than S&P, or may not be
rated by any of such organizations. With respect to the percentage of the
Portfolio's assets invested in such securities, the Investment Adviser
believes that 2.9% are of comparable quality to bonds rated AAA, 0.3% are of
comparable quality to bonds rated AA, 3.2% are of comparable quality to bonds
rated A, 0.6% are of comparable quality to bonds rated BBB, 1.9% are of
comparable quality to bonds rated BB and 0.7% are of comparable quality to
bonds rated B. This determination is based on the Investment Adviser's own
internal evaluation and does not necessarily reflect how such securities would
be rated by S&P if it were to rate the securities.
It is expected that the National Portfolio will consist primarily of
revenue bonds emphasizing hospital, health care, public utility and housing
issues.
LIMITED MATURITY PORTFOLIO
The Limited Maturity Portfolio invests primarily in a portfolio of
short-term investment grade Municipal Bonds. Municipal Bonds in the Limited
Maturity Portfolio will be either Municipal Bonds with a remaining
22
<PAGE> 25
maturity of less than four years or short-term municipal notes, which typically
are issued with a maturity of not more than one year. The Limited Maturity
Portfolio will treat Municipal Bonds that it has the option to require the
issuer to redeem within four years as having a remaining maturity of less than
four years, even if the period to the stated maturity date of such Bonds is
greater than four years. Municipal notes include tax anticipation notes, bond
anticipation notes and revenue anticipation notes. The Limited Maturity
Portfolio can be expected to offer a lower yield than the longer-term
Portfolios. Interest rates on short-term Municipal Bonds may fluctuate more
widely from time to time than interest rates on long-term Municipal Bonds.
However, because of the shorter maturities, the market value of the Municipal
Bonds held by the Limited Maturity Portfolio can be expected to fluctuate less
in value as a result of changes in interest rates.
The Limited Maturity Portfolio will invest only in Municipal Bonds rated at
the date of purchase in the four highest rating categories by S&P (AAA, AA, A
and BBB) or Moody's (Aaa, Aa, A and Baa) in the case of long-term debt, rated by
Moody's as MIG 1 through MIG 4, or rated SP-1+ through SP-2 by S&P in the case
of short-term tax-exempt notes, and rated by Moody's P-1 through P-2 or rated
A-1+ through A-3 by S&P in the case of tax-exempt commercial paper. The Limited
Maturity Portfolio will also invest in other Municipal Bonds deemed to qualify
for such ratings and in variable rate tax-exempt demand notes. Securities rated
in the lowest of these categories are considered to have some speculative
characteristics. The Limited Maturity Portfolio may continue to hold securities
that, after being purchased by the Portfolio, are downgraded to a rating lower
than those set forth above.
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 industrial development bonds are issued by or on behalf of
public authorities to finance various privately operated facilities, including
pollution control facilities. Such obligations are included within the term
Municipal Bonds if the interest paid thereon is exempt from Federal income tax.
Municipal Bonds also include short-term tax-exempt municipal obligations such as
tax anticipation notes, bond anticipation notes, revenue anticipation notes,
variable rate demand notes and Public Housing Authority notes that are fully
secured by a pledge of the full faith and credit of the United States.
The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" or "special obligation" bonds. General obligation
bonds are secured by the issuer's pledge of faith, credit, and taxing power for
the payment of principal and 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.
Industrial development bonds 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 payment of the principal of and interest on such industrial
revenue bonds depends solely on the ability of the user of the facilities
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. A
Portfolio 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.
23
<PAGE> 26
Municipal Bonds may at times be purchased or sold on a delayed delivery
basis or a when-issued basis. These transactions arise when securities are
purchased or sold by a Portfolio with payment and delivery taking place in the
future, often a month or more after the purchase. The payment obligation and the
interest rate are each fixed at the time the buyer enters into the commitment.
The Fund will only make commitments to purchase such securities with the
intention of actually acquiring the securities, but the Fund may sell these
securities prior to the settlement date if the Investment Adviser deems it
advisable. Purchasing Municipal Bonds on a when-issued basis involves the risk
that the yields available in the market when the delivery takes place may
actually be higher than those obtained in the transaction itself; if yields so
increase, the value of the when-issued obligation will generally decrease. When
a Portfolio engages in when-issued and delayed delivery transactions, the
Portfolio relies on the buyer or seller, as the case may be, to consummate the
trade. Failure of the buyer or seller to do so may result in the Portfolio's
missing the opportunity of obtaining a price considered to be advantageous. The
Fund will maintain a separate account as its custodian bank consisting of cash
or liquid Municipal Bonds (valued on a daily basis) equal at all times to the
amount of the when-issued commitment.
Variable rate demand notes ("VRDNs") are tax-exempt obligations that
contain a floating or variable interest rate adjustment formula and an
unconditional right of demand to receive payment of the unpaid principal balance
plus accrued interest upon a short notice period not to exceed seven days. The
interest rates are adjustable at intervals ranging from daily up to six months
to some prevailing market rate for similar investments, such adjustment formula
being calculated to maintain the market value of the VRDN at approximately the
par value of the VRDN upon the adjustment date. The adjustments are typically
based upon the prime rate of a bank or some other appropriate interest rate
adjustment index.
The Fund may also invest in VRDNs in the form of participation interests
("Participating VRDNs") in variable rate tax-exempt obligations held by a
financial institution, typically a commercial bank ("institution").
Participating VRDNs provide the Fund with a specified undivided interest (up to
100%) of the underlying obligation and the right to demand payment of the unpaid
principal balance plus accrued interest on the Participating VRDNs from the
institution upon a specified number of days' notice, not to exceed seven days.
In addition, the Participating VRDN is backed by an irrevocable letter of credit
or guaranty of the institution. The Fund has an undivided interest in the
underlying obligation and thus participates on the same basis as the institution
in such obligation except that the institution typically retains fees out of the
interest paid on the obligation for servicing the obligation, providing the
letter of credit and issuing the repurchase commitment.
The Fund has been advised by its counsel to the effect that the interest
received on Participating VRDNs will be treated as interest from tax-exempt
obligations as long as the Fund does not invest more than a limited amount (not
more than 20%) of its total assets in such investments and certain other
conditions are met. It is contemplated that the Fund will not invest more than a
limited amount of its total assets in Participating VRDNs.
Yields on Municipal Bonds are dependent on a variety of factors, including
the general condition of the money market and of the municipal bond market, the
size of a particular offering, the maturity of the obligation, and the rating of
the issue. The ability of a Portfolio to achieve its investment objective is
also dependent on the continuing ability of the issuers of the Municipal Bonds
in which the Portfolio invests to meet their obligations for the payment of
interest and principal when due. There are variations in the risks involved in
holding Municipal Bonds, within a particular classification and between
classifications, depending
24
<PAGE> 27
on numerous factors. Furthermore, the rights of holders of Municipal Bonds and
the obligations of the issuers of such Municipal Bonds may be subject to
applicable bankruptcy, insolvency and similar laws and court decisions affecting
the rights of creditors generally and such laws, if any, that may be enacted by
Congress or state legislatures imposing a moratorium on the payment of principal
and interest or imposing other constraints or conditions on the payment of
principal of and interest on Municipal Bonds.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Bonds. It may be expected that similar proposals may be
introduced in the future. If such a proposal were enacted, the ability of the
Portfolios to pay "exempt-interest" dividends might be adversely affected and
the Fund would re-evaluate its investment objective and policies and consider
changes in its structure. See "Additional Information -- Dividends and
Distributions" and "Additional Information -- Federal Income Taxes."
FORWARD COMMITMENTS
Each Portfolio may purchase Municipal Bonds on a forward commitment basis
at fixed purchase terms. The purchase will be recorded on the date the Portfolio
enters into the commitment and the value of the security will thereafter be
reflected in the calculation of the Portfolio's net asset value. The value of
the security on the delivery date may be more or less than its purchase price. A
separate account of the Portfolio will be established with its custodian
consisting of cash or liquid Municipal Bonds having a market value at all times
at least equal to the amount of the forward commitment.
FINANCIAL FUTURES CONTRACTS AND DERIVATIVES
The Portfolios are authorized to purchase and sell certain financial
futures contracts ("futures contracts") and options on such futures contracts
solely for the purpose of hedging their investments in Municipal Bonds against
declines in value and to hedge against increases in the cost of securities the
Portfolios intend 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 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 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 futures contracts.
The Portfolios intend to trade in futures contracts based upon The Bond
Buyer Municipal Bond Index, a price-weighted measure of the market value of 40
large, recently issued tax-exempt bonds, and to engage in transactions in
exchange-traded futures contracts on U.S. Treasury securities and options on
such futures. If making or accepting delivery of the underlying commodity is not
desired, a position in a futures contract or an option on a futures contract may
be terminated only by entering into an offsetting transaction on the exchange on
which the position was established and only if there is a liquid market for such
contract. If it is not economically practicable, or otherwise possible to close
a futures position or certain option positions entered into by a Portfolio, the
Portfolio could be required to make continuing daily cash payments of variation
margin in the event of adverse price movements. In such situations, if the
Portfolio 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. In addition, the Portfolio may be required to perform
under the terms of its contracts. The
25
<PAGE> 28
inability to close futures or options positions could also have an adverse
impact on the Portfolio's ability to hedge effectively. There is also risk of
loss by a Portfolio of margin deposits in the event of bankruptcy of a broker
with whom the Portfolio has an open position in a futures contract, or the
exchange or clearing organization on which that contract is traded. The
Portfolios may also engage in transactions in other futures contracts, such as
futures contracts on other municipal bond indexes that may become available, if
the Investment Adviser believes such contracts would be appropriate for hedging
the Portfolios' investments in Municipal Bonds.
Utilization of futures or option contracts involves the risk of imperfect
correlation in movements in the price of such contracts and movements in the
price of the security or securities that are the subject of the hedge. If the
price of the futures or option contract moves more or less than the price of the
security or securities that are the subject of the hedge, a Portfolio will
experience a gain or loss that will not be completely offset by movements in the
price of such security, which could occur as a result of many factors, including
where the securities underlying futures or option contracts have different
maturities, ratings, or geographic mixes 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 an index futures contract. The trading of
futures contracts or options on futures contracts based on indexes of securities
also involves a risk of imperfect correlation between the value of the futures
contracts and the value of the underlying index. The anticipated spread between
such values or in the correlation between the futures contract and the
underlying security may be affected by differences in markets, such as margin
requirements, market liquidity and the participation of speculators in the
futures markets. Moreover, when a Portfolio enters into transactions in futures
contracts on U.S. Treasury securities, or options on such contracts, the
underlying securities will not correspond to securities held by the Portfolio.
Finally, in the case of futures contracts on U.S. Treasury securities and
options on such futures contracts, the anticipated correlation of price
movements between U.S. Treasury 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 ("CFTC"), the
futures trading activities described herein will not result in the Portfolios
being deemed to be "commodity pools," as defined under such regulations,
provided that certain restrictions are adhered to. In particular, among other
requirements, the Portfolios may either (a) purchase and sell futures contracts
only for bona fide hedging purposes, as defined under CFTC regulations, or (b)
limit any transaction not qualifying as bona fide hedging so that the sum of the
amount of initial margin deposits and premiums paid on such positions would not
exceed 5% of the market value of a Portfolio's net assets. Margin deposits may
consist of cash or securities acceptable to the broker and the relevant contract
market.
When a Portfolio purchases a futures contract, it will maintain an amount
of cash, cash equivalents or commercial paper or other liquid securities in a
segregated account with the Fund's custodian, so that the amount segregated plus
the amount of initial margin and option premiums held in the account of its
broker equals the value represented by the futures contract, as reflected by its
daily settlement price, thereby ensuring that the use of such futures contract
is unleveraged. It is not anticipated that transactions in the futures contracts
will have the effect of increasing portfolio turnover.
Reference is made to the Statement of Additional Information for further
information on financial futures contracts.
26
<PAGE> 29
INDEXED AND INVERSE FLOATING OBLIGATIONS
The Fund may invest in a variety of instruments that may be characterized
as "Derivative Securities." The Fund may invest in Municipal Bonds, the return
on which is 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 or based on the value of gold or some other
commodity. The principal amount payable upon maturity of certain Municipal Bonds
also may be based on the value of an index. Also, the Fund may invest in
so-called "inverse floating obligations" or "residual interest bonds" on which
the interest rates typically decline as market rates increase and increase as
market rates decline. 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. 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 which is a multiple (typically two) of the rate at which fixed-rate
long-term exempt securities increase or decrease in response to such changes. As
a result, the market values of such securities will generally 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 which contain 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. Certain investments in such obligations may be illiquid. The Fund
may not invest in such illiquid obligations if such investments, together with
other illiquid investments, would exceed 10% of the Fund's net assets.
INVESTMENT RESTRICTIONS
The Fund has adopted a number of restrictions and policies relating to the
investment of its assets and its activities, which are fundamental policies of
the Fund and may not be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities (including a majority of
the shares of each Portfolio). One such restriction prohibits the Fund from
entering into a repurchase agreement if, as a result thereof, more than 10% of
the total assets of any Portfolio (taken at market value at the time of each
investment) would be subject to repurchase agreements maturing in more than
seven days. Investors are referred to the Statement of Additional Information
for a complete description of such restrictions and policies.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Board of Directors of the Fund consists of six individuals, five of
whom are not "interested persons" of the Fund as defined in the Investment
Company Act of 1940, as amended (the "Investment Company Act"). The Directors of
the Fund are responsible for the overall supervision of the operations of the
Fund and perform the various duties imposed on the directors of investment
companies by the Investment Company Act.
27
<PAGE> 30
The Directors are:
ARTHUR ZEIKEL* -- President of the Investment Adviser and its affiliate,
MLAM; President and Director of Princeton Services, Inc. ("Princeton Services");
Executive Vice President of ML & Co.; and Director of Merrill Lynch Funds
Distributor, Inc. (the "Distributor").
RONALD W. FORBES -- Professor of Finance, School of Business State
University of New York at Albany.
CYNTHIA A. MONTGOMERY -- Professor of Competition and Strategy, Harvard
Business School.
CHARLES C. REILLY -- Former Adjunct Professor, Columbia University Graduate
School of Business.
KEVIN A. RYAN -- Professor of Education, Boston University; Founder and
current Director of The Boston University Center for Advancement of Ethics and
Character.
RICHARD R. WEST -- Dean Emeritus, New York University Leonard N. Stern
School of Business Administration.
- ---------------
* Interested person, as defined in the Investment Company Act, of the Fund.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Investment Adviser to the Fund is FAM, an affiliate of MLAM, an
indirect subsidiary of ML & Co., a financial services holding company and the
parent of Merrill Lynch. The address of FAM is P.O. Box 9011, Princeton, New
Jersey 08543-9011. FAM or MLAM acts as the investment adviser for more than 140
registered investment companies. As of August 31, 1997, the Investment Adviser
and MLAM had a total of $267.7 billion in investment company and other portfolio
assets under management, including accounts of certain affiliates of the
Investment Adviser.
Subject to the supervision of the Directors of the Fund, the Investment
Adviser is responsible for the actual management of the Fund's portfolio and
constantly reviews the Fund's holdings in light of its own research and analysis
and that from other relevant sources. The responsibility for making decisions to
buy, sell or hold a particular security rests with the Investment Adviser. The
Investment Adviser performs certain other administrative services for the Fund
and provides all of the office space, facilities, equipment and necessary
personnel for management of the Fund.
For its services as Investment Adviser, the Fund pays FAM a monthly fee
based upon the aggregate average net assets of the three Portfolios. For the
fiscal year ended June 30, 1997, the fee paid by the Fund to FAM was
$16,555,920, of which $8,042,098 was received with respect to the Insured
Portfolio (representing 0.36% of its average net assets), $6,961,453 was
received with respect to the National Portfolio (representing 0.48% of its
average net assets) and $1,552,369 was received with respect to the Limited
Maturity Portfolio (representing 0.33% of its average net assets).
The Investment Advisory Agreement obligates each Portfolio to pay certain
expenses incurred in its operation and a portion of the Fund's general
administrative expenses allocated on the basis of the asset size of the
respective Portfolios. The Fund's total expenses for the fiscal year ended June
30, 1997 were $28,449,431, of which $14,925,877 was attributable to the Insured
Portfolio (representing 0.44%, 1.19%, 1.25%, and 0.69% of average net assets for
Class A, Class B, Class C and Class D shares, respectively), $11,465,595 was
attributable to the National Portfolio representing 0.55%, 1.31%, 1.36%, and
0.80% of average net assets for Class A, Class B, Class C and Class D shares,
respectively), and $2,057,959 was attributable to the Limited
28
<PAGE> 31
Maturity Portfolio (representing 0.39%, 0.75%, 0.75%, and 0.48% of average net
assets for Class A, Class B, Class C and Class D shares, respectively). FAM was
not required to reduce its fee or reimburse any of the Fund's expenses for the
fiscal year ended June 30, 1997.
The Fund pays certain expenses incurred in its operations including, among
other things, taxes; expenses for legal and auditing services; and costs of
printing proxies, stock certificates, shareholder reports, prospectuses and
statements of additional information. Also, 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. For the fiscal year
ended June 30, 1997, the Fund reimbursed the Investment Adviser $433,527 for
accounting services, of which $249,511 was received with respect to the Insured
Portfolio, $142,298 was received with respect to the National Portfolio and
$41,718 was received with respect to the Limited Maturity Portfolio.
Kenneth A. Jacob has served as the Portfolio Manager for the Insured
Portfolio since 1995 and is primarily responsible for its day-to-day management.
Peter J. Hayes has served as the Portfolio Manager for the Limited Maturity
Portfolio and is primarily responsible for its day-to-day management. Walter
O'Connor has served as the Portfolio Manager for the National Portfolio and is
primarily responsible for its day-to-day management.
TRANSFER AGENCY SERVICES
Merrill Lynch Financial Data Services, Inc. (the "Transfer Agent"), which
is a subsidiary of ML & Co., acts as the Fund's Transfer Agent pursuant to a
Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement (the "Transfer Agency Agreement"). Pursuant to the Transfer Agency
Agreement, the Transfer Agent is responsible for the issuance, transfer and
redemption of shares and the opening and maintenance of shareholder accounts.
Pursuant to the Transfer Agency Agreement, the Transfer Agent receives an annual
fee of up to $11.00 per Class A or Class D account and up to $14.00 per Class B
or Class C account and is entitled to reimbursement for certain transaction
charges and out-of-pocket expenses incurred by the Transfer Agent under the
Transfer Agency Agreement. Additionally, a $0.20 monthly closed account charge
will be assessed to all accounts that close during the calendar year.
Application of this fee will commence the month following the month the account
is closed. At the end of the calendar year, no further fees will be due. For
purposes of the Transfer Agency Agreement, the term "account" includes a
shareholder account maintained directly by the Transfer Agent and any other
account representing the beneficial interest of a person in the relevant share
class on a recordkeeping system, provided the recordkeeping system is maintained
by a subsidiary of ML & Co. For the fiscal year ended June 30, 1997, the
Insured, National and Limited Maturity Portfolios of the Fund incurred fees
totaling $1,467,879, pursuant to the Transfer Agency Agreement.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-1 of the Investment Company Act 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.
29
<PAGE> 32
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are designed
to identify any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Investment Adviser include a ban on acquiring any securities in a "hot" initial
public offering and a prohibition from profiting on short-term trading in
securities. In addition, no employee may purchase or sell any security which at
the time is being purchased or sold (as the case may be), or to the knowledge of
the employee is being considered for purchase or sale, by any fund advised by
the Investment Adviser. Furthermore, the Codes provide for trading "blackout
periods" which prohibit trading by investment personnel of the Fund within
periods of trading by the Fund in the same (or equivalent) security (15 or 30
days depending upon the transaction).
PURCHASE OF SHARES
The Distributor, an affiliate of both the Investment Adviser and Merrill
Lynch, acts as the Distributor of the shares of each Portfolio. Shares may be
purchased directly from the Distributor or from other securities dealers,
including Merrill Lynch, with whom the Distributor has entered into selected
dealer agreements; however, only Class A and Class D shares may be available for
purchase through securities dealers, other than Merrill Lynch, that are eligible
to sell shares. The Fund is offering shares in four classes of its Portfolios at
a public offering price equal to the next determined net asset value per share
plus sales charges imposed either at the time of purchase (the "initial sales
charge alternative") or on a deferred basis (the "deferred sales charge
alternative") depending upon the class of shares selected by the investor under
the Merrill Lynch Select Pricing(SM) System, as described below. Net asset value
per share will be determined in the manner set forth under "Additional
Information -- Determination of Net Asset Value." The minimum initial purchase
in each Portfolio is $1,000 and the minimum subsequent purchase in each
Portfolio is $50 except that for participants in certain fee-based programs the
minimum initial purchase is $500 and the minimum subsequent purchase is $50.
Merrill Lynch may charge its customers a processing fee (currently $5.35) to
confirm a sale of shares. Purchases made directly through the Fund's transfer
agent are not subject to the processing fee.
As to purchase orders received by selected dealers prior to the close of
the New York Stock Exchange, which includes orders received after the close on
the previous day, the applicable offering price will be based on the net asset
value determined on the day the order is placed with the Distributor, provided
the order is received by the Distributor prior to 4:30 p.m., New York City time,
on that day. Any order may be rejected by the Distributor or the Fund. Neither
the Distributor nor the dealers are permitted to withhold placing orders to
benefit themselves by a price change. The Fund reserves the right to suspend the
sale of its shares to the public in response to conditions in the Municipal Bond
markets, or otherwise.
Each of the Portfolios issues four classes of shares under the Merrill
Lynch Select Pricing(SM) System, which permits each investor to choose the
method of purchasing shares that the investor believes is most beneficial given
the amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. Shares of Class A and Class D shares
are sold to investors choosing the initial sales charge alternatives and shares
of Class B and Class C shares are sold to investors choosing the deferred sales
charge alternatives. Class C shares of the Limited Maturity Portfolio are
available only through the Exchange Privilege and may not be purchased except
through exchange of Class C shares of another Portfolio or another MLAM-advised
mutual fund. Because retirement plans qualified under Section 401 of the
Internal
30
<PAGE> 33
Revenue Code of 1986, as amended (the "Code"), will be unable to benefit from
the tax-exempt dividends of the Fund, the shares of the Fund may not be suitable
investments for such retirement plans.
Investors should determine whether under their particular circumstances it
is more advantageous to incur the initial sales charge or to have the initial
purchase price invested with the Portfolio with the investment thereafter being
subject to a CDSC and ongoing distribution fees. A discussion of the factors
that investors should consider in determining the method of purchasing shares
under the Merrill Lynch Select Pricing(SM) System is set forth under the Merrill
Lynch Select Pricing(SM) System on page 8. Each Class A, Class B, Class C and
Class D share of a Portfolio represents an identical interest in the Portfolio
and has the same rights, except that Class B, Class C and Class D shares bear
the expenses of the ongoing account maintenance fees, and Class B and Class C
shares bear the expenses of the ongoing distribution fees and the additional
incremental transfer agency costs resulting from the deferred sales charge
arrangements. The deferred sales charges, distribution fees and account
maintenance fees that are imposed on Class B and Class C shares, as well as the
account maintenance fees that are imposed on Class D shares, will be imposed
directly against those classes and not against all assets of the Fund and,
accordingly, such charges will not affect the net asset value of any other class
or have any impact on investors choosing another sales charge option. Dividends
paid by a Portfolio for each class of shares will be calculated in the same
manner at the same time and will differ only to the extent that account
maintenance and distribution fees and any incremental transfer agency costs
relating to a particular class are borne exclusively by that class. Class B,
Class C and Class D shares each have exclusive voting rights with respect to the
Rule 12b-1 distribution plan adopted with respect to such class pursuant to
which account maintenance and/or distribution fees are paid (except that Class B
shareholders may vote upon any material changes to expenses charged under the
Class D Distribution Plan). See "Distribution Plans" below. Each class has
different exchange privileges. See "Shareholder Services -- Exchange
Privileges."
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges and distribution fees with respect to Class B and
Class C shares in that the sales charges and distribution fees applicable to
each class provide for the financing of the distribution of the shares of the
Fund. The distribution-related revenues paid with respect to a class will not be
used to finance the distribution expenditures of another class. Sales personnel
may receive different compensation for selling different classes of shares.
Investors are advised that only Class A and Class D shares may be available for
purchase through securities dealers, other than Merrill Lynch, that are eligible
to sell shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System.
31
<PAGE> 34
INSURED AND NATIONAL PORTFOLIOS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 4.00% initial sales
charge(2)(3) No No No
- -------------------------------------------------------------------------------------------------
B CDSC for a period of 4 0.25% 0.50% B shares convert to D shares
years, at a rate of 4.00% automatically after
during the first year, approximately ten years(5)
decreasing 1.00% annually to
0.0%(4)
- -------------------------------------------------------------------------------------------------
C 1.00% CDSC for one year 0.25% 0.55% No
decreasing to 0.0% after the
first year(6)
- -------------------------------------------------------------------------------------------------
D Maximum 4.00% initial sales 0.25% No No
charge(3)
- -------------------------------------------------------------------------------------------------
</TABLE>
LIMITED MATURITY PORTFOLIO
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 1.00% initial sales No No No
charge(2)(3)
- -------------------------------------------------------------------------------------------------
B CDSC at a rate of 1.00% 0.15% 0.20% B shares convert to D shares
during the first year, automatically after
decreasing to 0.0% after the approximately ten years(5)
first year(4)
- -------------------------------------------------------------------------------------------------
C* 1.00% CDSC for one year 0.15% 0.20% No
decreasing to 0.0% after the
first year(6)
- -------------------------------------------------------------------------------------------------
D Maximum 1.00% initial sales 0.10% No No
charge(3)
- -------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs are imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares -- Initial Sales
Charge Alternatives -- Class A and Class D Shares -- Eligible Class A
Investors."
(3) Reduced for purchases of $25,000 or more for the Insured and National
Portfolios and $100,000 or more for the Limited Maturity Portfolio and
waived for purchases of Class A shares by participants in certain fee-based
programs. Class A and Class D share purchases of $1,000,000 or more may not
be subject to an initial sales charge but instead may be subject to a 1.0%
CDSC for the Insured and National Portfolios and 0.20% CDSC for the Limited
Maturity Portfolio, for one year. See "Class A" and "Class D" below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans was modified. Also, Class B
shares of certain other MLAM-advised mutual funds into which exchanges may
be made have an eight-year conversion period. If Class B shares of the Fund
are exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked
onto the holding period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
* Class C shares of the Limited Maturity Portfolio are available only through
the Exchange Privilege. See page 46.
32
<PAGE> 35
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible
to purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
The public offering price of Class A and Class D shares of the Portfolios,
for purchasers choosing the initial sales charge alternative, is the next
determined net asset value plus varying sales charges (i.e., sales loads), as
set forth below:
CLASS A AND CLASS D SHARES OF INSURED AND NATIONAL PORTFOLIOS
<TABLE>
<CAPTION>
SALES CHARGE
-----------------------------------------------------------
DISCOUNT TO
SALES LOAD AS SALES LOAD AS SELECT DEALERS AS A
A PERCENTAGE OF A PERCENTAGE* OF PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE NET AMOUNT INVESTED OFFERING PRICE
- ----------------------------------------------- --------------- ------------------- -------------------
<S> <C> <C> <C>
Less than $25,000.............................. 4.00% 4.17% 3.75%
$25,000 but less than $50,000.................. 3.75 3.90 3.50
$50,000 but less than $100,000................. 3.25 3.36 3.00
$100,000 but less than $250,000................ 2.50 2.56 2.25
$250,000 but less than $1,000,000.............. 1.50 1.52 1.25
$1,000,000 and over**.......................... 0.00 0.00 0.00
</TABLE>
CLASS A AND CLASS D SHARES OF LIMITED MATURITY PORTFOLIO
<TABLE>
<CAPTION>
SALES CHARGE
-----------------------------------------------------------
DISCOUNT TO
SALES LOAD AS SALES LOAD AS SELECT DEALERS AS A
A PERCENTAGE OF A PERCENTAGE* OF PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE NET AMOUNT INVESTED OFFERING PRICE
- ----------------------------------------------- --------------- ------------------- -------------------
<S> <C> <C> <C>
Less than $100,000............................. 1.00% 1.01% .95%
$100,000 but less than $250,000................ .75 .75 .70
$250,000 but less than $500,000................ .50 .50 .45
$500,000 but less than $1,000,000.............. .30 .30 .27
$1,000,000 and over**.......................... .00 .00 .00
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more made on or after October 21, 1994, but such purchases may
be subject to a CDSC of 1.00% for the Insured and National Portfolios and
0.20% for the Limited Maturity Portfolio, if the shares are redeemed within
one year after purchase. Such CDSC may be waived in connection with certain
fee-based programs.
The Distributor may reallow discounts to securities dealers with whom it
has agreements and retain the balance over such discount. At times the
Distributor may reallow the entire sales charge to selected dealers, in which
case such dealers may be deemed to be underwriters within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"), and subject to
liability as such. The Distributor will retain the entire sales
33
<PAGE> 36
charge on orders placed directly with it. The proceeds from account maintenance
fees are used to compensate Merrill Lynch for providing continuing account
maintenance activities.
During the fiscal year ended June 30, 1997, the Insured Portfolio, the
National Portfolio and the Limited Maturity Portfolio sold 4,575,281, 7,233,788
and 2,507,909 Class A shares, respectively, for aggregate net proceeds of
$36,693,201, $74,396,433 and $24,924,435, respectively. The gross sales charges
for the sale of Class A shares of the Insured Portfolio, the National Portfolio
and the Limited Maturity Portfolio for that period were $192,703, $166,061, and
$12,434, of which Merrill Lynch received $168,171 for the Insured Portfolio,
$149,402 for the National Portfolio and $11,295, for the Limited Maturity
Portfolio, and the Distributor received $24,532(1) for the Insured Portfolio,
$16,659(2) for the National Portfolio and $1,139(3) for the Limited Maturity
Portfolio. For the fiscal year ended June 30, 1997, the Distributor did not
receive any CDSCs with respect to redemption within one year after purchase of
Class A shares purchased subject to a front-end sales charge waiver for the
Insured, the National and the Limited Maturity Portfolios.
During the fiscal year ended June 30, 1997, the Insured Portfolio, the
National Portfolio and the Limited Maturity Portfolio sold 12,779,520,
10,536,060, and 3,468,693 Class D shares, respectively, for aggregate net
proceeds of $101,973,172, $108,053,333 and $34,441,741, respectively. The gross
sales charges for the sale of Class D shares of the Insured Portfolio, the
National Portfolio and the Limited Maturity Portfolio for that period were
$76,775, $110,841, and $21,653, of which the Merrill Lynch received $69,053 for
the Insured Portfolio, $98,975 for the National Portfolio and $20,019, for the
Limited Maturity Portfolio, and the Distributor received $7,722(4), for the
Insured Portfolio, $11,866(5) for the National Portfolio and $1,634 for the
Limited Maturity Portfolio. For the fiscal year ended June 30, 1997, the
Distributor received CDSC proceeds of $180,983 and $177,957 with respect to
redemption within one year after purchase of Class D shares purchased subject to
a front-end sales charge waiver for the Insured and National Portfolios,
respectively. For the same period the Distributor did not receive any CDSC
proceeds with respect to redemption within one year after purchase of Class D
shares purchased subject to a front-end sales charge waiver for the Limited
Maturity Portfolio.
Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends from
outstanding Class A shares. Investors that currently own Class A shares of a
Portfolio in a shareholder account, including participants in the Merrill Lynch
Blueprint(SM) program, are entitled to purchase additional Class A shares of
that Portfolio in that account. Class A shares are available at net asset value
to corporate warranty insurance reserve fund programs and U.S. branches of
foreign banking institutions, provided that the program or branch has $3 million
or more initially invested in MLAM-advised mutual funds. Also eligible to
purchase Class A shares at net asset value are participants in certain
investment programs, including TMA(SM) Managed Trusts to which Merrill Lynch
Trust Company provides discretionary trustee services, collective investment
trusts for which Merrill Lynch Trust Company
- ---------------
(1) Includes $4,806 in direct commissions received by MLFD.
(2) Includes $114 in direct commissions received by MLFD.
(3) Includes $138 in direct commissions received by MLFD.
(4) Includes $56 in direct commissions received by MLFD.
(5) Includes $56 in direct commissions received by MLFD.
34
<PAGE> 37
serves as trustee, certain Merrill Lynch investment programs that offer pricing
alternatives for securities transactions and purchases made in connection with
certain fee-based programs. In addition, Class A shares will be offered at net
asset value to ML & Co. and its subsidiaries and their directors and employees
and to members of the Boards of MLAM-advised mutual funds, including the Fund.
Certain persons who acquired shares of certain MLAM-advised closed-end funds in
their initial offerings who wish to reinvest the net proceeds from a sale of
their closed-end fund shares of common stock in shares of the Fund also may
purchase Class A shares of the Fund if certain conditions set forth in the
Statement of Additional Information are met (for closed-end funds that commenced
operations prior to October 21, 1994). In addition, Class A shares of the Fund
and certain other MLAM-advised mutual funds are offered at net asset value to
shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and, if certain
conditions set forth in the Statement of Additional Information are met, to
shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch
High Income Municipal Bond Fund, Inc. who wish to reinvest the net proceeds from
a sale of certain of their shares of common stock pursuant to a tender offer
conducted by such funds in shares of the Fund and certain other MLAM-advised
mutual funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges also
may be reduced under a Right of Accumulation and a Letter of Intention. Class A
shares are offered at net asset value to certain eligible Class A investors as
set forth under "Eligible Class A Investors." See "Shareholder
Services -- Fee-Based Programs."
Provided applicable threshold requirements are met, Class D shares are
offered at net asset value to Employee Access(SM) Accounts available through
authorized employers. Subject to certain conditions, Class A and Class D shares
are offered at net asset value to shareholders of Merrill Lynch Municipal
Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund, Inc., and
Class A shares are offered at net asset value to shareholders of Merrill Lynch
Senior Floating Rate Fund, Inc., who wish to reinvest in shares of the Fund the
net proceeds from a sale of certain of their shares of common stock, pursuant to
tender offers conducted by those funds.
Class D shares are offered at net asset value without sales charge to an
investor who has a business relationship with a Merrill Lynch Financial
Consultant if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
Class D shares are offered with reduced sales charges and, in certain
circumstances, at net asset value, to participants in the Merrill Lynch
Blueprint(SM) Program.
Additional information concerning these reduced initial sales charges is
set forth in the Statement of Additional Information.
Employee Access(SM) Accounts. Class A or Class D shares are offered at net
asset value to Employee Access Accounts available through employers that provide
employer sponsored retirement or savings plans that are eligible to purchase
such shares at net asset value. The initial minimum investments for such
accounts is $500, except that the initial minimum investments for shares
purchased for such accounts pursuant to the Automatic Investment Program is $50.
35
<PAGE> 38
DEFERRED SALES CHARGE ALTERNATIVES -- CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net asset
value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares of the Insured and National
Portfolios are subject to a four year CDSC and Class B shares of the Limited
Maturity Portfolio are subject to a one year CDSC, while Class C shares of each
Portfolio are subject only to a one year 1.00% CDSC. On the other hand,
approximately ten years after Class B shares are issued, such Class B shares,
together with shares issued upon dividend reinvestment with respect to those
shares, are automatically converted into Class D shares of the relevant
Portfolio and thereafter will be subject to lower continuing fees. See
"Conversion of Class B Shares to Class D Shares" below. Class C shares of the
Limited Maturity Portfolio are available only through the Exchange Privilege.
Both Class B and Class C shares of each Portfolio are subject to an account
maintenance fee of 0.25% (in the case of the National and Insured Portfolios)
and 0.15% (in the case of the Limited Maturity Portfolio) of net assets. Class B
and Class C shares of the Insured and National Portfolios are subject to
distribution fees equal to 0.50% and 0.55%, respectively, of net assets. Class B
and Class C shares of the Limited Maturity portfolio are subject to a
distribution fee of 0.20% of net assets. See "Distribution Plans." The proceeds
from account maintenance fees are used to compensate Merrill Lynch for providing
continuing account maintenance activities.
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of the Class B and Class C
shares, such as the payment of compensation to financial consultants for selling
Class B and Class C shares from its own funds. The combination of the CDSC and
the ongoing distribution fee facilitates the ability of the Fund to sell the
Class B and Class C shares without a sales charge being deducted at the time of
purchase. Approximately ten years after issuance, Class B shares of a Portfolio
will convert automatically into Class D shares of that Portfolio, which are
subject to an account maintenance fee but no distribution fee; Class B shares of
certain other MLAM-advised mutual funds into which exchanges may be made convert
into Class D shares automatically after approximately eight years. If Class B
shares of the Fund are exchanged for Class B shares of another MLAM-advised
mutual fund, the conversion period applicable to the Class B shares acquired in
the exchange will apply, and the holding period for the shares exchanged will be
tacked onto the holding period for the shares acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See "Limitations on
the Payment of Deferred Sales Charges" below. Class B shareholders of the Fund
exercising the exchange privilege described under "Shareholder Services --
Exchange Privileges" will continue to be subject to the Fund's CDSC schedule if
such schedule is higher than the CDSC schedule relating to the Class B shares
acquired as a result of the exchange.
36
<PAGE> 39
Contingent Deferred Sales Charge -- Class B Shares. Class B shares of the
Insured and National Portfolios redeemed within four years of purchase and Class
B shares of the Limited Maturity Portfolio redeemed within one year of purchase,
may be subject to a CDSC at the rates set forth below charged as a percentage of
the dollar amount subject thereto. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the shares
being redeemed. Accordingly, no CDSC will be imposed on increases in net asset
value above the initial purchase price. In addition, no CDSC will be assessed on
the redemption of shares received upon the reinvestment of dividends or capital
gains distributions. Effective on or about May 12, 1997, the Class B CDSC also
will be waived for any Class B shares purchased within eligible Employee
Access(SM) Accounts.
The following table sets forth the rates of the CDSC on Class B shares
applicable for the period starting October 21, 1994:
<TABLE>
<CAPTION>
INSURED OR CDSC AS A
NATIONAL PORTFOLIO; PERCENTAGE OF
YEAR SINCE PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
--------------------- -----------------
<S> <C>
0-1.......................................................... 4.00%
1-2.......................................................... 3.00%
2-3.......................................................... 2.00%
3-4.......................................................... 1.00%
4 and thereafter............................................. 0.00%
</TABLE>
<TABLE>
<CAPTION>
LIMITED MATURITY CDSC AS A
PORTFOLIO; PERCENTAGE OF
YEAR SINCE PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
--------------------- -----------------
<S> <C>
0-1.......................................................... 1.0%
1 and thereafter............................................. 0.0%
</TABLE>
For the fiscal year ended June 30, 1997, the Distributor received
$1,906,615 in CDSCs with respect to redemptions of Class B shares, amounting to
$979,435, $868,705 and $58,475 in the Insured, National and Limited Maturity
Portfolios, respectively, all of which were paid to Merrill Lynch. Additional
CDSCs payable to the Distributor may have been waived or converted to a
contingent obligation in connection with a shareholder's participation in
certain fee-based programs.
In determining whether a CDSC is applicable to a redemption, the
calculation will be made in a manner that results in the lowest possible
applicable rate being charged. Therefore, with respect to the Insured and
National Portfolios, it will be assumed that the redemption is first of shares
held for over four years or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the applicable
four-year period. It will be assumed, with respect to the Limited Maturity
Portfolio, that the redemption is of shares held for over one year or shares
acquired pursuant to reinvestment of dividends or distributions and then of
shares held longest during the one-year period. The charge will not be applied
to dollar amounts representing an increase in the net asset value since the time
of purchase. A transfer of shares from a shareholder's account to another
account will be assumed to be made in the same order as a redemption.
37
<PAGE> 40
To provide an example, assume an investor purchased 100 Class B shares of
the Insured Portfolio at $10 per share (at a cost of $1,000) and in the third
year after purchase, the net asset value per share is $12 and, during such time,
the investor has acquired 10 additional shares upon dividend reinvestment. If at
such time the investor makes his or her first redemption of 50 shares (proceeds
of $600), 10 shares will not be subject to charge because of dividend
reinvestment. With respect to the remaining 40 shares, the CDSC is applied only
to the original cost of $10 per share and not the increase in net asset value of
$2 per share. Therefore, $400 of the $600 redemption proceeds will be charged at
a rate of 2.00% (the applicable rate in the third year after purchase for shares
purchased on or after October 21, 1994).
Additional information concerning the waiver of the Class B CDSC is set
forth in the Statement of Additional Information.
Contingent Deferred Sales Charges -- Class C Shares. Class C shares that
are redeemed within one year of purchase may be subject to a 1.00% CDSC charged
as a percentage of the dollar amount subject thereto. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the
cost of the shares being redeemed. Accordingly, no Class C CDSC will be imposed
on increases in net asset value above the initial purchase price. In addition,
no Class C CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions. The Class C CDSC may be waived in
connection with certain fee-based programs. See "Shareholder
Services -- Fee-Based Programs."
The following table sets forth the rates of the contingent deferred sales
charge on the Class C shares of the Insured, National and Limited Maturity
Portfolios:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
YEAR SINCE PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
------------------------------------------------------------ -------------------
<S> <C>
0-1......................................................... 1.00%
thereafter.................................................. 0.00%
</TABLE>
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be made in the manner that results in the lowest possible rate
being charged. Therefore, it will be assumed that the redemption is first of
shares held for over one year or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the one-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of shares
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.
For the fiscal year ended June 30, 1997, the Distributor received $17,583
in CDSCs with respect to redemptions of Class C shares, amounting to $6,915,
$10,273 and $395 in the Insured, National and Limited Maturity Portfolios,
respectively, all of which were paid to Merrill Lynch. Additional CDSCs payable
to the Distributor may have been waived or converted to a contingent obligation
in connection with a shareholder's participation in certain fee-based programs.
Conversion of Class B Shares to Class D Shares. After approximately ten
years (the "Conversion Period"), Class B shares of a Portfolio will be converted
automatically into Class D shares of the relevant Portfolio. Class D shares are
subject to an ongoing account maintenance fee of 0.25% (in the case of Insured
38
<PAGE> 41
Portfolio and National Portfolio) and 0.10% (in the case of the Limited Maturity
Portfolio) of net assets but are not subject to the distribution fee that is
borne by Class B shares. Automatic conversion of Class B shares into Class D
shares will occur at least once each month (on the "Conversion Date") on the
basis of the relative net asset values of the shares of the two classes on the
Conversion Date, without the imposition of any sales load, fee or other charge.
Conversion of Class B shares to Class D shares will not be deemed a purchase or
sale of the shares for federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class D
shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert approximately
ten years after initial purchase. If, during the Conversion Period, a
shareholder exchanges Class B shares with an eight-year Conversion Period for
Class B shares with a ten-year Conversion Period, or vice versa, the Conversion
Period applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the holding
period for the shares acquired.
The Conversion Period also may be modified in connection with certain
fee-based programs. See "Shareholder Services -- Fee-Based Programs."
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or distribution
fees paid by the Fund to the Distributor with respect to such classes. The Class
B and Class C Distribution Plans provide for the payment of account maintenance
fees and distribution fees, and the Class D Distribution Plan provides for the
payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class of a Portfolio, accrued daily and paid monthly, at
the annual rate of 0.25% (in the case of the Class B, Class C and Class D shares
of the Insured Portfolio and the National Portfolio) and 0.15% (in the case of
Class B and Class C shares of the Limited Maturity) and 0.10% (in the case of
the Class D shares of the Limited Maturity Portfolio) of the average daily net
assets of the Portfolio attributable to shares of the relevant class in order to
compensate the Distributor and Merrill Lynch (pursuant to a sub-agreement) in
connection with account maintenance activities.
39
<PAGE> 42
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class of a Portfolio, accrued daily and paid monthly, at the annual
rate of 0.50% and 0.55% for the Class B and Class C shares, respectively, of the
Insured and National Portfolios and 0.20% for the Class B and Class C shares of
the Limited Maturity Portfolio of the average daily net assets of the Portfolio
attributable to the shares of the relevant class in order to compensate the
Distributor and Merrill Lynch (pursuant to a sub-agreement) for providing
shareholder and distribution services, and bearing certain distribution-related
expenses of the Fund, including payments to financial consultants for selling
Class B and Class C shares of the Portfolio. The Distribution Plans relating to
Class B and Class C shares are designed to permit an investor to purchase Class
B and Class C shares through dealers without the assessment of an initial sales
charge and at the same time permit the dealer to compensate its financial
consultants in connection with the sale of the Class B and Class C shares. In
this regard, the purpose and function of the ongoing distribution fees and the
CDSC are the same as those of the initial sales charge with respect to the Class
A and Class D shares of the Fund in that the deferred sales charges provide for
the financing of the distribution of the Fund's Class B and Class C shares.
Prior to July 6, 1993, the Fund paid the Distributor an ongoing
distribution fee, accrued daily and paid monthly, at the annual rate of 0.75%
(in the case of the Insured Portfolio and National Portfolio) and 0.35% (in the
case of the Limited Maturity Portfolio) of the average daily net assets of the
Class B shares of the respective Portfolio (the "Prior Plan") to compensate the
Distributor and Merrill Lynch for providing account maintenance and
distribution-related activities and services to Class B shareholders. The fee
rate payable and the services provided under the Prior Plan are identical to the
aggregate fee rate payable and the services provided under the Distribution
Plan, the difference being that the account maintenance and distribution
services have been unbundled. For the fiscal year ended June 30, 1997, the
Insured, National and Limited Maturity Portfolios paid the Distributor
$4,901,030, $3,073,016, and $222,614, respectively, pursuant to the Class B
Distribution Plan (based on average net assets subject to the Class B
Distribution Plan of approximately $653.5 million, $409.7 million, and $63.6
million, respectively), all of which were paid to Merrill Lynch for providing
account maintenance and distribution-related activities and services in
connection with Class B shares. For the fiscal year ended June 30, 1997, the
Insured, National and Limited Maturity Portfolios paid the Distributor $134,437,
$162,696, and $634, respectively, pursuant to the Class C Distribution Plan
(based on average net assets subject to the Class C Distribution Plan of
approximately $16.8 million, $20.3 million, and $0.2 million, respectively), all
of which were paid to Merrill Lynch for providing account maintenance and
distribution-related activities and services in connection with Class C shares.
For the fiscal year ended June 30, 1997, the Insured, National and Limited
Maturity Portfolios paid the Distributor $116,523, $126,564, and $17,810,
respectively, pursuant to the Class D Distribution Plan (based on average net
assets subject to the Class D Distribution Plan of approximately $46.6 million,
$50.6 million, and $17.8 million, respectively), all of which were paid to
Merrill Lynch for providing account maintenance services in connection with
Class D shares.
The payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the relevant shares regardless of the
amount of expenses incurred and, accordingly, distribution-related revenues from
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses
incurred by the Distributor and Merrill Lynch is presented to the Directors for
their consideration in connection with their deliberations as to the continuance
of the Class B and Class C Distribution Plans. This information is presented
annually as of December 31, of each year on a "fully allocated accrual" basis
and quarterly on a "direct expense and revenue/cash" basis. On
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<PAGE> 43
the fully allocated accrual basis, revenues consist of account maintenance fees,
the distribution fees, the CDSCs and certain other related revenues, and
expenses consist of financial consultant compensation, branch office and
regional operation center selling and transaction procession expenses,
advertising, sales promotion and marketing expenses, corporate overhead and
interest expense. On the direct expense and revenue/cash basis, revenues consist
of the account maintenance fees, distribution fees and the CDSCs, and expenses
consist of financial consultant compensation.
As of December 31, 1996, the last date for which fully allocated accrual
data is available, the fully allocated accrual revenues incurred by the
Distributor and Merrill Lynch since October 21, 1988 (commencement of
operations) with respect to Class B shares of the Insured Portfolio exceeded
fully allocated expenses for that period by $28,142,845 (representing 4.13% of
the Insured Portfolio's Class B net assets at that date), and the fully
allocated accrual revenues incurred by the Distributor and Merrill Lynch during
that period with respect to Class B shares of the National Portfolio exceeded
the fully allocated accrual expenses for that period by $13,052,833
(representing 3.28% of the National Portfolio's Class B net assets at that
date). The fully allocated accrual revenues incurred by the Distributor and
Merrill Lynch during the period from November 2, 1992 (commencement of
operations) to December 31, 1996, with respect to Class B shares of the Limited
Maturity Portfolio exceeded fully allocated expenses by $1,480,421 (representing
2.35% of the Limited Maturity Portfolio's Class B net assets at that date). As
of June 30, 1997, direct cash revenues received with respect to the Class B
shares of the Insured Portfolio for the period since October 21, 1988
(commencement of operations) exceeded direct cash expenses by $30,395,737
(representing 5.43% of Insured Portfolio Class B net assets at that date) and
direct cash revenues received with respect to Class B shares of the National
Portfolio for the same period exceeded direct cash expenses by $14,736,843
(representing 3.55% of National Portfolio Class B net assets at that date). As
of June 30, 1997, direct cash revenues received with respect to the Class B
shares of the Limited Maturity Portfolio for the period since November 2, 1992
(commencement of operations) exceeded direct cash expenses by $1,584,188
(representing 2.92% of Limited Maturity Portfolio Class B net assets at that
date).
With respect to Class C shares, as of December 31, 1996, the last date for
which fully allocated accrual data is available, the fully allocated accrual
revenues incurred by the Distributor and Merrill Lynch since October 21, 1994
(commencement of operations) with respect to Class C shares of the Insured
Portfolio exceeded fully allocated expenses for that period by $112,698
(representing 0.55% of the Insured Portfolio's Class C net assets at that date),
and the fully allocated accrual revenues incurred by the Distributor and Merrill
Lynch during that period with respect to Class C shares of the National
Portfolio exceeded the fully allocated accrual expenses for that period by
$75,014 (representing 0.40% of the National Portfolio's Class C net assets at
that date) and the fully allocated accrual expenses incurred by the Distributor
and Merrill Lynch during that period with respect to Class C shares of the
Limited Maturity Portfolio exceeded the fully allocated accrual revenues for
that period by $1,128 (representing 0.50% of the Limited Maturity Portfolio's
Class C net assets at that date). As of June 30, 1997, direct cash revenues
received with respect to the Class C shares of the Insured Portfolio for the
period since October 21, 1994 (commencement of operations) exceeded direct cash
expenses by $152,980 (representing 1.28% of Insured Portfolio Class C net assets
at that date), and the direct cash revenues received with respect to the Class C
shares of the National Portfolio for the same period exceeded direct cash
expenses by $144,667 (representing 0.51% of National Portfolio Class C net
assets at that date) and the direct cash expenses with respect to Class C shares
of the Limited Maturity Portfolio exceeded direct cash revenues by $812
(representing 0.76% of Limited Maturity Portfolio Class C net assets at that
date).
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<PAGE> 44
The Fund has no obligation with respect to distribution and/or account
maintenance related expenses incurred by the Distributor and Merrill Lynch in
connection with the Class B, Class C and Class D shares, and there is no
assurance that the Board of Directors of the Fund will approve the continuation
of the Distribution Plans from year to year. However, the Distributor intends to
seek annual continuation of the Distribution Plans. In their review of the
Distribution Plans, the Directors will be asked to take into consideration
expenses incurred in connection with the account maintenance and/or distribution
of each Class of a Portfolio separately. The initial sales charges, the account
maintenance fee, the distribution fee and/or the CDSCs received with respect to
the one class of a Portfolio will not be used to subsidize the sale of shares of
another class of the same Portfolio or of any class of another Portfolio.
Payments of the distribution fee on Class B shares will terminate upon
conversion of those Class B shares into Class D shares as set forth under
"Deferred Sales Charge Alternatives -- Class B and Class C Shares -- Conversion
of Class B to Class D Shares."
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the Fund's distribution
fee and the CDSC borne by the Class B and Class C but not the account
maintenance fees. The maximum sales charge rule is applied separately to each
class and Portfolio. As applicable to a Portfolio, the maximum sales charge rule
limits the aggregate of distribution fee payments and CDSCs payable by the Fund
to (1) 6.25% of eligible gross sales of Class B shares and Class C shares of
that Portfolio, computed separately (defined to exclude shares issued pursuant
to dividend reinvestments and exchanges), plus (2) interest on the unpaid
balance for the respective classes, computed separately at the prime rate plus
1% (the unpaid balance being the maximum amount payable minus amounts received
from the payment of the distribution fee and the CDSC). In connection with the
Class B shares the Distributor has voluntarily agreed to waive interest charges
on the unpaid balance in excess of 0.50% of eligible gross sales. Consequently,
the maximum amount payable to the Distributor (referred to as the "voluntary
maximum") in connection with the Class B shares is 6.75% of eligible gross
sales. The Distributor retains the right to stop waiving the interest charge at
any time. To the extent payments would exceed the voluntary maximum, the Fund
will not make further payments of the distribution fee with respect to Class B
shares and any CDSCs will be paid to the Fund rather than to the Distributor;
however, the Fund will continue to make payments of the account maintenance
fees. In certain circumstances the amount payable pursuant to the voluntary
maximum may exceed the amount payable under the NASD formula. In such
circumstances payment in excess of the amount payable under the NASD formula
will not be made.
REDEMPTION OF SHARES
The Fund is required to redeem for cash all shares of each Portfolio upon
receipt of a written request in proper form. The redemption price is the net
asset value per share of the Portfolio next determined after the initial receipt
of proper notice of redemption. Except for any CDSC that may be applicable,
there will be no charge for redemption if the redemption request is sent
directly to the Transfer Agent. Shareholders liquidating their holdings will
receive upon redemption all dividends declared through the date of redemption.
The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending on the market value of the securities held by the
relevant Portfolio at such time. If a shareholder redeems all of the shares in
his account, he will receive, in addition to the net asset value of the shares
redeemed, a separate check representing all dividends declared but unpaid. If a
shareholder redeems a portion of the shares in his
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account, the dividends declared but unpaid on the shares redeemed will be
distributed on the next dividend payment date. As set forth below, special
procedures are available pursuant to which shareholders may redeem by check.
REDEMPTION
A shareholder wishing to redeem shares may do so by tendering the shares
directly to the Transfer Agent, Merrill Lynch Financial Data Services, Inc.,
P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption requests delivered
other than by mail should be delivered to Merrill Lynch Financial Data Services,
Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484. Proper notice
of redemption in the case of shares deposited with the Transfer Agent may be
accomplished by a letter requesting redemption. Proper notice of redemption in
the case of shares for which certificates have been issued may be accomplished
by a written letter as noted above accompanied by the certificate(s) for the
shares to be redeemed. The notice in either event requires the signature(s) of
all persons in whose name(s) the shares are registered, signed exactly as their
name(s) appear(s) on the Transfer Agent's register or on the certificate(s), as
the case may be. The signature(s) on the redemption request must be guaranteed
by an "eligible guarantor institution" as such is defined in Rule 17Ad-15 under
the Securities Exchange Act of 1934, the existence and validity of which may be
verified by the Transfer Agent through the use of industry publications.
Notarized signatures are not sufficient. Examples of eligible guarantor
institutions include most commercial banks and other broker dealers (including
for example, Merrill Lynch branch offices). Information regarding other
financial institutions that qualify as "eligible guarantor institutions" may be
obtained from the Transfer Agent. In certain instances, the Transfer Agent may
require additional documents such as, but not limited to, trust instruments,
death certificates, appointments as executor or administrator, or certificates
of corporate authority. For shareholders redeeming directly with the Transfer
Agent, payment will be mailed within seven days of receipt of a proper notice of
redemption.
At various times the Fund may be requested to redeem shares of a Portfolio
for which it has not yet received good payment. The Fund may delay or cause to
be delayed the mailing of a redemption check until such time as it has assured
itself that good payment (e.g., cash, Federal funds, or a certified check drawn
on a United States bank) has been collected for the purchase of such shares.
Normally this delay will not exceed ten days.
REPURCHASE
The Fund will also repurchase shares of each Portfolio through a
shareholder's listed securities dealer. The Fund will normally accept orders to
repurchase shares by wire or telephone from dealers for their customers at the
net asset value next computed after receipt of the order by the dealer, provided
that the request for repurchase is received by the dealer prior to the close of
business on the New York Stock Exchange on the day received and is received by
the Fund from the dealer not later than 4:30 p.m., New York City time, on the
same day. Dealers have the responsibility of submitting such repurchase requests
to the Fund not later than 4:30 p.m., New York City time, in order to obtain
that day's closing price. These repurchase arrangements are for the convenience
of shareholders and do not involve a charge by the Fund (other than any
applicable CDSC). Securities dealers that do not have selected dealer agreements
with the Distributor may impose a charge on the shareholder for transmitting the
notice of repurchase to the Fund. Merrill Lynch may charge its customers a
processing fee (currently $5.35) to confirm a repurchase of shares. Redemptions
made
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directly through the Fund's Transfer Agent are not subject to the processing
fee. The Fund reserves the right to reject any order for repurchase. The
exercise of this right of rejection might adversely affect shareholders seeking
redemption through the repurchase procedure.
For shareholders redeeming through their listed securities dealer, payment
for full and fractional shares will be made by the securities dealer within
seven days of the proper tender of the certificates, if any, and stock power or
letter requesting redemption, in each instance with signatures guaranteed as
noted above.
REINSTATEMENT PRIVILEGE -- CLASS A AND CLASS D SHARES
As described in further detail in the Statement of Additional Information,
holders of Class A or Class D shares of any of the three Portfolios who have
redeemed their shares have a one-time privilege to reinstate their accounts by
purchasing Class A or Class D, as the case may be, shares of the same Portfolio,
in which they had invested at net asset value without a sales charge up to the
dollar amount redeemed. The reinstatement privilege may be exercised by sending
a notice of exercise along with a check for the amount to be reinstated to the
Transfer Agent within 30 days after the date the request for redemption was
accepted by the Transfer Agent or the Distributor. Alternatively, the
reinstatement privilege may be exercised through the investor's Merrill Lynch
Financial Consultant within 30 days after the date the request for redemption
was accepted by the Transfer Agent or Distributor. The reinstatement will be
made at the net asset value per share next determined after the notice of
reinstatement is received and cannot exceed the amount of the redemption
proceeds.
SHAREHOLDER SERVICES
Each Portfolio offers a number of shareholder services designed to
facilitate investment in its shares at no extra cost to the investor. Below is a
description of these services. Full details as to each of these services and
copies of the various plans described below can be obtained from the Fund.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained with the Transfer Agent has an
Investment Account and will receive a statement, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income dividends
and long-term capital gains distributions. These statements will also show any
other activity in the account since the preceding statement. After the end of
each year, shareholders will receive Federal income tax information regarding
dividends and capital gain distributions. A shareholder may make additions to
his Investment Account at any time by purchasing shares at the applicable public
offering price either through a securities dealer that has entered into a
selected dealer agreement with the Distributor or by mail directly to the
Transfer Agent.
Shareholders also may maintain their accounts through Merrill Lynch. Upon
the transfer of shares out of a Merrill Lynch brokerage account, an Investment
Account in the transferring shareholder's name will be opened automatically, at
the Transfer Agent. Shareholders considering transferring their Class A or Class
D shares from Merrill Lynch to another brokerage firm or financial institution
should be aware that, if the firm to which the Class A or Class D shares are to
be transferred will not take delivery of shares of the Fund, a shareholder
either must redeem the Class A or Class D shares (paying any applicable CDSC) so
that the cash
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<PAGE> 47
proceeds can be transferred to the account at the new firm or such shareholder
must continue to maintain an Investment Account at the Transfer Agent for those
Class A or Class D shares. Shareholders interested in transferring their Class B
or Class C shares from Merrill Lynch and who do not wish to have an Investment
Account maintained for such shares at the Transfer Agent may request their new
brokerage firm to maintain such shares in an account registered in the name of
the brokerage firm for the benefit of the shareholder at the Transfer Agent.
Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Certificates representing all or only part
of the full shares in an Investment Account may be requested by a shareholder
directly from the Transfer Agent.
AUTOMATIC INVESTMENT PLAN
An Automatic Investment Plan is available whereby the Transfer Agent is
authorized through pre-authorized checks of $50 or more to charge the regular
bank account of the shareholder on a monthly basis to provide systematic
additions of shares of the Fund to the shareholder's Investment Account.
Shareholders whose positions in any Portfolio of the Fund are maintained in a
CMA(R) or CBA(R) account may participate in the CMA(R) or CBA(R) Automated
Investment Program, through which investments in any Portfolio of the Fund may
be made on a regularly scheduled basis ranging from weekly to semiannually in
amounts of $100 or more.
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives
for securities transactions (each referred to in this paragraph as a "Program"),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares that will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of shares
held therein or the automatic exchange thereof to another class at net asset
value, which may be shares of a money market fund. In addition, upon termination
of participation in a Program, shares that have been held for less than
specified periods within such Program may be subject to a fee based upon the
current value of such shares. These Programs also generally prohibit such shares
from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance fees)
in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from the Transfer Agent at
1-800-MER-FUND or (800) 637-3863.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All dividends and capital gains distributions are automatically reinvested
in full and fractional shares of the respective Portfolio, without a sales
charge at the net asset value of the shares of the respective Portfolio as of
the close of business on the payable date of the dividend or distribution. A
shareholder may at any time, by
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written notification to Merrill Lynch if the shareholder's account is maintained
with Merrill Lynch or by written notification or by telephone (1-800-MER-FUND)
to the Transfer Agent if the shareholder's account is maintained with the
Transfer Agent, elect to have subsequent dividends or capital gains
distributions, or both, paid in cash, rather than reinvested, in which event
payment will be mailed on or about the payment date. The Fund is not responsible
for any failure of delivery to the shareholder's addresses of record and no
interest will accrue on amounts represented by uncashed distribution or
redemption checks. Cash payments can also be directed to the shareholder's bank
account. No CDSC will be imposed upon redemption of shares issued as a result of
the automatic reinvestment of dividends or capital gains distributions.
SYSTEMATIC WITHDRAWAL PLANS
A shareholder of any of the three Portfolios may elect to receive
systematic withdrawal payments from his or her Investment Account in the form of
payments by check or through automatic payment by direct deposit to his or her
bank account on either a monthly or calendar quarterly basis. A shareholder
whose shares are held within a CMA(R), CBA(R) or Retirement Account may elect to
have shares redeemed on a monthly, bimonthly, quarterly, semiannual or annual
basis through the CMA(R) or CBA(R) Systematic Redemption Program, subject to
certain conditions. With respect to redemptions of Class B and Class C shares
pursuant to a systematic withdrawal plan, the maximum number of Class B or Class
C shares that can be redeemed from an account annually shall not exceed 10% of
the value of shares of such class in that account at the time the election to
join the systematic withdrawal plan was made. Any CDSC that otherwise might be
due on such redemption of Class B or Class C shares will be waived. Shares
redeemed pursuant to a systematic withdrawal plan will be redeemed in the same
order as Class B or Class C shares are otherwise redeemed. See "Purchase of
Shares -- Deferred Sales Charge Alternatives -- Class B and Class C
Shares -- Contingent Deferred Sales Charge -- Class B Shares" and "Contingent
Deferred Sales Charges -- Class C Shares." Where the systematic withdrawal plan
is applied to Class B Shares, upon conversion of the last Class B shares in an
account to Class D shares, the systematic withdrawal plan will automatically be
applied thereafter to Class D shares. See "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares -- Conversion of Class B
Shares to Class D Shares."
EXCHANGE PRIVILEGES
U.S. Shareholders of each class of shares of a Portfolio who have held all
or part of their shares in the Portfolio for at least 15 days may exchange their
shares for shares of certain other Portfolios of the Fund, or with certain other
MLAM-advised mutual funds.
Under the Merrill Lynch Select Pricing(SM) System, Class A shareholders may
exchange Class A shares of a Portfolio for Class A shares of another Portfolio
or a second MLAM-advised mutual fund if the shareholder holds any Class A shares
of the other Portfolio or second fund in the account in which the exchange is
made at the time of the exchange or is otherwise eligible to purchase Class A
shares of the other Portfolio or second fund. If the Class A shareholder wants
to exchange Class A shares for shares of another Portfolio or a second
MLAM-advised mutual fund, and the shareholder does not hold Class A shares of
the other Portfolio or second fund in his account at the time of the exchange
and is not otherwise eligible to acquire Class A shares of the other Portfolio
or second fund, the shareholder will receive Class D shares of the other
Portfolio or second fund as a result of the exchange. Class D shares also may be
exchanged for Class A shares of another Portfolio or a second MLAM-advised
mutual fund at any time as long as, at the time of the exchange, the
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shareholder holds Class A shares of the other Portfolio or second fund in the
account in which the exchange is made or is otherwise eligible to purchase Class
A shares of the other Portfolio or second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares of a Portfolio will be exchangeable
with shares of the same class of another Portfolio or other MLAM-advised mutual
funds. Class C shares of the Limited Maturity Portfolio are available only
through the Exchange Privilege.
Shares of a Portfolio that are subject to a CDSC will be exchangeable on
the basis of relative net asset value per share without the payment of any CDSC
that might otherwise be due upon redemption of the shares of the Portfolio. For
purposes of computing the CDSC that may be payable upon a disposition of the
shares acquired in the exchange, the holding period for the previously owned
shares of the Portfolio is "tacked" to the holding period for the newly acquired
shares of the other fund or Portfolio.
Class A, Class B, Class C and Class D shares also will be exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares are
held in a money market fund, however, will not count toward satisfaction of the
holding period requirement for reduction of any CDSC imposed on such shares, if
any, and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of a Portfolio exercising the exchange privilege will
continue to be subject to the CDSC schedule applicable to that Portfolio if such
schedule is higher than the CDSC schedule relating to the new Class B shares. In
addition, Class B shares of a Portfolio acquired through use of the exchange
privilege will be subject to the CDSC schedule applicable to that Portfolio if
such schedule is higher than the CDSC schedule relating to the Class B shares of
the MLAM-advised mutual fund from which the exchange has been made.
Exercise of the exchange privilege is treated as a sale of the exchanged
shares and a purchase of the acquired shares for Federal income tax purposes.
For further information, see "Shareholder Services -- Exchange Privilege" in the
Statement of Additional Information.
PORTFOLIO TRANSACTIONS
No Portfolio has any obligation to deal with any dealer or group of dealers
in the execution of transactions in portfolio securities. Municipal Bonds and
money market securities in which each Portfolio invests are traded primarily in
the over-the-counter market. Where possible, each Portfolio deals directly with
the dealers who make a market in the securities involved except in those
circumstances where better prices and execution are available elsewhere. It is
the policy of the Fund to obtain the best net results taking into account such
factors as price (including the applicable dealer spread), the size, type and
difficulty of the transaction involved, the firm's general execution and
operational facilities, and the firm's risk in positioning the securities
involved and the provision of supplemental investment research by the firm.
While the Fund generally seeks
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reasonably competitive spreads or commissions, the Fund will not necessarily be
paying the lowest spread or commission available.
Municipal Bonds and money market securities are generally traded on a net
basis and do not normally involve either brokerage commissions or transfer
taxes. The cost of the portfolio securities transactions of each Portfolio
consists primarily of dealer or underwriter spreads. Under the Investment
Company Act, persons affiliated with the Fund, including Merrill Lynch, are
prohibited from dealing with the Fund as a principal in the purchase and sale of
securities. The Fund has obtained an exemptive order permitting it to engage in
certain principal transactions involving high-quality short-term Municipal
Bonds. In addition, the Fund may not purchase Municipal Bonds from any
underwriting syndicate of which Merrill Lynch is a member except pursuant to
procedures approved by the Board of Directors which comply with rules adopted by
the Securities and Exchange Commission. Affiliated persons of the Fund may serve
as its broker in over-the-counter transactions conducted on an agency basis.
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
The net investment income of each Portfolio is declared as dividends daily
immediately prior to the determination of the net asset value of each Portfolio
on that day. The net investment income of each Portfolio for dividend purposes
consists of interest earned on portfolio securities, less expenses, in each case
computed since the most recent determination of net asset value. Expenses of
each Portfolio, including the advisory fee and Class B, Class C and Class D
account maintenance and Class B and Class C distribution fees (if applicable),
are accrued daily. Dividends of net investment income are declared daily and
reinvested monthly in the form of additional full and fractional shares of each
Portfolio at net asset value unless the shareholder elects to receive such
dividends in cash. The per share dividend distributions on each class of shares
of each of the three Portfolios will be reduced as a result of any account
maintenance, distribution and transfer agency fees applicable to that class.
Shares will accrue dividends as long as they are issued and outstanding. Shares
are issued and outstanding as of the settlement date of a purchase order to the
settlement date of a redemption order.
Net realized capital gains, if any, are declared and distributed to the
Fund's shareholders at least annually. Capital gains distributions will be
automatically reinvested in shares unless the shareholder elects to receive such
distributions in cash.
See "Shareholder Services -- Automatic Reinvestment of Dividends and
Capital Gains Distributions" for information as to how to elect either dividend
reinvestment or cash payments. Any portions of dividends and distributions that
are taxable to shareholders as described below are subject to income tax whether
they are reinvested in shares of any Portfolio or received in cash.
FEDERAL INCOME TAXES
Each Portfolio of the Fund generally will be treated as a separate
corporation for Federal income tax purposes. Each Portfolio has qualified and
expects to continue to qualify for the special tax treatment afforded regulated
investment companies under the Internal Revenue Code of 1986, as amended (the
"Code"). If each
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Portfolio qualifies for that tax treatment, it will not be subject to Federal
income tax on that part of its net ordinary income and net realized long-term
capital gains that it distributes to its shareholders.
Each Portfolio has qualified and expects to continue to qualify to pay
"exempt-interest" dividends as defined in the Code. If it so qualifies,
dividends or any part thereof (other than any capital gain distributions) paid
by the Portfolio that are attributable to interest on tax-exempt obligations and
designated by the Portfolio as exempt-interest dividends in a written notice
mailed to the Portfolio's shareholders within sixty days after the close of its
taxable year may be treated by shareholders for all purposes as items of
interest excludable from their gross income under Section 103(a) of the Code.
The recipient of tax-exempt income is required to report such income on his or
her Federal income tax return. However, a shareholder is advised to consult his
or her tax adviser with respect to whether exempt-interest dividends retain the
exclusion under Section 103(a) if such shareholder would be treated as a
"substantial user" under Section 147(a)(1) of the Code with respect to some or
all of the tax-exempt obligations held by the Portfolio. The Code provides that
interest on indebtedness incurred or continued to purchase or carry shares of
the Portfolio is not deductible to the extent attributable to exempt-interest
dividends. Also, any losses realized by individuals who dispose of shares of the
Fund within six months of their purchase are disallowed to the extent of any
exempt-interest dividends received with respect to such shares.
Each Portfolio may realize capital gains, which will constitute taxable
income. Any distributions designated as capital gain dividends, i.e., as being
made from the Portfolio's net long-term capital gains (whether from tax-exempt
or taxable obligations) in a written notice furnished annually to shareholders
are taxable to shareholders as gains from the sale or exchange of a capital
asset held for more than one year, regardless of a shareholder's holding period
for shares of the Portfolio. In addition, if, after April 30, 1993, a Portfolio
acquired tax-exempt obligations having market discount (generally, obligations
acquired for a price less than their principal amount), any gain on the
disposition or retirement of such obligations will be treated as ordinary income
to the extent of accrued market discount.
Dividends paid by each Portfolio from its taxable income (i.e., interest on
money market securities) and distributions of net realized short-term capital
gains (whether from tax-exempt or taxable obligations) are taxable to
shareholders as ordinary income.
Some shareholders may be subject to a 31% withholding tax ("backup
withholding") on reportable dividends, capital gains distributions and
redemption payments. Backup withholding is not required with respect to
dividends representing "exempt-interest." 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 penalties of perjury that such number is correct and that he is not
otherwise subject to backup withholding.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period
49
<PAGE> 52
beginning 30 days before and ending 30 days after the date that the shares are
disposed of. In such a case, the basis of the shares acquired will be adjusted
to reflect the disallowed loss.
Individual shareholders of the Fund may be subject to alternative minimum
tax to the extent the Fund holds "private activity" bonds. The Fund expects that
it will hold private activity bonds; however, in general, an individual
shareholder filing a joint return who does not have any tax preference items
subject to the alternative minimum tax other than income received from the Fund
derived from private activity bonds would have to receive more than $45,000 of
such income from the Fund before becoming subject to the alternative minimum
tax.
Exempt-interest dividends paid by the Fund, whether or not attributable to
private activity bonds, may increase a corporate shareholder's alternative
minimum taxable income. In addition, the payment of exempt-interest dividends
may increase a corporate shareholder's liability for the environmental tax
imposed on a corporation's alternative minimum taxable income (computed without
regard to either the alternative tax net operating loss deduction or the
environmental tax deduction) at a rate of $12 per $10,000 (0.12%) of alternative
minimum taxable income in excess of $2,000,000. The tax will be imposed even if
the corporation is not required to pay an alternative minimum tax.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations currently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury Regulations promulgated thereunder. The Code and these Regulations
are subject to change by legislative or administrative action either
prospectively or retroactively. The Statement of Additional Information sets
forth additional information regarding other tax aspects of investment in the
Fund.
Ordinary income and capital gains dividends may also be subject to State
and local taxes.
STATE AND LOCAL TAXES
Depending upon the extent of the Fund's activities in those states and
localities in which its offices are maintained or in which its agents or
independent contractors are located, the Fund may be subject to the tax laws of
such states or localities. In addition, the exemption of interest income for
Federal income tax purposes does not necessarily result in exemption under the
income or other tax laws of any state or local taxing authority. The laws of the
several states and local taxing authorities vary with respect to the taxation of
such interest income, and each holder of shares of the Fund is advised to
consult his or her own tax adviser in that regard. The Fund will report annually
the percentage of interest income received by each Portfolio during the
preceding year on tax-exempt obligations, indicating, on a state-by-state basis,
the source of such income.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of each Portfolio is
determined once daily, Monday through Friday, immediately after the declaration
of dividends as of 15 minutes after the close of business on the New York Stock
Exchange (generally 4:00 p.m., New York City time), on each day that the New
York Stock Exchange is open for trading or on any other day on which there is
sufficient trading in portfolio securities that the net asset value of a
Portfolio's shares may be materially affected. The New York Stock Exchange is
not open on New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. The net asset value per share is
50
<PAGE> 53
computed by dividing the sum of the value of the portfolio securities held by
each Portfolio plus any cash or other assets minus all liabilities by the total
number of shares outstanding at such time, rounded to the nearest cent.
Expenses, including the investment advisory fees payable to FAM and account
maintenance and/or distribution fees payable to the distributor are accrued
daily.
The per share net asset value of Class A shares of a Portfolio generally
will be higher than the per share net asset value of shares of the other classes
of that Portfolio, reflecting the daily expense accruals of the account
maintenance, distribution and higher transfer agency fees applicable with
respect to Class B and Class C shares and the daily expense accruals of the
account maintenance and higher transfer agency fees applicable with respect to
Class D shares. Moreover, the per share net asset value of Class D shares
generally will be higher than the per share net asset value of Class B and Class
C shares, reflecting the daily expense accruals of distribution and higher
transfer agency fees applicable with respect to Class B and Class C shares. It
is expected, however, that the per share net asset value of the four classes of
a Portfolio will tend to converge (although not necessarily meet) immediately
after the payment of dividends or distributions, which will differ by
approximately the amount of expense accrual differentials among the classes.
The Municipal Bonds and money market securities in which each Portfolio
invests are traded primarily in the over-the-counter markets and are valued at
the most recent bid price or yield equivalent as obtained from dealers that make
markets in such securities. Positions in futures contracts are valued at closing
prices for such contracts established by the exchange on which they are traded
on each day during which trading is conducted thereon. Assets for which 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,
including valuations furnished by a pricing service retained by the Fund, which
may utilize a matrix system for valuations.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return,
yield and tax equivalent yield for various specified time periods in
advertisements or information furnished to present or prospective shareholders.
Average annual total return, yield and tax equivalent yield are computed
separately for the Class A, Class B, Class C and Class D shares of the
Portfolios in accordance with formulas specified by the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return will be computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including any CDSC that would be applicable to a
complete redemption of the investment at the end of the specified period, such
as in the case of Class B and Class C shares and the maximum sales charge in the
case of Class A and Class D shares. Dividends paid with respect to all shares of
a Portfolio, to the extent any dividends are paid, will be calculated in the
same manner at the same time on the same day and will be in the same amount,
except that distribution fees, account maintenance fees and any incremental
transfer agency costs relating to a class of shares will be borne exclusively by
that class. The Fund will include performance data for all classes of shares of
the Portfolios in any advertisement or information including performance data
for such Portfolios.
51
<PAGE> 54
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return calculated
will not be average annual rates, but rather, actual annual, annualized or
aggregate rates of return and (2) the maximum applicable sales charge will not
be included. Actual annual or annualized total return data generally will be
lower than average annual total return data since the average annual rates of
return reflect compounding; aggregate total return data generally will be higher
than average annual total return data since the aggregate rates of return
reflect compounding over a longer period of time. See "Purchase of Shares." The
Fund's total return may be expressed either as a percentage or as a dollar
amount in order to illustrate such total return on a hypothetical investment in
the Fund at the beginning of each specified period.
Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield of each security earned during the period by
(b) the average daily number of shares outstanding during the period that were
entitled to receive dividends multiplied by the maximum offering price per share
on the last day of the period. Tax equivalent yield quotations will be computed
by dividing (a) the part of the Fund's yield that is tax-exempt by (b) one minus
a stated tax rate and adding the result to that part, if any, of the Fund's
yield that is not tax-exempt. The yield for the 30-day period ending June 30,
1997 was:
<TABLE>
<CAPTION>
LIMITED
MATURITY
INSURED PORTFOLIO NATIONAL PORTFOLIO PORTFOLIO
----------------- ------------------ --------
<S> <C> <C> <C>
Class A............................ 4.91% 4.92% 3.90%
Class B............................ 4.36% 4.37% 3.58%
Class C............................ 4.30% 4.32% 3.56%
Class D............................ 4.66% 4.68% 3.80%
</TABLE>
The tax equivalent yield for the same period (based on a tax rate of 28%)
was:
<TABLE>
<CAPTION>
LIMITED
MATURITY
INSURED PORTFOLIO NATIONAL PORTFOLIO PORTFOLIO
----------------- ------------------ --------
<S> <C> <C> <C>
Class A............................ 6.82% 6.83% 5.42%
Class B............................ 6.06% 6.07% 4.97%
Class C............................ 5.97% 6.00% 4.94%
Class D............................ 6.47% 6.50% 5.28%
</TABLE>
Total return, yield and tax equivalent yield figures are based on the
Fund's historical performance and are not intended to indicate future
performance. The Fund's total return, yield and tax equivalent yield will vary
depending on market conditions, the securities comprising the Portfolio, the
Portfolio's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in a
Portfolio will fluctuate and an investor's shares, when redeemed, may be worth
more or less than their original cost.
On occasion, the Fund may compare its performance to that of the Standard &
Poor's 500 Index, the Value Line Composite Index, the Dow Jones Industrial
Average, or performance data contained in publications such as Lipper Analytical
Services, Inc., Morningstar Publications, Inc., Money Magazine, U.S. News &
World Report, Business Week, CDA Investment Technology, Inc., Forbes Magazine or
Fortune
52
<PAGE> 55
Magazine. As with other performance data, performance comparisons should not be
considered indicative of the Fund's relative performance for any future period.
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, acts as the Fund's Transfer Agent. The
Transfer Agent is responsible for the issuance, transfer and redemption of
shares and the opening, maintenance and servicing of shareholder accounts. See
"Management of the Fund -- Transfer Agency Services."
CUSTODIAN
The Bank of New York, 90 Washington Street, 12th Floor, New York, New York
10286, is the Fund's Custodian.
COUNSEL AND AUDITOR
Rogers & Wells, counsel to the Fund, passes upon legal matters for the Fund
in connection with the shares offered by this Prospectus. Deloitte & Touche LLP,
independent auditors, are auditors of the Fund.
SHAREHOLDER REPORTS
The Fund issues to its shareholders quarterly reports containing unaudited
financial statements and annual reports containing financial statements examined
by auditors approved annually by the Directors. Only one copy of each
shareholder report and certain shareholder communications will be mailed to each
identified shareholder regardless of the number of accounts such shareholder
has. If a shareholder wishes to receive separate copies of each report and
communication for each of the shareholder's related accounts the shareholder
should notify in writing:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. If you have any questions regarding this
please call your Merrill Lynch Financial Consultant or Merrill Lynch Financial
Data Services, Inc. at (800) 637-3863.
ADDITIONAL INFORMATION
This Prospectus does not contain all the information included in the
Registration Statement filed with the Commission under the Securities Act with
respect to the securities offered hereby, certain portions of which have been
omitted pursuant to the rules and regulations of the Commission. The Statement
of Additional Information, dated October 7, 1997, which forms a part of the
Registration Statement, is incorporated by reference into this Prospectus. The
Statement of Additional Information may be obtained without charge as provided
on the cover page of this Prospectus. The Registration Statement, including the
exhibits filed therewith, may be examined at the office of the Commission in
Washington, D.C. To the knowledge of the Fund, no person or entity owned
beneficially 5% or more of any class of the Fund's shares on September 1, 1997.
53
<PAGE> 56
[This page is intentionally left blank]
54
<PAGE> 57
MERRILL LYNCH MUNICIPAL BOND FUND -- AUTHORIZATION FORM (PART 1)
- --------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINT(SM) PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINT(SM)
PROGRAM APPLICATION BY CALLING (800) 637-3766.
- --------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
<TABLE>
<S> <C> <C> <C> <C>
Insured Portfolio [ ] Class A [ ] Class B [ ] Class C [ ] Class D
shares shares shares shares
National Portfolio [ ] Class A [ ] Class B [ ] Class C [ ] Class D
shares shares shares shares
Limited Maturity Portfolio [ ] Class A [ ] Class B [ ] Class D
shares shares shares
</TABLE>
of Merrill Lynch Municipal Bond Fund and establish an Investment Account as
described in the Prospectus. In the event that I am not eligible to purchase
Class A shares, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $.......... payable to Merrill Lynch Financial
Data Services, Inc., as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price next to
be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of paper
if necessary.)
1. .......................................................... 4.
..........................................................
2. .......................................................... 5.
..........................................................
3. .......................................................... 6.
..........................................................
Name............................................................................
First Name Initial Last Name
Name of Co-Owner (if any).......................................................
First Name Initial Last Name
Address
...............................................................................
Date............................................................................
<TABLE>
<S> <C>
(Zip Code)
Occupation .........................................
...................................................
Signature of Owner
<CAPTION>
Occupation ......................................... Name and Address of Employer.................................................
<S> <C>
.............................................................................
.............................................................................
................................................... .............................................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
- --------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
<TABLE>
<S> <C> <C> <C> <C> <C>
Ordinary Income Dividends Long-Term Capital Gains
--------------------------------- ---------------------------------
SELECT [ ] Reinvest SELECT [ ] Reinvest
ONE: [ ] Cash ONE: [ ] Cash
--------------------------------- ---------------------------------
</TABLE>
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: [ ] CHECK
OR [ ] DIRECT DEPOSIT TO BANK ACCOUNT
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch Municipal Bond Fund Authorization Form.
SPECIFY TYPE OF ACCOUNT (CHECK ONE) [ ] CHECKING [ ] SAVINGS
Name on your Account............................................................
Bank Name.......................................................................
Bank Number ................................................... Account
Number..........................................................................
Bank Address....................................................................
I agree that this authorization will remain in effect until I provide written
notification to Merrill Lynch Financial Data Services, Inc. amending or
terminating this service.
Signature of Depositor..........................................................
Signature of Depositor ......................................................
Date............................................................................
(If joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS
APPLICATION.
55
<PAGE> 58
MERRILL LYNCH MUNICIPAL BOND FUND -- AUTHORIZATION FORM
(PART 1) -- (CONTINUED)
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is my
correct Social Security Number or Taxpayer Identification Number and (2) that I
am not subject to backup withholding (as discussed in the Prospectus under
"Dividends, Distributions and Taxes -- Federal Income Taxes") either because I
have not been notified that I am subject thereto as a result of a failure to
report all interest or dividends, or the Internal Revenue Service ("IRS") has
notified me that I am no longer subject thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDER-REPORTING AND
IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO
OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
<TABLE>
<S> <C>
............................................................. ............................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
(In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified)
- --------------------------------------------------------------------------------
4. LETTER OF INTENTION -- CLASS A AND D SHARES ONLY (SEE TERMS AND CONDITIONS IN
THE STATEMENT OF ADDITIONAL INFORMATION)
<TABLE>
<S> <C>
......................,
19 . . . .
Dear Sir/Madam: Date of initial purchase
</TABLE>
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Municipal Bond Fund or any other investment company with an initial sales
charge or deferred sales charge for which the Merrill Lynch Funds Distributor,
Inc. acts as distributor over the next 13-month period which will equal or
exceed:
<TABLE>
<S> <C> <C> <C> <C> <C>
Insured Portfolio [ ] $25,000 [ ] $50,000 [ ] $100,000 [ ] $250,000 [ ] $1,000,000
National Portfolio [ ] $25,000 [ ] $50,000 [ ] $100,000 [ ] $250,000 [ ] $1,000,000
Limited Maturity [ ] $100,000 [ ] $250,000 [ ] $500,000 [ ] $1,000,000
Portfolio
</TABLE>
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch Municipal Bond Fund
Prospectus.
I agree to the terms and conditions of the Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Municipal Bond Fund held as security.
<TABLE>
<S> <C>
By:.............................................................. ...............................................................
Signature of Owner Signature of Co-Owner (If registered in joint parties, both must
sign)
</TABLE>
In making purchases under this letter, the following are the related accounts
on which reduced offering prices are to apply:
<TABLE>
<S> <C>
(1) Name ................................................... (2) Name....................................................
Account Number ............................................ Account Number..............................................
</TABLE>
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
- --- Branch Office, Address, Stamp
- ---
=
=
===
This form when completed should be mailed to:
Merrill Lynch Municipal Bond Fund
c/o Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, FL 32232-5289
We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our agent in
connection with transactions under this authorization form and agree to notify
the Distributor of any purchases or sales made under a Letter of Intention,
Automatic Investment Plan or Systematic Withdrawal Plan. We guarantee the
shareholder's signature.
...............................................................
Dealer Name and Address
By .............................................................................
Authorized Signature of Dealer
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- --------- ------------
..............................
- --------- ------------
Branch-Code F/C No. F/C Last Name
- --------- ---------------
- --------- ---------------
Dealer's Customer Account No.
</TABLE>
56
<PAGE> 59
MERRILL LYNCH MUNICIPAL BOND FUND -- AUTHORIZATION FORM (PART 2)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
1. ACCOUNT REGISTRATION
------------------------------------
Name of Owner.......................................................................
First Name Initial Last Name
------------------------------------
Social Security No.
or Taxpayer Identification No.
Name of Co-Owner (if any)...........................................................
First Name Initial Last Name
Address.............................................................................
.................................................................................... Account Number...........................
(if existing account)
(Zip Code)
<CAPTION>
Name of Owner.......................................................................
First Name Initial Last Name
Name of Co-Owner (if any)...........................................................
First Name Initial Last Name
Address.............................................................................
....................................................................................
(Zip Code)
</TABLE>
- --------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN -- (SEE TERMS AND CONDITIONS IN THE STATEMENT OF
ADDITIONAL INFORMATION)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of [ ] Class A, [ ] Class B*, Class C* or [ ] Class D of the
Insured Portfolio, [ ] Class A, [ ] Class B*, Class C* or [ ] Class D shares
of the National Portfolio, or [ ] Class A, [ ] Class B*, Class C* or [ ]
Class D shares of the Limited Maturity Portfolio in Merrill Lynch Municipal Bond
Fund at cost or current offering price. Withdrawals to be made either (check
one) [ ] Monthly on the 24th day of each month, or [ ] Quarterly on the 24th
day of March, June, September and December. If the 24th falls on a weekend or
holiday, the next succeeding business day will be utilized. Begin systematic
withdrawal on ............... (month), or as soon as possible thereafter.
SPECIFY THE AMOUNT OF THE WITHDRAWAL YOU WOULD LIKE PAID TO YOU (CHECK ONE): [ ]
$________ of [ ] Class A, [ ] Class B*, Class C* or [ ] Class D shares in the
account.
SPECIFY WITHDRAWAL METHOD: [ ] check or [ ] direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a) I hereby authorize payment by check
[ ] as indicated in Item 1.
[ ] to the order of..........................................................
Mail to (check one)
[ ] the address indicated in Item 1.
[ ] Name (Please Print)......................................................
Address.........................................................................
...........................................................................
Signature of Owner
........................................................................ Date...
Signature of Co-Owner (if any).............................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO MY BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Specify type of account (check one): [ ] checking [ ] savings
Name on your Account............................................................
Bank Name.......................................................................
Bank Number .............................................................
Account Number..................................................................
Bank Address....................................................................
................................................................................
Signature of Depositor
..............................................................................
Date............................................................................
Signature of Depositor..........................................................
(If joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID" OR
A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS APPLICATION.
- ------------------------------------
* Annual withdrawal cannot exceed 10% of the value of shares of such class held
in the account at the time the election to join the systematic withdrawal plan
is made.
57
<PAGE> 60
MERRILL LYNCH MUNICIPAL BOND FUND -- AUTHORIZATION FORM
(PART 2) -- (CONTINUED)
- --------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account as described below
each month to purchase: (choose one)
[ ] Class A shares [ ] Class B shares [ ] Class C
shares* [ ] Class D shares
of Merrill Lynch Municipal Bond Fund subject to the terms set forth below. In
the event that I am not eligible to purchase Class A shares, I understand that
Class D shares will be purchased.
* Not available for the Limited Maturity Portfolio.
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw an ACH debit each month on my bank account for
investment in Merrill Lynch Municipal Bond Fund as indicated below:
Amount of each ACH debit $...................................................
Account Number...............................................................
Please date and invest ACH debits on the 20th of each month beginning
................................................................................
................................ (month)
or as soon thereafter as possible.
I agree that you are drawing these ACH debits voluntarily at my request and that
you shall not be liable for any loss arising from any delay in preparing or
failure to prepare any such debit. If I change banks or desire to terminate or
suspend this program, I agree to notify you promptly in writing. I hereby
authorize you to take any action to correct erroneous ACH debits of my bank
account or purchases of fund shares including liquidating shares of the Fund and
credit my bank account. I further agree that if a check or debit is not honored
upon presentation, Merrill Lynch Financial Data Services, Inc. is authorized to
discontinue immediately the Automatic Investment Plan and to liquidate
sufficient shares held in my account to offset the purchase made with the
dishonored debit.
................. .......................................
Date Signature of Depositor
.......................................
Signature of Depositor
(If joint account, both must sign)
AUTHORIZATION TO HONOR ACH DEBITS
DRAWN BY MERRILL LYNCH FINANCIAL
DATA SERVICES, INC.
To..........................................................................Bank
(Investor's Bank)
Bank Address....................................................................
City........................................ State .......... Zip Code..........
As a convenience to me, I hereby request and authorize you to pay and charge to
my account ACH debits drawn on my account by and payable to Merrill Lynch
Financial Data Services, Inc. I agree that your rights in respect to each such
debit shall be the same as if it were a check drawn on you and signed personally
by me. This authority is to remain in effect until revoked personally by me in
writing. Until you receive such notice, you shall be fully protected in honoring
any such debit. I further agree that if any such debit be dishonored, whether
with or without cause and whether intentionally or inadvertently, you shall be
under no liability.
................. .......................................
Date Signature of Depositor
................. .......................................
Bank Account Number Signature of Depositor
(If joint account, both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED
"VOID" SHOULD ACCOMPANY THIS APPLICATION.
58
<PAGE> 61
APPENDIX
DESCRIPTIONS OF RATINGS
DESCRIPTIONS OF MOODY'S INVESTORS SERVICE, INC.'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 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.
Conditional Rating: Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when
A-1
<PAGE> 62
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Rating Refinements: Moody's may apply numerical modifiers, 1, 2 and 3 in
each generic rating classification from Aa through B in its municipal bond
rating system. The modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and a modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
Short-term Notes: The four ratings of Moody's for short-term notes are MIG
1, MIG 2, MIG 3 and MIG 4. MIG 1 denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing; MIG 2 denotes high quality.
Margins of protection are ample although not so large as in the preceding group;
MIG 3 denotes favorable quality. All security elements are accounted for but
there is lacking the undeniable strength of the preceding grades. Liquidity and
cash flow protection may be narrow and market access for refinancing is likely
to be less well established; MIG 4 denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
DESCRIPTIONS OF MOODY'S COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability to repay
punctually promissory obligations having an original maturity not 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 related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTIONS OF STANDARD & POOR'S RATINGS GROUP'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 obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, 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 rating
may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.
A-2
<PAGE> 63
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 by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditor's rights.
<TABLE>
<S> <C>
AAA Debt rated "AAA" have the highest rating assigned by Standard & Poor's to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA Debt rated "AA" have a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A Debt rated "A" have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debts in higher rated categories.
BBB Debt rated "BBB" are regarded as having an adequate capacity to pay interest and
repay principal. Whereas they normally exhibit adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this category
than in higher rated categories.
BB Debt rated "BB," "B," "CCC" and "CC" are regarded, on balance, as predominantly
B speculative with respect to capacity to pay interest and repay principal in
CCC accordance with the terms of the obligation. "BB" indicates the lowest degree of
CC speculation and "CC" the highest of speculation. While such debts will likely
have some quality and protective characteristics, these are out-weighed by large
uncertainties or major risk exposures to adverse conditions.
C The rating "C" is reserved for income bonds on which no interest is being paid.
D Debt rated "D" is in default, and payment of interest and/or repayment of
principal is in arrears.
</TABLE>
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and 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.
<TABLE>
<S> <C>
NR Indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
</TABLE>
A-3
<PAGE> 64
DESCRIPTIONS OF STANDARD & POOR'S RATINGS GROUP'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 four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. The four categories are as
follows:
<TABLE>
<S> <C>
A Issues assigned this highest rating are regarded as having the greatest capacity
for timely payment. Issues in this category are delineated with the numbers 1, 2
and 3 to indicate the relative degree of safety.
A-1 This designation indicates that the degree of safety regarding timely payment is
very strong.
A-2 Capacity for timely payment on issues with this designation is strong. However,
the relative degree of safety is not as high as for issues designated "A-1."
A-3 Issues carrying this designation have a satisfactory capacity for timely payment.
They are, however, somewhat 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 an adequate capacity for timely
payment. However, such capacity may be damaged by changing conditions or
short-term adversities.
C This rating is assigned to short-term debt obligations with a doubtful capacity
for payment.
D This rating indicates that the issue is either in default or is expected to be in
default upon maturity.
</TABLE>
The 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.
DESCRIPTIONS OF STANDARD & POOR'S RATINGS SERVICES' NOTE RATINGS
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to 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).
Note rating symbols are as follows:
<TABLE>
<S> <C>
SP-1 Very strong, or strong, capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics will be given a plus
(+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
</TABLE>
A-4
<PAGE> 65
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND, THE INVESTMENT ADVISER, OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY
BE MADE.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Tables.............................. 2
Merrill Lynch Select Pricing (SM)
System................................ 8
Financial Highlights.................... 13
Investment Objective and Policies....... 19
Investment Policies of the Portfolios... 20
Insured Portfolio..................... 20
National Portfolio.................... 21
Limited Maturity Portfolio............ 22
Description of Municipal Bonds........ 23
Forward Commitments................... 25
Financial Futures Contracts and
Derivatives......................... 25
Indexed and Inverse Floating
Obligations......................... 27
Investment Restrictions............... 27
Management of the Fund.................. 27
Board of Directors.................... 27
Management and Advisory Arrangements.. 28
Transfer Agency Services.............. 29
Code of Ethics........................ 29
Purchase of Shares...................... 30
Initial Sales Charge
Alternatives -- Class A and Class D
Shares.............................. 33
Deferred Sales Charge Alternatives
-- Class B and Class C Shares....... 36
Distribution Plans.................... 39
Limitations on the Payment of Deferred
Sales Charges....................... 42
Redemption of Shares.................... 42
Redemption............................ 43
Repurchase............................ 43
Reinstatement Privilege -- Class A and
Class D Shares...................... 44
Shareholder Services.................... 44
Investment Account.................... 44
Automatic Investment Plan............. 45
Fee-Based Programs.................... 45
Automatic Reinvestment of Dividends
and Capital Gains Distribution...... 45
Systematic Withdrawal Plans........... 46
Exchange Privileges................... 46
Portfolio Transactions.................. 47
Additional Information.................. 48
Dividends and Distributions........... 48
Federal Income Taxes.................. 48
State and Local Taxes................. 50
Determination of Net Asset Value...... 50
Performance Data...................... 51
Transfer Agent........................ 53
Custodian............................. 53
Counsel and Auditor................... 53
Shareholder Reports................... 53
Additional Information................ 53
Authorization Form...................... 55
Code #10051-1097
</TABLE>
<PAGE> 66
[Merrill Lynch Logo]
MERRILL LYNCH
MUNICIPAL BOND FUND, INC.
[MERRILL LYNCH COMPASS]
PROSPECTUS
October 7, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This Prospectus should be
retained for future reference.
<PAGE> 67
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH MUNICIPAL BOND FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
------------------------
Merrill Lynch Municipal Bond Fund, Inc. (the "Fund") is a professionally
managed, diversified, open-end investment company that seeks to provide
shareholders with as high a level of income exempt from Federal income taxes as
is consistent with the investment policies of each of its Portfolios and prudent
investment management. The Fund is comprised of three separate Portfolios: the
Insured Portfolio, the National Portfolio and the Limited Maturity Portfolio,
each of which invests primarily in a diversified portfolio of tax-exempt
Municipal Bonds, principally consisting of state, municipal and public authority
securities.
The Fund is a series fund and is comprised of three separate Portfolios.
Each Portfolio is, in effect, a separate fund issuing its own shares. Pursuant
to the Merrill Lynch Select Pricing(SM) System, each Portfolio of the Fund
offers four classes of shares, each with a different combination of sales
charges, ongoing fees and other features. Class C shares of the Limited Maturity
Portfolio are available only through the Exchange Privilege. The Merrill Lynch
Select Pricing System permits an investor to choose the method of purchasing
shares that the investor believes is most beneficial, given the amount of the
purchase, the length of time the investor expects to hold the shares and other
relevant circumstances.
------------------------
This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the Prospectus of the Fund (the
"Prospectus") dated October 7, 1997, which has been filed with the Securities
and Exchange Commission (the "Commission") and is available upon oral or written
request without charge. Copies of the Prospectus can be obtained by calling or
writing the Fund at the above telephone number or address. This Statement of
Additional Information has been incorporated by reference into the Prospectus.
------------------------
FUND ASSET MANAGEMENT -- INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
------------------------
The date of this Statement of Additional Information is October 7, 1997.
<PAGE> 68
INVESTMENT OBJECTIVE AND POLICIES
Reference is made to "Investment Objective and Policies" in the Prospectus
for a discussion of the investment objective and policies of the Fund.
At June 30, 1997, the average maturity of the Insured Portfolio, National
Portfolio and the Limited Maturity Portfolio was approximately 19.01 years,
20.26 years and 1.7 years, respectively.
INSURANCE ON PORTFOLIO SECURITIES
Reference is made to the discussion of the Insured Portfolio under
"Investment Policies of the Portfolios" in the Prospectus. As stated in the
Prospectus, the Fund has purchased from AMBAC Indemnity Corporation ("AMBAC"),
Municipal Bond Investors Assurance Corporation ("MBIA") and Financial Security
Assurance Inc. ("FSA") separate Mutual Fund Insurance Policies (the "Policies").
The Policies guarantee the payment of principal at maturity and interest on
all Municipal Bonds that are purchased by the Insured Portfolio at a time when
they are eligible for insurance. Municipal Bonds are eligible for insurance if
they are, at the time of purchase by the Insured Portfolio, identified
separately or by category in qualitative guidelines furnished by AMBAC, MBIA or
FSA and are in compliance with the aggregate limitations on amounts set forth in
such guidelines. AMBAC, MBIA and/or FSA may withdraw particular securities from
the classifications of securities eligible for insurance while continuing to
insure previously acquired bonds of such ineligible issues so long as they
remain in the Insured Portfolio and may limit the aggregate amount of each issue
or category of municipal securities thereof. The restrictions on investment
imposed by the eligibility requirement of the Policies may reduce the yield of
the Insured Portfolio.
RISK FACTORS IN TRANSACTIONS IN JUNK BONDS
The National Portfolio may invest in Municipal Bonds that are rated below
Baa by Moody's Investors Service, Inc. ("Moody's") or below BBB by Standard &
Poor's Ratings Services ("S&P") or that, in the Investment Adviser's judgment,
possess similar credit characteristics ("junk bonds"). See "Additional
Information -- Rating Information" in the Prospectus for additional information
regarding ratings of debt securities. The Investment Adviser considers the
ratings assigned by S&P or Moody's as one of several factors in its independent
credit analysis of issuers.
Junk bonds are considered by S&P and Moody's to have varying degrees of
speculative characteristics. Consequently, although junk bonds can be expected
to provide higher yields, such securities may be subject to greater market price
fluctuations and risk of loss of principal than lower yielding, higher rated
debt securities. Investments in junk bonds will be made only when, in the
judgment of the Investment Adviser, such securities provide attractive total
return potential relative to the risk of such securities, as compared to higher
quality debt securities. The National Portfolio will not invest in debt
securities in the lowest rating categories (those rated CC or lower by S&P or Ca
or lower by Moody's) unless the Investment Adviser believes that the financial
condition of the issuer or the protection afforded the particular securities is
stronger than would otherwise be indicated by such low ratings. The National
Portfolio does not intend to purchase debt securities that are in default or
that the Investment Adviser believes will be in default.
Issuers of junk bonds may be highly leveraged and may not have available to
them more traditional methods of financing. Therefore, the risks associated with
acquiring the securities of such issuers generally are
2
<PAGE> 69
greater than is the case with higher rated securities. For example, during an
economic downturn or a sustained period of rising interest rates, issuers of
high-yield securities may be more likely to experience financial stress,
especially if such issuers are highly leveraged. In addition, the market for
high-yield municipal securities is relatively new and has not weathered a major
economic recession, and it is unknown what effects such a recession might have
on such securities. During such a period, such issuers may not have sufficient
revenues to meet their interest payment obligations. The issuer's ability to
service its debt obligations also may be adversely affected by specific issuer
developments, or the issuer's inability to meet specific projected business
forecasts, or the unavailability of additional financing. The risk of loss due
to default by the issuer is significantly greater for the holders of junk bonds
because such securities may be unsecured and may be subordinated to other
creditors of the issuer.
Junk bonds frequently have call or redemption features that would permit an
issuer to repurchase the security from the National Portfolio. If a call were
exercised by the issuer during a period of declining interest rates, the
National Portfolio likely would have to replace such called security with a
lower yielding security, thus decreasing the net investment income to the
National Portfolio and dividends to shareholders.
The National Portfolio may have difficulty disposing of certain junk bonds
because there may be a thin trading market for such securities. Because not all
dealers maintain markets in all junk bonds, there is no established secondary
market for many of these securities, and the National Portfolio anticipates that
such securities could be sold only to a limited number of dealers or
institutional investors. To the extent that a secondary trading market for junk
bonds does exist, it is generally not as liquid as the secondary market for
higher rated securities. Reduced secondary market liquidity may have an adverse
impact on market price and the National Portfolio's ability to dispose of
particular issues when necessary to meet its liquidity needs or in response to a
specific economic event such as a deterioration in the creditworthiness of the
issuer. Reduced secondary market liquidity for certain securities also may make
it more difficult for the National Portfolio to obtain accurate market
quotations for purposes of valuing its portfolio. Market quotations are
generally available on many junk bonds only from a limited number of dealers and
may not necessarily represent firm bids of such dealers or prices for actual
sales.
It is expected that a significant portion of the junk bonds acquired by the
National Portfolio will be purchased upon issuance, which may involve special
risks because the securities so acquired are new issues. In such instances, the
National Portfolio may be a substantial purchaser of the issue and therefore
have the opportunity to participate in structuring the terms of the offering.
Although this may enable the National Portfolio to seek to protect itself
against certain of such risks, the considerations discussed herein would
nevertheless remain applicable.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of junk bonds,
particularly in a thinly traded market. Factors adversely affecting the market
value of such securities are likely to affect adversely the National Portfolio's
net asset value. In addition, the National Portfolio may incur additional
expenses to the extent that it is required to seek recovery upon a default on a
portfolio holding or participate in the restructuring of the obligation.
TRANSACTIONS IN FUTURES CONTRACTS
The Insured Portfolio, the National Portfolio and the Limited Maturity
Portfolio (collectively, the "Portfolios" and each, a "Portfolio") may engage in
the purchase and sale of futures contracts on an index of municipal bonds or on
U.S. Treasury securities, or options on such futures contracts, for hedging
purposes
3
<PAGE> 70
only. The Portfolios may sell such futures contracts in anticipation of a
decline in the value of municipal bonds held by them or may purchase such
futures contracts in anticipation of an increase in the cost of municipal bonds
they intend to acquire. The Portfolios also are authorized to purchase and sell
other financial futures contracts that in the opinion of management, provide an
appropriate hedge for some or all of the Fund's portfolio securities.
Because of low initial margin deposits made upon the opening of a futures
position, futures transactions involve substantial leverage. As a result,
relatively small movements in the price of the futures contract can result in
substantial unrealized gains or losses. Because the Portfolios will engage in
the purchase and sale of financial futures contracts solely for hedging
purposes, however, any losses incurred in connection therewith should, if the
hedging strategy is successful, be offset in whole or in part by increases in
the value of securities held by the Portfolios or decreases in the price of
securities the Portfolios intend to acquire. Further, the Portfolios will
maintain cash, cash equivalents and high-grade securities with the Fund's
custodian, so that the amount segregated plus the initial margin equals the
value represented by the futures contract purchased by the Portfolios, thereby
ensuring that such transactions are actually unleveraged.
Municipal bond index futures contracts commenced trading in June 1985, and
it is possible that trading in such futures contracts will be less liquid than
that in other futures contracts. The trading of futures contracts and options
thereon is subject to certain market risks, such as trading halts, suspensions,
exchange or clearing house equipment failures, government intervention or other
disruptions of normal trading activity, which could at times make it difficult
or impossible to liquidate existing positions.
The liquidity of the market in futures contracts may be further adversely
affected by "daily price fluctuation limits" established by contract markets,
which limit the amount of a fluctuation in the price of a futures contract or
option thereon 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 positions at prices beyond the
limit. Prices of existing contracts have in the past moved the daily limit on a
number of consecutive trading days. The Portfolios will enter into a futures
position only if, in the judgment of the Investment Adviser, there appears to be
an actively traded market for such futures contracts.
The successful use of transactions in futures contracts and options thereon
depends on the ability of the Investment Adviser correctly to forecast the
direction and extent of price movements of these instruments, as well as price
movements of the securities held by the Portfolios within a given time frame. To
the extent these price movements are not correctly forecast or move in a
direction opposite to that anticipated, the Portfolios 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, either Portfolio's total return for
such period may be less than if it had not engaged in the hedging transaction.
See "Additional Information -- Description of Financial Futures Contracts" below
for a further discussion of the risks of futures trading.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental and non-fundamental
restrictions and policies relating to the investment of its assets and its
activities. The fundamental policies set forth below may not be changed without
the approval of the holders of a majority of the Fund's outstanding voting
securities, including a majority of the shares of each Portfolio affected (which
for this purpose and under the Investment Company Act of 1940, as amended (the
"Investment Company Act"), means the lesser of (i) 67% of the shares
4
<PAGE> 71
represented at a meeting at which more than 50% of the outstanding shares are
represented or (ii) more than 50% of the outstanding shares).
Under the fundamental investment restrictions, none of the Portfolios of
the Fund may:
1. Make any investment inconsistent with the Fund's classification as
a diversified company under the Investment Company Act.
2. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).
3. Make investments for the purpose of exercising control or
management.
4. Purchase or sell real estate, except that to the extent permitted
by applicable law, each Portfolio of the Fund may invest in securities
directly or indirectly secured by real estate or interests therein or
issued by companies which invest in real estate or interests therein.
5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investments in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers' acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that each Portfolio of the Fund may lend its portfolio securities,
provided that the lending of portfolio securities may be made only in
accordance with applicable law and the guidelines set forth in the Fund's
Prospectus and Statement of Additional Information, as they may be amended
from time to time.
6. Issue senior securities to the extent such issuance would violate
applicable law.
7. Borrow money, except that (i) each Portfolio of the Fund may borrow
from banks (as defined in the Investment Company Act) in amounts up to
33 1/3% of its total assets (including the amount borrowed), (ii) each
Portfolio of the Fund may, to the extent permitted by applicable law,
borrow up to an additional 5% of its total assets for temporary purposes,
(iii) each Portfolio of the Fund may obtain such short-term credit as may
be necessary for the clearance of purchases and sales of portfolio
securities and (iv) each Portfolio of the Fund may purchase securities on
margin to the extent permitted by applicable law. The Fund may not pledge
its assets other than to secure such borrowings or, to the extent permitted
by the Fund's investment policies as set forth in its Prospectus and
Statement of Additional Information, as they may be amended from time to
time, in connection with hedging transactions, short sales, when-issued and
forward commitment transactions and similar investment strategies.
8. Underwrite securities of other issuers except insofar as a
Portfolio of the Fund technically may be deemed an underwriter under the
Securities Act of 1933, as amended (the "Securities Act"), in selling
portfolio securities.
9. Purchase or sell commodities or contracts on commodities, except to
the extent that a Portfolio of the Fund may do so in accordance with
applicable law and the Fund's Prospectus and Statement of Additional
Information, as they may be amended from time to time, and without
registering as a commodity pool operator under the Commodity Exchange Act.
The Fund has also adopted certain non-fundamental investment restrictions,
which may be changed by the Investment Adviser without approval by the
shareholders subject to the supervision by the Board of Directors.
5
<PAGE> 72
Under the non-fundamental investment restrictions, none of the Portfolios
of the Fund may:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law. As a matter of
policy, however, the Fund will not purchase shares of any registered
open-end investment company or registered unit investment trust, in
reliance on Section 12(d)(1)(F) or (G) (the "fund of funds" provisions) of
the Investment Company Act, at any time its shares are owned by another
investment company that is part of the same group of investment companies
as the Fund.
b. Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law. The Fund currently does not
intend to engage in short sales, except short sales "against the box."
c. Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of
acquisition more than 15% of its total assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Directors of the Fund
has otherwise determined to be liquid pursuant to applicable law.
Securities purchased in accordance with Rule 144A under the Securities Act
(a "Rule 144A Security") and determined to be liquid by the Fund's Board of
Directors are not subject to the limitations set forth in this investment
restriction.
d. Notwithstanding fundamental investment restriction (7) above, the
Fund currently does not intend to borrow amounts in any Portfolio in excess
of 10% of the total assets of such Portfolio, taken at market value, and
then only from banks as a temporary measure for extraordinary or emergency
purposes such as the redemption of Fund shares. In addition, the Fund will
not purchase securities while borrowings are outstanding.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Directors and executive officers of the Fund, their ages and their
principal occupations for at least the last five years are set forth below.
Unless otherwise noted, the address of each Director and officer is P.O. Box
9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL (65) -- President and Director(1)(2) -- President of Merrill
Lynch Asset Management, L.P. ("MLAM") (which term as used herein includes its
corporate predecessors) since 1977; President of Fund Asset Management, L.P.
("FAM") (which term as used herein includes its corporate predecessors) since
1977; President and Director of Princeton Services, Inc. ("Princeton Services")
since 1993; Executive Vice President of Merrill Lynch & Co., Inc. ("ML & Co.")
since 1990; Director of Merrill Lynch Funds Distributor, Inc. (the
"Distributor") since 1977.
RONALD W. FORBES (57) -- Director(2) -- 1400 Washington Avenue, Albany, New
York 12222. Professor of Finance, School of Business, State University of New
York at Albany since 1989.
CYNTHIA A. MONTGOMERY (45) -- Director(2) -- Harvard Business School,
Soldiers Field Road, Boston, Massachusetts 02163. Professor, Harvard Business
School since 1989; Associate Professor, J.L.
6
<PAGE> 73
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 (66) -- Director(2) -- 9 Hampton Harbor Road, Hampton
Bays, New York 11946. Self-employed financial consultant since 1990; President
and Chief Investment Officer of Versus Capital, Inc. from 1979 to 1990; Senior
Vice President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business, from 1990 to 1991;
Adjunct Professor, Wharton School, The University of Pennsylvania from 1989 to
1990; Partner, Small Cities Cable Television since 1986.
KEVIN A. RYAN (64) -- Director(2) -- 127 Commonwealth Avenue, Chestnut
Hill, Massachusetts 02167. Founder and current Director 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 (59) -- 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. (financial printers), Vornado,
Inc. (real estate holding company), and Alexander's Inc. (real estate company).
TERRY K. GLENN (57) -- Executive Vice President(1)(2) -- Executive Vice
President of MLAM and FAM since 1983; Executive Vice President and Director of
Princeton Services since 1993; President of the Distributor since 1986 and
Director thereof since 1991; President of Princeton Administrators, L.P. since
1988.
VINCENT R. GIORDANO (53) -- Senior Vice President(1)(2) -- Senior Vice
President of the Investment Adviser and MLAM since 1984; Senior Vice President
of Princeton Services since 1993; portfolio manager of the Investment Adviser
since 1977 and Vice President from 1980 to 1984.
DONALD C. BURKE (37) -- Vice President(2) -- First Vice President of MLAM
since 1997; Vice President and Director of Taxation of MLAM since 1990.
KENNETH A. JACOB (46) -- Vice President(1)(2) -- First Vice President of
MLAM since 1997; Vice President of the Investment Adviser since 1984; employee
of MLAM since 1978.
GERALD M. RICHARD (48) -- Treasurer(1)(2) -- Senior Vice President and
Treasurer of the Investment Adviser and MLAM since 1984; Senior Vice President
and Treasurer of Princeton Services since 1993; Vice President of the
Distributor since 1981 and Treasurer since 1984.
PETER J. HAYES (38) -- Vice President(1)(2) -- First Vice President of MLAM
since 1997; Vice President of MLAM since 1988.
WALTER O'CONNOR (35) -- Vice President(1)(2) -- Director of MLAM since
1997; Vice President of MLAM since 1993; Assistant Vice President of MLAM from
1991 to 1993; Assistant Vice President of Prudential Securities from 1984 to
1991.
7
<PAGE> 74
BARBARA G. FRASER (53) -- Secretary(2) -- First Vice President of MLAM
since 1997; Vice President of the Investment Adviser and MLAM since 1996.
- ---------------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such a Director or officer is a Director or officer of certain other
investment companies for which the Investment Adviser or MLAM acts as
investment adviser.
COMPENSATION OF DIRECTORS
At September 30, 1997, the Directors and officers of the Fund as a group
(14 persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At that date, Mr. Zeikel, an officer and Director of the Fund, and the
other officers of the Fund, owned less than 1% of the outstanding Common Stock
of ML & Co.
Pursuant to the terms of the Investment Advisory Agreement, the Investment
Adviser pays all compensation of officers and employees of the Fund as well as
the fees of all Directors of the Fund who are affiliated persons of the
Investment Adviser. The Fund pays each Director not affiliated with the
Investment Adviser (each a "non-interested Director") an annual fee of $3,000
plus a fee of $400 per meeting attended, together with such Director's actual
out-of-pocket expenses relating to attendance at meetings. The Fund also
compensates members of its Audit and Nominating Committee (the "Committee"),
which consists of all of the non-interested Directors with a fee of $2,900 per
year. The Chairman of the Audit Committee is paid an additional annual fee of
$1,000. For the fiscal year ended June 30, 1997, fees and expenses paid to the
non-interested Directors of the Fund aggregated $52,926.
The following table sets forth the compensation paid by the Fund to the
non-interested Directors for the fiscal year ended June 30, 1997 and the
aggregate compensation paid by all investment companies advised by MLAM and its
affiliate, FAM ("MLAM/FAM-Advised Funds") to the non-interested Directors for
the calendar year ended December 31, 1996:
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
FROM FUND AND
PENSION OR RETIREMENT MLAM/FAM-ADVISED
COMPENSATION BENEFITS ACCRUED AS FUNDS PAID TO
DIRECTOR/TRUSTEE FROM FUND PART OF FUND EXPENSE DIRECTOR(1)
- ---------------------------------------- ------------ ---------------------- ----------------
<S> <C> <C> <C>
Ronald W. Forbes........................ $ 9,200 None $142,500
Cynthia A. Montgomery................... 9,200 None 142,500
Charles C. Reilly....................... 10,200 None 293,833
Kevin A. Ryan........................... 9,200 None 142,500
Richard R. West......................... 9,200 None 272,833
</TABLE>
- ---------------
(1) The Directors serve on the boards of MLAM/FAM-Advised Funds as follows: Mr.
Forbes (28 registered investment companies consisting of 41 portfolios); Ms.
Montgomery (28 registered investment companies consisting of 41 portfolios);
Mr. Reilly (46 registered investment companies consisting of 59 portfolios);
Mr. Ryan (28 registered investment companies consisting of 41 portfolios);
and Mr. West (47 registered investment companies consisting of 69
portfolios).
MANAGEMENT AND ADVISORY ARRANGEMENTS
FAM, a subsidiary of MLAM, an indirect subsidiary of ML & Co., acts as the
investment adviser for the Fund and provides the Fund with management services.
While FAM is at all times subject to the direction of
8
<PAGE> 75
the Board of Directors of the Fund, under the Investment Advisory Agreement FAM
is responsible for the actual management of each Portfolio and constantly
reviews the holdings of each Portfolio in light of its own research analysis and
analyses from other relevant sources. The responsibility for making decisions to
buy, sell or hold a particular security rests with FAM. FAM provides the
portfolio managers for each Portfolio, who consider analyses from various
sources, make the necessary investment decisions and place transactions
accordingly. FAM is also obligated to perform certain administrative and
management services for the Fund and is obligated to provide all the office
space, facilities, equipment and personnel necessary to perform its duties under
the Agreement.
Securities held by the Fund may also be held by other funds for which FAM
or MLAM acts as an adviser or by investment advisory clients of MLAM. If
purchases or sales of securities for the Fund or other funds for which FAM or
MLAM acts as investment adviser or for their advisory clients arise for
consideration at or about the same time, transactions in such securities will be
made, insofar as feasible, for the respective funds and clients in a manner
deemed equitable to all. To the extent that transactions on behalf of more than
one client of the Investment Adviser or MLAM during the same period may increase
the demand for securities being purchased or the supply of securities being
sold, there may be an adverse effect on price.
Advisory Fee. As compensation for its services to the Portfolios, the
Investment Adviser receives at the end of each month a fee with respect to each
Portfolio. The fee for each Portfolio is determined based on the annual advisory
fee rates for that Portfolio set forth in the table below. These fee rates are
applied to the average daily net assets of each Portfolio, with the reduced
rates shown below applicable to portions of the assets of each Portfolio to the
extent that the aggregate of the average daily net assets of the three combined
Portfolios exceeds $250 million, $400 million, $550 million and $1.5 billion
(each such amount being a "breakpoint level"). The portion of the assets of a
Portfolio to which the rate at each breakpoint level applies will be determined
on a "uniform percentage" basis. The uniform percentage applicable to a
breakpoint level is determined by dividing the amount of the aggregate of the
average daily net assets of the three combined Portfolios that falls within that
breakpoint level by the aggregate of the average daily net assets of the three
combined Portfolios. The amount of the fee for a Portfolio at each breakpoint
level is determined by multiplying the average daily net assets of that
Portfolio by the uniform percentage applicable to that breakpoint level and
multiplying the product by the advisory fee rate.
<TABLE>
<CAPTION>
RATE OF ADVISORY FEE
---------------------------------
LIMITED
AGGREGATE OF AVERAGE DAILY NET ASSETS OF THE THREE COMBINED INSURED NATIONAL MATURITY
PORTFOLIOS PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Not exceeding $250 million......................................... 0.40% 0.50% 0.40%
In excess of $250 million but not exceeding $400 million........... 0.375 0.475 0.375
In excess of $400 million but not exceeding $550 million........... 0.375 0.475 0.35
In excess of $550 million but not exceeding $1.5 billion........... 0.375 0.475 0.325
In excess of $1.5 billion.......................................... 0.35 0.475 0.325
</TABLE>
For the fiscal year ended June 30, 1995, FAM received $9,408,013 from the
Insured Portfolio, $7,415,203 from the National Portfolio and $2,712,662 from
the Limited Maturity Portfolio as advisory fees. For the fiscal year ended June
30, 1996, FAM received $8,850,984 from the Insured Portfolio, $7,014,416 from
the National Portfolio and $1,899,352 from the Limited Maturity Portfolio as
advisory fees. For the fiscal year ended
9
<PAGE> 76
June 30, 1997, FAM received $8,042,098 from the Insured Portfolio, $6,961,453
from the National Portfolio and $1,552,369 from the Limited Maturity Portfolio
as advisory fees.
Payment of Expenses. The Investment Advisory Agreement obligates FAM to
provide investment advisory services and to pay all compensation of and furnish
office space for officers and employees of the Fund connected with economic
research, investment research, trading and investment management of the Fund, as
well as the fees of all Directors of the Fund who are affiliated persons of ML &
Co. or any of its subsidiaries. Each Portfolio pays all other expenses incurred
in its operation and a portion of the Fund's general administrative expenses
allocated on the basis of the asset size of the respective Portfolios. Expenses
that will be borne directly by the Portfolios include redemption expenses,
expenses of portfolio transactions, shareholder servicing costs, portfolio
insurance maintained and paid by the Insured Portfolio, expenses of registering
the shares under Federal and state securities laws, pricing costs (including the
daily calculation of net asset value), interest, certain taxes, charges of the
custodian and Transfer Agent and other expenses attributable to a particular
Portfolio. Expenses that will be allocated on the basis of the size of the
respective Portfolios include Directors' fees, legal expenses, state franchise
taxes, auditing services, costs of printing proxies, stock certificates,
shareholder reports and prospectuses (except to the extent paid by the
Distributor), Commission fees, accounting costs and other expenses properly
payable by the Fund and allocable on the basis of the size of the respective
Portfolios. Accounting services are provided for the Fund by FAM, and the Fund
reimburses FAM for its costs in connection with such services. During the fiscal
year ended June 30, 1997, the Fund reimbursed FAM $433,527 for such services.
Depending upon the nature of a lawsuit, litigation costs may be directly
applicable to the Portfolios or allocated on the basis of the size of the
respective Portfolios. The Board of Directors has determined that this is an
appropriate method of allocation of expenses. As required by the Distribution
Agreement, the Distributor will pay certain of the expenses of each Portfolio
incurred in connection with the offering of shares of each Portfolio, including
the expense of printing the prospectuses used in connection with the continuous
offering of shares by each Portfolio. See "Purchase of Shares -- Distribution
Plans" in the Prospectus.
The Investment Adviser is a limited partnership, the partners of which are
ML & Co. and Princeton Services. ML & Co. and Princeton Services are
"controlling persons" of the Investment Adviser as defined under the Investment
Company Act because of their ownership of its voting securities or their power
to exercise a controlling influence over its management or policies.
Duration and Termination. Unless earlier terminated as described below,
the Investment Advisory Agreement will continue in effect from year to year if
approved annually (a) by the Board of Directors of the Fund or by a majority of
the outstanding voting shares of each Portfolio and (b) by a majority of the
Directors who are not parties to such contract or interested persons (as defined
in the Investment Company Act) of any such party. Such contract terminates upon
assignment 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.
If the shareholders of any Portfolio fail to approve the continuance of the
Investment Advisory Agreement, the Investment Advisory Agreement will continue
in effect as to any other Portfolio if the shareholders of such Portfolio have
approved the contract.
10
<PAGE> 77
PURCHASE OF SHARES
The Fund has entered into separate distribution agreements (the
"Distribution Agreements") with the Distributor in connection with the offering
of each class of shares of the three Portfolios. The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the offering
of the Fund's shares. After the prospectuses, statements of additional
information and periodic reports have been prepared, set in type and mailed to
shareholders, the Distributor pays for the printing and distribution of copies
thereof used in connection with the offering to dealers and investors. The
Distributor also pays for other supplementary sales literature and advertising
costs. The Distribution Agreements are subject to the same renewal requirements
and termination provisions as the Investment Advisory Agreement described above.
The Fund is a series fund comprised of three separate Portfolios. All three
Portfolios are divided into four classes of shares under the Merrill Lynch
Select Pricing(SM) System. Class A and Class D shares of the three Portfolios
are sold to investors choosing the initial sales charge alternative and Class B
and Class C shares are sold to investors choosing the deferred sales charge
alternative. Each Class A, Class B, Class C and Class D share of a Portfolio
represents an identical interest in the investment portfolio of the Portfolio,
has the same rights and is identical in all respects to the other classes of
shares, except that Class B, Class C and Class D shares of the Portfolio bear
the expenses of the ongoing account maintenance fees and Class B and Class C
shares bear the expenses of the ongoing distribution fees and the additional
transfer agency costs resulting from the deferred sales charge arrangements.
Class B, Class C and Class D shares each have exclusive voting rights with
respect to the Rule 12b-1 distribution plan adopted with respect to such class
pursuant to which the distribution fee is paid (except that Class B shareholders
may vote upon any material changes to expenses charged under the Class D
Distribution Plan). Each class has different exchange privileges. See "Exchange
Privilege."
The Merrill Lynch Select Pricing(SM) System is used by more than 50
registered investment companies advised by MLAM or FAM, an affiliate of MLAM.
Funds advised by MLAM or FAM that utilize the Merrill Lynch Select Pricing(SM)
System are referred to herein as "MLAM-advised mutual funds."
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
For the fiscal year ended June 30, 1997, Class A gross sales charges
aggregated $371,198, of which the Distributor received $42,330 and Merrill Lynch
received $328,868. During the fiscal year ended June 30, 1997, the Distributor
received no CDSCs with respect to redemptions within one year after purchase of
Class A shares purchased subject to a front-end sales charge waiver. For the
fiscal year ended June 30, 1996, Class A gross sales charges aggregated
$531,864, of which the Distributor received $60,672, and Merrill Lynch received
$471,192. During the fiscal year ended June 30, 1996, the Distributor received
$7,073 with respect to redemptions within one year after purchase of Class A
shares purchased subject to a front-end sales charge waiver. For the year ended
June 30, 1995, Class A gross sales charges aggregated $664,935, of which the
Distributor received $63,348, and Merrill Lynch received $601,587. During the
fiscal year ended June 30, 1995, the Distributor received $13,802 with respect
to redemptions within one year after purchase of Class A shares purchased
subject to a front-end sales charge waiver. All of such sales charges were
attributable to payments of initial sales charges in connection with purchases
of Class A shares of the Portfolios.
For the fiscal year ended June 30, 1997, Class D gross sales charges
aggregated $209,269, of which the Distributor received $21,222 and Merrill Lynch
received $188,047. During the fiscal year ended, June 30,
11
<PAGE> 78
1997 the Distributor received $358,940 in CDSCs with respect to redemptions
within one year after purchase of Class D shares purchased subject to a
front-end sales charge waiver. For the fiscal year ended June 30, 1996, Class D
gross sales charges aggregated $271,962 of which the Distributor received
$29,110 and Merrill Lynch received $242,852. During the fiscal year ended June
30, 1996, the distributor received $10,531 in CDSCs with respect to redemptions
within one year after purchase of Class D shares purchased subject to a
front-end sales charge waiver. For the period October 21, 1994 (commencement of
operations) to June 30, 1995, Class D sales charges aggregated $246,501 of which
the Distributor received $17,470 and Merrill Lynch received $229,031. During the
period October 21, 1994 to June 30, 1995, the distributor received $800 in CDSCs
with respect to redemptions within one year after purchase of Class D shares
purchased subject to a front-end sales charge waiver. All of such sales charges
were attributable to payments of initial sales charges in connection with
purchases of Class D shares of the Portfolios.
Closed-End Fund Investment Option. Class A shares of the Fund and other
MLAM-advised mutual funds ("Eligible Class A Shares") are offered at net asset
value to shareholders of certain closed-end funds advised by MLAM or the
Investment Adviser who purchased such closed-end fund shares prior to October
21, 1994 and wish to reinvest the net proceeds from a sale of their closed-end
fund shares of common stock in Eligible Class A shares, if the conditions set
forth below are satisfied. Alternatively, closed-end fund shareholders who
purchased such shares on or after October 21, 1994 and wish to reinvest the net
proceeds from a sale of their closed-end fund shares are offered Class A shares
(if eligible to purchase Class A shares) or Class D shares of the Fund and other
MLAM-advised mutual funds ("Eligible Class D Shares"), if the following
conditions are met. First, the sale of the closed-end fund shares must be made
through Merrill Lynch, and the net proceeds therefrom must be immediately
reinvested in Eligible Class A or Class D shares. Second, the closed-end fund
shares must either have been acquired in the initial public offering or be
shares representing dividends from shares of common stock acquired in such
offering. Third, the closed-end fund shares must have been continuously
maintained in a Merrill Lynch securities account. Fourth, there must be a
minimum purchase of $250 to be eligible for the investment option.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund,
Inc. will receive Class D shares of the Fund, except that shareholders already
owning Class A shares of the Fund will be eligible to purchase additional Class
A shares pursuant to this option, if such additional Class A shares will be held
in the same account as the existing Class A shares and the other requirements
pertaining to the reinvestment privilege are met. In order to exercise this
investment option, a shareholder of one of the above-referenced continuously
offered closed-end funds (an "eligible fund") must sell his or her shares of
common stock of the eligible fund (the "eligible shares") back to the fund in
connection with a tender offer conducted by the eligible fund and reinvest the
proceeds immediately in the designated class of shares of the Fund. This
investment option is available only with respect to eligible shares as to which
no Early Withdrawal Charge or CDSC (each as defined in the eligible fund's
prospectus) is applicable. Purchase orders from eligible fund shareholders
wishing to exercise this investment option will be accepted only on the day that
the related tender offer terminates and will be effected at the net asset value
of the designed class of the Fund on such day.
12
<PAGE> 79
REDUCED INITIAL SALES CHARGES -- CLASS A AND CLASS D SHARES
As set forth in the Prospectus, a reduced sales charge is available for any
purchase in excess of $25,000 (in the case of the Insured Portfolio and National
Portfolio) and $100,000 for the Limited Maturity Portfolio of Class A or Class D
shares of a Portfolio. The term "purchase" as used in the Prospectus and
Statement of Additional Information in connection with investment in Class A and
Class D shares of the Fund refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts by an individual, his spouse and their children under the age
of 21 years purchasing shares for his or their own account and to single
purchases by a trustee or fiduciary purchasing shares for a single trust or
estate or single fiduciary account although more than one beneficiary is
involved. The term "purchase" also includes purchases by any "company," as that
term is defined in the Investment Company Act, but does not include purchases by
any such company that has not been in existence for at least six months or has
no purpose other than the purchase of shares of the Fund or shares of other
registered investment companies at a discount; provided, however, that it will
not include purchases by any group of individuals whose sole organizational
nexus is that the participants therein are credit card holders of a company,
policyholders of an insurance company, customers of either a bank or
broker-dealer or clients of an investment adviser.
Right of Accumulation. Reduced sales charges are applicable through a
right of accumulation under which investors are permitted to purchase shares of
any of the three Portfolios subject to an initial sales charge at the offering
price applicable to the total of (a) the public offering price of the shares
then being purchased plus (b) an amount equal to the then current net asset
value or cost, whichever is higher, of the purchaser's combined holdings of all
classes of the shares of all of the Portfolios and of other MLAM-advised mutual
funds. For any such right of accumulation to be made available, the Distributor
must be provided at the time of purchase, by the purchaser or the purchaser's
securities dealer, with sufficient information to permit confirmation of
qualification, and acceptance of the purchase order is subject to such
confirmation. The right of accumulation may be amended or terminated at any
time. Shares held in the name of a nominee or custodian under pension,
profit-sharing or other employee benefits plans may not be combined with other
shares to qualify for the right of accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases of
Class A and Class D shares of the Portfolios, or any other MLAM-advised mutual
funds, where purchases of such shares aggregating $25,000 or more for the
Insured Portfolio and National Portfolio or $100,000 or more for the Limited
Maturity Portfolio are made through any dealer within a 13-month period starting
with the first purchase pursuant to a Letter of Intention in the form provided
by the Distributor. The Letter of Intention is not a binding obligation to
purchase any amount of Class A or Class D shares, but its execution will result
in the purchaser's paying a lower sales charge at the appropriate quantity
purchase level. The Letter of Intention is available only to investors whose
accounts are maintained at the Fund's Transfer Agent. A purchase not originally
made pursuant to a Letter of Intention may be included under a subsequent letter
executed within 90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. The value of Class A and Class
D shares of the Portfolios and of other MLAM-advised mutual funds (or eligible
shares) presently held, at cost or maximum offering price (whichever is higher)
on the date of the first purchase under the Letter of Intention, may be included
as a credit toward the completion of such Letter, but the reduced sales charge
applicable to the amount covered by the Letter of Intention will be applied only
to new purchases. If the total amount of shares purchased does not equal the
amount stated in the Letter of Intention (minimum of $25,000 for the National
and Insured Portfolio or $100,000 for the Limited Maturity Portfolio), the
investor
13
<PAGE> 80
will be notified and must pay, within 20 days of the expiration of such Letter,
the difference between the sales charge on Class A or Class D shares purchased
at the reduced rate and the sales charge applicable to the shares actually
purchased through the Letter. Class A and Class D shares equal to five percent
of the intended amount will be held in escrow during the 13-month period (while
remaining registered in the name of the purchaser) for this purpose and will be
involuntarily redeemed to pay the additional sales charge, if necessary. The
first purchase under the Letter of Intention must be at least five percent of
the dollar amount of such Letter. If during the term of such Letter a purchase
brings the total amount invested to an amount equal to or in excess of the
amount indicated in the Letter, the purchaser will be entitled on that purchase
and subsequent purchases to the reduced percentage sales charge which would be
applicable to a single purchase equal to the total dollar value of the shares
then being purchased plus the total cost of all shares previously purchased
under such Letter, but there will be no retroactive reduction of the sales
charges on any previous purchase. The value of any shares redeemed or otherwise
disposed of by the purchaser prior to termination or completion of the Letter of
Intention will be deducted from the total purchases made under such Letter. An
exchange from a MLAM-advised money market fund into any Portfolio that creates a
sales charge will count toward completing a new or existing Letter of Intention
in any Portfolio.
Employee Access (SM) Accounts. Class A or Class D shares are offered at
net asset value to Employee Access Accounts available through employers that
provide employer sponsored retirement or savings plans that are eligible to
purchase such shares at net asset value. The initial minimum investment for such
accounts is $500, except that the initial minimum investment for shares
purchased for such accounts pursuant to the Automatic Investment Program is $50.
TMA(SM) Managed Trusts. Class A shares are offered to TMA(SM) Managed
Trusts to which Merrill Lynch Trust Company provides discretionary trustee
services at net asset value.
Merrill Lynch Blueprint (SM) Program. Class D shares of any of the three
Portfolios are offered to participants in the Merrill Lynch Blueprint(SM)
Program ("Blueprint"). In addition, participants in Blueprint who own Class A
shares of a Portfolio may purchase additional Class A shares of the Portfolio
through Blueprint. Blueprint is directed to small investors, group IRAs and
participants in certain affinity groups such as credit unions and trade
associations. Investors placing orders to purchase Class A or Class D shares of
a Portfolio through Blueprint will acquire the shares at net asset value plus a
sales charge calculated in accordance with Blueprint sales charge schedule
(i.e., up to $5,000 at 0.80% for Limited Maturity Portfolio, up to $5,000 at
3.5% for the Insured Portfolio or National Portfolio, and $5,000.01 or more at
the standard disclosed sales charge rate in the Prospectus). However, services,
including the exchange privilege, available to Class A or Class D shareholders
through Blueprint may differ from those available to other investors. Class A
and Class D shares are offered at net asset value, to Blueprint participants
through the Merrill Lynch Directed IRA Rollover Program ("IRA Rollover Program")
available from Merrill Lynch Business Financial Services, a business unit of
Merrill Lynch. Orders for purchases and redemptions of Class A or Class D shares
of the Portfolios may be grouped for execution purposes which, in some
circumstances, may involve the execution of such orders two business days
following the day such orders are placed. The minimum initial purchase price is
$100, with a $50 minimum for subsequent purchases through Blueprint. There are
no minimum initial or subsequent purchase requirements for participants who are
part of an automatic investment plan. Additional information concerning
purchases through Blueprint, including any annual fees and transaction charges,
is available from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The
Blueprint(SM) Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
14
<PAGE> 81
Purchase Privileges of Certain Persons. Directors of the Fund, members of
the Boards of other MLAM-advised investment companies, ML & Co. and its
subsidiaries (the term "subsidiaries," when used herein with respect to ML &
Co., includes MLAM, FAM and certain other entities directly or indirectly wholly
owned and controlled by ML & Co.), and their directors and employees and any
trust, pension, profit-sharing or other benefit plan for such persons, may
purchase Class A shares of the Fund at net asset value.
Class D shares of the Fund will be offered at net asset value, without
sales charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied. First, the investor must advise Merrill Lynch that it
will purchase Class D shares of the Fund with proceeds from a redemption of a
mutual fund that was sponsored by the financial consultant's previous firm and
was subject to a sales charge either at the time of purchase or on a deferred
basis. Second, the investor also must establish that such redemption had been
made within 60 days prior to the investment in the Fund, and the proceeds from
the redemption had been maintained in the interim in cash or a money market
fund.
Class D shares of the Fund are also offered at net asset value, without
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice"), if the following conditions are
satisfied: First, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and such fund was
subject to a sales charge either at the time of purchase or on a deferred basis.
Second, such purchase of Class D shares must be made within 90 days after such
notice.
Class D shares of the Fund will be offered at net asset value, without
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund for which
Merrill Lynch has not served as a selected dealer if the following conditions
are satisfied: First, the investor must advise Merrill Lynch that it will
purchase Class D shares of the Fund with proceeds from the redemption of such
shares of other mutual fund and that such shares have been outstanding for a
period of no less than six months. Second, such purchase of Class D shares must
be made within 60 days after the redemption and the proceeds from the redemption
must be maintained in the interim in cash or a money market fund.
A purchase of $1 million or more in a single transaction by an investor, or
a purchase by a TMA(SM) Managed Trust, of Class A and Class D Shares of the
Fund's Portfolios may not be subject to an initial sales charge. Such purchases
may instead be subject to a contingent deferred sales charge if the shares are
redeemed within one year after purchase at the following rates: 1.00% on
purchases of $1,000,000 to $2,500,000; 0.60% on purchases of $2,500,000 to
$3,500,000; 0.40% on purchases of $3,500,000 to $5,000,000; and 0.25% on
purchases of more than $5,000,000 in lieu of paying an initial sales charge.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares of the Portfolios may be reduced to the net asset value per share
in connection with the acquisition of the assets of or merger or consolidation
with a personal holding company or a public or private investment company. The
value of the assets or company acquired in a tax-free transaction may in
appropriate cases be adjusted to reduce possible adverse tax consequences to the
Fund that might result from an acquisition of assets having
15
<PAGE> 82
net unrealized appreciation that is disproportionately higher at the time of
acquisition than the realized or unrealized appreciation of the Fund.
The issuance of Class D shares for consideration other than cash is limited
to bona fide reorganizations, statutory mergers or other acquisitions of
portfolio securities that (i) meet the investment objectives and policies of the
Fund; (ii) are acquired for investment and not for resale (subject to the
understanding that the disposition of the Fund's portfolio securities shall at
all times remain within its control); and (iii) are liquid securities, the value
of which is readily ascertainable, which are not restricted as to transfer
either by law or illiquidity of market (except that the Fund may acquire through
such transactions restricted or illiquid securities to the extent the Fund does
not exceed the applicable limits on acquisition of such securities set forth
under "Investment Objective and Policies" herein).
Purchases by Banks. Class A shares of the Fund's Insured Portfolio may be
purchased at net asset value, without a sales charge, by banks that have
invested a minimum of $25 million in such shares.
Fee-Based Investment Programs. Certain Merrill Lynch fee-based investment
programs, including pricing alternatives for securities transactions, (each
referred to in this paragraph as a "Program") may permit the purchase of Class A
shares at net asset value. Under specified circumstances, participants in
certain Programs may deposit other classes of shares, which will be exchanged
for Class A shares. Initial or deferred sales charges otherwise due in
connection with such exchanges may be waived or modified. Termination of
participation in a Program may result in the redemption of such shares or the
automatic exchange thereof to another class at net asset value. In addition,
upon termination of participation in a Program, shares that have been held for
less than specified periods within such Program may be subject to a fee based
upon the current value of such shares. These Programs also generally prohibit
such shares from being transferred to another account at Merrill Lynch, to
another broker-dealer or to the Transfer Agent. Except in limited circumstances
(which may also involve an exchange as described above), such shares must be
redeemed and another class of shares purchased (which may involve the imposition
of initial or deferred sales charges and distribution and account maintenance
fees) in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in the Program's client agreement and from the Transfer Agent at (800)
MER-FUND or (800) 637-3863.
DISTRIBUTION PLANS
Distribution Plans. Reference is made to "Purchase of
Shares -- Distribution Plans" in the Prospectus for certain information with
respect to the distribution plans for Class B and Class C shares pursuant to
Rule 12b-1 under the Investment Company Act (each, a "Distribution Plan") with
respect to the account maintenance and/or distribution fees paid by the Fund to
the Distributor with respect to such classes.
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act. Among
other things, each Distribution Plan provides that the Distributor shall provide
and the Directors shall review quarterly reports of the disbursement of the
account maintenance and/or distribution fees paid to the Distributor. In their
consideration of each Distribution Plan, the Directors must consider all factors
they deem relevant, including information as to the benefits of the Distribution
Plan to the Fund and the related class of shareholders of the relevant
Portfolio. Each Distribution Plan further provides that, so long as the
Distribution Plan remains in effect, the selection and nomination of
16
<PAGE> 83
Directors who are not "interested persons" of the Fund, as defined in the
Investment Company Act (the "Independent Directors"), shall be committed to the
discretion of the Independent Directors then in office. In approving each
Distribution Plan in accordance with Rule 12b-1, the Independent Directors
concluded that there is reasonable likelihood that such Distribution Plan will
benefit the Fund and the related class of shareholders of the Portfolio. Each
Distribution Plan can be terminated at any time, without penalty, by the vote of
a majority of the Independent Directors or by the vote of the holders of a
majority of the outstanding related voting securities of the relevant Portfolio.
A Distribution Plan cannot be amended to increase materially the amount to be
spent by any Portfolio without the approval of the related class of shareholders
of such Portfolio and all material amendments are required to be approved by the
vote of directors, including a majority of the Independent Directors who have no
direct or indirect financial interest in such Distribution Plan, cast in person
at a meeting called for that purpose. Rule 12b-1 further requires that the Fund
preserve copies of each class of Distribution Plan and any report made pursuant
to such plan for a period of not less than six years from the date of such
Distribution Plan or such report, the first two years in an easily accessible
place.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on certain
asset-based sales charges such as the distribution fee and the CDSC borne by the
Class B and Class C shares but not the account maintenance fee. The maximum
sales charge rule is applied separately to each class of each Portfolio. As
applicable to the Fund, the maximum sales charge rule limits the aggregate of
distribution fee payments and CDSCs payable by the Fund with respect to Class B
or Class C shares of a Portfolio to (1) 6.25% of eligible gross sales of such
shares, computed separately for each class of a Portfolio (defined to exclude
shares issued pursuant to dividend reinvestments and exchanges), plus (2)
interest on the unpaid balance for the respective class, computed separately, at
the prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts received from the payment of the distribution fee and the CDSC).
In connection with the Class B shares, the Distributor has voluntarily agreed to
waive interest charges on the unpaid balance in excess of 0.50% of eligible
gross sales. Consequently, the maximum amount payable to the Distributor
(referred to as the "voluntary maximum") in connection with the Class B shares
of a Portfolio is 6.75% of eligible gross sales. The Distributor retains the
right to stop waiving the interest charges at any time. To the extent payments
would exceed the voluntary maximum, the Fund will not make further payments of
the distribution fee with respect to Class B shares of the relevant Portfolio,
and any CDSCs with respect to that class will be paid to the Fund rather than to
the Distributor; however, the Fund will continue to make payments of the account
maintenance fee. In certain circumstances the amount payable pursuant to the
voluntary maximum may exceed the amount payable under the NASD formula. In such
circumstances payment in excess of the amount payable under the NASD formula
will not be made.
The following tables set forth comparative information as of June 30, 1997
with respect to the Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales charge
rule and the Distributor's voluntary maximum for the period October 21, 1988
(commencement of operations) to June 30, 1997 for the Class B shares of the
National and Insured Portfolios, for the period November 2, 1992 (commencement
of operations) to June 30, 1997 for Class B shares of the Limited Maturity
Portfolio, and for the period October 21, 1994 (commencement of operations) to
June 30, 1997 for the Insured, National and Limited Maturity Portfolios.
17
<PAGE> 84
DATA CALCULATED AS OF JUNE 30, 1997
INSURED PORTFOLIO
<TABLE>
<CAPTION>
ANNUAL
DISTRIBUTION
ALLOWABLE ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
---------- --------- ---------- -------- -------------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B
Under NASD Rule as
Adopted............ $1,276,011 $79,750 $ 36,227 $115,977 $ 38,365 $77,612 $2,800
Under Distributor's
Voluntary Waiver... $1,276,011 $79,750 $ 6,380 $ 86,130 $ 38,365 $47,765 $2,800
CLASS C
Under NASD Rule as
Adopted............ $ 23,404 $ 1,462 $ 210 $ 1,672 $ 197 $ 1,475 $ 65
</TABLE>
NATIONAL PORTFOLIO
<TABLE>
<CAPTION>
ANNUAL
DISTRIBUTION
ALLOWABLE ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
-------- --------- ---------- ------- -------------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B
Under NASD Rule as
Adopted.............. $684,109 $42,756 $ 17,315 $60,071 $ 19,235 $40,836 $2,075
Under Distributor's
Voluntary Waiver..... $684,109 $42,756 $ 3,421 $46,177 $ 19,235 $26,942 $2,075
CLASS C
Under NASD Rule as
Adopted.............. $ 2,705 $ 1,719 $ 198 $1,917 $ 190 $ 1,727 $ 154
</TABLE>
(see footnotes on next page).
18
<PAGE> 85
LIMITED MATURITY PORTFOLIO
<TABLE>
<CAPTION>
ANNUAL
DISTRIBUTION
ALLOWABLE ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(5) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(6) BALANCE LEVEL(4)
-------- --------- ---------- ------- -------------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B
Under NASD Rule as
Adopted.............. $176,436 $11,027 $3,727 $14,754 $1,811 $12,943 $108
Under Distributor's
Voluntary Waiver..... $176,436 $11,027 $ 882 $11,909 $1,811 $10,098 $108
CLASS C
Under NASD Rule as
Adopted.............. $ 3,360 $ 210 $ 50 $ 260 $ 7 $ 253 $215
</TABLE>
- ---------------
(1) Purchase price of all eligible Class B shares sold since October 21, 1988
(commencement of Class B operations) other than shares acquired through
dividend reinvestment and the exchange privilege.
(2) Interest is computed on a monthly average Prime Rate basis, based upon the
prime rate as reported in The Wall Street Journal, plus 1.0%, as permitted
under the NASD Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. Of these
distribution fee payments made prior to July 6, 1993 under the Prior Plan at
the 0.75% rate, 0.50% of average daily net assets has been treated as a
distribution fee and 0.25% of average daily net assets has been deemed to
have been a service fee and not subject to the NASD maximum sales charge
rule. This figure may include CDSCs that were deferred when a shareholder
redeemed shares prior to the expiration of the applicable CDSC period and
invested the proceeds, without the imposition of a sales charge, in Class A
shares in conjunction with the Shareholder's participation in the Merrill
Lynch Mutual Funds Advisor ("MFA") program. The CDSC is booked as a
contingent obligation that may be payable if the shareholder terminates
participation in the MFA program.
(4) Provided to illustrate the extent to which the current level of distribution
fee payments (not including any CDSC payments) is amortizing the unpaid
balance. No assurance can be given that payments of the distribution fee
will reach either the voluntary maximum or the NASD maximum.
(5) Purchase price of all eligible Class B shares sold since November 2, 1992
(commencement of Class B operations) other than shares acquired through
dividend reinvestment and exchange privilege.
(6) Consists of CDSC payments, distribution fee payments and accruals. Of these
distribution fee payments made prior to July 6, 1993 under the Prior Plan at
the 0.35% rate, 0.25% of average daily net assets has been treated as a
distribution fee and 0.10% of average daily net assets has been deemed to
have been a service fee and not subject to the NASD maximum sales charge
rule.
REDEMPTION OF SHARES
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for any period during which trading on the New York
Stock Exchange (the "NYSE") is restricted as determined by the Commission or the
NYSE is closed (other than customary weekend and holiday closings), for any
period during which an emergency exists, as defined by the Commission, as a
result of which disposal of portfolio securities or determination of the net
asset value of any Portfolio is not reasonably practicable, and for such other
periods as the Commission may by order permit for the protection of shareholders
of each Portfolio. Reference is made to "Redemption of Shares" in the
Prospectus, for certain information as to the redemption and repurchase of Fund
shares.
19
<PAGE> 86
The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending on the market value of the securities held by each
Portfolio at such time.
REINSTATEMENT PRIVILEGE
Holders of Class A or Class D shares of any Portfolio who have redeemed
their shares have a one-time privilege to reinstate their accounts by purchasing
Class A or Class D shares, as the case may be, of the Portfolio in which they
had invested at net asset value without a sales charge up to the dollar amount
redeemed. The reinstatement privilege may be exercised as follows. A notice to
exercise this privilege along with a check for the amount to be reinstated must
be received by the Transfer Agent within 30 days after the date the request for
redemption was executed by the Transfer Agent or the Distributor. The
reinstatement will be made at the net asset value per share next determined
after the notice of reinstatement is received and cannot exceed the amount of
the redemption proceeds. Alternatively, the reinstatement privilege may be
exercised through the investor's Merrill Lynch Financial Consultant within 30
days after the date the request for redemption was accepted by the Transfer
Agent or Distributor.
DEFERRED SALES CHARGE -- CLASS B AND CLASS C SHARES
As discussed in the Prospectus under "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares," while under most
circumstances, Class B shares of the Insured Portfolio and National Portfolio
redeemed within four years of purchase and Class B shares of the Limited
Maturity Portfolio redeemed within one year of purchase are subject to a CDSC,
the charge is waived on redemptions of Class B shares in certain instances,
including in connection with certain post-retirement withdrawals from an
Individual Retirement Account ("IRA") or other retirement plan or following the
death or disability of a Class B shareholder. Redemptions for which the waiver
applies in the case of such withdrawal are: (a) any partial or complete
redemption in connection with a tax-free distribution following retirement under
a tax-deferred retirement plan or attaining age 59 1/2 in the case of an IRA or
other retirement plan, or part of a series of equal periodic payments (not less
frequently than annually) made for the life (or life expectancy) or any
redemption resulting from the tax-free return of an excess contribution to an
IRA; or, (b) any partial or complete redemption following the death or
disability (as defined in the Code) of a Class B shareholder (including one who
owns the Class B shares as joint tenant with his or her spouse), provided the
redemption is requested within one year of the death or initial determination of
disability.
For the fiscal year ended June 30, 1997, the Distributor received CDSCs of
$979,435 for the Insured Portfolio, $868,705 for the National Portfolio, and
$58,475 for the Limited Maturity Portfolio, with regard to redemptions of Class
B shares, all of which were paid to Merrill Lynch. Additional CDSCs payable to
the Distributor may have been waived or converted to a contingent obligation in
connection with a shareholder's participation in certain fee-based programs. For
the fiscal year ended June 30, 1996, the Distributor received CDSCs of
$1,033,602 for the Insured Portfolio, $771,851 for the National Portfolio, and
$106,430 for the Limited Maturity Portfolio, with regard to redemptions of Class
B shares, all of which were paid to Merrill Lynch. For the fiscal year ended
June 30, 1995, the Distributor received CDSCs of $1,840,608 for the Insured
Portfolio, $1,036,339 for the National Portfolio, and $387,044 for the Limited
Maturity Portfolio, with regard to redemptions of Class B shares, all of which
were paid to Merrill Lynch.
For the fiscal year ended June 30, 1997, the Distributor received CDSCs of
$6,915 for the Insured Portfolio, $10,273 for the National Portfolio, and $395
for the Limited Maturity Portfolio, with regard to
20
<PAGE> 87
redemptions of Class C shares, all of which were paid to Merrill Lynch.
Additional CDSCs payable to the Distributor may have been waived or converted to
a contingent obligation in connection with a shareholder's participation in
certain fee-based programs. For the fiscal year ended June 30, 1996, the
Distributor received CDSCs of $7,257 for the Insured Portfolio, $6,455 for the
National Portfolio, and $2,130 for the Limited Maturity Portfolio, with regard
to redemptions of Class C shares, all of which were paid to Merrill Lynch. For
the period ended October 21, 1994 (commencement of Class C operations) to June
30, 1995, the Distributor received CDSCs of $5,361 for the Insured Portfolio,
$3,219 for the National Portfolio, and $2,661 for the Limited Maturity
Portfolio, with regard to redemptions of Class C shares, all of which were paid
to Merrill Lynch.
All of such contingent deferred sales charges were attributable to payments
made in connection with redemptions of Class B and Class C shares of the
Portfolios.
Merrill Lynch Blueprint(SM) Program. Class B shares of all three
Portfolios are offered to certain participants in the Merrill Lynch
Blueprint(SM) Program ("Blueprint"). Blueprint is directed to small investors
and participants in certain affinity groups such as trade associations and
credit unions. Class B shares are offered through Blueprint only to members of
certain affinity groups. The CDSC is waived for shareholders who are members of
such affinity groups at the time of placing orders to purchase Class B shares
through Blueprint. However, services, including the exchange privilege,
available to Class B shareholders through Blueprint may differ from those
available to other Class B investors. Orders for purchases and redemptions of
Class B shares of any of the three Portfolios may be grouped for execution
purposes which, in some circumstances, may involve the execution of such orders
two business days following the day such orders are placed. The minimum initial
purchase price is $100, with a $50 minimum for subsequent purchases throughout
Blueprint. There is no minimum initial or subsequent purchase requirement for
investors who are part of the Blueprint automatic investment plan. Additional
information concerning Blueprint, including any annual fees or transaction
charges, is available from Merrill Lynch, Pierce, Fenner & Smith Incorporated.
The Blueprint(SM) Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of each class of each Portfolio of the
Fund is determined once daily, Monday through Friday, as of 15 minutes after the
close of business on the NYSE (generally, 4:00 p.m., New York City time), on
each day on which the NYSE is open for trading. The NYSE is not open on New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The net
asset value per share is computed by dividing the sum of the value of the
portfolio securities held by each Portfolio plus any cash or other assets
(including interest and dividends accrued but not yet received) minus all
liabilities (including accrued expenses) by the total number of shares
outstanding at such time, rounded to the nearest cent. Expenses, including the
investment advisory and any account maintenance and/or distribution fees, are
accrued daily.
The per share net asset value of the Class B, Class C and Class D shares of
a Portfolio generally will be lower than the per share net asset value of the
Class A shares of that Portfolio reflecting the daily expense accruals of the
account maintenance distribution and higher transfer agency fees applicable with
respect to the Class B, Class C and Class D shares and daily expense accruals of
the account maintenance fees applicable with respect to the Class D shares.
Moreover the per share net asset value of the Class B and Class C shares
21
<PAGE> 88
generally will be lower than the per share net asset value of its Class D shares
reflecting the daily expense accruals of the distribution fees and higher
transfer agency fees applicable with respect to the Class B and Class C shares.
It is expected, however, that the per share net asset value of the four classes
of a Portfolio will tend to converge, although not necessarily meet, immediately
after the payment of dividends, which will differ by approximately the amount of
the expense accrual differential among the classes.
The Municipal Bonds and money market securities in which each Portfolio
invests are traded primarily in the over-the-counter markets and are valued at
the most recent bid price or yield equivalent as obtained from dealers that make
markets in such securities. Positions in futures contracts are valued at closing
prices for such contracts established by the exchange on which they are traded
on each day during which trading is conducted thereon. Assets for which 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,
including valuations furnished by a pricing service retained by the Fund, which
may utilize a matrix system for valuations.
It is the intention of FAM, subject to guidelines established by the Board
of Directors of the Fund, to hold Insured Municipal Bonds in the Insured
Portfolio that are in default, or in significant risk of default, in the payment
of principal or interest until the default has been cured or the principal and
interest are paid by the issuer or the insurer. In accordance with such
guidelines, FAM will consider the following factors in determining the effective
value of Insured Municipal Bonds in the Insured Portfolio that are in default,
or in significant risk of default, in the payment of principal or interest: (1)
the market value of the bonds; (2) the market value of securities of similar
issuers whose securities carry similar interest rates; and (3) the value of the
insurance guaranteeing interest and principal payments. Absent unusual or
unforeseen circumstances, the value ascribed to the insurance feature of the
bonds would be the difference between the market value of the bonds and the
market value of securities of a similar nature which are not in default or
significant risk of default. It is the position of the Board of Directors that
this is a fair method of valuing the insurance feature and reflects a proper
valuation method in accordance with the provisions of the Investment Company
Act. This method of valuing securities will mean that shareholders of the
Insured Portfolio, whether they decide to redeem or decide to retain their
investment in the Insured Portfolio, will in normal circumstances receive the
benefit of the insurance. Because of the unusual circumstances surrounding the
bonds held in the Insured Portfolio that were in default at the end of the
Fund's last fiscal year, the insurance feature was valued in an amount that,
when combined with the market value of the bonds, resulted in the bonds' having
an effective value of par.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Under the Investment Company Act, persons affiliated with the Fund are
prohibited from dealing with the Fund as a principal in the purchase and sale of
securities unless an exemptive order allowing such transactions is obtained from
the Commission. Since over-the-counter transactions are usually principal
transactions, affiliated persons of the Fund, including Merrill Lynch, may not
serve as a dealer in connection with transactions with the Fund. However, the
Fund has obtained an exemptive order permitting it to engage in certain
principal transactions involving high quality short-term Municipal Bonds.
Affiliated persons of the Fund may serve as its broker in over-the-counter
transactions conducted on an agency basis. Certain court decisions have raised
questions as to the extent to which investment companies should seek exemptions
under the Investment Company Act in order to seek to recapture underwriting and
dealer spreads from affiliated entities. The Directors have considered the
possibilities of seeking to recapture spreads for the benefit of the
22
<PAGE> 89
Fund and, after considering factors deemed relevant, have made a determination
not to seek such recapture at this time. The Board will reconsider this matter
from time to time.
Under the Investment Company Act, the Fund may not purchase Municipal Bonds
from any underwriting syndicate of which Merrill Lynch is a member except
pursuant to an exemptive order or rules adopted by the Commission. During the
year ended June 30, 1995, the Fund purchased $79,188,750 of Municipal Bonds in
20 transactions pursuant to an exemptive order or such a rule. During the fiscal
years ended June 30, 1996 and June 30, 1997, the Fund did not engage in any
transactions pursuant to such order. For the fiscal years ended June 30, 1995,
June 30, 1996 and June 30, 1997, the National Portfolio paid total brokerage
commissions of $315,000, $20,250 and $29,400, respectively, none of which was
paid to Merrill Lynch. For the same fiscal periods, the Insured Portfolio and
the Limited Maturity Portfolio paid no brokerage commissions.
The Fund does not expect to use any particular dealer in the execution of
transactions for its Portfolios, but, subject to obtaining the best net results,
dealers who provide supplemental investment research (such as economic data and
market forecasts) to FAM may receive orders for transactions by any Portfolio.
Information so received will be in addition to and not in lieu of the services
required to be performed by FAM under its Investment Advisory Agreement and
FAM's expenses will not necessarily be reduced as a result of the receipt of
such supplemental information.
FAM expects that the portfolio turnover rate for the Insured Portfolio and
the National Portfolio should not generally exceed 100%. Because of the
short-term nature of the Limited Maturity Portfolio, its turnover rate may be
substantially higher. In any particular year, however, market conditions could
result in portfolio activity of a Portfolio at a greater or lesser rate than
anticipated. The portfolio turnover rates for the Insured Portfolio for the
fiscal years ended June 30, 1997 and June 30, 1996 were 74.40% and 78.49%,
respectively. The portfolio turnover rates for the National Portfolio for the
fiscal years ended June 30, 1997 and June 30, 1996 were 99.52% and 95.09%,
respectively. The portfolio turnover rates for the Limited Maturity Portfolio
for the fiscal years ended June 30, 1997 and June 30, 1996 were 61.90% and
88.32%, respectively.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Reference is made to "Additional Information -- Dividends and
Distributions" and "Additional Information -- Federal Income Taxes" in the
Prospectus.
Each Portfolio intends to qualify to pay "exempt-interest" dividends as
defined in Section 852(b)(5) of the Internal Revenue Code of 1986, as amended
(the "Code"). Under that 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
exempt from federal income tax ("tax-exempt obligations"), pursuant to Section
103(a) of the Code (relating to obligations of a state, territory, or a
possession of the United States, or any political sub-division of any of the
foregoing, or of the District of Columbia), the Portfolio will be qualified to
pay exempt-interest dividends to its shareholders. Exempt-interest dividends are
dividends or any part thereof (other than any capital gain distributions) paid
by the Portfolio which are attributable to interest on tax-exempt obligations
and designated by the Portfolio as exempt-interest dividends in a written notice
mailed to the Portfolio's shareholders within sixty days after the close of its
taxable year. The percentage of the total dividends paid by the Portfolio during
any taxable year which qualifies as exempt-interest dividends will be the same
for all shareholders of each Portfolio receiving dividends during such year.
Exempt-interest dividends may be treated by shareholders for all purposes as
items of interest excludible from their gross income under Section 103(a) of the
Code. However, a shareholder is advised to consult his or her tax adviser with
respect to whether exempt-interest
23
<PAGE> 90
dividends retain the exclusion under Section 103(a) if such shareholder would be
treated as a "substantial user" under Section 147(a)(1) with respect to some or
all of the tax-exempt obligations held by the Portfolio.
Dividends paid by each Portfolio from its taxable income (i.e., interest on
money market securities) and distributions of net realized short-term capital
gains (whether from tax-exempt or taxable obligations) are taxable to
shareholders as ordinary income. If a Portfolio acquires tax-exempt obligations
having market discount (generally, obligations acquired for a price less than
their principal amount) after April 30, 1993, gain on the disposition or
retirement of such obligations will be treated as ordinary income to the extent
of accrued market discount. To the extent the Portfolio has both taxable and
tax-exempt income, expenses of the Fund will be allocated between the taxable
and the tax-exempt income on a proportional basis. Since the Portfolio will not
invest in the stock of domestic corporations, the dividends received deductions
for corporations will not be available. The per share dividends on Class B and
Class C shares of any Portfolio will be lower than the per share dividends on
Class A and Class D shares of those Portfolios as a result of the account
maintenance distribution and higher transfer agency fees applicable to Class B
and Class C shares; similarly, the per share dividends and distributions on
Class D shares will be lower than the per share dividends and distributions on
Class A shares as a result of the account maintenance fees applicable with
respect to the Class D shares. See "Net Asset Value." The Code provides that
interest on indebtedness incurred or continued to purchase or carry shares of
the Portfolio is not deductible to the extent attributable to exempt-interest
dividends.
As a result of trading in futures contracts, a Portfolio may realize net
capital gains which, when distributed to shareholders, would be taxable in the
hands of the shareholders. For example, if the Portfolios sold municipal bond
index futures contracts in anticipation of a decline in the value of securities
they own and that index in fact declines in value, the Portfolios would realize
a capital gain upon the closing out of that futures contract. Furthermore, if a
Portfolio holds such a futures contract on the last day of its taxable year, it
would be deemed under the Code to have sold that futures contract at its fair
market value on the last day of its taxable year and thus would realize a gain
or loss. Such gain or loss is treated as 60% long-term capital gain or loss and
40% short-term capital gain or loss (hereinafter "blended gain or loss"),
notwithstanding the holding period of the futures contract. Since the futures
transaction was entered into to hedge the anticipated decline in the portfolio
securities of the Portfolio in question, it is likely that the gain on the
futures transactions would be partly or completely offset by a corresponding
decline in the value of the portfolio securities of such Portfolio. However,
unless the Portfolios sell such securities so as to "realize" such losses in a
manner to offset the blended gain for Federal income tax purposes, the Portfolio
would have a blended gain. Such blended gain would result in taxable income to
the shareholders of the Fund.
A redemption resulting in a gain is a taxable event whether or not the
reinstatement privilege is exercised. A redemption resulting in a loss will not
be a taxable event to the extent the reinstatement privilege is exercised and an
adjustment will be made to the shareholder's tax basis in shares acquired
pursuant to the reinstatement. For shares of a Portfolio acquired after October
3, 1989, if a shareholder disposes of those shares and subsequently reacquires
shares of the Portfolio pursuant to the reinstatement privilege, then the
shareholder's tax basis in those shares will be reduced to the extent the sales
charge paid to the Portfolio reduces any sales charge such shareholder would
have been required to pay on the subsequent acquisition in the absence of the
reinstatement privilege. Instead, such sales charge will be treated as an
additional amount paid for the subsequently acquired shares and will be included
in the shareholder's tax basis for such shares.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares for Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's
24
<PAGE> 91
basis in the Class B shares converted, and the holding period of the acquired
Class D shares will include the holding period of the converted Class B shares.
If a shareholder exercises his exchange privilege within 90 days after the
date such shares were acquired to acquire shares in such fund or another fund
("New Fund"), then the loss, if any, recognized on the exchange will be reduced
(or the gain, if any, increased) to the extent the load charge paid to the Fund
reduces any load charge such shareholder would have been required to pay on the
acquisition of the New Fund shares in the absence of the exchange privilege.
Instead, such load charge will be treated as an amount paid for the New Fund
shares and will be included in the shareholder's basis for such shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
An exchange between funds pursuant to the Exchange Privilege (as described
below on page 29) is treated as a sale of the exchanged shares and a purchase of
the acquired shares for Federal income tax purposes and, depending upon the
circumstances, a short-, mid- or long-term capital gain or loss may be realized.
In addition, any shareholder of the Fund who exercises the Exchange Privilege
and becomes a shareholder of another fund must certify to such other fund his or
her Social Security Number or Taxpayer Identification Number and that he is not
subject to the backup withholding tax if he or she wishes to avoid a 31% backup
withholding tax on the gross proceeds paid by such other fund on redemption of
shares and on dividend distributions made to him or to her by such other fund.
Any dividend declared by a Portfolio in October, November or December of
any year and made payable to shareholders of record in such a month will be
deemed to be received on December 31 of such year if actually paid during the
following January. Accordingly, those dividends, to the extent taxable, will be
taxable to shareholders in the year declared, and not in the year in which
shareholders actually receive the dividend.
Not later than sixty days after the end of each fiscal year of the Fund,
the Fund will send to its shareholders the written notice required by the Code
designating the amount of its dividends that constitute exempt-interest
dividends, the amount of the dividends and distributions which are ordinary
taxable income and the amount of distributions which are taxable to shareholders
as mid- or long-term capital gains.
Every person required to file a tax return must disclose on that return the
amount of exempt-interest dividends received from a Portfolio during the taxable
year. The disclosure of this amount is for information purposes only. In
addition, with respect to a shareholder who receives exempt-interest dividends
on shares held for less than six months, any loss on the sale or exchange of
such shares will, to the extent of the amount of such exempt-interest dividends,
be disallowed.
Interest income with respect to certain tax-exempt bonds, known as "private
activity" bonds, is a preference item for purposes of the corporate and
individual alternative minimum tax. To the extent that a Portfolio invests in
private activity bonds, shareholders of the Portfolio will have preference items
attributable to their proportionate shares of the interest income received by
the Portfolio from such bonds, thereby increasing a shareholder's alternative
minimum taxable income. In addition, a corporation must increase its alternative
minimum taxable income by 75 percent of the amount by which adjusted current
earnings exceed alternative minimum taxable income (without regard to this
provision or the alternative net operating loss
25
<PAGE> 92
deduction). Adjusted current earnings are computed by making certain
adjustments, which generally follow the rules applicable to corporations in
computing earnings and profits. All tax-exempt dividends received by the
corporate shareholders of a Portfolio are included in their current earnings,
thus, increasing a corporate shareholders' alternative minimum taxable income.
The Code imposes a four percent nondeductible excise tax on a regulated
investment company, such as a Portfolio of the Fund, if the company does not
distribute to its shareholders during the calendar year an amount equal to 98
percent of the investment company's taxable income, with certain adjustments,
for such calendar year, plus 98 percent of the company's capital gain net income
for the one-year period ending on October 31 of such calendar year. In addition,
an amount equal to any undistributed investment company taxable income or
capital gain net income from the previous calendar year must also be distributed
to avoid the excise tax. The excise tax is imposed on the amount by which a
company does not meet the foregoing distribution requirements. The excise tax
will not, however, generally apply to the tax-exempt income of a regulated
investment company, such as a Portfolio of the Fund, that pays exempt-interest
dividends. In addition, if a Portfolio has taxable income that would be subject
to the excise tax, the Fund intends to distribute the income of such Portfolio
so as to avoid payment of the excise tax.
At June 30, 1997, the Fund had a net capital loss carryforward as follows:
Approximately $4,620,000 in the Insured Portfolio, of which $1,981,000 expires
in 2003 and $2,639,000 expires in 2004; approximately $48,141,000 in the
National Portfolio, of which $19,665,000 expires in 2003 and $28,476,000 expires
in 2004; and approximately $4,658,000 in the Limited Maturity Portfolio, of
which $2,590,000 expires in 1998, $22,000 expires in 1999, $25,000 expires in
2002 and $2,021,000 expires in 2003. These amounts will be available to offset
like amounts of any future taxable gains.
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 and
the Treasury Regulations promulgated thereunder. The Code and these Regulations
are subject to change by legislative or administrative action.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services, described below, that are
designed to facilitate investment in its shares. Full details as to each of such
services and copies of the various plans described below can be obtained from
the Fund, the Distributor or Merrill Lynch. Certain of these services are
available only to United States investors.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of income dividends and
long-term capital gains distributions. The quarterly statements will also show
any other activity in the account since the preceding statement. Shareholders
will receive separate transaction confirmations for each purchase or sale
transaction other than automatic investment purchases and the reinvestment of
ordinary income dividends and long-term capital gains distributions. A
shareholder may make additions to his Investment Account at any time by mailing
a check directly to the Transfer Agent.
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<PAGE> 93
Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing all
or only part of the full shares in an Investment Account may be requested by a
shareholder directly from the Transfer Agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the Class A or Class D shares are to be transferred
will not take delivery of shares of the Fund, a shareholder either must redeem
the Class A or Class D shares so that the cash proceeds can be transferred to
the account at the new firm or such shareholder must continue to maintain an
Investment Account at the Transfer Agent for those Class A or Class D shares.
Shareholders interested in transferring their Class B or Class C shares from
Merrill Lynch and who do not wish to have an Investment Account maintained for
such shares at the Transfer Agent may request their new brokerage firm to
maintain such shares in an account registered in the name of the brokerage firm
for the benefit of the shareholder. If the new brokerage firm is willing to
accommodate the shareholder in this manner, the shareholder must request that he
or she be issued certificates for his or her shares, and then must turn the
certificates over to the new firm for re-registration as described in the
preceding sentence.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to the Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor as
described in the Prospectus) or Class B, Class C or Class D shares at the
applicable public offering price either through the shareholder's securities
dealer or by mail directly to the Transfer Agent, acting as agent for such
securities dealer. Voluntary accumulation also can be made through a service
known as the Automatic Investment Plan whereby the Fund is authorized through
pre-authorized checks or automated clearing house debits of $50 or more to
charge the regular bank account of the shareholder on a regular basis to provide
systematic additions to the Investment Account of such shareholder. For
investors who buy shares of the Fund through Blueprint, no minimum charge to the
investors' bank account is required. Investors who maintain CMA(R) or CBA(R)
accounts may arrange to have periodic investments made in the Fund, in the
CMA(R) or CBA(R) accounts or in certain related accounts in amounts of $100 or
more ($1 for retirement accounts) through the CMA(R) or CBA(R) Automated
Investment Program. The Automatic Investment Plan is not available for Class C
shares of the Limited Maturity Portfolio.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will be
reinvested automatically in additional shares of the Fund. Such reinvestment
will be at the net asset value of shares of the Fund, without sales charge, as
of the close of business on the NYSE on the ex-dividend date of such dividend or
distribution. Shareholders may elect in writing to receive either their income
dividends or capital gains distributions, or both, in cash, in which event
payment will be mailed or direct deposited on or about the payment date.
Shareholders may, at any time, notify the Transfer Agent in writing or by
telephone ((800)-MER-FUND) that they no longer wish to have their dividends
and/or distributions reinvested in shares of the Fund or vice versa and,
commencing ten days after the receipt by the Transfer Agent of such notice,
those instructions will be effected.
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<PAGE> 94
SYSTEMATIC WITHDRAWAL PLANS
A shareholder of any of the three Portfolios may elect to make systematic
withdrawals from an Investment Account of Class A, Class B, Class C or Class D
shares in the form of payments by check or through automatic payment by direct
deposit to such shareholder's bank account on either a monthly or calendar
quarterly basis as provided below. Quarterly withdrawals are available for
shareholders who have acquired shares of the Fund having a value, based on cost
or the current offering price, of $5,000 or more, and monthly withdrawals are
available for shareholders with shares having a value of $10,000 or more.
At the time of each withdrawal payment, sufficient Class A or Class D
shares are redeemed from those on deposit in the shareholder's account to
provide the withdrawal payment specified by the shareholder. The shareholder may
specify the dollar amount and class of shares to be redeemed. Redemptions will
be made at net asset value as determined once daily by FAM immediately after the
declaration of dividends as of 15 minutes after the close of business on the
NYSE (generally 4:00 p.m. New York City time) on the 24th day of each month or
the 24th day of the last month of each quarter, whichever is applicable. If the
NYSE is not open for business on that day, the shares will be redeemed at the
close of business on the following business day. The check for the withdrawal
payment will be mailed or the direct deposit for the withdrawal payment will be
made, on the next business day following redemption. When a shareholder is
making systematic withdrawals, dividends and distributions on all shares in the
Investment Account are reinvested automatically in shares of the Fund. A
shareholder's Systematic Withdrawal Plan may be terminated at any time, without
a charge or penalty, by the shareholder, the Fund, the Transfer Agent or the
Distributor. Withdrawal payments should not be considered as dividends, yield or
income. Each withdrawal is a taxable event. If periodic withdrawals continuously
exceed reinvested dividends, the shareholder's original investment may be
reduced correspondingly. Purchases of additional shares concurrent with
withdrawals are ordinarily disadvantageous to the shareholder because of sales
charges and tax liabilities. The Fund will not knowingly accept purchase orders
for shares of the Fund from investors who maintain a Systematic Withdrawal Plan
unless such purchase is equal to at least one year's scheduled withdrawals or
$1,200, whichever is greater. Periodic investments may not be made into an
Investment Account in which the shareholder has elected to make systematic
withdrawals. With respect to redemptions of Class B and Class C shares pursuant
to a systematic withdrawal plan, the maximum number of Class B or Class C shares
that can be redeemed from an account annually shall not exceed 10% of the value
of shares of such class in that account at the time the election to join the
systematic withdrawal plan was made. Any CDSC that otherwise might be due on
such redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the same order as
Class B or Class C shares are otherwise redeemed. See "Purchase of
Shares -- Deferred Sales Charge Alternatives -- Class B and Class C
Shares -- Contingent Deferred Sales Charge -- Class B Shares" and "Contingent
Deferred Sales Charges -- Class C Shares" in the Prospectus. Where the
systematic withdrawal plan is applied to Class B Shares, upon conversion of the
last Class B shares in an account to Class D shares, the systematic withdrawal
plan will automatically be applied thereafter to Class D shares. See "Purchase
of Shares -- Deferred Sales Charge Alternatives -- Class B and Class C
Shares -- Conversion of Class B Shares to Class D Shares" in the Prospectus; if
an investor wishes to change the amount being withdrawn in a systematic
withdrawal plan the investor should contact his or her Financial Consultant.
Alternatively, a shareholder whose shares are held within a CMA(R), CBA(R)
or Retirement Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the CMA(R) or CBA(R) Systematic
Redemption Program. The minimum fixed dollar amount redeemable is $50.
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<PAGE> 95
The proceeds of systematic redemptions will be posted to the shareholder's
account five business days after the date the shares are redeemed all
redemptions are made at net asset value. A shareholder may elect to have his or
her shares redeemed on the first, second, third or fourth Monday of each month,
in the case of monthly redemptions, or of every other month, in the case of
bimonthly redemptions. For quarterly, semiannual or annual redemptions, the
shareholder may select the month in which the shares are to be redeemed and may
designate whether the redemption is to be made on the first, second, third or
fourth Monday of the month. If the Monday selected is not a business day, the
redemption will be processed at net asset value on the next business day. The
CMA(R) or CBA(R) Systematic Redemption Program is not available if Fund shares
are being purchased within the account pursuant to the Automatic Investment
Program. For more information on the CMA(R) or CBA(R) Systematic Redemption
Program, eligible shareholders should contact their Merrill Lynch Financial
Consultant.
EXCHANGE PRIVILEGE
U.S. Shareholders of each class of shares of a Portfolio of the Fund have
an exchange privilege (the "Exchange Privilege") with other Portfolios of the
Fund and with certain other MLAM-advised mutual funds listed below. Under the
Merrill Lynch Select Pricing(SM) System, Class A shareholders may exchange Class
A shares of a Portfolio for Class A shares of another Portfolio or a second
MLAM-advised mutual fund if the shareholder holds any Class A shares of the
other Portfolio or second fund in the account in which the exchange is made at
the time of the exchange or is otherwise eligible to purchase Class A shares of
the second fund. If the Class A shareholder wants to exchange Class A shares for
shares of another Portfolio or a second MLAM-advised mutual fund, and the
shareholder does not hold Class A shares of the other Portfolio or second fund
in his account at the time of the exchange and is not otherwise eligible to
acquire Class A shares of the other Portfolio or second fund, the shareholder
will receive Class D shares of the other Portfolio or second fund as a result of
the exchange. Class D shares also may be exchanged for Class A shares of another
Portfolio or a second MLAM-advised mutual fund at any time as long as, at the
time of the exchange, the shareholder holds Class A shares of the other
Portfolio or second fund in the account in which the exchange is made or is
otherwise eligible to purchase Class A shares of the other Portfolio or second
fund. Class B, Class C and Class D of a Portfolio shares will be exchangeable
with shares of the same class of another Portfolio or other MLAM-advised mutual
funds. For purposes of computing the CDSC that may be payable upon a disposition
of the shares acquired in the exchange, the holding period for the previously
owned shares of the Portfolio is "tacked" to the holding period of the newly
acquired shares of the other Portfolio or other MLAM-advised mutual fund as more
fully described below. Class A, Class B, Class C and Class D shares also will be
exchangeable for shares of certain MLAM-advised money market funds specifically
designated below as available for exchange by holders of Class A, Class B, Class
C or Class D shares. Shares with a net asset value of at least $100 are required
to qualify for the exchange privilege, except that there is no minimum value of
shares that must be exchanged by shareholders of the Insured Portfolio who
exchange their shares for shares of either the National Portfolio or the Limited
Maturity Portfolio and any shares utilized in an exchange must have been held by
the shareholder for at least 15 days. The Exchange Privilege available to
participants in the Merrill Lynch Blueprint(SM) Program may be different from
that available to other investors.
Exchanges of Class A and Class D shares of a Portfolio outstanding
("outstanding Class A and Class D shares") for Class A or Class D shares of
another Portfolio or another MLAM-advised mutual fund ("new Class A or Class D
shares) are transacted on the basis of relative net asset value per Class A or
Class D share
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<PAGE> 96
respectively, plus an amount equal to the difference, if any, between the sales
charge previously paid on the outstanding Class A or Class D shares and the
sales charge payable at the time of the exchange on the new Class A or Class D
shares. With respect to outstanding Class A or Class D shares as to which
previous exchanges have taken place, the 'sales charge previously paid' will
include the aggregate of the sales charges paid with respect to such Class A or
Class D shares in the initial purchase and any subsequent exchange. Class A or
Class D shares issued pursuant to dividend reinvestment are sold on a no-load
basis in each of the funds offering Class A or Class D shares. For purposes of
the Exchange Privilege, dividend reinvestment Class A or Class D shares will be
exchanged into the Class A or Class D shares of the other funds or into shares
of the Class A or Class D money market funds without a sales charge.
In addition, the Fund offers to exchange Class B and Class C shares of a
Portfolio outstanding ("outstanding Class B or Class C shares") for Class B or
Class C shares respectively of another Portfolio or any of the other
MLAM-advised mutual funds ("new Class B or Class C shares") on the basis of
relative net asset value per Class B or Class C share, without the payment of
any CDSC that might otherwise be due on redemption of the outstanding shares.
Class B shareholders of a Portfolio exercising the Exchange Privilege will
continue to be subject to that Portfolio's CDSC schedule if such schedule is
higher than the CDSC schedule relating to the new Class B shares acquired
through the use of the Exchange Privilege. In addition, Class B shares of the
Portfolio acquired through the use of the Exchange Privilege will be subject to
that Portfolio's CDSC schedule if such schedule is higher than the CDSC schedule
relating to the Class B shares of the fund or Portfolio from which the exchange
has been made. For purposes of computing the sales charge that may be payable on
a disposition of the new Class B or Class C shares, the holding period for the
outstanding Class B or Class C shares is "tacked" to the holding period of the
new Class B or Class C shares. For example, an investor may exchange Class B or
Class C shares of the National Portfolio for those of the Merrill Lynch Basic
Value Fund, Inc. after having held the National Portfolio Class B shares for two
and a half years. The 2% contingent deferred sales charge that generally would
apply to a redemption would not apply to the exchange. Two years later the
investor may decide to redeem the Class B shares of Merrill Lynch Basic Value
Fund, Inc. and receive cash. There will be no CDSC due on this redemption, since
by "tacking" the two and a half year holding period of National Portfolio Class
B shares to the two year holding period for the Merrill Lynch Basic Value Fund,
Inc. Class B shares, the investor will be deemed to have held the new Class B
shares for more than four years.
Shareholders also may exchange shares of the Fund into shares of certain
money market funds advised by the Investment Adviser or its affiliates, but the
period of time that Class B or Class C shares are held in a Class B or Class C
money market fund will not count towards satisfaction of the holding period
requirement for purposes of reducing the CDSC or, with respect to the Class B
shares, towards satisfaction of the conversion period. However, Class B shares
of a money market fund that were acquired as a result of an exchange for Class B
or Class C shares of a fund may, in turn, be exchanged back into Class B or
Class C shares of any fund offering such shares, in which event the holding
period for Class B or Class C shares of the newly acquired fund will be
aggregated with previous holding periods for purposes of reducing the CDSC.
Thus, for example, an investor may exchange Class B shares of the National
Portfolio for shares of Merrill Lynch Institutional Fund ("Institutional Fund")
after having held the Class B shares for two and a half years, and two years
later decide to redeem the shares of Institutional Fund for cash. At the time of
this redemption, the 2% CDSC that would have been due had the Class B shares of
the National Portfolio been redeemed for cash rather than exchanged for shares
of Institutional Fund will be payable. If, instead of such redemption the
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<PAGE> 97
shareholder exchanged such shares for Class B shares of a fund which the
shareholder continued to hold for an additional one and a half years, any
subsequent redemption will not incur a CDSC.
Before effecting an exchange, shareholders of the Fund should obtain a
currently effective prospectus of the fund into which the exchange is to be
made. Exercise of the Exchange Privilege is treated as a sale for Federal income
tax purposes and, depending on the circumstances, a short- or long-term capital
gain or loss may be realized. In addition, a shareholder exchanging shares of
any of the funds may be subject to a backup withholding tax unless such
shareholder certifies under penalty of perjury that the taxpayer identification
number on file with any such fund is correct and that such shareholder is not
otherwise subject to backup withholding. See "Dividends, Distributions and
Taxes" above.
To exercise the Exchange Privilege, shareholders should contact their
listed dealer, who will advise the Fund of the exchange, or the shareholder may
write to the Transfer Agent requesting that the exchange be effected. Such
letter must be signed exactly as the account is registered with signature(s)
guaranteed by "eligible guarantor institution" (including, for example, Merrill
Lynch branch offices and certain other financial institutions) as such is
defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended,
the existence and validity of which may be verified by the transfer agent
through the use of industry publications. Shareholders of the Fund, and
shareholders of the other funds described above with shares for which
certificates have not been issued may exercise the Exchange Privilege by wire
through their securities dealers. The Fund reserves the right to require a
properly completed Exchange Application. These funds may suspend the continuous
offering of their shares to the public at any time and may thereafter resume
such offering from time to time.
The Exchange Privilege may be modified or terminated at any time on 60
days' notice. The Fund reserves the right to limit the number of times an
investor may exercise the Exchange Privilege. The exchange privilege is
available only to U.S. shareholders in states where the exchange legally may be
made.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data, as well as yield and tax equivalent yield, in
advertisements or information furnished to present or prospective shareholders.
Total return, yield, and tax equivalent yield figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return, yield and tax equivalent yield are determined
separately for Class A, Class B, Class C and Class D shares, in accordance with
formulas specified by the Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A and Class D
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period in the case of Class B and Class C
shares.
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<PAGE> 98
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that, (1) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted (2)
the maximum applicable sales charges will not be included with respect to annual
or annualized rates of return calculations. Aside from the impact on the
performance data calculation of including or excluding the maximum applicable
sales charges, actual annual or annualized total return data generally will be
lower than average annual total return data since the average rates of return
reflect compounding of return. Aggregate total return data generally will be
higher than average annual total return data since the aggregate rates of return
reflect compounding over a longer period of time.
Set forth below is total return information for each class of shares of
each Portfolio for the periods indicated.
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<TABLE>
<CAPTION>
EXPRESSED AS A PERCENTAGE BASED ON A REDEEMABLE VALUE OF A HYPOTHETICAL
$1,000 INVESTMENT AT THE END OF THE
HYPOTHETICAL $1,000 INVESTMENT PERIOD
-------------------------------------- --------------------------------------
LIMITED LIMITED
INSURED NATIONAL MATURITY INSURED NATIONAL MATURITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
One Year Ended June 30, 1997
Class A....................... 3.41% 4.49% 3.35% $ 1,034.10 $ 1,044.90 $ 1,033.50
Class B....................... 2.78 3.92 3.13 1,027.80 1,039.20 1,031.30
Class C....................... 5.86 6.97 3.11 1,058.60 1,069.70 1,031.10
Class D....................... 3.16 4.23 3.35 1,031.60 1,042.30 1,033.50
Five Years Ended June 30, 1997
Class A....................... 5.67% 6.13% 3.84% $ 1,317.80 $ 1,346.70 $ 1,207.10
Class B....................... 5.71 6.20 -- 1,320.30 -- --
Ten Years Ended June 30, 1997
Class A....................... 7.42% 7.57% 4.94% $ 2,045.30 $ 2,074.90 $ 1,620.10
Class B 10/21/88-6/30/97...... 6.86 7.08 -- 1,780.60 1,811.90 --
Class B 11/02/92-6/30/97...... -- -- 3.63 -- -- 1,180.50
Inception (October 21, 1994) to
June 30, 1997
Class C....................... 7.57% 8.19% 3.95% $ 1,217.10 $ 1,235.80 $ 1,109.70
Class D....................... 6.55 7.19 3.96 1,186.10 1,205.30 1,110.10
</TABLE>
32
<PAGE> 99
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
<TABLE>
<CAPTION>
LIMITED LIMITED
INSURED NATIONAL MATURITY INSURED NATIONAL MATURITY
YEAR ENDED JUNE 30, PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- -------------------------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
1997
(Class A)..................... 7.72% 8.84% 4.40% $1,077.20 $1,088.50 $1,044.00
(Class B)..................... 6.78 7.92 4.13 1,067.80 1,079.20 1,041.30
(Class C)..................... 6.86 7.97 4.11 1,068.60 1,079.70 1,041.10
(Class D)..................... 7.46 8.57 4.40 1,074.60 1,085.70 1,044.00
1996
(Class A)..................... 5.51 6.98 3.75 1,055.10 1,069.80 1,037.50
(Class B)..................... 4.71 6.17 3.37 1,047.10 1,061.70 1,033.70
(Class C)..................... 4.65 6.01 2.97 1,046.50 1,060.10 1,029.70
(Class D)..................... 5.25 6.71 3.55 1,052.50 1,067.10 1,035.50
1995
(Class A)..................... 8.60 7.89 4.53 1,086.00 1,078.90 1,045.30
(Class B)..................... 7.91 7.28 4.14 1,079.10 1,072.80 1,041.40
(Class C)**................... 8.83 7.97 3.52 1,088.30 1,079.70 1,035.20
(Class D)**................... 9.24 8.37 3.73 1,092.40 1,083.70 1,037.30
1994
(Class A)..................... (1.08) (0.47) 2.30 989.20 995.30 1,023.00
(Class B)..................... (1.81) (1.39) 1.98 981.90 986.10 1,019.80
1993
(Class A)..................... 12.41 12.19 5.28 1,124.10 1,121.90 1,052.80
(Class B)*.................... 11.44 11.45 3.26 1,114.40 1,114.50 1,032.60
1992
(Class A)..................... 12.11 13.09 6.93 1,121.10 1,130.90 1,069.30
(Class B)..................... 11.27 12.25 -- 1,112.70 1,122.50 --
1991
(Class A)..................... 8.84 7.94 6.45 1,088.40 1,079.40 1,064.50
(Class B) 8.02.... 7.14 -- 1,080.20 1,071.40 --
1990
(Class A)..................... 5.76 5.53 6.16 1,057.60 1,055.30 1,061.60
(Class B) 4.98.... 4.74 -- 1,049.80 1,047.40 --
1989
(Class A)..................... 11.62 11.89 5.96 1,116.20 1,118.90 1,059.60
(Class B)(10/21/88-6/30/89)... 6.88.... 6.48 -- 1,068.80 1,064.80 --
1988............................ 7.75 6.89 4.83 1,077.50 1,068.90 1,048.30
1987............................ 6.94 7.99 4.99 1,069.40 1,079.90 1,049.90
1986............................ 15.62 17.09 6.50 1,156.20 1,170.90 1,065.00
1985............................ 22.21 22.36 8.72 1,222.10 1,223.60 1,087.20
1984............................ 3.00 4.44 5.58 1,030.00 1,044.40 1,055.80
1983............................ 31.60 32.66 8.59 1,316.00 1,326.60 1,085.90
1982............................ (.33) 2.73 7.96 996.70 1,027.30 1,079.60
1981............................ (10.27) (2.72) 4.55 897.30 972.80 1,045.50
1980............................ (5.88) 4.21 5.91 941.20 1,042.10 1,059.10
</TABLE>
- ---------------
* November 2, 1992 to June 30, 1993 for Limited Maturity Portfolio.
** October 21, 1994 (commencement of operations) to June 30, 1995 for Class C
and Class D Shares.
33
<PAGE> 100
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<TABLE>
<CAPTION>
LIMITED LIMITED
INSURED NATIONAL MATURITY INSURED NATIONAL MATURITY
YEAR ENDED JUNE 30, PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------- ------- -------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
From Inception to June
30, 1997**
Class A................ 260.63% 363.16% 169.91% $3,606.30 $4,631.60 $2,699.10
Class B................ 78.06 81.19 18.05 1,780.60 1,811.90 1,180.50
Class C................ 21.71 23.58 10.97 1,217.10 1,235.80 1,109.70
Class D................ 18.61 20.53 11.01 1,186.10 1,205.30 1,110.10
</TABLE>
- ---------------
** Commencement of operations is November 2, 1979 for Class A shares of National
Portfolio and shares of Limited Maturity Portfolio, October 21, 1977 for
Class A shares of Insured Portfolio, and October 21, 1988 for Class B shares
of National Portfolio and Insured Portfolio, and November 2, 1992 for Class B
shares of Limited Maturity Portfolio. Commencement of operations is October
21, 1994 for Class C and Class D shares of each Portfolio.
In order to reflect the reduced sales charges applicable to certain
investors the performance data in advertisements distributed to investors whose
purchases are subject to reduced sales load, in the case of Class A or Class D
shares, or waiver of the contingent deferred sales charge in the case of the
Class B and Class C shares, may take into account the reduced, and not the
maximum, sales charge or may not take into account the contingent deferred sales
charge and therefore may reflect greater total return since, due to the reduced
sales charge, a lower amount of expenses is deducted.
The Fund's total return may be expressed either as a percentage or as a
dollar amount in order to illustrate such total return on a hypothetical
investment in the Fund at the beginning of each specified period.
Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield of each security earned during the period by
(b) the average daily number of shares outstanding during the period that were
entitled to receive dividends multiplied by the maximum offering price per share
on the last day of the period. Tax equivalent yield quotations will be computed
by dividing (a) the part of the Fund's yield that is tax-exempt by (b) one minus
a stated tax rate and adding the result to that part, if any, of the Fund's
yield that is not tax-exempt.
The following table sets forth the yield for the 30-day period ending June
30, 1997 for each class of each Portfolio.
<TABLE>
<CAPTION>
FOR THE PERIOD ENDING JUNE 30, 1997
-----------------------------------------------------------------------
YIELD
-----------------------------------------------------------------------
INSURED PORTFOLIO NATIONAL PORTFOLIO LIMITED MATURITY PORTFOLIO
----------------- ------------------ --------------------------
<S> <C> <C> <C>
Class A............... 4.91% 4.92% 3.90%
Class B............... 4.36% 4.37% 3.58%
Class C............... 4.30% 4.32% 3.56%
Class D............... 4.66% 4.68% 3.80%
</TABLE>
34
<PAGE> 101
The tax equivalent yield for the same period (based on a tax rate of 28%)
was:
<TABLE>
<CAPTION>
INSURED PORTFOLIO NATIONAL PORTFOLIO LIMITED MATURITY PORTFOLIO
----------------- ------------------ --------------------------
<S> <C> <C> <C>
Class A............... 6.82% 6.83% 5.42%
Class B............... 6.06% 6.07% 4.97%
Class C............... 5.97% 6.00% 4.94%
Class D............... 6.47% 6.50% 5.28%
</TABLE>
Total return, yield and tax equivalent yield figures are based on each
Portfolio's historical performance and are not intended to indicate future
performance. Each Portfolio's total return, yield and tax equivalent yield will
vary depending on market conditions, the securities comprising the Portfolio,
the Portfolio's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in a
Portfolio will fluctuate and an investor's shares, when redeemed, may be worth
more or less than their original cost.
ADDITIONAL INFORMATION
ORGANIZATION OF THE FUND
The Fund, a Maryland corporation, is a diversified, open-end management
investment company that commenced operations on October 21, 1977. Prior to
September 21, 1979, the Fund consisted solely of the Insured Portfolio.
Currently, the Fund is comprised of three separate Portfolios: Insured
Portfolio, National Portfolio and Limited Maturity Portfolio.
The authorized capital stock of the Fund consists of 3,850,000,000 shares
of Common Stock, divided into three series, each of which is divided into four
classes, having a par value of $0.10 per share. The shares
of Insured Portfolio Series Common Stock (500,000,000 Class A, 375,000,000 Class
B shares, 375,000,000 Class C shares, 500,000,000 Class D shares authorized),
National Portfolio Series Common Stock (375,000,000 Class A, 375,000,000 Class B
shares, 375,000,000 Class C shares, 375,000,000 Class D shares authorized),
which does business under the name "National Portfolio," and Limited Maturity
Portfolio Series Common Stock (150,000,000 Class A, 150,000,000 Class B shares,
150,000,000 Class C shares, 150,000,000 Class D shares authorized) are divided
into four classes, designated Class A, Class B, Class C and Class D Common
Stock. Each Class A, Class B, Class C and Class D share of common stock of each
of the Portfolios represents an interest in the same assets of such Portfolio
and are identical in all respects to the shares of the other classes except that
the Class B, Class C and Class D shares bear certain expenses related to the
account maintenance associated with such shares, and Class B and Class C shares
bear certain expenses related to the distribution of such shares. Each Class of
shares of a Portfolio has exclusive voting rights with respect to matters
relating to account maintenance services and distribution expenditures relative
to that Portfolio, as applicable (except that Class B shareholders have certain
voting rights with respect to the Class D Distribution Plan). Only shares of
each respective Portfolio are entitled to vote on matters concerning only that
Portfolio.
Each issued and outstanding share is entitled to one vote and to
participate equally in dividends and distributions declared by the respective
Portfolios and in net assets of the respective Portfolios upon liquidation or
dissolution remaining after satisfaction of outstanding liabilities, except, as
noted above, the Class B,
35
<PAGE> 102
Class C and Class D shares of the Portfolios bear certain expenses related to
the distribution of such shares. The shares of each Portfolio, when issued, will
be fully paid and nonassessable, have no preference, pre-emptive, conversion,
exchange or similar rights. Shares have the conversion rights described in the
Prospectus. Holders of shares of any Portfolio are entitled to redeem their
shares as set forth under "Redemption of Shares." Shares do not have cumulative
voting rights, and the holders of more than 50% of the shares of the Fund voting
for the election of Directors can elect all of the Directors of the Fund if they
choose to do so and in such event the holders of the remaining shares would not
be able to elect any Directors. Stock certificates will be issued by the
Transfer Agent only on specific request. Certificates for fractional shares are
not issued in any case. Shareholders are entitled to redeem their shares as set
forth under "Redemption of Shares."
DESCRIPTION OF TEMPORARY INVESTMENTS
The short-term money market securities in which the Portfolios may invest
as temporary investments consist of U.S. Government securities, U.S. Government
agency securities, domestic bank certificates of deposit and bankers'
acceptances, short-term corporate debt securities such as commercial paper, and
repurchase agreements. The money market securities must have a stated maturity
not in excess of one year from the date of purchase. U.S. Government securities
consist of various types of marketable securities issued by or guaranteed as to
principal and interest by the U.S. Government and supported by the full faith
and credit of the U.S. Treasury. U.S. Government agency securities consist of
debt securities issued by government sponsored enterprises, federal agencies and
international institutions. Such securities are not direct obligations of the
Treasury but involve government sponsorship or guarantees by government agencies
or enterprises. The Fund has established the following standards with respect to
money market securities in which the Portfolios invest. Commercial paper
investments at the time of purchase must be rated "A" by Standard & Poor's
Ratings Services ("S&P") or "Prime" by Moody's Investors Service, Inc.
("Moody's") or, if not rated, issued by companies having an outstanding debt
issue rated at least "A" by S&P or Moody's. Investments in corporate bonds and
debentures (which must have maturities at the date of purchase of one year or
less) must be rated at the time of purchase at least "A" by S&P or by Moody's.
The Portfolios may not invest in any securities issued by a commercial bank or a
savings and loan association unless the bank or association is organized and
operating in the United States, has total assets of at least one billion dollars
and is a member of the Federal Deposit Insurance Corporation.
INSURANCE ON PORTFOLIO SECURITIES
Set forth below is further information with respect to the Mutual Fund
Insurance Policies (the "Policies") which the Fund has obtained from AMBAC
Indemnity Corporation ("AMBAC"), Municipal Bond Investors Assurance Corporation
("MBIA") and Financial Security Assurance Inc. ("FSA"), with respect to Insured
Municipal Bonds held by the Insured Portfolio (see "Investment Policies of the
Portfolios -- Insured Portfolio" in the Prospectus). During the fiscal year
ended June 30, 1997, the premium for the Policies aggregated $29,338 or
approximately 0.001% of the average net assets of the Insured Portfolio.
In determining eligibility for insurance, AMBAC, MBIA and FSA have applied
their own standards, which correspond generally to the standards they normally
use in establishing the insurability of new issues of Municipal Bonds and which
are not necessarily the criteria which would be used in regard to the purchase
of Municipal Bonds by the Insured Portfolio. The Policies do not insure (i)
municipal securities ineligible for
36
<PAGE> 103
insurance, or (ii) municipal securities that are no longer owned by the Insured
Portfolio. In addition, the AMBAC policy does not insure municipal obligations
which were insured as to the payment of principal and interest at the time of
their issuance by AMBAC.
The Policies do not guarantee the market value of the Insured Municipal
Bonds or the value of the shares of the Insured Portfolio. 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 claims paying
ability of any such insurer deteriorates, neither AMBAC, MBIA nor FSA has any
obligation to insure any issue held by the Insured Portfolio which is adversely
affected by either of the above described events. The AMBAC policy provides for
an annual policy period, which is renewable by the Fund for successive annual
periods for so long as the Fund is in compliance with the terms of the AMBAC
policy. In addition to the payment of premiums, the Policies require that the
Insured Portfolio notify AMBAC and MBIA as to all Municipal Bonds in the Insured
Portfolio and permit AMBAC and MBIA to audit records. The insurance premiums are
payable monthly by the Insured Portfolio in accordance with a premium schedule
which was furnished by AMBAC, MBIA and FSA at the time the Policies were issued.
Premiums are based upon the amounts covered and the composition of the
portfolio. AMBAC has reserved the right to change the premium schedule for any
renewal policy period as to any municipal securities purchased by the Insured
Portfolio during such renewal period. The FSA policy and the MBIA policy both
provide that the premium rate for subsequent purchases by the Insured Portfolio
of the same obligations will be determined by FSA or MBIA as of the date of such
purchases.
AMBAC has received a letter ruling from the Internal Revenue Service, which
holds in effect that insurance proceeds representing maturing interest on
defaulted municipal obligations paid by AMBAC to municipal bond funds
substantially similar to the Insured Portfolio, under policy provisions
substantially identical to the policy described herein, will be excludable from
federal gross income under Section 103(a) of the Internal Revenue Code.
AMBAC insures the portfolio of the Insured Portfolio and the prompt payment
of the interest and principal of new issues of Municipal Bonds and Municipal
Bond portfolios of individuals, banks, trust companies, corporations, insurance
companies and units trusts. As of June 30, 1997, the admitted assets of AMBAC
were approximately $2,735.7 million (unaudited) with a qualified capital of
approximately $1,547.7 million (unaudited). Qualified capital consists of the
statutory contingency reserve and policyholders' surplus of the insurance
company.
FSA insures the prompt payment of interest and principal of new issues of
Municipal Bonds and Municipal Bond portfolios of individuals, banks, trust
companies, corporations, insurance companies and unit trusts. As of June 30,
1997, the total admitted assets (unaudited) of FSA were approximately $1,269.9
million with a total capital and surplus (unaudited) of approximately $711.2
million as reported to the Insurance Department of the State of New York.
MBIA insures the prompt payment of interest and principal of new issues of
Municipal Bonds and Municipal Bond portfolios of individuals, banks, trust
companies, corporations, insurance companies and unit trusts. As of June 30,
1997, the total admitted assets of MBIA were approximately $4,823.7 million
(unaudited) with total capital and surplus of approximately $2,552.6 million
(unaudited).
AMBAC has entered into reinsurance agreements with a number of unaffiliated
reinsurers, relating to the municipal bond insurance programs of AMBAC including
the insurance obtained by the Fund for the portfolio of the Insured Portfolio.
37
<PAGE> 104
The contracts of insurance relating to the Insured Portfolio and the
negotiations in respect thereof represent the only significant relationship
between AMBAC, MBIA and FSA and the Fund. Otherwise neither AMBAC or any
associate thereof, nor MBIA or any associate thereof, nor FSA or any associate
thereof has any material business relationship, direct or indirect, with the
Fund.
AMBAC, MBIA and FSA are subject to regulation by the department of
insurance in each state in which they are qualified to do business. Such
regulation, however, is not a guarantee that any of AMBAC, MBIA or FSA will be
able to perform on its contractual insurance in the event a claim should be made
thereunder at some time in the future.
The information relating to AMBAC, MBIA and FSA set forth above, including
the financial information, has been furnished by such corporations. Financial
information with respect to AMBAC, MBIA and FSA appears in reports filed by
AMBAC, MBIA and FSA with state insurance regulatory authorities and is subject
to audit and review by such authorities. No representation is made herein as to
the accuracy or adequacy of such information with respect to AMBAC, MBIA or FSA
or as to the absence of material adverse changes in such information subsequent
to the date thereof.
DESCRIPTION OF FINANCIAL FUTURES CONTRACTS
Futures Contracts. 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 called for in the contract or, in some instances, to
make a cash settlement based upon the value of an instrument or an index of
values, at a specified future time for a specified price. Although the terms of
a contract call for actual delivery of the underlying financial instrument, or
for a cash settlement, in most cases the contracts are closed out before the
delivery date without the delivery taking place. The Fund intends to close out
its futures contracts prior to the delivery date of such contracts.
The Portfolios may sell futures contracts in anticipation of a decline in
value of their investments in Municipal Bonds. The loss associated with any such
decline could be reduced without employing futures as a hedge by selling
long-term securities and either reinvesting the proceeds in securities with
shorter maturities or by holding assets in cash. This strategy, however, entails
increased transaction costs in the form of brokerage commissions and dealer
spreads and will typically reduce the Portfolio's average yields as a result of
the shortening of maturities.
The purchase or sale of a futures contract differs from the purchase or
sale of a security in that the total cash value reflected by the futures
contract is not paid. Instead, an amount of cash or securities acceptable to the
Fund's futures commission merchant ("FCM") and the relevant contract market,
which varies but is generally about 5% or less of the contract amount, must be
deposited with the FCM. This amount is known as "initial margin," and represents
a "good faith" deposit assuring the performance of both the purchaser and the
seller under the futures contract. Subsequent payments to and from the FCM,
known as "maintenance" or "variation margin," are required to be made on a daily
basis as the price of the futures contract fluctuates, making the long or short
position in the futures contract more or less valuable, a process known as
"marking to the market." Prior to the settlement date of the futures contract,
the position may be closed out by taking an opposite position which will operate
to terminate the position in the futures contract. A final determination of
variation margin is then made, additional cash is required to be paid to or
released by the FCM, and the
38
<PAGE> 105
purchaser realizes a loss or gain. In addition, a commission is paid on each
completed purchase and sale transaction.
The sale of financial futures contracts provides an alternative means of
hedging a Portfolio against declines in the value of its investments in
Municipal Bonds. As such values decline, the value of the Portfolio's positions
in the futures contracts are expected to increase, thus offsetting all or a
portion of the depreciation in the market value of the Portfolios' fixed income
investments which are being hedged. While the Portfolios will incur commission
expenses in establishing and closing out futures positions, commissions on
futures transactions may be significantly lower than transaction costs incurred
in the purchase and sale of fixed income securities. In addition, the ability of
the Portfolios to trade in the standardized contracts available in the futures
market may offer a more effective hedging strategy than a program to reduce the
average maturity of portfolio securities, due to the unique and varied credit
and technical characteristics of the municipal debt instruments available to the
Portfolios. Employing futures as a hedge may also permit the Portfolios to
assume a hedging posture without reducing the yield on their investments beyond
any amounts required to engage in futures trading.
The Portfolios engage in the purchase and sale of future contracts on an
index of municipal securities. These instruments provide for the purchase or
sale of a hypothetical portfolio of municipal bonds at a fixed price in a stated
delivery month. Unlike most other futures contracts, however, a municipal bond
index futures contract does not require actual delivery of securities but
results in a cash settlement based upon the difference in value of the index
between the time the contract was entered into and the time it is liquidated.
The municipal bond index underlying the futures contracts traded by the
Portfolios is The Bond Buyer Municipal Bond Index, developed by The Bond Buyer
and the Chicago Board of Trade ("CBT"), the contract market on which the futures
contracts are traded. As currently structured, the index is comprised of 40 tax-
exempt term municipal revenue and general obligation bonds. Each bond included
in the index must be rated either A- or higher by S&P or A or higher by Moody's
and must have a remaining maturity of 19 years or more. Twice a month new issues
satisfying the eligibility requirements are added to, and an equal number of old
issues will be deleted from, the index. The value of the index is computed daily
according to a formula based upon the price of each bond in the Index, as
evaluated by four dealer-to-dealers brokers.
The Portfolios may also purchase and sell futures contracts on U.S.
Treasury bills, notes and bonds for the same types of hedging purposes. Such
futures contracts provide for delivery of the underlying security at a specified
future time for a fixed price, and the value of the futures contract generally
fluctuates with movements in interest rates.
The municipal bond index futures contract, futures contracts on U.S.
Treasury securities and options on such futures contracts are traded on the CBT
and the Chicago Mercantile Exchange, which, like other contract markets, assures
the performance of the parties to each futures contract through a clearing
corporation, a nonprofit organization managed by the exchange membership, which
is also responsible for handling daily accounting of deposits or withdrawals of
margin.
The Portfolios may also purchase financial futures contracts when they are
not fully invested in municipal bonds in anticipation of an increase in the cost
of securities they intend to purchase. As such securities are purchased, an
equivalent amount of futures contracts will be closed out. In a substantial
majority of these transactions, the Portfolios will purchase municipal bonds
upon termination of the futures contracts. Due to changing market conditions and
interest rate forecasts, however, a futures position may be terminated without
39
<PAGE> 106
a corresponding purchase of securities. Nevertheless, all purchases of futures
contracts by the Portfolios will be subject to certain restrictions, described
below.
Options on Futures Contracts. An option on a futures contract provides the
purchaser with the right, but not the obligation, to enter into a long position
in the underlying futures contract (i.e., purchase the futures contract), in the
case of a "call" option, or to enter into a short position (i.e., sell the
futures contract), in the case of a "put" option, for a fixed price (the
"exercise" or "strike" price) up to a stated expiration date. The option is
purchased for a nonrefundable fee, known as the "premium." Upon exercise of the
option, the contract market clearing house assigns each party the appropriate
position in the underlying futures contract. In the event of exercise,
therefore, the parties are subject to all of the risks of futures trading, such
as payment of initial and variation margin. In addition, the seller, or
"writer," of the option is subject to margin requirements on the option
position. Options on futures contracts are traded on the same contract markets
as the underlying futures contracts.
The Portfolios may purchase options on futures contracts for the same types
of hedging purposes described above in connection with futures contracts. For
example, in order to protect against an anticipated decline in the value of
securities it holds, a Portfolio could purchase put options on futures
contracts, instead of selling the underlying futures contracts. Conversely, in
order to protect against the adverse effects of anticipated increases in the
cost of securities to be acquired, a Portfolio could purchase call options on
futures contracts, instead of purchasing the underlying futures contracts. The
Portfolios generally will sell options on futures contracts only to close out an
existing position.
The Portfolios will not engage in transactions in such instruments unless
and until the Investment Adviser determines that market conditions and the
circumstances of the Portfolios warrant such trading. To the extent the
Portfolios engage in the purchase and sale of futures contracts or options
thereon, they will do so only at a level that reflects the Investment Adviser's
view of the hedging needs of the Portfolios, the liquidity of the market for
futures contracts and the anticipated correlation between movements in the value
of the futures or option contract and the value of securities held by the
Portfolios.
Restrictions on the Use of Futures Contracts and Options on Futures
Contracts. Under regulations of the Commodity Futures Trading Commission
("CFTC"), the futures trading activities described herein will not result in the
Portfolios' being deemed to be "commodity pools," as defined under such
regulations, provided that certain trading restrictions are adhered to. In
particular, CFTC regulations require that a notice of eligibility be filed and
that all futures and option positions entered into by the Portfolios qualify as
bona fide hedge transactions, as defined under CFTC regulations, or that any
nonqualifying positions be limited so that the sum of the amount of initial
margin deposits and premiums paid on such positions would not exceed 5% of the
market value of the respective Portfolio's net assets.
When either Portfolio purchases a futures contract, it will maintain an
amount of cash, cash equivalents or commercial paper or liquid securities in a
segregated account with the Fund's custodian, so that the amount so segregated
plus the amount of initial margin held in the account of its broker equals the
market value of the futures contract, thereby ensuring that the use of such
futures is unleveraged.
Risk Factors in Transactions in Futures Contracts and Options Thereon. The
particular municipal bonds comprising the index underlying the municipal bond
index futures contract may vary from the bonds held by the Portfolios. In
addition, the securities underlying futures contracts on U.S. Treasury
securities will not be the same as securities held by the Portfolios. As a
result, the Portfolios' ability effectively to hedge all or
40
<PAGE> 107
a portion of the value of their municipal bonds through the use of futures
contracts will depend in part on the degree to which price movements in the
index underlying the municipal bond index futures contract, or the U.S. Treasury
securities underlying other futures contracts traded, correlate with price
movements of the Municipal Bonds held by the Portfolios.
For example, where prices of securities in the Portfolios do not move in
the same direction or to the same extent as the values of the securities or
index underlying a futures contract, the trading of such futures contracts may
not effectively hedge the Portfolios' investments and may result in trading
losses. The correlation may be affected by disparities in the average maturity,
ratings, geographical mix or structure of the Portfolios' investments as
compared to those comprising the index, and general economic or political
factors. In addition, the correlation between movements in the value of the
index underlying a futures contract may be subject to change over time, as
additions to and deletions from the index alter its structure. In the case of
futures contracts on U.S. Treasury securities and options thereon, the
anticipated correlation of price movements between the U.S. Treasury securities
underlying the futures or options and Municipal Bonds may be adversely affected
by economic, political, legislative or other developments that have a disparate
impact on the respective markets for such securities. In the event that the
Investment Adviser determines to enter into transactions in financial futures
contracts other than the municipal bond index futures contract or futures on
U.S. Treasury securities, the risk of imperfect correlation between movements in
the prices of such futures contracts and the prices of Municipal Bonds held by
the Portfolios may be greater.
The trading of futures contracts on an index also entails the risk of
imperfect correlation between movements in the price of the futures contract and
the value of the underlying index. The anticipated spread between the prices may
be affected due to differences in the nature of the markets, such as margin
requirements, liquidity and the participation of speculators in the futures
markets. The risk of imperfect correlation, however, generally diminishes as the
delivery month specified in the futures contract approaches.
Prior to exercise or expiration, and absent delivery, a position in futures
contracts or options thereon may be terminated only by entering into a closing
purchase or sale transaction on the relevant contract market. A Portfolio will
enter into a futures or option position only if there appears to be a liquid
market therefor, although there can be no assurance that such a liquid market
will exist for any particular contract at any specific time. Thus, it may not be
economically practicable, or otherwise possible, to close out a position once it
has been established. Under such circumstances, a portfolio could be required to
make continuing daily cash payments of variation margin in the event of adverse
price movements. In such situations, if the Portfolio has insufficient cash, it
may be required to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. In addition, the
Portfolio may be required to perform under the terms of the futures or option
contracts it holds. The inability to close out futures or options positions also
could have an adverse impact on the Portfolio's ability effectively to hedge its
portfolio.
When a Portfolio purchases an option on a futures contract, its risk is
limited to the amount of the premium, plus related transaction costs, although
this entire amount may be lost. In addition, in order to profit from the
purchase of an option on a futures contract, a Portfolio may be required to
exercise the option and liquidate the underlying futures contract, subject to
the availability of a liquid market. The trading of options on futures contracts
also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option, although the
risk of imperfect correlation generally tends to diminish as the maturity date
of the futures contract or expiration date of the option approaches.
41
<PAGE> 108
"Position Limits" are generally imposed on the maximum number of contracts
which any person may hold or control at a given time. A contract market may
order the liquidation of positions found to be in violation of these limits and
it may impose other sanctions or restrictions. The Investment Adviser does not
believe that position limits will have any adverse impact on the portfolio
strategies for hedging a Portfolio's investments.
Further, the trading of futures contracts is subject to the risk of the
insolvency of a brokerage firm or the relevant exchange or clearing corporation,
which could make it difficult or impossible to liquidate existing positions or
to recover margin or other payments due.
In addition to the risks of imperfect correlation and lack of a liquid
secondary market for such instruments, transactions in futures contracts involve
risks related to leveraging such that a change in the price of a futures
contract could result in substantial gains or losses. The potential for
incorrect forecasts of the direction and extent of interest rate movements
within a given time frame also involves the risk of loss in the event such
forecasts are inaccurate.
COMPUTATION OF OFFERING PRICE PER SHARE
The offering price for Class A , Class B, Class C and Class D shares of the
Insured, National and Limited Maturity, based on the value of each Portfolio's
net asset and the number of shares outstanding as of June 30, 1997, is
calculated as set forth below.
INSURED PORTFOLIO:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net Assets.................. $1,441,784,905 $ 560,105,263 $ 11,922,182 $ 38,421,750
============== ============ =========== ===========
Number of Shares
Outstanding............... 178,876,402 69,537,481 1,479,783 4,767,006
============== ============ =========== ===========
Net Asset Value Per Share
(net assets divided by
number of shares
outstanding) ............. $ 8.06 $ 8.05 $ 8.06 $ 8.06
Sales Charge (Class A and
Class D shares: 4.00% of
offering price (4.17% of
net asset value per
share))*.................. .34 ** ** .34
-------------- ------------ ----------- -----------
Offering Price.............. $ 8.40 $ 8.05 $ 8.06 $ 8.40
============== ============ =========== ===========
</TABLE>
(See footnotes on next page)
42
<PAGE> 109
NATIONAL PORTFOLIO:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net Assets..................... $ 983,649,868 $ 415,103,109 $ 28,095,834 $ 51,038,145
============== ============ =========== ===========
Number of Shares Outstanding... 94,784,980 40,014,114 2,706,856 4,914,399
============== ============ =========== ===========
Net Asset Value Per Share (net
assets divided by number of
shares outstanding) ......... $ 10.38 $ 10.37 $ 10.38 $ 10.39
Sales Charge (Class A and Class
D shares: 4.00% of offering
price (4.17% of net asset
value per share))*........... .43 ** ** .43
-------------- ------------ ----------- -----------
Offering Price................. $ 10.81 $ 10.37 $ 10.38 $ 10.82
============== ============ =========== ===========
</TABLE>
LIMITED MATURITY PORTFOLIO:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net Assets..................... $ 343,640,605 $ 54,275,249 $ 107,551 $ 20,383,393
============== ============ =========== ===========
Number of Shares Outstanding... 34,594,470 5,462,680 10,849 2,050,790
============== ============ =========== ===========
Net Asset Value Per Share (net
assets divided by number of
shares outstanding) ......... $ 9.93 $ 9.94 $ 9.91 9.94
Sales Charge (Class A and Class
D shares: 1.00% of offering
price (1.01% of the net asset
value per share))*........... .10 ** ** .10
-------------- ------------ ----------- -----------
Offering Price................. $ 10.03 $ 9.94 $ 9.91 $ 10.04
============== ============ =========== ===========
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.
** Class B and Class C shares are not subject to an initial sales charge but may
be subject to a CDSC on redemption of shares within four years of purchase
(for Class B shares of Insured Portfolio and National Portfolio) or within
one year of purchase (for Class B shares of Limited Maturity Portfolio and
Class C shares). See "Purchase of Shares -- Deferred Sales Charge
Alternatives -- Class B and Class C Shares" in the Prospectus and "Redemption
of Shares -- Deferred Sales Charge -- Class B and Class C Shares" herein.
43
<PAGE> 110
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Municipal Bond Fund, Inc.:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of the Insured, National and Limited Maturity
Portfolios of Merrill Lynch Municipal Bond Fund, Inc. as of June 30, 1997, the
related statements of operations for the year then ended and changes in net
assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years in the five-year period then ended.
These financial statements and the financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at June 30,
1997 by correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Insured,
National and Limited Maturity Portfolios of Merrill Lynch Municipal Bond Fund,
Inc. as of June 30, 1997, the results of their operations, the changes in their
net assets, and the financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
August 15, 1997
44
<PAGE> 111
<TABLE>
<CAPTION>
Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997
SCHEDULE OF INVESTMENTS (in Thousands)
Municipal Bonds Insured Portfolio
------------------------------------------------------------------------------------------------------
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <S> <S> <C> <S> <C>
Alabama--0.2% AAA Aaa $ 1,625 Alabama Water Pollution Control Authority, Revolving
Fund Loan, Series A, 6.75% due 8/15/2017 (b) $ 1,789
AAA Aaa 1,250 Mobile, Alabama, GO, Refunding and Capital Improvement
Bonds, 10.875% due 11/01/2007 (c) 1,697
Alaska--0.8% Kenai Peninsula Borough, Alaska, GO (b):
AAA Aaa 6,450 8.40% due 1/01/2000 7,059
AAA Aaa 8,460 8.40% due 1/01/2001 9,526
Arizona--1.5% AAA Aaa 6,750 Arizona State Municipal Financing Program, COP,
Series 34, 7.25% due 8/01/2009 (g) 8,091
AAA Aaa 3,800 Maricopa County, Arizona, IDA, Health Facilities Revenue
Bonds (Saint Joseph's Care Center Project), Series A, 7.75%
due 7/01/2020 (e) 4,170
AAA Aaa 4,000 Maricopa County, Arizona, IDA, Hospital Facility Revenue
Refunding Bonds (Samaritan Health Services), Series A, 7% due
12/01/2013 (e) 4,336
AAA Aaa 7,000 Maricopa County, Arizona, Unified School District No.097
(Deer Valley Project), UT, 1986 Series E, 10% due 7/01/2000 (h) 8,109
AAA Aaa 6,000 Mesa, Arizona, Utility System Revenue Bonds, 5.375%
due 7/01/2017 (h) 5,975
California--1.6% AAA Aaa 5,245 Los Angeles, California, Metropolitan Transportation
Authority, Revenue Refunding Bonds (General Union Station),
Series A, 5.25% due 7/01/2013 (i) 5,217
AAA Aaa 5,000 Los Angeles County, California, Public Works Finance
Authority (Lease Revenue Multiple Capital Facility
Project), Series V-B, 5.125% due 12/01/2017 (b) 4,754
AAA Aaa 8,800 Northern California Power Agency, Multiple Capital Facilities
Revenue Bonds, RIB, 8.837% due 9/02/2025 (d) (e) 10,296
AAA Aaa 5,900 Oakland, California, Redevelopment Agency, Refunding Bonds,
INFLOS, 7.966% due 9/01/2019 (d) (e) 6,114
AAA Aaa 5,000 University of California Revenue Bonds (Multiple Purpose
Projects), Series D, 6.375% due 9/01/2024 (e) 5,399
Colorado--0.9% AAA Aaa 590 La Plata County, Colorado, School District Number 9, GO
(R Durango), UT, 6.60% due 11/01/2017 (h) 643
A1+ VMIG1++ 2,000 Moffat County, Colorado, PCR, Refunding (Pacificorp
Projects), VRDN, 5.50% due 5/01/2013 (b) (f) 2,000
Municipal Subdistrict Northern Colorado, Water Conservancy
District, Revenue Refunding Bonds, Series F (b):
Aaa Aaa 4,470 6.15% due 12/01/2005 4,893
Aaa Aaa 4,250 6.25% due 12/01/2006 4,706
Aaa Aaa 5,055 6.35% due 12/01/2007 5,660
Delaware--0.2% AAA Aaa 3,750 Delaware State Health Facilities Authority, Crossover
Revenue Refunding Bonds (Medical Center of Delaware),
7% due 10/01/2015 (e) 4,004
Florida--3.9% Florida State Division, Board of Finance, Department of
General Services Revenue Bonds, Series 2000-A (b):
AAA Aaa 23,490 (Department of Enviromental Preservation),
5% due 7/01/2012 22,743
AAA Aaa 14,630 (Department of Enviromental Preservation),
5% due 7/01/2013 14,069
AAA Aaa 5,000 (Department of Natural Resource Preservation),
6.75% due 7/01/2013 5,423
AAA Aaa 1,000 Florida State Turnpike Authority, Turnpike Revenue Bonds,
Series A, 7.125% due 7/01/2001 (a) (b) 1,118
AAA Aaa 500 Jacksonville, Florida, Health Facilities Authority,
Hospital Revenue Refunding and Improvement Bonds
(Baptist Medical Center Project), 11.50% due 10/01/2012 (c) 819
AAA Aaa 10,000 Lee County, Florida, Hospital Board of Directors,
Hospital Revenue, INFLOS, 9.063% due 4/01/2020 (d) (e) 11,400
AAA Aaa 3,950 Orange County, Florida, HFA, Mortgage Revenue Refunding
Bonds, Series A, 7.60% due 1/01/2024 (h) (j) 4,191
AAA Aaa 5,790 Orange County, Florida, Health Facilities Authority
Revenue Bonds (Hospital--Orlando Regional Healthcare),
Series A, 6.25% due 10/01/2006 (e) 6,379
AAA Aaa 2,000 Port Saint Lucie, Florida, Special Assessment Revenue Bonds,
Assessment District No. 1, Phase II, 5.40% due 10/01/2016 (e) 1,979
AAA Aaa 4,900 Saint John's River, Florida, Water Management District,
Revenue Refunding Bonds (Land Acquisition), 5.125% due
7/01/2016 (i) 4,685
AAA Aaa 2,850 South Broward Hospital District, Florida, Hospital
Revenue Bonds, RIB, Series C, 9.034% due 5/01/2001 (a) (b) (d) 3,384
</TABLE>
45
<PAGE> 112
<TABLE>
<S> <S> <S> <C> <S> <C>
AAA Aaa 2,240 West Coast Regional Water Supply Authority, Florida,
Capital Improvement Revenue Bonds (Hillsborough County Project),
10.40% due 10/01/2010 (a) (b) 3,185
Georgia--2.2% A1+ VMIG1++ 6,200 Burke County, Georgia, Development Authority, PCR
(Oglethorpe Power Corporation), VRDN, Series A,
4.15% due 1/01/2016 (f) (h) 6,200
AAA Aaa 4,000 Chatam County, Georgia, School District, UT, 6.75%
due 8/01/2003 (a) (e) 4,526
AAA Aaa 20,000 Georgia Municipal Electric Authority, Power Revenue
Bonds, Series EE, 7% due 1/01/2025 (b) 24,293
AAA Aaa 9,000 Georgia Municipal Electric Authority, Special Obligation
Bonds (Fifth Crossover Series, Project One), 6.40% due
1/01/2013 (b) 10,007
Hawaii--3.7% Hawaii State Airport System Revenue Bonds:
AAA Aaa 21,795 AMT, 7.30% due 7/01/2020 (b) 23,591
AAA Aaa 23,200 AMT, Second Series, 7.50% due 7/01/2020 (h) 25,240
AAA Aaa 10,000 Refunding, Series 1993, 6.45% due 7/01/2013 (e) 10,909
AAA Aaa 5,000 Hawaii State Department of Budget and Finance, Special
Purpose Mortgage Revenue Bonds (Hawaiian Electric Company,
AMT, Series C, 7.375% due 12/01/2020 (e) 5,463
Hawaii State, GO (h):
AAA Aaa 2,920 Series CH, UT, 6% due 11/01/2005 3,146
AAA Aaa 2,000 Series CN, 5.25% due 3/01/2017 1,938
AAA Aaa 4,500 Hawaii State Harbor Capital Improvement Revenue
Bonds, AMT, 7% due 7/01/2017 (e) 4,833
Illinois--11.6% AAA Aaa 28,200 Chicago, Illinois, GO, Series A-1, 5.125% due
1/01/2025 (b) 26,257
AAA Aaa 48,835 Chicago, Illinois, Refunding, Series B, 5.125%
due 1/01/2025 (h) 45,406
AAA Aaa 24,000 Chicago, Illinois, Wastewater Transmission Revenue
Refunding Bonds, 5.125% due 1/01/2025 (h) 22,315
AAA Aaa 3,000 Chicago, Illinois, Water Revenue Bonds, 5% due 11/01/2015 (h) 2,818
AAA Aaa 7,000 Cleveland, Ohio, Public Power System, Revenue Refunding
Bonds (First Mortgage, Series 1), 5.25% due 11/15/2016 (e) 6,825
Illinois Health Facilities Authority Revenue Bonds:
AAA Aaa 3,250 (Elmhurst Memorial Hospital), 6.625% due 1/01/2022 (h) 3,498
AAA Aaa 2,000 (Methodist Health Project), RIB, 9.628% due 5/01/2021 (b) (d) 2,303
AAA Aaa 28,900 Refunding (Sinai Health System), 6% due 2/15/2024 (b) 29,397
AAA Aaa 10,000 (Rush Presbyterian-Saint Luke's Medical Center),
INFLOS, 9.615% due 10/01/2024 (d) (e) 11,550
Illinois State, GO, Refunding Bonds, UT (h):
AAA Aaa 5,000 5.125% due 12/01/2013 4,862
AAA Aaa 5,750 5.125% due 12/01/2016 5,461
AAA Aaa 4,520 Illinois State Sales Tax Revenue Bonds, Series W,
5% due 6/15/2016 (h) 4,266
</TABLE>
Portfolio
Abbreviations
To simplify the listings of
Merrill Lynch Municipal
Bond Fund, Inc.'s portfolio
holdings in the Schedule of
Investments, we have
abbreviated the names of
many of the securities
according to the list at right.
AMT Alternative Minimum Tax (subject to)
BAN Bond Anticipation Notes
COP Certificates of Participation
EDA Economic Development Authority
GAN Grant Anticipation Notes
GO General Obligation Bonds
HDA Housing Development Authority
HFA Housing Finance Agency
IDA Industrial Development Authority
IDR Industrial Development Revenue Bonds
INFLOS Inverse Floating Rate Municipal Bonds
IRS Inverse Rate Securities
LEVRRS Leveraged Reverse Rate Securities
M/F Multi-Family
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
RITR Residual Interest Tax Receipts
S/F Single-Family
TAN Tax Anticipation Notes
TRAN Tax Revenue Anticipation Notes
UT Unlimited Tax
VRDN Variable Rate Demand Notes
46
<PAGE> 113
<TABLE>
<CAPTION>
Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
Municipal Bonds Insured Portfolio
------------------------------------------------------------------------------------------------------
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <S> <S> <C> <S> <C>
Illinois Metropolitan Pier and Exposition Authority, Illinois,
(concluded) Dedicated State Tax Revenue Bonds (McCormick Place
Expansion Project):
AAA Aaa $ 6,070 Refunding, Series A, 6% due 12/15/2006 (b) $ 6,556
AAA Aaa 16,660 Refunding, Series A, 6.10% due 12/15/2015 (e) (k) 5,851
AAA Aaa 8,330 Refunding, Series A, 6.10% due 12/15/2016 (e) (k) 2,764
AAA Aaa 9,400 Refunding, Series A, 6.05% due 12/15/2018 (e) (k) 2,756
AAA Aaa 13,550 Refunding, Series A, 6.03% due 12/15/2022 (e) (k) 3,120
AAA Aaa 49,575 Refunding, Series A, 6.09% due 12/15/2023 (e) (k) 10,740
AAA Aaa 14,305 Refunding, Series A, 6.24% due 6/15/2024 (e) (k) 3,006
AAA Aaa 6,260 Refunding, Series A, 6.02% due 6/15/2025 (e) (k) 1,238
AAA Aaa 5,000 Refunding, Series B, 5.867% due 6/15/2018 (e) (k) 1,509
AAA Aaa 6,600 Series A, 6.50% due 6/15/2003 (a) (b) 7,366
AAA Aaa 3,000 Series A, 5.87% due 6/15/2020 (h) (k) 802
AAA Aaa 26,000 Regional Transportation Authority, Illinois,
Series A, 6.25% due 6/01/2024 (b) 27,565
Indiana--1.6% AAA Aaa 2,470 Indiana State Employment Development Commission,
Environmental Revenue Bonds (Public Service
Company of Indiana, Inc.), AMT, 7.50% due 3/15/2015 (e) 2,671
AAA Aaa 4,040 Indianapolis, Indiana, Local Public Improvement
Bond Bank, Series A, 7.90% due 2/01/2002 (a) (g) 4,607
AAA Aaa 4,340 Jasper County, Indiana, PCR, Refunding (Northern
Indiana Public Service), 7.10% due 7/01/2017 (e) 4,758
AAA Aaa 4,510 Munster, Indiana, School Building Corp. (First
Mortgage), 5.75% due 1/15/2021 (e) 4,516
AAA Aaa 5,000 Penn, Indiana, High School Building Corp. (First
Mortgage), 6.125% due 1/15/2016 (e) 5,223
Rockport, Indiana, PCR, Refunding:
A1 Aaa 4,200 (AEP Generating Co. Project), VRDN, Series A,
5.50% due 7/01/2025 (b) (f) 4,200
AAA Aaa 5,800 (Indiana--Michigan Power), Series B, 7.60%
due 3/01/2016 (h) 6,421
Iowa--0.3% AAA Aaa 5,000 Des Moines, Iowa, Parking Facilities Revenue
Refunding Bonds, Series A, 7.25% due 7/01/2015 (h) 5,361
Kentucky--0.6% AAA Aaa 11,470 Kentucky Development Finance Authority, Hospital
Revenue Refunding and Improvement Bonds (Saint Elizabeth
Medical Center), Series A, 9% due 11/01/2000 (h) 13,101
Louisiana--0.4% A1 VMIG1++ 10,000 Louisiana Public Facilities Authority, Hospital
Revenue Bonds (Willis-Knighton Medical Center Project),
VRDN, 4.15% due 9/01/2025 (b) (f) 10,000
Maryland--0.4% Maryland State Health and Higher Educational Facilities
Authority Revenue Bonds (University of Maryland
Medical Systems) (h):
AAA Aaa 2,250 Series A, 7% due 7/01/2001 (a) 2,504
AAA Aaa 4,400 Series B, 7% due 7/01/2022 5,284
Massachusetts AAA Aaa 13,000 Massachusetts Bay Transportation Authority, COP,
- --5.3% Series A, 7.65% due 8/01/2000 (a) (i) 14,477
Massachusetts Bay Transportation Authority (Massachusetts
General Transportation), Series A (h):
AAA Aaa 4,325 6% due 3/01/2006 4,670
AAA Aaa 4,610 6% due 3/01/2007 4,993
AAA Aaa 4,690 Massachusetts Educational Loan Authority, Education
Loan Revenue Bonds, AMT, Issue D, Series A,
7.25% due 1/01/2009 (e) 5,027
Massachusetts State Consolidated Loan (b):
AAA Aaa 5,110 Series A, 5% due 3/01/2010 5,002
AAA Aaa 5,420 Series D, 5% due 11/01/2016 5,093
Massachusetts State Health and Educational Facilities
Authority Revenue Bonds:
AAA Aaa 10,000 (Beth Israel), INFLOS, 8.319% due 7/01/2025 (b) (d) 10,400
A1+ VMIG1++ 500 (Capital Assets Program), VRDN, Series D, 5.35%
due 1/01/2035 (e) (f) 500
AAA Aaa 3,100 (Saint Elizabeth's Hospital), LEVRRS, Series E,
9.37% due 8/12/2021 (d) (i) 3,565
</TABLE>
47
<PAGE> 114
<TABLE>
<S> <S> <S> <C> <S> <C>
AAA Aaa 19,755 Massachusetts State, HFA, Housing Revenue Refunding
Bonds (Insured Rental), AMT, Series A, 6.75% due
7/01/2028 (b) 20,648
AAA Aaa 12,250 Massachusetts State, HFA, M/F Housing Refunding Bonds,
Series A, 6.15% due 7/01/2018 (e) 12,591
AAA Aaa 4,020 Massachusetts State Insured Revenue Refunding Bonds,
Series B, 5.40% due 11/01/2007 (e) 4,184
AAA Aaa 3,250 Massachusetts State Port Authority Revenue Bonds, 13%
due 7/01/2013 (c) 5,448
Massachusetts State Water Resources Authority
Revenue Bonds, Series B (e):
AAA Aaa 2,730 5% due 12/01/2016 2,574
AAA Aaa 10,000 5% due 12/01/2025 9,112
Michigan--2.5% AAA Aaa 5,000 Michigan State Building Authority, Revenue Refunding
Bonds, Series I, 6.25% due 10/01/2020 (e) 5,351
Aaa Aaa 6,915 Michigan State, HDA, Rental Housing Revenue Bonds,
Series B, 6.15% due 10/01/2015 (e) 7,090
AAA Aaa 10,000 Michigan State Strategic Fund Limited Obligation, Revenue
Refunding Bonds (Detroit Edison Co.) Series AA,
6.40% due 9/01/2025 (e) 10,757
Monroe County, Michigan, PCR (Detroit Edison
Company Project), AMT:
AAA Aaa 16,500 (Monroe and Fermi Plants), Series 1, 7.65% due
9/01/2020 (h) 18,078
AAA Aaa 9,745 Series I-B, 7.50% due 9/01/2019 (b) 10,556
Mississippi--0.1% AAA Aaa 1,320 Harrison County, Mississippi, Wastewater Management
District, Revenue Refunding Bonds (Wastewater
Treatment Facilities), Series A, 8.50% due 2/01/2013 (h) 1,751
Missouri--0.2% AAA Aaa 3,500 Sikeston, Missouri, Electric Revenue Refunding Bonds,
6.25% due 6/01/2002 (a) (e) 3,830
Nebraska--0.4% AAA Aaa 9,000 Nebraska Public Power District Revenue Refunding Bonds,
6.125% due 1/01/2015 (e) 9,387
Nevada--2.5% AAA Aaa 3,450 Clark County, Nevada, Airport Revenue Bonds, 6.90%
due 6/01/2001 (a) (h) 3,757
AAA Aaa 45,000 Washoe County, Nevada, Water Facility Revenue Bonds
(Sierra Pacific Power), AMT, 6.65% due 6/01/2017 (e) 48,527
New Jersey--7.1% AAA Aaa 3,350 Cape May County, New Jersey, Industrial Pollution Control
Financing Authority, Revenue Refunding Bonds
(Atlantic City Electric Company Project), Series A,
6.80% due 3/01/2021 (e) 3,957
Casino Reinvestment Development Authority, New Jersey,
Parking Fee Revenue Bonds, Series A (i):
AAA Aaa 3,730 6% due 10/01/2005 4,013
AAA Aaa 3,955 6% due 10/01/2006 4,263
AAA Aaa 4,190 6% due 10/01/2007 4,519
AAA Aaa 28,750 New Jersey EDA, Natural Gas Facilities, Revenue
Refunding Bonds (NUI Corp.), Series A, 6.35% due
10/01/2022 (b) 31,029
A1+ VMIG1++ 1,100 New Jersey Sports and Exposition Authority Revenue
Bonds (State Contract), VRDN, Series C, 3.95% due
9/01/2024 (e) (f) 1,100
New Jersey State Housing and Mortgage Finance Agency
Revenue Bonds (Home Buyer), AMT (e):
AAA Aaa 8,790 Series D, 7.70% due 10/01/2029 9,204
AAA Aaa 23,890 Series M, 7% due 10/01/2026 25,442
New Jersey State Transit Corp., Capital, GAN, Series A (i):
AAA Aaa 15,000 5% due 9/01/2000 15,265
AAA Aaa 35,000 5.25% due 9/01/2001 36,008
New Jersey State Turnpike Authority, Turnpike Revenue
Refunding Bonds:
AAA Aaa 4,215 Series C, 6.50% due 1/01/2008 (b) 4,738
AAA VMIG1++ 6,100 VRDN, Series D, 3.80% due 1/01/2018 (f) (h) 6,100
</TABLE>
48
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<TABLE>
<CAPTION>
Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
Municipal Bonds Insured Portfolio
------------------------------------------------------------------------------------------------------
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <S> <S> <C> <S> <C>
New York--10.7% Nassau County, New York, General Improvement,
UT, Series V (b):
AAA Aaa $ 5,305 5.25% due 3/01/2015 $ 5,197
AAA Aaa 2,845 5.25% due 3/01/2016 2,769
New York City, New York, GO, UT:
AAA Aaa 15,000 Series B, 6.25% due 8/15/2008 (b) 16,376
AAA Aaa 8,175 Series E, 6% due 8/01/2007 (h) 8,809
AAA Aaa 13,770 Series G, 6% due 10/15/2007 (b) 14,855
AAA Aaa 31,000 Series I, 6% due 4/15/2012 (i) 32,509
AAA Aaa 2,500 Series L, 5.20% due 8/01/2008 (e) 2,515
AAA Aaa 10,095 Series M, 5.30% due 6/01/2012 (b) 10,006
AAA Aaa 15,000 Series M, 5.50% due 6/01/2017 (b) 14,874
New York City, New York, GO, UT, Series I (b):
AAA Aaa 2,825 7.25% due 8/15/1999 (a) 3,043
AAA Aaa 7,150 7.25% due 8/15/2013 7,636
AAA Aaa 4,385 7.25% due 8/15/2016 4,693
New York City, New York, Municipal Water Finance Authority,
Water and Sewer System Revenue Bonds:
AAA Aaa 28,510 RITR, 6.945% due 6/15/2026 (d) (e) 29,294
AAA Aaa 5,010 Series C, 6.20% due 6/15/2021 (b) 5,282
A1+ VMIG1++ 1,000 Series C, VRDN, 5.50% due 6/15/2023 (f) (h) 1,000
AAA Aaa 1,500 New York City, New York, Refunding, UT, Series E, 6.20%
due 8/01/2008 (e) 1,637
AAA Aaa 2,500 New York State Dormitory Authority Revenue Bonds
(City University), Third Generation Reserves,
Series 2, 6.25% due 7/01/2019 (e) 2,639
AAA Aaa 1,650 New York State Environmental Facilities Corporation,
Special Obligation Revenue Refunding Bonds
(Riverbank State Park), 5.50% due 4/01/2016 (b) 1,647
AAA Aaa 2,015 New York State Medical Care Facilities Finance Agency,
Revenue Improvement Bonds (Mental Health
Services), Series C, 7.375% due 8/15/2019 (e) 2,161
Aaa Aaa 9,125 New York State Medical Care Facilities Financial Agency
Revenue Bonds (Mental Health Services), Series E, 6.25%
due 8/15/2019 (h) 9,650
AAA VMIG1++ 13,700 New York State Thruway Authority, General Revenue Bonds,
VRDN, 5.45% due 1/01/2024 (f) (h) 13,700
AAA Aaa 12,000 New York State Thruway Authority, Highway and Bridge
Trust Fund, Series B, 5.125% due 4/01/2015 (e) 11,585
Niagara Falls, New York, Public Improvement Bonds, UT (e):
AAA Aaa 2,975 6.90% due 3/01/2023 3,313
AAA Aaa 3,190 6.90% due 3/01/2024 3,553
AAA Aaa 11,940 Suffolk County, New York, Water Authority, Water Works
Revenue Bonds, 5% due 6/01/2011 (e) 11,613
Ohio--1.1% AAA Aaa 2,710 Clermont County, Ohio, Hospital Facilities Revenue
Refunding Bonds (Mercy Health Systems), Series A,
7.50% due 9/01/2001 (a) (b) 3,028
AAA Aaa 12,000 Cleveland, Ohio, Public Power System Revenue Bonds,
First Mortgage, Series A, 7% due 11/15/2004 (a) (e) 13,930
AAA Aaa 1,550 Cleveland, Ohio, Water Works Revenue Bonds (First Mortgage),
Series F-92 A, 6.50% due 1/01/2002 (a) (b) 1,704
AAA Aaa 3,500 Ohio State Building Authority, State Facilities (Adult
Correctional), Series A, 6% due 4/01/2004 (b) 3,762
Oklahoma--1.3% AAA Aaa 10,500 Central Oklahoma, Transportation and Packaging Authority,
Packaging Systems Revenue Refunding, 5.25% due 7/01/2016 (i) 10,169
AAA Aaa 9,280 Grand River Dam Authority, Oklahoma, Revenue Refunding
Bonds, 5.50% due 6/01/2009 (b) 9,718
AAA Aaa 7,500 Oklahoma State Industrial Authority, Hospital Revenue
Bonds (Baptist Medical Center), Series A, 7% due 8/15/2000
(a) (b) 8,212
Oregon--0.2% Port Portland, Oregon, International Airport Revenue
Bonds (Portland International Airport), Series Seven-B,
AMT (e):
AAA Aaa 3,865 7.10% due 1/01/2012 (a) 4,511
AAA Aaa 135 7.10% due 7/01/2021 146
</TABLE>
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<TABLE>
<S> <S> <S> <C> <S> <C>
Pennsylvania AAA Aaa 2,000 Allegheny County, Pennsylvania, Higher Education Building
- --5.4% Authority Revenue Bonds (Duquesne University Project),
5% due 3/01/2016 (b) 1,882
AAA Aaa 1,750 Allegheny County, Pennsylvania, Hospital Development Authority
Revenue Bonds (Mercy Hospital of Pittsburgh), 6.75% due
4/01/2001 (a) (b) 1,922
AAA Aaa 6,900 Beaver County, Pennsylvania, Hospital Authority Revenue
Bonds (Medical Center of Beaver, Pennsylvania Inc.), Series A,
6.25% due 7/01/2022 (b) 7,218
AAA Aaa 3,365 Beaver County, Pennsylvania, IDA, PCR, Refunding (Ohio Edison
Company/Mansfield), Series A, 7% due 6/01/2021 (h) 3,675
AAA Aaa 7,590 Erie County, Pennsylvania, Prison Authority, Lease Revenue
Bonds, 6.25% due 11/01/2001 (a) (e) 8,144
AAA Aaa 1,155 Exeter Township Pennsylvania School District, UT, 6.65%
due 5/15/2002 (a) (h) 1,265
Pennsylvania State Higher Educational Assistance Agency,
Student Loan Revenue Bonds, AMT, RIB (d):
AAA Aaa 15,000 9.317% due 9/03/2026 (b) 16,856
AAA Aaa 8,000 Series B, 10.749% due 3/01/2020 (e) 9,160
AAA Aaa 18,600 Series B, 7.955% due 3/01/2022 (b) 19,321
Pennsylvania State Higher Educational Facilities Authority,
College and University Revenue Bonds:
AAA Aaa 1,500 (Bryn Mawr College), 6.50% due 12/01/1999 (a) (h) 1,607
AAA Aaa 4,250 (Temple University), First Series, 6.50% due 4/01/2021 (e) 4,566
AAA Aaa 10,000 Pennsylvania State Higher Educational Facilities Authority,
Health Services Revenue Refunding (Allegheny Delaware Valley),
Series A, 5.875% due 11/15/2016 (e) 10,228
Pennsylvania State Second Series, GO, UT (b):
AAA Aaa 8,875 5% due 11/15/2014 8,468
AAA Aaa 1,000 5% due 11/15/2015 950
AAA Aaa 6,000 Philadelphia, Pennsylvania, Gas Works Revenue Bonds,
12th Series B, 7% due 5/15/2020 (c) (e) 7,013
AAA Aaa 5,000 Philadelphia, Pennsylvania, School District, Series B,
5.50% due 9/01/2015 (b) 4,977
AAA Aaa 4,020 Philadelphia, Pennsylvania, Water and Sewer Authority,
Water and Wastewater Revenue Bonds, 5.60% due 8/01/2018 (e) 3,976
Rhode Island AAA Aaa 6,100 Rhode Island Depositors Economic Protection Corporation,
- --1.4% Special Obligation Bonds, Series A, 6.625% due 8/01/2002
(a) (i) 6,792
AAA Aaa 3,775 Rhode Island State Consolidated Capital Development Loan,
Series A, 6% due 8/01/2007 (e) 4,096
Rhode Island State Health and Educational Building
Corporation Revenue Bonds:
AAA Aaa 1,500 Higher Education Facility, Refunding (Rhode Island
School Design), 5.625% due 6/01/2026 (e) 1,472
AAA Aaa 12,800 (Rhode Island Hospital), INFLOS, 9.487% due
8/15/2021 (d) (h) 15,568
South AAA Aaa 5,000 Florence County, South Carolina, Hospital Revenue
Carolina--1.6% Bonds (McLeod Regional Medical Center Project),
6.75% due 11/01/2020 (h) 5,374
AAA Aaa 4,000 Piedmont, South Carolina, Municipal Power Agency,
Electric Revenue Refunding Bonds, 6.30% due 1/01/2022 (e) 4,263
South Carolina State Public Service Authority, Revenue
Refunding Bonds, Series A (b):
AAA Aaa 17,090 6.375% due 7/01/2021 18,425
AAA Aaa 4,200 6.25% due 1/01/2022 4,452
Texas--14.3% Austin, Texas, Utility System, Combined Revenue Bonds,
Prior Lien (e):
AAA Aaa 11,190 9.25% due 5/15/2004 (a) 14,160
AAA Aaa 5,000 6.25% due 11/15/2019 5,273
AAA Aaa 20,000 Austin, Texas, Utility System, Combined Revenue
Refunding Bonds, Series A, 5.25% due 5/15/2016 (i) 19,348
Brazos River Authority, Texas, PCR (Texas Utilities
Electric Company Project), AMT:
AAA Aaa 6,000 Refunding, 6.50% due 12/01/2027 (b) 6,422
AAA Aaa 12,000 Series B, 6.625% due 6/01/2022 (h) 12,882
AAA Aaa 12,400 Brazos River Authority, Texas, Revenue Refunding
Bonds (Houston Light and Power Co.), Series B,
7.20% due 12/01/2018 (h) 13,387
Brownsville, Texas, Utility System, Revenue
Refunding Bonds:
AAA Aaa 20,000 6.25% due 9/01/2014 (e) 21,862
AAA Aaa 2,000 5.25% due 9/01/2015 (b) 1,952
</TABLE>
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<CAPTION>
Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
Municipal Bonds Insured Portfolio
------------------------------------------------------------------------------------------------------
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <S> <S> <C> <S> <C>
Texas AAA Aaa $ 5,000 Harris County, Texas, Hospital District Mortgage,
(concluded) Revenue Refunding Bonds, 7.40% due 2/15/2010 (b) $ 5,974
Harris County, Texas, Toll Road Revenue Bonds,
Senior Lien:
AAA Aaa 11,455 Senior Lien, Refunding, 5% due 8/15/2016 (h) 10,756
AAA Aaa 20,430 Senior Lien, Refunding, Series A, 6.50% due
8/15/2002 (a) (b) 22,645
AAA Aaa 10,305 Senior Lien, Refunding, Series A, 6.50% due
8/15/2002 (a) (h) 11,422
AAA Aaa 1,000 Senior Lien, Series A, 6.25% due 8/15/2015 (e) 1,069
AAA Aaa 2,750 Senior Lien, Series A, 6.50% due 8/15/2017 (b) 2,994
AAA Aaa 11,100 Senior Lien, Series A, 6.375% due 8/15/2024 (e) 11,953
AAA Aaa 1,695 Series A, 6.50% due 8/15/2011 (h) 1,845
Houston, Texas, Water and Sewer System Revenue Bonds,
Junior Lien, Series A (e):
AAA Aaa 7,615 6.375% due 12/01/2022 8,242
AAA Aaa 19,770 Refunding, 6.125% due 12/01/2015 20,708
AAA Aaa 8,000 Refunding, 6.20% due 12/01/2023 8,400
AAA Aaa 3,500 Houston, Texas, Water Conveyance System Contract,
COP, Series J, 6.25% due 12/15/2013 (b) 3,854
AAA Aaa 5,000 Matagorda County, Texas, Navigation District No. 1, PCR
(Central Power and Light Company Project), AMT, 7.50%
due 3/01/2020 (b) 5,404
AAA Aaa 11,800 Matagorda County, Texas, Navigation District No. 1,
Revenue Refunding Bonds (Houston Light and
Power Co.), Series A, 6.70% due 3/01/2027 (b) 12,838
A1 Aaa 15,400 North Central, Texas, Health Facility Development Corp.
Revenue Bonds (Methodist Hospital, Dallas), VRDN, Series B,
5.50% due 10/01/2015 (f) (g) 15,400
Nueces River Authority, Texas, Water Supply Facilities
Revenue (Corpus Christi Lake Project) (i):
AAA Aaa 3,705 5.25% due 7/15/2013 3,642
AAA Aaa 3,900 5.25% due 7/15/2014 3,814
A1 VMIG1++ 16,500 Sabine River Authority, Texas, PCR, Refunding (Texas
Utilities Project), VRDN, Series A, 5.50% due
3/01/2026 (b) (f) 16,500
AAA Aaa 3,000 San Antonio, Texas, Electric and Gas Revenue Bonds,
Series 95, 5.375% due 2/01/2016 (e) 2,943
AAA Aaa 15,000 Southwest Higher Education Authority Incorporated,
Texas, Revenue Refunding Bonds (Southern Methodist University),
Series B, 6.25% due 10/01/2022 (h) 15,931
Texas State Municipal Power Agency, Revenue Refunding Bonds:
AAA Aaa 3,520 5.25% due 9/01/2007 (e) 3,643
AAA Aaa 3,150 Series A, 6.75% due 9/01/2012 (b) 3,424
AAA Aaa 5,095 Texas State Public Finance Authority, Building Revenue
Bonds, Series A, 5% due 8/01/2016 (b) 4,790
Utah--1.7% AAA Aaa 12,855 Intermountain Power Agency, Utah, Power Supply Revenue
Refunding Bonds, Series B, 6% due 7/01/2006 (e) 13,836
AAA Aaa 14,000 Salt Lake City, Utah, Hospital Revenue Refunding Bonds
(IHC Hospitals, Inc.), INFLOS, 9.491% due
5/15/2020 (b) (d) 16,327
AA- Aaa 1,000 Uintah County, Utah, PCR (Desert Generation and
Transmission Cooperative--National Rural Utilities
Company), Series 1984 F-2, 10.50% due 6/15/2001 (a) 1,218
AAA Aaa 2,650 Utah State Board of Regents, Student Loan Revenue Bonds,
AMT, Series F, 7.45% due 11/01/2008 (b) 2,773
Vermont--1.0% AAA Aaa 18,950 Vermont, HFA, Home Mortgage Purchase Bonds, AMT,
Series B, 7.60% due 12/01/2024 (e) 19,986
Virginia--3.1% AAA Aaa 5,000 Danville, Virginia, IDA, Hospital Revenue Refunding
Bonds (Danville Regional Medical Center),
6.50% due 10/01/2019 (h) 5,394
AAA Aaa 4,000 Loudoun County, Virginia, Sanitation Authority,
Water and Sewer Revenue Refunding Bonds, 5.125% due
1/01/2026 (h) 3,769
AAA Aaa 20,000 Upper Occoquan, Virginia, Sewer Authority Regional,
Revenue Bonds, Series A, 4.75% due 7/01/2029 (e) 17,429
Virginia State, HDA, Commonwealth Mortgage, AMT,
Series A, Sub-Series A-4 (e):
AAA Aaa 5,000 6.30% due 7/01/2014 5,195
AAA Aaa 11,215 6.35% due 7/01/2018 11,535
AAA Aaa 19,000 6.45% due 7/01/2028 19,584
</TABLE>
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<TABLE>
<S> <S> <S> <C> <S> <C>
Washington--2.9% Seattle, Washington, Metropolitan Seattle Municipality,
Sewer Revenue Bonds, Series W (e):
AAA Aaa 3,730 6.25% due 1/01/2020 3,949
AAA Aaa 2,465 6.25% due 1/01/2022 2,610
AAA Aaa 4,485 6.25% due 1/01/2023 4,749
AAA Aaa 33,535 Seattle, Washington, Municipal Light and Power
Revenue Bonds, 6.625% due 7/01/2020 (h) 36,944
University of Washington, University Revenue Bonds
(Housing and Dining) (e):
AAA Aaa 2,785 7% due 12/01/2001 (a) 3,121
AAA Aaa 465 7% due 12/01/2021 512
AAA Aaa 7,000 Washington State Health Care Facilities Authority
Revenue Bonds (Southwest Washington
Hospital--Vancouver), 7.125% due 10/01/2019 (g) 7,492
West AAA Aaa 23,150 Marshall County, West Virginia, PCR, Refunding
Virginia--2.4% (Ohio Power Company--Kammer Plant Project), Series B,
5.45% due 7/01/2014 (e) 23,197
AAA Aaa 11,465 Mason County, West Virginia, PCR, Refunding (Appalachian
Power Co.), Series I, 6.85% due 6/01/2022 (e) 12,570
AAA Aaa 12,250 Pleasants County, West Virginia, PCR (Potomac
Pleasants), Series 95-C, 6.15% due 5/01/2015 (b) 12,930
Wisconsin--3.5% Milwaukee County, Wisconsin, GO, UT, Series A (e):
AAA Aaa 2,975 5.25% due 10/01/2011 2,969
AAA Aaa 2,975 5.25% due 10/01/2012 2,956
AAA Aaa 9,000 Superior, Wisconsin, Limited Obligation Revenue
Refunding Bonds (Midwest Energy Resources), Series E,
6.90% due 8/01/2021 (h) 10,630
AAA Aaa 6,500 Wisconsin Public Power System Inc., Power Supply
System Revenue Bonds, Series A, 6.875% due
7/01/2001 (a) (b) 7,199
Wisconsin State Health and Educational Facilities
Authority Revenue Bonds:
AAA Aaa 6,520 Refunding (Sister's Sorrowful Mother), Series A,
6.125% due 8/15/2022 (e) 6,657
AAA Aaa 8,545 Refunding (Waukesha Memorial Horpital), Series A,
5.50% due 8/15/2015 (b) 8,448
AAA Aaa 1,500 (Saint Luke's Medical Center Project), 7.10%
due 8/15/2019 (e) 1,638
AAA Aaa 5,655 (Waukesha Memorial Hospital), Series B, 7.25%
due 8/15/2000 (a) (b) 6,233
Wisconsin State Veteran's Housing Loans, AMT,
Series B (e):
AAA Aaa 7,920 6.50% due 5/01/2020 8,330
AAA Aaa 17,130 6.50% due 5/01/2025 17,908
Wyoming--0.0% A1 VMIG1++ 400 Sweetwater County, Wyoming, PCR, Refunding
(PacificCorp. Projects), VRDN, 5.50% due
11/01/2024 (b) (f) 400
Total Investments (Cost--$1,910,410)--98.6% 2,023,013
Other Assets Less Liabilities--1.4% 29,221
-----------
Net Assets--100.0% $ 2,052,234
===========
<FN>
(A)PREREFUNDED.
(B)AMBAC INSURED.
(C)ESCROWED TO MATURITY.
(D)THE INTEREST RATE IS SUBJECT TO CHANGE PERIODICALLY AND INVERSELY
BASED UPON PREVAILING MARKET RATES. THE INTEREST RATE SHOWN IS THE
RATE IN EFFECT AT JUNE 30, 1997.
(E)MBIA INSURED.
(F)THE INTEREST RATE IS SUBJECT TO CHANGE PERIODICALLY BASED UPON
PREVAILING MARKET RATES. THE INTEREST RATE SHOWN IS THE RATE IN
EFFECT AT JUNE 30, 1997.
(G)BIG INSURED.
(H)FGIC INSURED.
(I)FSA INSURED.
(J)GNMA COLLATERALIZED.
(K)REPRESENTS A ZERO COUPON BOND; THE INTEREST RATE SHOWN IS THE
EFFECTIVE YIELD AT THE TIME OF PURCHASE BY THE PORTFOLIO.
++HIGHEST SHORT-TERM RATING ISSUED BY MOODY'S INVESTORS SERVICE, INC.
RATINGS OF ISSUES SHOWN HAVE NOT BEEN AUDITED BY DELOITTE & TOUCHE LLP.
See Notes to Financial Statements.
</TABLE>
52
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<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997
(in Thousands)
Municipal Bonds National Portfolio
------------------------------------------------------------------------------------------------------
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <S> <S> <C> <S> <C>
Alaska--2.5% Valdez, Alaska, Marine Terminal Revenue Refunding Bonds:
AA Aa2 $ 6,000 (British Petroleum Pipeline), Series B, 7% due
12/01/2025 $ 6,584
AA Aa3 27,150 (Sohio Pipeline--British Petroleum Oil), 7.125%
due 12/01/2025 30,123
California--3.7% NR* NR* 6,000 Antioch, California, Improvement Bond Act of 1915
(Assessment District No.27--Lone Tree), Series E,
7.125% due 9/02/2016 6,189
A Aaa 10,350 California State Public Works Board, Lease Revenue
Bonds (Department of Corrections--Monterey County,
Soledad II), Series A, 7% due 11/01/2004 (j) 12,143
NR* NR* 4,000 Long Beach, California, Special Tax Community
Facilities (District No.3--Pine Avenue), 6.375% due 9/01/2023 4,001
A NR* 8,975 Palmdale, California, Civic Authority, Revenue Refunding
Bonds (Merged Redevelopment Project), Series A,
6.60% due 9/01/2034 9,800
AAA Aaa 18,755 Riverside County, California, Asset Leasing Corp.,
Leasehold Revenue Bonds (Riverside County Hospital
Project), 6%** due 6/01/2023 (f) 4,151
AAA Aaa 20,000 San Diego, California, Public Facilities Financing
Authority, Sewer Revenue Bonds, 5% due 5/15/2020 (e) 18,510
Colorado--2.8% Denver, Colorado, City and County Airport Revenue Bonds, AMT:
BBB Baa1 3,000 Series A, 7.50% due 11/15/2023 3,410
BBB Baa1 8,570 Series A, 8% due 11/15/2025 9,507
BBB Baa1 13,000 Series B, 7.25% due 11/15/2023 14,335
BBB Baa1 13,150 Series D, 7.75% due 11/15/2021 14,678
Connecticut--0.3% AA- Baa1 4,550 Connecticut State Resource Recovery Authority, Resource
Recovery Revenue Bonds (American Refunding Fuel), AMT,
Series A, 8% due 11/15/2015 4,875
Delaware--0.6% AAA NR* 7,500 Delaware State Health Facilities Authority, Revenue
Refunding Bonds (Beebe Medical Center Project),
8.50% due 6/01/2000 (j) 8,481
District of District of Columbia General Fund Recovery Bonds, VRDN, UT (a):
Columbia--1.3% A1+ VMIG1++ 6,300 Series B-1, 5.25% due 6/01/2003 6,300
A1+ VMIG1++ 8,200 Series B-3, 5.25% due 6/01/2003 8,200
A+ A1 3,750 District of Columbia Revenue Bonds (Georgetown
University), RIB, 8.683% due 4/25/2022 (k) 4,186
Florida--4.3% AAA Aaa 16,070 Dade County, Florida, Refunding, Seaport, UT, 5.125%
due 10/01/2026 (f) 15,130
AAA Aaa 8,140 Dade County, Florida, Special Obligation Refunding Bonds,
Series B, 5% due 10/01/2035 (c) 7,432
AAA Aaa 6,330 Florida HFA (Antigua Club Apartments), AMT, Series A-1,
7% due 2/01/2035 (c) 6,791
NR* Aaa 8,860 Florida HFA, Home Ownership Revenue Bonds, AMT,
Series G1, 7.90% due 3/01/2022 (i) 9,333
NR* NR* 5,000 Grand Haven Community Development District, Florida,
Special Assessment, Series A, 6.30% due 5/01/2002 4,995
AA Aa3 5,000 Hillsborough County, Florida, IDA, PCR, Refunding
(Tampa Electric Company Project), Series 91, 7.875%
due 8/01/2021 5,703
A- NR* 2,700 Leesburg, Florida, Hospital Revenue Capital Improvement
Bonds (Leesburg Regional Medical Center Project),
Series 91-A, 7.50% due 7/01/2002 (j) 3,109
AAA NR* 4,345 Orange County, Florida, HFA, Mortgage Revenue Bonds, AMT,
Series A, 8.375% due 3/01/2021 (i) 4,587
AAA Aaa 5,850 South Broward, Florida, Hospital District, RIB,
Series C, 9.034% due 5/01/2001 (c) (j) (k) 6,947
Georgia--1.8% A1 VMIG1++ 3,580 Floyd County, Georgia, Development Authority, PCR,
Georgia Power Co. (Plt Hammond Project), VRDN,
5.60% due 9/01/2026 (a) 3,580
AAA Aaa 20,000 Metropolitan Atlanta, Georgia, Rapid Transit Authority,
Sales Tax Revenue Bonds, Second Indenture, Series A,
6.90% due 7/01/2004 (f) (j) 22,966
Idaho--0.1% AA NR* 1,675 Idaho Housing Agency, S/F Mortgage, AMT, Series E,
7.875% due 7/01/2024 (b) 1,803
Illinois--5.1% AA- Aa3 8,000 Chicago, Illinois, Gas Supply Revenue Bonds (Peoples
Gas, Light & Coke Company Project), AMT, Series A,
8.10% due 5/01/2020 8,785
</TABLE>
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<TABLE>
<S> <S> <S> <C> <S> <C>
Chicago, Illinois, O'Hare International Airport,
Special Facilities Revenue Bonds (United Airlines, Inc.):
BB+ Baa2 4,675 AMT, Series B, 8.95% due 5/01/2018 5,295
BB+ Baa2 13,565 Series 1984-B, 8.85% due 5/01/2018 15,346
AAA Aaa 16,000 Chicago, Illinois, Water Revenue Bonds, 5% due 11/01/2025 (e) 14,580
BBB NR* 3,500 Illinois Development Finance Authority, Revenue
Refunding Bonds (Community Rehabilitation Providers),
Series A, 6% due 7/01/2015 3,477
A+ Aa2 5,100 Illinois HDA, Residential Mortgage Revenue Bonds,
RIB, AMT, Series C-2, 9.471% due 2/01/2018 (k) 5,514
Illinois Health Facilities Authority Revenue Bonds:
AAA Aaa 1,500 (Methodist Health Project), RIB, 9.628% due
5/01/2021 (c) (k) 1,727
BBB NR* 2,625 Refunding (Saint Elizabeth's Hospital--Chicago),
7.75% due 7/01/2016 2,907
AAA Aaa 11,000 (Rush Presbyterian--Saint Luke's Medical Center),
INFLOS, 9.615% due 10/01/2024 (f) (k) 12,705
NR* A1 4,400 Southwestern Illinois Development Authority, Sewer
Facilities Revenue Bonds (Monsanto Company Project),
AMT, 7.30% due 7/15/2015 4,871
Indiana--1.8% NR* Aaa 9,500 Indiana State Educational Facilities Authority Revenue
Bonds (University of Notre Dame Project),
6.70% due 3/01/2025 10,519
A+ NR* 9,100 Indianapolis, Indiana, Local Public Improvement Bond
Bank, Refunding, Series D, 6.75% due 2/01/2020 9,931
AA- Aa2 5,700 Petersburg, Indiana, PCR, Refunding (Indianapolis
Power & Light Company Project), 6.625% due 12/01/2024 6,144
Iowa--0.7% NR* NR* 9,000 Iowa Finance Authority, Health Care Facilities,
Revenue Refunding Bonds (Care Initiatives Project),
9.25% due 7/01/2025 10,652
Kansas--1.7% Wichita, Kansas, Hospital Revenue Bonds, RIB (f) (k):
AAA Aaa 12,000 Series III-A, 8.702% due 10/01/2017 13,740
AAA Aaa 10,000 Series III-B, 8.691% due 10/21/2022 11,450
Kentucky--2.0% AAA Aaa 18,500 Louisville and Jefferson County, Kentucky, Metropolitan
Sewer District, Sewer and Drain System Revenue
Refunding Bonds, Series A, 5.25% due 5/15/2027 (f) 17,642
NR* NR* 4,500 Perry County, Kentucky, Solid Waste Disposal Revenue
Bonds (TJ International Project), AMT, 7% due 6/01/2024 4,725
AA- Aa2 6,345 Trimble County, Kentucky, PCR (Louisville Gas and
Electric Company), AMT, Series A, 7.625% due 11/01/2020 6,949
Louisiana--4.1% NR* Baa2 37,850 Lake Charles, Louisiana, Harbor and Terminal District
Port Facilities, Revenue Refunding Bonds (Trunkline LNG
Company Project), 7.75% due 8/15/2022 43,018
Port New Orleans, Louisiana, IDR, Refunding (Continental
Grain Company Project):
BB NR* 10,000 7.50% due 7/01/2013 10,785
BB NR* 5,000 6.50% due 1/01/2017 5,101
BBB Baa2 1,100 Saint Charles Parish, Louisiana, PCR (Union Carbide
Project), AMT, 7.35% due 11/01/2022 1,183
Maine--0.3% NR* Aa2 3,815 Maine State Housing Authority, Mortgage Purchase, AMT,
Series B-4, 6.90% due 11/15/2026 3,990
Maryland--0.5% AA- Aa 7,000 Maryland State Stadium Authority, Sports Facilities
Lease Revenue Bonds, AMT, Series D, 7.60% due 12/15/2019 7,618
Massachusetts AAA Aaa 6,000 Massachusetts Bay Transportation Authority,
- --5.0% Series B, 7.875% due 3/01/2001 (j) 6,811
AAA Aaa 7,500 Massachusetts State, HFA, Revenue Bonds (Residential
Development) Series C, 6.90% due 11/15/2021 (d) 8,015
Massachusetts State Health and Educational Facilities
Authority Revenue Bonds:
AAA NR* 6,900 (North Adams Regional Hospital), Series A, 9.625%
due 7/01/1999 (j) 7,736
NR* B2 12,350 Refunding (New England Memorial Hospital), Series B,
6.25% due 7/01/2023 9,880
Massachusetts State Water Resources Authority:
AAA Aaa 12,500 Series A, 6.50% due 12/01/2001 (j) 13,766
AAA Aaa 30,000 Series B, 5% due 12/01/2025 (f) 27,335
</TABLE>
54
<PAGE> 121
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997
(in Thousands)
Municipal Bonds National Portfolio
------------------------------------------------------------------------------------------------------
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <S> <S> <C> <S> <C>
Michigan--2.1% A A $ 3,500 Michigan State Hospital Finance Authority, Hospital
Revenue Bonds (Detroit Medical Center), Series A,
7.50% due 8/15/2011 $ 3,848
AAA Aaa 15,000 Michigan State Hospital Finance Authority
(Sisters of Mercy), INFLOS, 8.514% due 2/15/2022 (h) (k) 16,275
BBB Baa1 9,350 Monroe County, Michigan, PCR (Detroit Edison
Company Project), AMT, Series A, 7.75% due 12/01/2019 10,100
Minnesota--1.5% Minnesota State, HFA, S/F Mortgage:
AA+ Aa 6,080 AMT, Series A, 7.45% due 7/01/2022 (b) 6,402
AA+ Aa2 4,250 Series F, 6.30% due 7/01/2025 4,397
AA+ NR* 3,000 Rochester, Minnesota, Health Care Facilities Revenue
Bonds (Mayo Foundation), IRS, Series H, 7.875% due
11/15/2015 (k) 3,229
AAA NR* 8,070 Saint Paul, Minnesota, Housing and Redevelopment
Authority, S/F Mortgage Revenue Refunding Bonds,
Series C, 6.95% due 12/01/2031 8,403
Mississippi--0.7% BBB Baa 5,950 Lowndes County, Mississippi, Hospital Revenue
Refunding Bonds (Golden Triangle Medical Center),
8.50% due 2/01/2010 6,552
NR* Aaa 4,195 Mississippi Home Corporation, S/F Mortgage Revenue Bonds
(Access Program), AMT, Final Tranche, Series A, 6.90%
due 6/01/2024 (i) 4,423
Missouri & BBB NR* 11,400 Bi-State Development Agency, Missouri and Illinois,
Illinois-- Metropolitan No. 5, Refunding (American Commonwealth
0.8% Lines, Inc.), 7.75% due 6/01/2010 12,457
Nebraska--0.3% AAA Aaa 3,400 Nebraska Investment Finance Authority, S/F Mortgage
Revenue Bonds, AMT, Series 2, RIB, 11.177% due
9/10/2030 (i) (k) 3,787
New Hampshire-- A+ Aa 2,685 New Hampshire State, HFA, S/F Residential Mortgage,
0.2% AMT, 7.90% due 7/01/2022 2,840
New Jersey--1.2% NR* NR* 6,495 New Jersey Health Care Facilities Financing Authority
Revenue Bonds (Riverwood Center), Series A,
9.90% due 7/01/2001 (j) 7,852
AA- A3 9,500 University of Medicine and Dentistry of New Jersey,
Series C, 7.20% due 12/01/1999 (j) 10,332
New York--14.6% Metropolitan Transportation Authority, New York,
Service Contract Refunding Bonds (Commuter Facilities),
Series 5:
BBB Baa1 2,145 6.90% due 7/01/2006 2,330
BBB Baa1 5,000 7% due 7/01/2012 5,399
New York City, New York, GO, UT:
AAA Aaa 7,240 Series A, 7.75% due 8/15/2001 (j) 8,254
BBB+ Aaa 9,385 Series A, 7.75% due 8/15/2001 (j) 10,699
BBB+ Baa1 280 Series A, 7.75% due 8/15/2017 311
BBB+ Baa1 4,000 Series B, 8.25% due 6/01/2006 4,803
BBB+ Baa1 10,000 Series B, Fiscal 92, 7.75% due 2/01/2011 11,177
BBB+ Baa1 4,500 Series B, Fiscal 92, 7.75% due 2/01/2012 5,030
BBB+ Baa1 2,875 Series B, Fiscal 92, 7.75% due 2/01/2013 3,213
BBB+ Baa1 1,650 Series B, Fiscal 92, 7.75% due 2/01/2014 1,844
AAA Aaa 1,865 Series D, 7.70% due 2/01/2002 (j) 2,140
BBB+ Aaa 3,495 Series D, Group C, 8% due 8/01/2001 (j) 4,009
AAA Aaa 5,495 Series F, 8.25% due 11/15/2001 (j) 6,402
New York City, New York, Municipal Water Finance
Authority, Water and Sewer System Revenue Bonds:
A- Aaa 11,685 Series 93-B, 6.50% due 6/15/2002 (j) 12,856
A- Aaa 10,000 Series A, 6.75% due 6/15/2001 (j) 10,952
AAA Aaa 10,000 Series B, 5.875% due 6/15/2026 (h) 10,185
A1 VMIG1++ 3,000 Series RI-2, RITR, 7.025% due 6/15/2025 (k) 3,150
</TABLE>
55
<PAGE> 122
<TABLE>
<S> <S> <S> <C> <S> <C>
New York State Dormitory Authority Revenue Bonds (State
University Educational Facilities):
BBB+ Baa1 6,735 Refunding, Series B, 7.375% due 5/15/2014 7,318
BBB+ Baa1 2,000 Refunding, Series B, 7% due 5/15/2016 2,135
BBB+ Baa1 5,000 Series A, 7.50% due 5/15/2013 5,978
New York State Local Government Assistance Corporation:
A Aaa 6,000 Series A, 7% due 4/01/2002 (j) 6,757
A Aaa 10,000 Series B, 7.25% due 4/01/2001 (j) 11,182
A A3 10,000 Series C, 6.25% due 4/01/2018 10,475
A A3 18,810 Series D, 5% due 4/01/2023 17,065
New York State Medical Care Facilities, Finance
Agency Revenue Bonds (New York Hospital Mortgage),
Series A (b) (c):
AAA Aaa 8,400 6.75% due 8/15/2014 9,223
AAA Aaa 9,100 6.80% due 8/15/2024 10,020
BBB Aaa 10,000 New York State Urban Development Corporation Revenue
Bonds (State Facilities), 7.50% due 4/01/2001 (j) 11,268
AAA Aaa 4,000 Niagara Falls, New York, Commission Toll Bridge, Revenue
Refunding Bonds, Series B, 5.25% due 10/01/2021 (e) 3,775
AAA Aaa 6,800 Port Authority of New York and New Jersey, Consolidated
Revenue Bonds, 104th Series, 3rd Installment,
4.75% due 1/15/2026 6,007
A+ Aa 12,750 Triborough Bridge and Tunnel Authority, New York,
General Purpose Revenue Bonds, Series B, 5.20% due
1/01/2027 12,035
North A1+ NR* 5,000 Raleigh-Durham, North Carolina, Airport Authority,
Carolina--0.3% Special Facilities Revenue Refunding Bonds (American Airlines),
VRDN, Series B, 5.50% due 11/01/2015 (a) 5,000
Ohio--2.7% AAA Aaa 20,300 Cleveland, Ohio, Public Power System Revenue Bonds
(First Mortgage), Series A, 7% due 11/15/2004 (f) (j) 23,565
Ohio, HFA, S/F Mortgage Revenue Bonds, AMT (i):
AAA Aaa 9,100 RIB, Series B-4, 9.578% due 3/31/2031 (k) 9,942
AAA NR* 1,895 Series B, 8.25% due 12/15/2019 2,003
AAA NR* 4,295 Series C, 7.85% due 9/01/2021 4,565
Pennsylvania BBB Baa 10,000 Pennsylvania Convention Center Authority, Revenue
- --3.8% Refunding Bonds, Series A, 6.75% due 9/01/2019 10,787
Pennsylvania HFA, Refunding:
AA Aa2 8,800 RIB, AMT, Series 1991-31C, 9.68% due 10/01/2023 (k) 9,647
AAA Aaa 7,850 (Rental Housing), 6.50% due 7/01/2023 (d) 8,122
AAA A1 5,000 Pennsylvania State, 3rd Series A, UT, 6.50% due 11/15/2001 (j) 5,473
AAA Aaa 10,000 Pennsylvania State Higher Educational Assistance Agency,
Student Loan Revenue Bonds, RIB, AMT, 9.317%
due 9/03/2026 (c) (k) 11,238
NR* NR* 2,000 Pennsylvania State Higher Educational Facilities
Authority, College and University Revenue Bonds
(Eastern College), Series B, 8% due 10/15/2025 2,139
AAA Aaa 4,800 Pittsburgh, Pennsylvania, Water and Sewer Authority,
Water and Sewer System, Revenue Refunding Bonds,
Series A, 6.75% due 9/01/2001 (e) (j) 5,309
AAA Aaa 2,500 York County, Pennsylvania, Hospital Authority Revenue
Bonds (York Hospital), 7% due 1/01/2001 (c) (j) 2,754
Rhode AAA Aaa 5,250 Rhode Island Depositors Economic Protection Corporation,
Island--0.4% Special Obligation Bonds, Series A, 6.95% due 8/01/2002 (j) 5,923
South AAA Aaa 2,500 Spartanburg County, South Carolina, Hospital Revenue
Carolina--0.2% Bonds (Health Services District Inc.), Series A,
5.50% due 4/15/2027 (f) 2,439
</TABLE>
56
<PAGE> 123
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997
(in Thousands)
Municipal Bonds National Portfolio
---------------------------------------------------------------------------------------------------------
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <S> <S> <C> <S> <C>
South AAA Aa1 $ 9,085 South Dakota HDA, Homeownership Mortgage, Series A,
Dakota--0.7% 7.15% due 5/01/2027 $ 9,551
Tennessee--1.9% NR* Aaa 10,000 Knox County, Tennessee, Health, Educational and
Housing Facilities Board, Hospital Facilities Revenue
Bonds (Baptist Health System of East Tennessee),
8.60% due 4/15/1999 (j) 10,916
AAA Aaa 14,750 Metropolitan Government, Nashville and Davidson County,
Tennessee (Meharry Medical College Project), 6.875% due
12/01/2004 (j) 16,999
Texas--16.8% AAA Aaa 10,000 Bexar County, Texas, Health Facilities Development
Corporation, Revenue Refunding Bonds (Baptist Health
Systems), Series A, 5.25% due 11/15/2027 (f) 9,326
Brazos River Authority, Texas, PCR (Texas Utilities
Electric Company Project), AMT, Series A:
BBB+ Baa1 2,095 8.25% due 1/01/2019 2,230
BBB+ Baa1 18,150 7.875% due 3/01/2021 19,958
A- A2 12,350 Brazos River Authority, Texas, Revenue Refunding Bonds
(Houston Light and Power), Series 1989-A, 7.625% due 5/01/2019 13,175
BBB Baa1 7,250 Gulf Coast Waste Disposal Authority, Texas, Revenue Bonds
(Champion International Corporation), AMT, 7.45% due 5/01/2026 7,890
AA Aa3 19,000 Harris County, Texas, Health Facilities Development
Corporation, Health Care System Revenue Bonds
(Sisters of Charity), 7.10% due 7/01/2001 (j) 21,183
Harris County, Texas, Health Facilities Development
Corporation, Hospital Revenue Bonds:
A1+ NR* 200 (Methodist Hospital), 5.50% due 12/01/2025 (a) 200
AAA Aaa 10,150 RITR, Series 12, 8.07% due 10/01/2024 (k) 11,317
AAA Aaa 10,000 Refunding (Memorial Hospital System Project), Series A,
5.50% due 6/01/2024 (f) 9,766
AAA Aa3 12,470 (Saint Luke's Episcopal Hospital Project), Series A,
6.75% due 2/15/2001 (j) 13,667
AAA Aaa 11,100 Harris County, Texas, Toll Road Revenue Bonds, Senior Lien,
Series A, 6.375% due 8/15/2024 (f) 11,953
Houston, Texas, Water and Sewer System, Revenue Refunding
Bonds, Junior Lien, Series A:
AAA Aaa 10,000 6.20% due 12/01/2023 (f) 10,501
AAA Aaa 10,000 5.25% due 12/01/2025 (e) 9,518
BB Ba1 8,095 Jefferson County, Texas, Health Facilities Development
Corporation, Hospital Revenue Bonds (Baptist
Healthcare System Project), 8.875% due 6/01/2021 8,523
AA Aa 12,000 North Central Texas, Health Facilities Development
Corporation Revenue Bonds (Baylor University
Medical Center), INFLOS, Series A, 9.715% due
5/15/2001 (j) (k) 14,415
BB Ba 3,000 Odessa, Texas, Junior College District, Revenue
Refunding Bonds, Series A, 8.125% due 12/01/2018 3,258
A+ Aa 5,195 Texas Housing Agency, Residential Development Mortgage
Revenue Bonds, Series A, 7.50% due 7/01/2015 (i) 5,538
Texas State Turnpike Authority, Dallas North Thruway
Revenue Bonds (President George Bush Turnpike) (e):
AAA Aaa 15,000 5.25% due 1/01/2023 14,311
AAA Aaa 30,000 5% due 1/01/2025 27,608
AA Aa 4,440 Texas State Veteran's Housing Assistance (Fund II),
AMT, UT, Series A, 7% due 12/01/2025 4,713
AA Aa 16,000 Texas State Water Development, Series A, B, and C,
5.25% due 8/01/2028 15,338
AAA Aa1 15,000 Texas Water Development Revenue Board, State Revolving
Fund, Senior-Lien, Series B, 5.125% due 7/15/2018 14,321
Utah--3.6% A1+ VMIG1++ 10,300 Emery County, Utah, PCR, Refunding (Pacificorp Projects),
VRDN, 4.10% due 11/01/2024 (a) (c) 10,300
A+ A1 20,000 Intermountain Power Agency, Utah, Power Supply Revenue
Refunding Bonds, Series D, 5% due 7/01/2021 18,254
AAA Aaa 5,000 Murray City, Utah, Hospital Revenue Bonds (IHC Health
Services Inc.), 4.75% due 5/15/2020 (f) 4,351
AAA Aaa 5,500 Utah County, Utah, Hospital Revenue Bonds (IHC Health
Services, Inc.), 5.25% due 8/15/2026 5,120
AAA Aaa 13,250 Weber County, Utah, Municipal Building Authority,
Lease Revenue Bonds, 7.50% due 12/15/2004 (j) 15,795
Virginia--1.5% AAA Aaa 20,000 Prince William County, Virginia, Service Authority,
Water and Sewer System, Revenue Refunding Bonds,
5% due 7/01/2021 (e) 18,328
AA+ Aa1 4,000 Virginia State, HDA, Commonwealth Mortgage, Series A,
7.15% due 1/01/2033 4,183
Washington--3.3% AA Aaa 10,000 Washington State, GO, Series B, UT, 6.75% due 6/01/2001 (j) 10,845
AAA Aaa 13,860 Washington State, GO, Series C, 5% due 1/01/2022 (e) 12,863
</TABLE>
57
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<TABLE>
<S> <S> <S> <C> <S> <C>
AAA NR* 18,070 Washington State Housing Finance Commission, S/F
Mortgage Revenue Refunding Bonds, AMT, Series E,
7.10% due 7/01/2022 (g) 18,878
AA- Aaa 5,000 Washington State Public Power Supply System, Revenue
Refunding Bonds (Nuclear Project No. 1), Series A,
6.875% due 7/01/2001 (j) 5,538
West NR* NR* 4,000 Upshur County, West Virginia, Solid Waste Disposal
Virginia--0.9% Revenue Bonds (TJ International Project), AMT,
7% due 7/15/2025 4,218
AAA Aaa 8,400 West Virginia State, Housing Development Fund,
Housing Finance, Series D, 7.05% due 11/01/2024 8,854
Wisconsin--1.9% AA Aa 4,925 Wisconsin Housing and EDA, Home Ownership Revenue Bonds,
Series A, 7.10% due 3/01/2023 5,186
Wisconsin Housing and EDA, Housing Revenue Bonds:
A A1 5,400 Series B, 7.05% due 11/01/2022 5,716
A A1 5,105 Series C, 7% due 5/01/2015 5,405
AAA Aaa 11,400 Wisconsin State Health and Educational Facilities
Authority Revenue Bonds (Wausau Hospitals Inc.), Series B,
6.70% due 8/15/2020 (c) 12,205
Total Investments (Cost--$1,357,588)--98.0% 1,448,055
Other Assets Less Liabilities--2.0% 29,832
----------
Net Assets--100.0% $1,477,887
==========
<FN>
(A)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at June 30, 1997.
(B)FHA Insured.
(C)AMBAC Insured.
(D)FNMA Collateralized.
(E)FGIC Insured.
(F)MBIA Insured.
(G)GNMA/FNMA Collateralized.
(H)FSA Insured.
(I)GNMA Collateralized.
(J)Prerefunded.
(K)The interest rate is subject to change periodically and inversely
based upon prevailing market rates. The interest rate shown is the
rate in effect at June 30, 1997.
*Not Rated.
**Represents a zero coupon bond; the interest rate shown is the
effective yield at the time of purchase by the Portfolio.
++Highest short-term rating issued by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
</TABLE>
58
<PAGE> 125
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997
(in Thousands)
Municipal Bonds Limited Maturity Portfolio
----------------------------------------------------------------------------------------------------
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <S> <S> <C> <S> <C>
Alabama--1.0% A1+ NR* $ 4,100 Birmingham, Alabama, Medical Clinic Board Revenue
Bonds (U.A.H.S.F.), VRDN, 5.50% due 12/01/2026 (b) $ 4,100
Arizona--1.2% AAA Aaa 5,000 Phoenix, Arizona, Airport Revenue Refunding Bonds,
Series A, 5.55% due 7/01/2000 (d) 5,174
Arkansas--0.1% NR* Aa 460 Arkansas State Student Loan Authority Revenue Bonds,
AMT, Senior Series A-1, 5.50% due 12/01/1998 467
California--2.4% SP1+ VMIG1++ 5,000 Los Angeles County, California, Local Educational
Agencies, COP, TRAN, Series B, 4.50% due 9/30/1998 (e) 5,026
SP1+ NR* 5,000 Santa Barbara County, California, TRAN, Series A, 4.50%
due 10/01/1998 5,029
Connecticut--2.7% AAA Aaa 2,160 Bridgeport, Connecticut, Refunding, GO, UT, Series A,
4.40% due 9/01/1998 (c) 2,171
AAA Aaa 8,900 Connecticut State Special Assessment (Unemployment
Compensation Advance Fund), Revenue Refunding Bonds,
Series A, 5.50% due 5/15/2001 (c) 9,255
District of A1+ VMIG1++ 10,000 District of Columbia, General Fund Recovery
Columbia-- Bonds, VRDN, UT, Series B-2, 5.25% due 6/01/2003 (b) 10,000
2.4%
Florida--1.4% AAA Aaa 4,000 Florida School Boards Association Incorporated,
Lease Revenue Bonds (Orange County School Board
Project), 6.80% due 7/01/1998 (c) 4,116
A1+ VMIG1++ 1,500 Hillsborough County, Florida, IDA, PCR, Refunding
(Tampa Electric Company Project), VRDN, 4% due
5/15/2018 (b) 1,500
Georgia--2.5% A NR* 6,410 Burke County, Georgia, Development Authority, PCR,
Refunding (Oglethorpe Power Corporation) (Plant
Vogtle Project), Series B, 3.95% due 1/01/1999 6,375
AAA Aaa 4,000 Georgia Municipal Electric Authority, General Power
Revenue Refunding Bonds, Series D, 6% due
1/01/2000 (c) 4,157
Hawaii--2.1% AAA Aaa 3,200 Hawaii State, GO, Refunding, Series CO, 6% due 3/01/2001 (f) 3,366
A+ Aa3 5,250 Hawaii State, GO, UT, Series CH, 4.75% due 11/01/1999 5,311
Illinois--7.8% AA- NR* 10,000 Chicago, Illinois, Board of Education, COP (School
Reform Equipment Acquisition), 4.60% due 12/01/1999 10,038
AA- Baa1 5,000 Chicago, Illinois, School Finance Authority, 7.25%
due 6/01/1998 5,116
AAA Aaa 3,000 Cook County, Illinois, High School District No. 205,
Revenue Refunding Bonds (Thorton Township), UT, 5.60%
due 6/01/1998 (f) (g) 3,048
AA Aa1 6,425 Cook County, Illinois, Township High School District
No. 211 (Palatine and Schaumb), 4.25% due 12/01/1998 6,444
Illinois State Refunding, GO, UT:
AA- Aa3 4,600 3.90% due 12/01/1998 4,587
AAA Aaa 3,500 5.125% due 12/01/1999 (f) 3,576
Kentucky--2.2% Kentucky State Property and Buildings Commission,
Revenue Refunding Bonds:
A+ A 5,000 (Project No. 55), 4.10% due 9/01/1998 5,004
A+ A 4,000 (Project No. 59), 5% due 11/01/1998 4,048
Louisiana--5.9% A1+ VMIG1++ 5,000 Louisiana State Recovery District, Sales Tax
Revenue Bonds, 4.25% due 7/01/1998 (d) (g) 5,021
AAA Aaa 19,230 Louisiana State Refunding, GO, Series A, 5.50%
due 8/01/1998 (f) 19,546
Massachusetts AAA Aaa 2,005 Massachusetts State Health and Educational
- --2.9% Facilities Authority Revenue Bonds (New England Medical
Center Hospitals), Series G, 3.80% due 7/01/1997 (d) 2,005
A- A1 10,160 New England Education Loan Marketing Corporation
Refunding Bonds (Massachusetts Student Loan),
Series D, 4.75% due 7/01/1998 10,231
Michigan--3.8% AAA Aaa 8,000 Detroit, Michigan, Distributable State Aid, 7.20%
due 5/01/1999 (a) (c) 8,576
AA- A1 6,000 Michigan State Building Authority, Revenue Refunding
Bonds, Series I, 5.80% due 10/01/1998 6,127
</TABLE>
59
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<TABLE>
<S> <S> <S> <C> <S> <C>
NR* VMIG1++ 800 Michigan State Strategic Fund, Solid Waste Disposal
Revenue Bonds (Grayling Generating Project),
VRDN, AMT, 4.25% due 1/01/2014 (b) 800
Minnesota--1.3% AAA Aaa 2,385 Metropolitan Council, Minnesota, St. Paul Metropolitan
Area Transit, UT, Series C, 4.75% due 2/01/2000 2,414
AAA Aaa 2,965 Minnesota State, HFA (Rental Housing), Refunding,
Series D, 4.50% due 8/01/1999 (d) 2,983
Mississippi--2.4% NR* Aaa 10,000 Mississippi Higher Education Assistance Corporation,
Student Loan Revenue Bonds, AMT, Series B, 4.80%
due 9/01/1998 10,061
Nebraska--1.5% A+ A1 6,250 Nebraska Public Power District Revenue Bonds (Consumer
Public Power District), 4.90% due 7/01/1998 6,309
New Jersey--3.6% A A1 2,000 Camden County, New Jersey, Improvement Authority, Solid
Waste Disposal, Revenue Refunding Bonds (Landfill Project),
4% due 7/01/1997 2,000
NR* NR* 3,000 New Jersey State, EDA, Economic Growth Revenue Bonds
(Greater Mercer County), VRDN, Series C, 4.25% due
11/01/2011 (b) 3,000
AAA Aaa 5,715 New Jersey State Educational Facilities Authority
Revenue Bonds (Higher Education Facilities Trust Fund),
Series A, 5.125% due 9/01/1999 (c) 5,829
AA+ Aa1 4,250 New Jersey State Refunding, UT, Series O, 5.10% due 2/15/2000 4,341
New York--10.4% AA- Aa2 4,550 Municipal Assistance Corporation, Refunding, Series E,
5.50% due 7/01/2000 4,700
A1+ VMIG1++ 100 New York City, New York, Municipal Water Finance Authority,
Water and Sewer System Revenue Bonds, VRDN, Series G, 5.50%
due 6/15/2024 (b) (f) 100
New York State Dormitory Authority Revenue Bonds
(Consolidated City University System), Series A:
BBB Baa1 6,675 4.50% due 7/01/1998 6,711
BBB Baa1 10,885 4.75% due 7/01/1999 10,945
AAA Aaa 3,000 New York State Dormitory Authority Revenue Bonds
(State University Educational), Series A, 7.125% due
5/15/1999 (a) 3,218
A- A2 11,820 New York State GO, Refunding, 7.80% due 11/15/1998 12,397
BBB Aaa 5,000 New York State Urban Development Corporation Revenue
Bonds (State Facilities), 7.50% due 4/01/2001 (a) 5,634
Ohio--12.4% AAA Aaa 2,000 Cincinnati, Ohio, City School District, TAN, Series B,
5% due 12/01/1998 (c) 2,026
NR* Aa1 6,000 Franklin County, Ohio, Hospital Revenue Refunding
Bonds (US Health Corp.), Series B, 4.50% due 6/01/2000 6,005
Ohio State Air Quality Development Authority, Revenue
Refunding Bonds (Ohio Edison Project), Series A:
A1+ VMIG1++ 7,500 3.95% due 2/01/1998 7,502
A1+ VMIG1++ 7,000 4.35% due 8/01/1998 7,003
NR* Aaa 6,700 Ohio State Buillding Authority, Correctional Facilities,
Series A, 7.35% due 8/01/1999 (a) 7,251
AAA Aa1 12,400 Ohio State Highway, GO, Series V, 4.70% due 5/15/2000 12,556
AAA Aaa 3,500 Ohio State Public Facilities Commission, Higher
Education Capital Facilities, Series II-A, 4.375% due
11/01/1999 (d) 3,516
NR* Aaa 6,000 Student Loan Funding Corporation, Cincinnati, Ohio,
Student Loan Revenue Refunding Bonds, AMT, Series C,
5.70% due 7/01/1999 6,123
Oklahoma--0.6% AA Aa 2,400 Tulsa, Oklahoma, GO, UT, 5.125% due 5/01/1999 2,443
</TABLE>
60
<PAGE> 127
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997
(in Thousands)
Municipal Bonds Limited Maturity Portfolio
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <S> <S> <C> <S> <C>
Oregon--0.7% A1+ VMIG1++ $ 3,000 Port Saint Helens, Oregon, PCR (Portland General Electric
Company Project), VRDN, Series A, 5.40% due 4/01/2010 (b) $ 3,000
Pennsylvania A1+ P1 4,000 Beaver County, Pennsylvania, IDA, PCR, Refunding
- --4.1% (Ohio Edison Co.), Series A, 4.30% due 10/01/1997 4,006
AAA Aaa 8,675 Pennsylvania State Refunding Bonds, GO, UT, 5.25%
due 11/15/1998 (f) 8,818
AAA Aaa 4,145 Pittsburgh, Pennsylvania, Refunding, UT, Series A,
5% due 3/01/2000 (d) 4,214
South Carolina-- AA- A1 8,250 Greenville County, South Carolina, School District,
2.0% UT, 4% due 3/01/1999 8,235
Tennessee--2.9% AA NR* 11,885 Clarksville, Tennessee, Public Building Authority,
Revenue Refunding Bonds (Pooled Loan Program),
4.40% due 12/01/1998 11,926
Texas--6.6% Brazos, Texas, Higher Education Authority Incorporated,
Student Loan Revenue Refunding Bonds, AMT:
NR* Aaa 2,200 Senior Lien, Series A-2, 5.45% due 6/01/1998 2,228
NR* Aa 5,135 Series C-1, 5.60% due 11/01/1997 5,163
Harris County, Texas, Health Facilities Development
Corporation, Hospital Revenue Bonds, VRDN (b):
A1+ NR* 5,900 (Methodist Hospital), 5.50% due 12/01/2025 5,900
AAA NR* 1,000 (Saint Luke's Episcopal Hospital), Series B, 5.50%
due 9/15/1997 (a) 1,000
AAA NR* 100 (Saint Luke's Episcopal Hospital), Series D, 5.50%
due 9/15/1997 (a) 100
AA+ Aa3 6,700 Houston, Texas, Independent School District, Public
Property Financial Contractual Obligation, 5% due
7/15/1999 6,816
AAA Aaa 2,600 Houston, Texas, Water and Sewer Systems, Revenue
Refunding Bonds, Junior Lien, Series C, 5.90% due
12/01/1999 (c) 2,701
NR* Aaa 2,455 Panhandle-Plains, Texas, Higher Education Authority
Incorporated, Student Loan Revenue Refunding Bonds,
Series C, 4.15% due 9/01/1997 2,456
A+ A2 2,000 Texas Municipal Power Agency, Revenue Refunding Bonds,
GO, Series A, 4.25% due 9/01/1997 2,001
Utah--1.1% AAA Aaa 4,700 Utah State Building and Highway, GO, UT, 4.40% due 7/01/1999 4,730
Virginia--0.6% AA Aa 2,555 Virginia State Transportation Board, Transportation
Contract Revenue Bonds (US Route 58 Corridor),
Series B, 5% due 5/15/2000 2,604
Washington--4.7% AAA Aaa 5,000 Seattle, Washington, Municipality Metropolitan Seattle
Sewer Revenue Bonds, Series U, 6.60% due 1/01/2001 (a) (f) 5,448
AA- Aa1 4,890 Washington State Public Power Supply System, Revenue
Refunding Bonds (Nuclear Project No. 2), Series A,
3.75% due 7/01/1997 4,890
AA Aa1 4,655 Washington State Refunding Bonds, GO, Series R-96B,
5% due 7/01/1998 4,705
Washington State Refunding Bonds, Motor Vehicle Fuel Tax:
AA Aa1 2,000 Series R-94B, 4.20% due 9/01/1998 2,005
AA Aa1 2,285 Series R-96A, 5% due 7/01/1998 2,310
Wisconsin--8.0% NR* NR* 4,500 Ashland County, Wisconsin, Promissary Notes, GO,
4.25% due 9/01/1997 4,502
NR* VMIG1++ 4,000 Mequon, Wisconsin, BAN, 4.10% due 11/01/1998 3,999
A A1 2,795 Wisconsin Housing and Economic Development Authority,
Housing Revenue Refunding Bonds, Series C, 4.30% due 11/01/1997 2,801
AA Aa2 11,000 Wisconsin State, GO, Refunding, UT, Series 3, 4.25%
due 11/01/1999 11,026
AA Aa2 4,385 Wisconsin State, GO, Series C, 5.50% due 5/01/2000 4,527
AAA NR* 5,720 Wisconsin State Health and Educational Facilities
Authority Revenue Bonds (Medical College of Wisconsin),
Series D, 7.35% due 12/01/2000 (a) 6,339
Wyoming--0.1% NR* P1 500 Uinta County, Wyoming, PCR, Refunding (Chevron USA Inc.
Project), VRDN, 5.50% due 8/15/2020 (b) 500
</TABLE>
61
<PAGE> 128
<TABLE>
<S> <C>
Total Investments (Cost--$422,830)--101.4% 424,231
Liabilities in Excess of Other Assets--(1.4%) (5,824)
----------
Net Assets--100.0% $ 418,407
==========
<FN>
(A)Prerefunded.
(B)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at June 30, 1997.
(C)AMBAC Insured.
(D)MBIA Insured.
(E)FSA Insured.
(F)FGIC Insured.
(G)Escrowed to maturity.
*Not Rated.
++Highest short-term rating issued by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
</TABLE>
62
<PAGE> 129
<TABLE>
STATEMENTS OF ASSETS AND LIABILITIES
<CAPTION>
Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997
Limited
Insured National Maturity
Portfolio Portfolio Portfolio
<S> <S> <C> <C> <C>
Assets: Investments, at value* (Note 1a).......... $2,023,013,288 $1,448,054,588 $ 424,230,840
Cash...................................... 341,447 27,022 8,214
Receivables:
Interest................................ 33,075,339 24,381,071 5,787,339
Securities sold......................... 790,557 32,781,265 --
Capital shares sold..................... 495,726 2,646,269 150,322
Prepaid registration fees and
other assets (Note 1e).................... 62,244 45,650 35,641
-------------- -------------- --------------
Total assets.............................. 2,057,778,601 1,507,935,865 430,212,356
-------------- -------------- --------------
Liabilities: Payables:
Securities purchased.................... -- 25,674,754 10,052,250
Capital shares redeemed................. 2,061,664 1,683,390 1,193,090
Dividends to shareholders (Note 1f)..... 2,087,176 1,569,055 319,585
Investment adviser (Note 2)............. 594,019 563,269 113,098
Distributor (Note 2).................... 352,997 276,962 17,801
Accrued expenses and other liabilities.... 448,645 281,479 109,734
-------------- -------------- --------------
Total liabilities......................... 5,544,501 30,048,909 11,805,558
-------------- -------------- --------------
Net Assets: Net assets................................ $2,052,234,100 $1,477,886,956 $ 418,406,798
============== ============== ==============
Net Assets Class A Common Stock, $0.10
Consist of: par value++............................... $ 17,887,640 $ 9,478,498 $ 3,459,447
Class B Common Stock, $0.10
par value++++............................. 6,953,748 4,001,411 546,268
Class C Common Stock, $0.10
par value++++++........................... 147,978 270,686 1,085
Class D Common Stock, $0.10
par value++++++++......................... 476,701 491,440 205,079
Paid-in capital in excess of par.......... 1,918,211,598 1,431,757,690 417,358,735
Accumulated realized capital losses
on investments--net (Note 5).............. (4,046,911) (58,579,321) (4,564,588)
Unrealized appreciation on
investments--net.......................... 112,603,346 90,466,552 1,400,772
-------------- -------------- --------------
Net assets................................ $2,052,234,100 $1,477,886,956 $ 418,406,798
============== ============== ==============
Net Asset Class A:
Value: Net assets.............................. $1,441,784,905 $ 983,649,868 $ 343,640,605
============== ============== ==============
Shares outstanding...................... 178,876,402 94,784,980 34,594,470
============== ============== ==============
Net asset value and redemption
price per share......................... $ 8.06 $ 10.38 $ 9.93
============== ============== ==============
Class B:
Net assets.............................. $ 560,105,263 $ 415,103,109 $ 54,275,249
============== ============== ==============
Shares outstanding...................... 69,537,481 40,014,114 5,462,680
============== ============== ==============
Net asset value and redemption
price per share......................... $ 8.05 $ 10.37 $ 9.94
============== ============== ==============
Class C:
Net assets.............................. $ 11,922,182 $ 28,095,834 $ 107,551
============== ============== ==============
Shares outstanding...................... 1,479,783 2,706,856 10,849
============== ============== ==============
Net asset value and redemption
price per share......................... $ 8.06 $ 10.38 $ 9.91
============== ============== ==============
Class D:
Net assets.............................. $ 38,421,750 $ 51,038,145 $ 20,383,393
============== ============== ==============
Shares outstanding...................... 4,767,006 4,914,399 2,050,790
============== ============== ==============
Net asset value and redemption
price per share......................... $ 8.06 $ 10.39 $ 9.94
============== ============== ==============
</TABLE>
63
<PAGE> 130
<TABLE>
<S> <S> <C> <C> <C>
<FN>
*IDENTIFIED COST......................... $1,910,409,942 $1,357,588,036 $ 422,830,068
============== ============== ==============
++AUTHORIZED SHARES--CLASS A.............. 500,000,000 375,000,000 150,000,000
============== ============== ==============
++++AUTHORIZED SHARES--CLASS B.............. 375,000,000 375,000,000 150,000,000
============== ============== ==============
++++++AUTHORIZED SHARES--CLASS C.............. 375,000,000 375,000,000 150,000,000
============== ============== ==============
++++++++AUTHORIZED SHARES--CLASS D.............. 500,000,000 375,000,000 150,000,000
============== ============== ==============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENTS OF OPERATIONS
<CAPTION>
Limited
Insured National Maturity
For the Year Ended June 30, 1997 Portfolio Portfolio Portfolio
<S> <S> <C> <C> <C>
Investment Interest and amortization of premium
Income (Note 1d): and discount earned....................... $ 134,133,814 $ 93,607,495 $ 20,199,235
-------------- -------------- --------------
Expenses: Investment advisory fees (Note 2)......... 8,042,098 6,961,453 1,552,369
Account maintenance and
distribution fees--Class B (Note 2)....... 4,901,030 3,073,016 222,614
Transfer agent fees--Class A (Note 2)..... 497,705 353,478 82,086
Transfer agent fees--Class B (Note 2)..... 275,141 186,850 18,726
Accounting services (Note 2).............. 249,511 142,298 41,718
Custodian fees............................ 186,028 130,167 43,968
Account maintenance and distribution
fees--Class C (Note 2).................... 134,437 162,696 634
Registration fees (Note 1e)............... 184,229 94,978 1,102
Account maintenance fees--Class D (Note 2) 116,523 126,564 17,810
Printing and shareholder reports.......... 115,250 66,878 28,907
Professional fees......................... 93,805 67,598 21,232
Pricing services.......................... 30,251 27,987 11,936
Directors' fees and expenses.............. 25,803 21,508 5,615
Transfer agent fees--Class D (Note 2)..... 15,283 18,048 3,561
Transfer agent fees--Class C (Note 2)..... 7,771 9,161 69
Other..................................... 51,012 22,915 5,612
-------------- -------------- --------------
Total expenses............................ 14,925,877 11,465,595 2,057,959
-------------- -------------- --------------
Investment income--net.................... 119,207,937 82,141,900 18,141,276
-------------- -------------- --------------
Realized & Realized gain on investments--net......... 37,935,579 18,687,317 1,870,059
Unrealized Gain on Change in unrealized appreciation on
Investments--Net investments--net.......................... 5,465,463 18,217,116 104,267
(Notes 1b, 1d -------------- -------------- --------------
& 3): Net Increase in Net Assets Resulting
from Operations........................... $ 162,608,979 $ 119,046,333 $ 20,115,602
============== ============== ==============
See Notes to Financial Statements.
</TABLE>
64
<PAGE> 131
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997
Insured Portfolio National Portfolio
--------------------------- -----------------------------
For the Year For the Year
Ended June 30, Ended June 30,
--------------------------- -----------------------------
INCREASE (DECREASE) IN NET ASSETS: 1997 1996 1997 1996
<S> <S> <C> <C> <C> <C>
Operations: Investment income--net............ $ 119,207,937 $ 131,085,773 $ 82,141,900 $ 83,697,410
Realized gain (loss)
on investments--net............... 37,935,579 (3,897,219) 18,687,317 3,774,748
Change in unrealized
appreciation/depreciation
on investments--net............... 5,465,463 3,149,618 18,217,116 10,373,235
-------------- -------------- -------------- --------------
Net increase in net assets
resulting from operations......... 162,608,979 130,338,172 119,046,333 97,845,393
-------------- -------------- -------------- --------------
Dividends & Investment income--net:
Distributions to Class A......................... (84,438,105) (92,116,281) (57,401,862) (60,489,070)
Shareholders Class B......................... (31,486,251) (36,347,050) (20,879,493) (20,995,504)
(Note 1f): Class C......................... (800,743) (626,972) (1,024,766) (462,078)
Class D......................... (2,482,838) (1,995,470) (2,835,779) (1,750,758)
Realized gain on investments--net:
Class A......................... -- -- -- --
Class B......................... -- -- -- --
Class C......................... -- -- -- --
Class D......................... -- -- -- --
-------------- -------------- -------------- --------------
Net decrease in net assets resulting
from dividends and distributions
to shareholders................... (119,207,937) (131,085,773) (82,141,900) (83,697,410)
-------------- -------------- -------------- --------------
Capital Share Net increase (decrease) in net
Transactions assets derived from capital
(Note 4): share transactions................ (357,799,862) (155,203,186) 916,838 (78,305,357)
-------------- -------------- -------------- --------------
Net Assets: Total increase (decrease)
in net assets..................... (314,398,820) (155,950,787) 37,821,271 (64,157,374)
Beginning of year................. 2,366,632,920 2,522,583,707 1,440,065,685 1,504,223,059
-------------- -------------- -------------- --------------
End of year....................... $2,052,234,100 $2,366,632,920 $1,477,886,956 $1,440,065,685
============== ============== ============== ==============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
Limited Maturity Portfolio
--------------------------------
For the Year
Ended June 30,
--------------------------------
Increase (Decrease) in Net Assets: 1997 1996
<S> <S> <C> <C>
Operations: Investment income--net............ $ 18,141,276 $ 21,711,132
Realized gain (loss)
on investments--net............... 1,870,059 1,322,566
Change in unrealized
appreciation/depreciation
on investments--net............... 104,267 (1,526,762)
-------------- --------------
Net increase in net assets
resulting from operations......... 20,115,602 21,506,936
-------------- --------------
Dividends & Investment income--net:
Distributions to Class A......................... (15,176,552) (18,019,083)
Shareholders Class B......................... (2,274,531) (3,055,609)
(Note 1f): Class C......................... (6,456) (25,939)
Class D......................... (683,737) (610,501)
Realized gain on investments--net:
Class A......................... (666,000) --
Class B......................... (108,061) --
Class C......................... (293) --
Class D......................... (28,170) --
-------------- --------------
Net decrease in net assets resulting
from dividends and distributions
to shareholders................... (18,943,800) (21,711,132)
-------------- --------------
Capital Share Net increase (decrease) in net
Transactions assets derived from capital
(Note 4): share transactions................ (86,916,618) (176,922,554)
-------------- --------------
Net Assets: Total increase (decrease)
in net assets..................... (85,744,816) (177,126,750)
Beginning of year................. 504,151,614 681,278,364
-------------- --------------
End of year....................... $ 418,406,798 $ 504,151,614
============== ==============
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Insured Portfolio
The following per share data and ratios ---------------------------
have been derived from information Class A
provided in the financial statements. ---------------------------
For the Year Ended June 30,
--------------------------------------------------------------------------
INCREASE (DECREASE)
IN NET ASSET VALUE: 1997 1996 1995 1994 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of year...... $ 7.91 $ 7.92 $ 7.88 $ 8.64 $ 8.26
Performance: ------------ ------------ ------------ ------------ ------------
Investment income--net.. .45 .44 .46 .47 .50
Realized and unrealized
gain (loss) on
investments--net....... .15 (.01) .18 (.53) .49
------------ ------------ ------------ ------------ ------------
</TABLE>
65
<PAGE> 132
<TABLE>
<S> <S> <C> <C> <C> <C> <C>
Total from investment
operations.............. .60 .43 .64 (.06) .99
------------ ------------ ------------ ------------ ------------
Less dividends and
distributions:
Investment income--net (.45) (.44) (.46) (.47) (.50)
Realized gain on
investments--net...... -- -- (.14) (.23) (.11)
------------ ------------ ------------ ------------ ------------
Total dividends and
distributions........... (.45) (.44) (.60) (.70) (.61)
------------ ------------ ------------ ------------ ------------
Net asset value,
end of year............. $ 8.06 $ 7.91 $ 7.92 $ 7.88 $ 8.64
============ ============ ============ ============ ============
Total Investment Based on net asset
Return:* value per share......... 7.72% 5.51% 8.60% (1.08%) 12.41%
============ ============ ============ ============ ============
Ratios to Average Expenses................ .44% .43% .43% .42% .42%
Net Assets: ============ ============ ============ ============ ============
Investment income--net.. 5.58% 5.55% 5.78% 5.53% 5.94%
============ ============ ============ ============ ============
Supplemental Net assets, end of
Data: year (in thousands)..... $ 1,441,785 $ 1,572,835 $ 1,706,064 $ 1,941,741 $ 2,225,188
============ ============ ============ ============ ============
Portfolio turnover...... 74.40% 78.49% 35.61% 28.34% 43.86%
============ ============ ============ ============ ============
<CAPTION>
Insured Portfolio
THE FOLLOWING PER SHARE DATA AND RATIOS -----------------
HAVE BEEN DERIVED FROM INFORMATION Class B
PROVIDED IN THE FINANCIAL STATEMENTS. -----------------
For the Year Ended June 30,
---------------------------------------------------------------------------
INCREASE (DECREASE)
IN NET ASSET VALUE: 1997 1996 1995 1994 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of year....... $ 7.91 $ 7.92 $ 7.87 $ 8.63 $ 8.26
Performance: ------------ ------------ ------------ ------------ ------------
Investment income--net.. .39 .38 .40 .40 .44
Realized and unrealized
gain (loss) on
investments--net........ .14 (.01) .19 (.53) .48
------------ ------------ ------------ ------------ ------------
Total from investment
operations.............. .53 .37 .59 (.13) .92
------------ ------------ ------------ ------------ ------------
Less dividends and
distributions:
Investment income--net (.39) (.38) (.40) (.40) (.44)
Realized gain on
investments--net...... -- -- (.14) (.23) (.11)
------------ ------------ ------------ ------------ ------------
Total dividends and
distributions........... (.39) (.38) (.54) (.63) (.55)
------------ ------------ ------------ ------------ ------------
Net asset value,
end of year............. $ 8.05 $ 7.91 $ 7.92 $ 7.87 $ 8.63
============ ============ ============ ============ ============
Total Investment Based on net asset
Return:* value per share......... 6.78% 4.71% 7.91% (1.81%) 11.44%
============ ============ ============ ============ ============
Ratios to Average Expenses................ 1.19% 1.19% 1.19% 1.17% 1.18%
Net Assets: ============ ============ ============ ============ ============
Investment income--net.. 4.82% 4.80% 5.03% 4.78% 5.17%
============ ============ ============ ============ ============
Supplemental Net assets, end of
Data: year (in thousands)..... $ 560,105 $ 723,090 $ 782,748 $ 866,193 $ 911,307
============ ============ ============ ============ ============
Portfolio turnover...... 74.40% 78.49% 35.61% 28.34% 43.86%
============ ============ ============ ============ ============
<FN>
*TOTAL INVESTMENT RETURNS EXCLUDE THE EFFECTS OF SALES LOADS.
See Notes to Financial Statements.
</TABLE>
66
<PAGE> 133
<TABLE>
FINANCIAL HIGHLIGHTS (continued)
<CAPTION>
Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997
Insured Portfolio
The following per share ---------------------------------------------------------------------
data and ratios have been Class C Class D
derived from information ------------------------------- --------------------------------
provided in the financial For the Period For the Period
statements. For the Year Oct 21, 1994++ For the Year Oct 21, 1994++
Ended June 30, to June 30, Ended June 30, to June 30,
INCREASE (DECREASE) IN -------------- --------------- --------------- ---------------
NET ASSET VALUE: 1997 1996 1995 1997 1996 1995
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of period.......$ 7.91 $ 7.92 $ 7.68 $ 7.91 $ 7.92 $ 7.68
Performance: ---------- ---------- ---------- ---------- ---------- ----------
Investment income--net.. .38 .38 .27 .43 .42 .29
Realized and unrealized
gain (loss) on
investments--net.......... .15 (.01) .38 .15 (.01) .38
---------- ---------- ---------- ---------- ---------- ----------
Total from investment
operations................ .53 .37 .65 .58 .41 .67
---------- ---------- ---------- ---------- ---------- ----------
Less dividends and
distributions:
Investment income--net.. (.38) (.38) (.27) (.43) (.42) (.29)
Realized gain on
investments--net........ -- -- (.14) -- -- (.14)
---------- ---------- ---------- ---------- ---------- ----------
Total dividends and
distributions............. (.38) (.38) (.41) (.43) (.42) (.43)
---------- ---------- ---------- ---------- ---------- ----------
Net asset value,
end of period............. 8.06 $ 7.91 $ 7.92 $ 8.06 $ 7.91 $ 7.92
========== ========== ========== ========== ========== ==========
Total Investment Based on net asset
Return:** value per share........... 6.86% 4.65% 8.83%+++ 7.46% 5.25% 9.24%+++
========== ========== ========== ========== ========== ==========
Ratios to Average Expenses.................. 1.25% 1.24% 1.23%* .69% .68% .68%*
Net Assets: ========== ========== ========== ========== ========== ==========
Investment income--net.... 4.77% 4.75% 4.93%* 5.33% 5.31% 5.50%*
========== ========== ========== ========== ========== ==========
Supplemental Net assets, end of
Data: period (in thousands).....$ 11,922 $ 18,936 $ 7,756 $ 38,422 $ 51,772 $ 26,015
========== ========== ========== ========== ========== ==========
Portfolio turnover........ 74.40% 78.49% 35.61% 74.40% 78.49% 35.61%
========== ========== ========== ========== ========== ==========
<CAPTION>
National Portfolio
The following per share --------------------------------------------------------------------------
data and ratios have been Class A
derived from information --------------------------------------------------------------------------
provided in the financial For the Yeear Ended June 30,
statements. --------------------------------------------------------------------------
INCREASE (DECREASE)
IN NET ASSET VALUE: 1997 1996 1995 1994 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of year.........$ 10.11 $ 10.02 $ 10.08 $ 11.02 $ 10.64
Performance: ------------ ------------ ------------ ------------ ------------
Investment income--net .60 .60 .60 .62 .67
Realized and unrealized
gain (loss) on
investments--net.......... .27 .09 .15 (.64) .57
------------ ------------ ------------ ------------ ------------
Total from investment
operations................ .87 .69 .75 (.02) 1.24
------------ ------------ ------------ ------------ ------------
Less dividends and
distributions:
Investment income--net.. (.60) (.60) (.60) (.62) (.67)
Realized gain on
investments--net........ -- -- (.19) (.30) (.19)
In excess of realized
gain on investments--net.. -- -- (.02) -- --
------------ ------------ ------------ ------------ ------------
Total dividends and
distributions............. (.60) (.60) (.81) (.92) (.86)
------------ ------------ ------------ ------------ ------------
Net asset value,
end of year...............$ 10.38 $ 10.11 $ 10.02 $ 10.08 $ 11.02
============ ============ ============ ============ ============
Total Investment Based on net asset
Return:** value per share........... 8.84% 6.98% 7.89% (.47%) 12.19%
============ ============ ============ ============ ============
Ratios to Average Expenses.................. .55% .56% .56% .55% .55%
Net Assets: ============ ============ ============ ============ ============
Investment income--net.... 5.86% 5.89% 6.01% 5.72% 6.23%
============ ============ ============ ============ ============
Supplemental Net assets, end of
Data: year (in thousands).......$ 983,650 $ 983,550 $ 1,059,440 $ 1,203,181 $ 1,353,805
============ ============ ============ ============ ============
Portfolio turnover........ 99.52% 95.09% 103.65% 73.33% 65.43%
============ ============ ============ ============ ============
</TABLE>
67
<PAGE> 134
<TABLE>
<CAPTION>
The following per share data and ratios
have been derived from information National Portfolio
provided in the financial statements. ---------------------------
Class B
---------------------------
For the Year Ended June 30,
---------------------------
INCREASE (DECREASE)
IN NET ASSET VALUE: 1997 1996 1995 1994 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of year.........$ 10.11 $ 10.02 $ 10.07 $ 11.02 $ 10.63
Performance: ------------ ------------ ------------ ------------ ------------
Investment income--net.... .52 .52 .52 .54 .59
Realized and unrealized
gain (loss) on
investments--net.......... .26 .09 .16 (.65) .58
------------ ------------ ------------ ------------ ------------
Total from investment
operations................ .78 .61 .68 (.11) 1.17
------------ ------------ ------------ ------------ ------------
Less dividends and
distributions:
Investment income--net.. (.52) (.52) (.52) (.54) (.59)
Realized gain on
investments--net........ -- -- (.19) (.30) (.19)
In excess of realized
gain on investments--net.. -- -- (.02) -- --
------------ ------------ ------------ ------------ ------------
Total dividends and
distributions............. (.52) (.52) (.73) (.84) (.78)
------------ ------------ ------------ ------------ ------------
Net asset value,
end of year...............$ 10.37 $ 0.11 $ 10.02 $ 10.07 $ 11.02
============ ============ ============ ============ ============
Total Investment Based on net asset
Return:** value per share........... 7.92% 6.17% 7.28% (1.39%) 11.45%
============ ============ ============ ============ ============
Ratios to Average Expenses.................. 1.31% 1.32% 1.32% 1.30% 1.31%
Net Assets: ============ ============ ============ ============ ============
Investment income--net.... 5.10% 5.13% 5.25% 4.97% 5.46%
============ ============ ============ ============ ============
Supplemental Net assets, end of
Data: year (in thousands).......$ 415,103 $ 399,341 $ 419,933 $ 459,169 $ 424,071
============ ============ ============ ============ ============
Portfolio turnover........ 99.52% 95.09% 103.65% 73.33% 65.43%
============ ============ ============ ============ ============
<CAPTION>
The following per share National Portfolio
data and ratios have been -----------------------------------------------------------------------
derived from information Class C Class D
provided in the financial --------------------------------- -------------------------------
statements. For the Period For the Period
For the Year Oct 21, 1994++ For the Year Oct 21, 1994++
Ended June 30, to June 30, Ended June 30, to June 30,
INCREASE (DECREASE) IN -------------------- --------------------
NET ASSET VALUE: 1997 1996 1995 1997 1996 1995
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of period.......$ 10.11 $ 10.03 $ 9.85 $ 10.12 $ 10.03 $ 9.85
Performance: ---------- ---------- ---------- ---------- ---------- ----------
Investment income--net .52 .52 .36 .58 .57 .40
Realized and unrealized
gain on investments--net.. .27 .08 .39 .27 .09 .39
---------- ---------- ---------- ---------- ---------- ----------
Total from investment
operations................ .79 .60 .75 .85 .66 .79
---------- ---------- ---------- ---------- ---------- ----------
Less dividends and
distributions:
Investment
income--net............. (.52) (.52) (.36) (.58) (.57) (.40)
Realized gain on
investments--net........ -- -- (.19) -- -- (.19)
In excess of
realized gain on
investments--net........ -- -- (.02) -- -- (.02)
---------- ---------- ---------- ---------- ---------- ----------
Total dividends and
distributions............. (.52) (.52) (.57) (.58) (.57) (.61)
---------- ---------- ---------- ---------- ---------- ----------
Net asset value,
end of period.............$ 10.38 $ 10.11 $ 10.03 $ 10.39 $ 10.12 $ 10.03
========== ========== ========== ========== ========== ==========
Total Investment Based on net asset
Return:** value per share........... 7.97% 6.01% 7.97%+++ 8.57% 6.71% 8.37%+++
========== ========== ========== ========== ========== ==========
Ratios to Average Expenses.................. 1.36% 1.37% 1.37%* .80% .81% .81%*
Net Assets: ========== ========== ========== ========== ========== ==========
Investment income--net.... 5.04% 5.08% 5.21%* 5.60% 5.64% 5.78%*
========== ========== ========== ========== ========== ==========
Supplemental Net assets, end of
Data: period (in thousands).....$ 28,096 $ 13,291 $ 5,195 $ 51,038 $ 43,884 $ 19,656
========== ========== ========== ========== ========== ==========
Portfolio turnover........ 99.52% 95.09% 103.65% 99.52% 95.09% 103.65%
========== ========== ========== ========== ========== ==========
<FN>
*ANNUALIZED.
**TOTAL INVESTMENT RETURNS EXCLUDE THE EFFECTS OF SALES LOADS.
++COMMENCEMENT OF OPERATIONS
+++AGGREGATE TOTAL INVESTMENT RETURN.
See Notes to Financial Statements.
</TABLE>
68
<PAGE> 135
Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997
<TABLE>
FINANCIAL HIGHLIGHTS (concluded)
<CAPTION>
The following per share
data and ratios have Limited Maturity Portfolio for the Period
been derived from ----------------------------------------------------------- ---------------
information provided Class A Nov. 2, 1992 to
in the financial ----------------------------------------------------------- ---------------
statements. For the Year Ended June 30, June 30, 1993
----------------------------------------------------------- ---------------
INCREASE (DECREASE)
IN NET ASSET VALUE: 1997 1996 1995 1994 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of year $ 9.91 $ 9.92 $ 9.87 $ 10.01 $ 9.91
Performance: ------------ ----------- ------------ ------------ ------------
Investment income--net .39 .38 .38 .37 .41
Realized and unrealized
gain (loss) on
investments--net .04 (.01) .05 (.14) .10
------------ ----------- ------------ ------------ ------------
Total from investment
operations .43 .37 .43 .23 .51
------------ ----------- ------------ ------------ ------------
Less dividends and
distributions:
Investment income--net (.39) (.38) (.38) (.37) (.41)
Realized gain on
investments--net (.02) -- -- -- --
------------ ----------- ------------ ------------ ------------
Total dividends and
distributions (.41) (.38) (.38) (.37) (.41)
------------ ----------- ------------ ------------ ------------
Net asset value,
end of year $ 9.93 $ 9.91 $ 9.92 $ 9.87 $ 10.01
============ =========== ============ ============ ============
Total Investment Based on net asset
Return:** value per share 4.40% 3.75% 4.53% 2.30% 5.28%
============ =========== ============ ============ ============
Ratios to Average Expenses .39% .44% .41% .40% .41%
Net Assets: ============ =========== ============ ============ ============
Investment income--net 3.93% 3.83% 3.86% 3.68% 4.13%
============ =========== ============ ============ ============
Supplemental Net assets, end of
Data: year (in thousands) $ 343,641 $ 417,097 $ 536,474 $ 790,142 $ 846,736
============ =========== ============ ============ ============
Portfolio turnover 61.90% 88.32% 37.33% 45.67% 65.43%
============ =========== ============ ============ ============
<CAPTION>
The following per share Limited Maturity Portfolio for the Period
data and ratios have ----------------------------------------------------------- ---------------
been derived from Class B Nov. 2, 1992 to
information provided in ----------------------------------------------------------- ---------------
the financial statements. For the Year Ended June 30, June 30, 1993
----------------------------------------------------------- ---------------
INCREASE (DECREASE)
IN NET ASSET VALUE: 1997 1996 1995 1994 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of period $ 9.91 $ 9.92 $ 9.87 $ 10.01 $ 9.93
Performance: ------------ ----------- ------------ ------------- ------------
Investment income--net .36 .35 .35 .33 .24
Realized and unrealized
gain (loss) on
investments--net .05 (.01) .05 (.14) .08
------------ ----------- ------------ ------------- ------------
Total from investment
operations .41 .34 .40 .19 .32
------------ ----------- ------------ ------------- ------------
Less dividends and
distributions:
Investment income--net (.36) (.35) (.35) (.33) (.24)
Realized gain on
investments--net (.02) -- -- -- --
------------ ----------- ------------ ------------- ------------
Total dividends and
distributions (.38) (.35) (.35) (.33) (.24)
------------ ----------- ------------ ------------- ------------
Net asset value,
end of period $ 9.94 $ 9.91 $ 9.92 $ 9.87 $ 10.01
============ =========== ============ ============ ============
Total Investment Based on net asset
Return:** value per share 4.13% 3.37% 4.14% 1.98% 3.26%+++
============ =========== ============ ============ ============
Ratios to Average Expenses .75% .80% .78% .76% .76%*
Net Assets: ============ =========== ============ ============ ============
Investment income--net 3.58% 3.46% 3.50% 3.33% 3.60%*
============ =========== ============ ============ ============
Supplemental Net assets, end of
Data: period (in thousands) $ 54,275 $ 71,075 $ 129,581 $ 145,534 $ 95,179
============ =========== ============ ============ ============
Portfolio turnover 61.90% 88.32% 37.33% 45.67% 65.43%
============ =========== ============ ============ ============
</TABLE>
69
<PAGE> 136
<TABLE>
<CAPTION>
Limited Maturity Portfolio
The following per share ----------------------------------------------------------------------
data and ratios have been Class C Class D
derived from information --------------------------------- ---------------------------------
provided in the financial For the Period For the Period
statements. For the Year Oct 21, 1994++ For the Year Oct 21, 1994++
Ended June 30, to June 30, Ended June 30, to June 30,
INCREASE (DECREASE) IN -------------------------------- ---------------------------------
NET ASSET VALUE: 1997 1996 1995 1997 1996 1995
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of period..... $ 9.88 $ 9.92 $ 9.83 $ 9.91 $ 9.93 $ 9.83
Performance: ---------- ---------- ---------- ---------- ---------- ----------
Investment income--net.. .35 .34 .25 .38 .37 .26
Realized and unrealized
gain (loss) on
investments--net........ .05 (.04) .09 .05 (.02) .10
---------- ---------- ---------- ---------- ---------- ----------
Total from investment
operations.............. .40 .30 .34 .43 .35 .36
---------- ---------- ---------- ---------- ---------- ----------
Less dividends
and distributions:
Investment income--net (.35) (.34) (.25) (.38) (.37) (.26)
Realized gain on
investments--net...... (.02) -- -- (.02) -- --
---------- ---------- ---------- ---------- ---------- ----------
Total dividends and
distributions........... (.37) (.34) (.25) (.40) (.37) (.26)
---------- ---------- ---------- ---------- ---------- ----------
Net asset value,
end of period........... $ 9.91 $ 9.88 $ 9.92 $ 9.94 $ 9.91 $ 9.93
========== ========== ========== ========== ========== ==========
Total Investment Based on net asset
Return:** value per share......... 4.11% 2.97% 3.52%+++ 4.40% 3.55% 3.73%+++
========== ========== ========== ========== ========== ==========
Ratios to Average Expenses................ .75% .80% .70%* .48% .54% .53%*
Net Assets: ========== ========== ========== ========== ========== ==========
Investment income--net.. 3.57% 3.41% 3.61%* 3.84% 3.71% 3.78%*
========== ========== ========== ========== ========== ==========
Supplemental Net assets, end of
Data: period (in thousands)... $ 108 $ 94 $ 3,965 $ 20,383 $ 15,886 $ 11,258
========== ========== ========== ========== ========== ==========
Portfolio turnover...... 61.90% 88.32% 37.33% 61.90% 88.32% 37.33%
========== ========== ========== ========== ========== ==========
<FN>
*ANNUALIZED.
**TOTAL INVESTMENT RETURNS EXCLUDE THE EFFECTS OF SALES LOADS.
++COMMENCEMENT OF OPERATIONS.
+++AGGREGATE TOTAL INVESTMENT RETURN.
See Notes to Financial Statements.
</TABLE>
70
<PAGE> 137
Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
Merrill Lynch Municipal Bond Fund, Inc. (the "Fund") is registered
under the Investment Company Act of 1940 as a diversified, open-end
management investment company. The Fund's Portfolios offer four
classes of shares under the Merrill Lynch Select Pricing SM System.
Shares of Class A and Class D are sold with a front-end sales
charge. Shares of Class B and Class C may be subject to a contingent
deferred sales charge. All classes of shares have identical voting,
dividend, liquidation and other rights and the same terms and
conditions, except that Class B, Class C and Class D Shares bear
certain expenses related to the account maintenance of such shares,
and Class B and Class C Shares also bear certain expenses related to
the distribution of such shares. Each class has exclusive voting
rights with respect to matters relating to its account maintenance
and distribution expenditures. The following is a summary of
significant accounting policies followed by the Fund.
(a) VALUATION OF INVESTMENTS--Insured Portfolio: Where bonds in the
Portfolio have not been insured pursuant to policies obtained by the
issuer, the Fund has obtained insurance with respect to the payment
of interest and principal of each bond. Such insurance is valid as
long as the bonds are held by the Fund.
ALL PORTFOLIOS: Municipal bonds and money market securities are
traded primarily in the over-the-counter markets and are valued at
the most recent bid price or yield equivalent as obtained from
dealers that make markets in such securities. Positions in futures
contracts and options thereon, which are traded on exchanges, are
valued at closing prices as of the close of such exchanges. Assets
for which market quotations are not readily available are valued at
fair value on a consistent basis using methods determined in good
faith by the Fund's Board of Directors, 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 National and Limited Maturity
Portfolios (the "Portfolios") may purchase or sell interest rate
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
Portfolios deposit and maintain as collateral such initial margin as
required by the exchange on which the transaction is effected.
Pursuant to the contract, the Portfolios agree 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 Portfolios as unrealized
gains or losses. When the contract is closed, the Portfolios record
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.
(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) PREPAID REGISTRATION FEES--Prepaid registration fees are charged
to expenses as the related shares are issued.
(f) DIVIDENDS AND DISTRIBUTIONS--Dividends from net investment
income are declared daily and paid monthly. Distributions of capital
gains are recorded on the ex-dividend dates.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS
WITH AFFILIATES:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner. The Fund has also entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
FAM is responsible for the management of the Fund's portfolios and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operation of the Fund. For such
services, FAM receives at the end of each month a fee with respect
71
<PAGE> 138
to each Portfolio at the annual rates set forth below which are
based upon the average daily value of the Fund's net assets.
<TABLE>
<CAPTION>
Rate of Advisory Fee
--------------------------------
AGGREGATE OF AVERAGE DAILY LIMITED
NET ASSETS OF THE THREE INSURED NATIONAL MATURITY
COMBINED PORTFOLIOS PORTFOLIO PORTFOLIO PORTFOLIO
- -------------------------- --------- --------- ---------
<S> <C> <C> <C>
Not exceeding $250 million .40 % .50 % .40 %
In excess of $250 million
but not exceeding $400 million .375 .475 .375
In excess of $400 million
but not exceeding $550 million .375 .475 .35
In excess of $550 million
but not exceeding $1.5 billion .375 .475 .325
In excess of $1.5 billion .35 .475 .325
</TABLE>
Pursuant to the distribution plans (the "Distribution Plans")
adopted by the Fund in accordance with Rule 12b-1 under the
Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are
accrued daily and paid monthly at annual rates based upon the
average daily net assets of the shares as follows:
<TABLE>
<CAPTION>
ACCOUNT MAINTENANCE FEES DISTRIBUTION FEES
----------------------------------- ---------------------------------
LIMITED LIMITED
INSURED NATIONAL MATURITY INSURED NATIONAL MATURITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Class B .25% .25% .15% .50% .50% .20%
Class C .25% .25% .15% .55% .55% .20%
Class D .25% .25% .10% -- -- --
---- ---- ---- ---- ---- ---
</TABLE>
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to the
Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services to
Class B, Class C and Class D shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing shareholder
and distribution-related services to Class B and Class C
shareholders.
For the year ended June 30, 1997, MLFD earned underwriting
discounts and direct commissions and MLPF&S earned dealer
concessions on sales of the Fund's Class A and Class D Shares
follows:
<TABLE>
<CAPTION>
LIMITED
INSURED NATIONAL MATURITY
PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- ---------
<S> <C> <C> <C>
CLASS A SHARES:
MLFD $ 24,532 $ 16,659 $ 1,139
MLPF&S 168,171 149,402 11,295
-------- -------- -------
CLASS D SHARES:
MLFD 7,722 11,866 1,634
MLPF&S 69,053 98,975 20,019
-------- -------- -------
</TABLE>
For the year ended June 30, 1997, MLPF&S received contingent
deferred sales charges of $1,906,615 relating to transactions in
Class B Shares, amounting to $979,435, $868,705 and $58,475 in the
Insured, National and Limited Maturity Portfolios, respectively, and
$17,583, relating to transactions in Class C Shares, amounting to
$6,915, $10,273 and $395 in the Insured, National and Limited
Maturity Portfolios, respectively, and $358,940 relating to
transactions in Class D Shares, amounting to $180,983 and $177,957
in the Insured and National Portfolios, respectively.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, MLFD, MLFDS, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities,
for the year ended June 30, 1997 were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
--------- -----
<S> <C> <C>
Insured Portfolio $1,539,869,960 $1,795,948,640
National Portfolio 1,385,982,904 1,395,027,690
Limited Maturity Portfolio 259,616,429 327,912,199
-------------- --------------
</TABLE>
Net realized and unrealized gains (losses) as of June 30, 1997 were
as follows:
<TABLE>
<CAPTION>
REALIZED UNREALIZED
INSURED PORTFOLIO GAINS GAINS
- ----------------- -------- ----------
<S> <C> <C>
Long-term investments $ 37,935,579 $ 112,603,346
-------------- --------------
Total $ 37,935,579 $ 112,603,346
============== ==============
<CAPTION>
REALIZED UNREALIZED
NATIONAL PORTFOLIO GAINS (LOSSES) GAINS
- ------------------ -------------- ----------
<S> <C> <C>
Long-term investments $ 22,647,030 $ 90,466,552
Financial futures contracts (3,959,713) --
-------------- --------------
Total $ 18,687,317 $ 90,466,552
============== ==============
</TABLE>
72
<PAGE> 139
Merrill Lynch Municipal Bond Fund Inc., June 30, 1997
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------
REALIZED UNREALIZED
LIMITED MATURITY PORTFOLIO GAINS GAINS
- -------------------------- -------- ----------
Long-term investments $ 1,870,059 $ 1,388,965
Short-term investments -- 11,807
-------------- --------------
Total $ 1,870,059 $ 1,400,772
============== ==============
- --------------------------------------------------------------
As of June 30, 1997 net unrealized appreciation/depreciation for
Federal income tax purposes were as follows:
- ---------------------------------------------------------------------
GROSS GROSS NET
UNREALIZED UNREALIZED UNREALIZED
APPRECIATION DEPRECIATION APPRECIATION
------------ ------------ ------------
Insured Portfolio $114,126,818 $ (1,772,618) $112,354,200
National Portfolio 92,758,314 (2,333,380) 90,424,934
Limited Maturity
Portfolio 1,811,320 (410,548) 1,400,772
- ---------------------------------------------------------------------
The aggregate cost of investments at June 30, 1997 for Federal
income tax purposes was $1,910,659,088 for the Insured Portfolio,
$1,357,629,654 for the National Portfolio, and $422,830,068 for the
Limited Maturity Portfolio.
4. CAPITAL SHARE TRANSACTIONS:
Net increase (decrease) on net assets derived from capital share
transactions for years ended June 30, 1997 and June 30, 1996 were
$(357,799,862) and $(155,203,186), respectively, for the Insured
Portfolio; $916,838 and $(78,305,357), respectively for the National
Portfolio and $(86,916,618) and $(176,922,554), respectively, for
the Limited Maturity Portfolio.
Transactions in capital shares for each class were as follows:
- --------------------------------------------------------------
INSURED PORTFOLIO
- --------------------------------------------------------------
CLASS A SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1997 SHARES AMOUNT
- --------------------------- ------ ------
Shares sold 4,575,281 $ 36,693,201
Shares issued to shareholders
in reinvestment of dividends 4,476,285 35,809,346
-------------- --------------
Total issued 9,051,566 72,502,547
Shares redeemed (28,976,583) (232,180,607)
-------------- --------------
Net decrease (19,925,017) $ (159,678,060)
============== ==============
- --------------------------------------------------------------
INSURED PORTFOLIO
- --------------------------------------------------------------
CLASS A SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1996 SHARES AMOUNT
- --------------------------- ------ ------
Shares sold 5,469,354 $ 44,001,252
Shares issued to shareholders
in reinvestment of dividends 4,986,858 40,042,330
-------------- --------------
Total issued 10,456,212 84,043,582
Shares redeemed (27,028,706) (217,178,396)
-------------- --------------
Net decrease (16,572,494) $ (133,134,814)
============== ==============
- --------------------------------------------------------------
INSURED PORTFOLIO
- --------------------------------------------------------------
CLASS B SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1997 SHARES AMOUNT
- --------------------------- ------ ------
Shares sold 5,729,555 $ 45,791,612
Shares issued to shareholders
in reinvestment of dividends 2,004,591 16,028,058
-------------- --------------
Total issued 7,734,146 61,819,670
Automatic conversion of shares (654,971) (5,237,060)
Shares redeemed (29,004,786) (232,763,104)
-------------- --------------
Net decrease (21,925,611) $ (176,180,494)
============== ==============
- --------------------------------------------------------------
INSURED PORTFOLIO
- --------------------------------------------------------------
CLASS B SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1996 SHARES AMOUNT
- --------------------------- ------ ------
Shares sold 13,419,351 $ 107,963,983
Shares issued to shareholders
in reinvestment of dividends 2,346,122 18,823,418
-------------- --------------
Total issued 15,765,473 126,787,401
Automatic conversion of shares (355,991) (2,835,885)
Shares redeemed (22,831,309) (183,110,029)
-------------- --------------
Net decrease (7,421,827) $ (59,158,513)
============== ==============
- --------------------------------------------------------------
INSURED PORTFOLIO
- --------------------------------------------------------------
CLASS C SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1997 SHARES AMOUNT
- --------------------------- ------ ------
Shares sold 742,610 $ 5,954,624
Shares issued to shareholders
in reinvestment of dividends 65,517 524,081
-------------- --------------
Total issued 808,127 6,478,705
Shares redeemed (1,722,393) (13,923,454)
-------------- --------------
Net decrease (914,266) $ (7,444,749)
============== ==============
- --------------------------------------------------------------
73
<PAGE> 140
- --------------------------------------------------------------
INSURED PORTFOLIO
- --------------------------------------------------------------
CLASS C SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1996 SHARES AMOUNT
- --------------------------------------------------------------
Shares sold 1,893,607 $ 15,225,385
Shares issued to shareholders
in reinvestment of dividends 53,775 431,720
-------------- --------------
Total issued 1,947,382 15,657,105
Shares redeemed (532,614) (4,266,135)
-------------- --------------
Net increase 1,414,768 $ 11,390,970
============== ==============
- --------------------------------------------------------------
INSURED PORTFOLIO
- --------------------------------------------------------------
CLASS D SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1997 SHARES AMOUNT
- --------------------------------------------------------------
Shares sold 12,779,520 $ 101,973,172
Automatic conversion of shares 654,971 5,237,060
Shares issued to shareholders
in reinvestment of dividends 147,570 1,180,790
-------------- --------------
Total issued 13,582,061 108,391,022
Shares redeemed (15,359,300) (122,887,581)
-------------- --------------
Net decrease (1,777,239) $ (14,496,559)
============== ==============
- --------------------------------------------------------------
INSURED PORTFOLIO
- --------------------------------------------------------------
CLASS D SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1996 SHARES AMOUNT
- --------------------------------------------------------------
Shares sold 14,968,451 $ 120,849,832
Automatic conversion of shares 355,872 2,835,885
Shares issued to shareholders
in reinvestment of dividends 118,797 953,911
-------------- --------------
Total issued 15,443,120 124,639,628
Shares redeemed (12,181,923) (98,940,457)
-------------- --------------
Net increase 3,261,197 $ 25,699,171
============== ==============
- --------------------------------------------------------------
NATIONAL PORTFOLIO
- --------------------------------------------------------------
CLASS A SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1997 SHARES AMOUNT
- --------------------------------------------------------------
Shares sold 7,233,788 $ 74,396,433
Shares issued to shareholders
in reinvestment of dividends 2,685,525 27,558,310
-------------- --------------
Total issued 9,919,313 101,954,743
Shares redeemed (12,395,672) (127,128,438)
-------------- --------------
Net decrease (2,476,359) $ (25,173,695)
============== ==============
- --------------------------------------------------------------
NATIONAL PORTFOLIO
- --------------------------------------------------------------
CLASS A SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1996 SHARES AMOUNT
- --------------------------------------------------------------
Shares sold 1,874,548 $ 19,100,358
Shares issued to shareholders
in reinvestment of dividends 2,851,242 29,021,298
-------------- --------------
Total issued 4,725,790 48,121,656
Shares redeemed (13,151,450) (133,904,005)
-------------- --------------
Net decrease (8,425,660) $ (85,782,349)
============== ==============
- --------------------------------------------------------------
NATIONAL PORTFOLIO
- --------------------------------------------------------------
CLASS B SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1997 SHARES AMOUNT
- --------------------------------------------------------------
Shares sold 11,777,487 $ 121,489,230
Shares issued to shareholders
in reinvestment of dividends 975,743 10,006,225
-------------- --------------
Total issued 12,753,230 131,495,455
Automatic conversion of shares (495,542) (5,075,762)
Shares redeemed (11,745,518) (120,476,972)
-------------- --------------
Net increase 512,170 $ 5,942,721
============== ==============
- --------------------------------------------------------------
NATIONAL PORTFOLIO
- --------------------------------------------------------------
CLASS B SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1996 SHARES AMOUNT
- --------------------------------------------------------------
Shares sold 6,798,097 $ 69,266,670
Shares issued to shareholders
in reinvestment of dividends 964,834 9,817,408
-------------- --------------
Total issued 7,762,931 79,084,078
Automatic conversion of shares (175,462) (1,776,371)
Shares redeemed (9,989,397) (101,634,492)
-------------- --------------
Net decrease (2,401,928) $ (24,326,785)
============== ==============
- --------------------------------------------------------------
NATIONAL PORTFOLIO
- --------------------------------------------------------------
CLASS C SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1997 SHARES AMOUNT
- --------------------------------------------------------------
Shares sold 2,182,254 $ 22,508,694
Shares issued to shareholders
in reinvestment of dividends 56,394 579,121
-------------- --------------
Total issued 2,238,648 23,087,815
Shares redeemed (845,937) (8,691,227)
-------------- --------------
Net increase 1,392,711 $ 14,396,588
============== ==============
- --------------------------------------------------------------
NATIONAL PORTFOLIO
- --------------------------------------------------------------
CLASS C SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1996 SHARES AMOUNT
- --------------------------------------------------------------
Shares sold 1,026,234 $ 10,483,940
Shares issued to shareholders
in reinvestment of dividends 22,712 231,247
-------------- --------------
Total issued 1,048,946 10,715,187
Shares redeemed (252,941) (2,580,645)
-------------- --------------
Net increase 796,005 $ 8,134,542
============== ==============
- --------------------------------------------------------------
NATIONAL PORTFOLIO
- --------------------------------------------------------------
CLASS D SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1997 SHARES AMOUNT
- --------------------------------------------------------------
Shares sold 10,536,060 $ 108,053,333
Automatic conversion of shares 495,032 5,075,762
Shares issued to shareholders
in reinvestment of dividends 114,893 1,179,969
-------------- --------------
Total issued 11,145,985 114,309,064
Shares redeemed (10,568,675) (108,557,840)
-------------- --------------
Net increase 577,310 $ 5,751,224
============== ==============
74
<PAGE> 141
Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997
NOTES TO FINANCIAL STATEMENTS (concluded)
- --------------------------------------------------------------
NATIONAL PORTFOLIO
- --------------------------------------------------------------
CLASS D SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1996 SHARES AMOUNT
- --------------------------------------------------------------
Shares sold 13,624,624 $ 139,439,739
Automatic conversion of shares 175,315 1,776,371
Shares issued to shareholders
in reinvestment of dividends 74,448 759,889
-------------- --------------
Total issued 13,874,387 141,975,999
Shares redeemed (11,497,765) (118,306,764)
-------------- --------------
Net increase 2,376,622 $ 23,669,235
============== ==============
- --------------------------------------------------------------
LIMITED MATURITY PORTFOLIO
- --------------------------------------------------------------
CLASS A SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1997 SHARES AMOUNT
- --------------------------------------------------------------
Shares sold 2,507,909 $ 24,924,435
Shares issued to shareholders
in reinvestment of dividends and
distributions 920,017 9,134,741
-------------- --------------
Total issued 3,427,926 34,059,176
Shares redeemed (10,923,304) (108,467,108)
-------------- --------------
Net decrease (7,495,378) $ (74,407,932)
============== ==============
- --------------------------------------------------------------
LIMITED MATURITY PORTFOLIO
- --------------------------------------------------------------
CLASS A SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1996 SHARES AMOUNT
- --------------------------------------------------------------
Shares sold 2,286,543 $ 22,746,544
Shares issued to shareholders
in reinvestment of dividends 1,098,806 10,929,822
-------------- --------------
Total issued 3,385,349 33,676,366
Shares redeemed (15,364,211) (152,811,221)
-------------- --------------
Net decrease (11,978,862) $ (119,134,855)
============== ==============
- --------------------------------------------------------------
LIMITED MATURITY PORTFOLIO
- --------------------------------------------------------------
CLASS B SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1997 SHARES AMOUNT
- --------------------------------------------------------------
Shares sold 1,746,766 $ 17,337,114
Shares issued to shareholders
in reinvestment of dividends and
distributions 156,709 1,556,287
-------------- --------------
Total issued 1,903,475 18,893,401
Automatic conversion of shares (11,559) (114,986)
Shares redeemed (3,599,880) (35,740,926)
-------------- --------------
Net decrease (1,707,964) $ (16,962,511)
============== ==============
- --------------------------------------------------------------
LIMITED MATURITY PORTFOLIO
- --------------------------------------------------------------
CLASS B SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1996 SHARES AMOUNT
- --------------------------------------------------------------
Shares sold 1,855,378 $ 18,448,441
Shares issued to shareholders
in reinvestment of dividends 196,945 1,959,129
-------------- --------------
Total issued 2,052,323 20,407,570
Automatic conversion of shares (1,991) (19,792)
Shares redeemed (7,937,046) (78,947,865)
-------------- --------------
Net decrease (5,886,714) $ (58,560,087)
============== ==============
- --------------------------------------------------------------
LIMITED MATURITY PORTFOLIO
- --------------------------------------------------------------
CLASS C SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1997 SHARES AMOUNT
- --------------------------------------------------------------
Shares sold 125,730 $ 1,243,007
Shares issued to shareholders
in reinvestment of dividends and
distributions 526 5,211
-------------- --------------
Total issued 126,256 1,248,218
Shares redeemed (124,926) (1,236,530)
-------------- --------------
Net increase 1,330 $ 11,688
============== ==============
75
<PAGE> 142
- --------------------------------------------------------------
LIMITED MATURITY PORTFOLIO
- --------------------------------------------------------------
CLASS C SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1996 SHARES AMOUNT
- --------------------------------------------------------------
Shares sold 1,035,202 $ 10,296,541
Shares issued to shareholders
in reinvestment of dividends 1,535 15,247
-------------- --------------
Total issued 1,036,737 10,311,788
Shares redeemed (1,426,909) (14,189,010)
-------------- --------------
Net decrease (390,172) $ (3,877,222)
============== ==============
- --------------------------------------------------------------
LIMITED MATURITY PORTFOLIO
- --------------------------------------------------------------
CLASS D SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1997 SHARES AMOUNT
- --------------------------------------------------------------
Shares sold 3,468,693 $ 34,441,741
Automatic conversion of shares 11,555 114,986
Shares issued to shareholders
in reinvestment of dividends and
distributions 40,524 402,564
-------------- --------------
Total issued 3,520,772 34,959,291
Shares redeemed (3,072,180) (30,517,154)
-------------- --------------
Net increase 448,592 $ 4,442,137
============== ==============
- --------------------------------------------------------------
LIMITED MATURITY PORTFOLIO
- --------------------------------------------------------------
CLASS D SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1996 SHARES AMOUNT
- --------------------------------------------------------------
Shares sold 5,319,786 $ 52,931,793
Automatic conversion of shares 1,989 19,792
Shares issued to shareholders
in reinvestment of dividends 32,445 322,874
-------------- --------------
Total issued 5,354,220 53,274,459
Shares redeemed (4,886,241) (48,624,849)
-------------- --------------
Net increase 467,979 $ 4,649,610
============== ==============
5. CAPITAL LOSS CARRYFORWARD:
At June 30, 1997, the Fund had a net capital loss carryforward as
follows: Approximately $4,620,000 in the Insured Portfolio, of which
$1,981,000 expires in 2003 and $2,639,000 expires in 2004;
approximately $48,141,000 in the National Portfolio, of which
$19,665,000 expires in 2003 and $28,476,000 expires in 2004; and
approximately $4,658,000 in the Limited Maturity Portfolio, of which
$2,590,000 expires in 1998, $22,000 expires in 1999, $25,000 expires
in 2002, and $2,021,000 expires in 2003. These amounts will be
available to offset like amounts of any future taxable gains.
76
<PAGE> 143
- ------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Investment Objective and Policies....... 2
Insurance on Portfolio Securities..... 2
Risk Factors In Transactions In Junk
Bonds............................... 2
Transactions In Futures Contracts..... 3
Investment Restrictions................. 4
Management of the Fund.................. 6
Directors and Officers................ 6
Compensation of Directors............. 8
Management and Advisory
Arrangements........................ 8
Purchase of Shares...................... 11
Initial Sales Charge Alternatives --
Class A and Class D Shares.......... 11
Reduced Initial Sales Charges -- Class
A and Class D Shares................ 13
Distribution Plans.................... 16
Limitations on the Payment of Deferred
Sales Charges....................... 17
Redemption of Shares.................... 19
Reinstatement Privilege............... 20
Deferred Sales Charge --
Class B and Class C Shares.......... 20
Determination of Net Asset Value........ 21
Portfolio Transactions and Brokerage
Commissions........................... 22
Dividends, Distributions and Taxes...... 23
Shareholder Services.................... 26
Investment Account.................... 26
Automatic Investment Plans............ 27
Automatic Reinvestment of Dividends
and Capital Gains Distributions..... 27
Systematic Withdrawal Plans........... 28
Exchange Privilege.................... 29
Performance Data........................ 31
Additional Information.................. 35
Organization of the Fund.............. 35
Description of Temporary
Investments......................... 36
Insurance on Portfolio Securities..... 36
Description of Financial Futures
Contracts........................... 38
Computation of Offering Price Per
Share............................... 42
Independent Auditors' Report............ 44
Financial Statements.................... 45
Code # 10130-1097
</TABLE>
Merrill Lynch Logo
MERRILL LYNCH
MUNICIPAL BOND FUND, INC.
[MLYNCH COMPASS GRAPH]
STATEMENT OF
ADDITIONAL
INFORMATION
October 7, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE> 144
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission File due to ASCII-incompatibility and
cross-references this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMDATE OR IMAGE IN TEST
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull.
<PAGE> 145
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS:
Contained in Part A:
Financial Highlights for each of the years in the ten year period
ended June 30, 1997.
Contained in Part B:
Schedules of Investments, as of June 30, 1997.
Statements of Assets and Liabilities, as of June 30, 1997.
Statements of Operations for the year ended June 30, 1997.
Statements of Changes in Net Assets for the years ended June 30, 1997
and 1996.
Financial Highlights for each of the years in the five year period
ended June 30, 1997.
(b) EXHIBITS:
1. (a) Articles of Incorporation (incorporated by reference to Exhibit 1
to Post-Effective Amendment No. 4 to Registrant's Registration Statement on Form
N-1, filed October 31, 1980 (Post-Effective Amendment No. 4)).
(b) Articles of Amendment (incorporated by reference to Exhibit 1 to
Post-Effective Amendment No. 13 to Registrant's Registration Statement on Form
N-1A, filed October 12, 1988 (Post-Effective Amendment No. 13)).
(c) Articles Supplementary to the Articles of Incorporation increasing
the authorized capital stock of the Insured Portfolio (incorporated by reference
to Exhibit 1(c) to Post-Effective Amendment No. 15 to Registrant's Registration
Statement on Form N-1A, filed October 29, 1990 (Post-Effective Amendment No.
15)).
(d) Articles Supplementary to the Articles of Incorporation
establishing Class B Common Stock of Limited Maturity Portfolio (incorporated by
reference to Exhibit 1(d) to Post-Effective Amendment No. 16, filed September 1,
1992).
2. By-Laws (incorporated by reference to Exhibit 2 to Post-Effective
Amendment No. 13).
3. Inapplicable.
4. (a) Specimen certificates for Class A shares of Insured Portfolio
Series and National Portfolio Series Common Stock of Registrant (incorporated by
reference to Exhibit 4 to Post-Effective Amendment No. 13).
(b) Specimen certificates for Class B shares of Insured Portfolio
Series and National Portfolio Series Common Stock of Registrant (incorporated by
reference to Exhibit 4 to Post-Effective Amendment No. 13).
(c) Specimen certificates for Class A shares of Limited Maturity
Portfolio Series Common Stock of Registrant (incorporated by reference to
Exhibit 4 to Post-Effective Amendment No. 4).
5. Advisory Agreement between Registrant and Fund Asset Management, Inc.
(incorporated by reference to Exhibit 5 to Post-Effective Amendment No. 4).
6. (a) Form of Amended Class A Distribution Agreement between Registrant
and Merrill Lynch Funds Distributor, Inc. (including form of Selected Dealers
Agreement incorporated by reference to Exhibit 6 to Post-Effective Amendment No.
20, filed October 31, 1995).
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<PAGE> 146
(b) Form of Class C Distribution Agreement between Registrant and
Merrill Lynch Funds Distribution Inc. (including form of Selected Dealers
Agreement, incorporated by reference to Exhibit 6 to Post-Effective Amendment
No. 20).
(c) Form of Class D Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (including form of Selected Dealers
Agreement, incorporated by reference to Exhibit 6 to Post-Effective Amendment
No. 20).
7. Inapplicable.
8. Custodian Agreement between Registrant and The Bank of New York
(incorporated by reference to Exhibit 8 to Post-Effective Amendment No. 4).
9. (a) Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between Insured Portfolio of Registrant and Financial
Data Services, Inc. (incorporated by reference to Exhibit 9 to Post-Effective
Amendment No. 13).
(b) Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between National Portfolio of Registrant and
Financial Data Services, Inc. (incorporated by reference to Exhibit 9 to
Post-Effective Amendment No. 13).
(c) Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between Limited Maturity Portfolio of Registrant and
Merrill Lynch Financial Data Services, Inc. (incorporated by reference to
Post-Effective Amendment No. 13).
10. Inapplicable.
11. Consent of Deloitte & Touche LLP (included herein).
12. Inapplicable.
13. (a) Letter from Fund Asset Management, Inc. with respect to the
purchase of 10,257 shares of Registrant's Common Stock (incorporated by
reference to Exhibit 13 to Post-Effective Amendment No. 3 to Registrant's
Registration Statement on Form N-1A, filed August 10, 1979).
(b) Letter from Fund Asset Management, L.P. with respect to the
purchase of shares of Registrant's Class C and Class D Common Stock of the
Insured Portfolio (incorporated by reference to Exhibit 13 to Post-Effective
Amendment No. 20).
(c) Letter from Fund Asset Management, L.P. with respect to the purchase
of shares of Registrant's Class C and Class D Common Stock of the National
Portfolio (incorporated by reference to Exhibit 13 to Post-Effective Amendment
No. 20).
(d) Letter from Fund Asset Management, L.P. with respect to the
purchase of shares of Registrant's Class C and Class D Common Stock of the
Limited Maturity Portfolio (incorporated by reference to Exhibit 13 to
Post-Effective Amendment No. 20).
14. Inapplicable.
15. (a) Amended and Restated Class B Distribution Plan of Registrant
(including Class B Distribution Plan Sub-Agreement incorporated by reference to
Exhibit 15 to Post-Effective Amendment No. 20).
(b) Form of Class C Distribution Plan of Registrant (including Class C
Distribution Plan Sub-Agreement, incorporated by reference to Exhibit 15 to
Post-Effective Amendment No. 20).
(c) Form of Class D Distribution Plan of Registrant (including Class D
Distribution Plan Sub-Agreement) (incorporated by reference to Exhibit 15 to
Post-Effective Amendment No. 20).
16. (a) Schedule for computation of each performance quotation for the
Class B shares of the Insured Portfolio and National Portfolio provided in the
Registration Statement in response to Item 22 (incorporated by reference to
Exhibit 16 to Post-Effective Amendment No. 14 to Registrant's Registration
Statement on Form N-1A, filed October 27, 1989 (Post-Effective Amendment No.
14)).
C-2
<PAGE> 147
(b) Schedule for computation of each performance quotation for the
Class A shares of the Insured Portfolio and National Portfolio and the shares of
the Limited Maturity Portfolio provided in the Registration Statement in
response to Item 22 (incorporated by reference to Exhibit 16 to Post-Effective
Amendment No. 13).
(c) Schedule for computation of each performance quotation for the
Class B shares of the Limited Maturity Portfolio provided in Registration
Statement in response to Item 22 (incorporated by reference to Exhibit 16 to
Post-Effective Amendment No. 14).
(d) Schedule for computation of each performance quotation for the
Class C shares of each Portfolio provided in the Registration Statement in
response to Item 22 (incorporated by reference to Exhibit 16 to Post-Effective
Amendment No. 20).
(e) Schedule for computation of each performance quotation for the
Class D shares of each Portfolio provided in the Registration Statement in
response to Item 22. (incorporated by reference to Exhibit 16 to Post-Effective
Amendment No. 20).
17. (a) Financial Data Schedule for each class of shares of the National
Portfolio, included herein.
(b) Financial Data Schedule for each class of shares of the Insured
Portfolio, included herein.
(c) Financial Data Schedule for each class of shares of the Limited
Maturity Portfolio, included herein.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Inapplicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
TITLE OF CLASS JULY 31, 1997
------------------------------------------------ -------------
<S> <C> <C>
Insured Portfolio Series -- Class A Common Stock............................ 25,443
Class B Common Stock............................ 15,514
Class C Common Stock............................ 332
Class D Common Stock............................ 770
National Portfolio Series -- Class A Common Stock............................ 23,092
Class B Common Stock............................ 13,596
Class C Common Stock............................ 1,016
Class D Common Stock............................ 1,099
Limited Maturity Portfolio -- Class A Common Stock............................ 4,994
Class B Common Stock............................ 1,495
Class C Common Stock............................ 11
Class D Common Stock............................ 174
</TABLE>
Note: The number of holders shown in the table above includes holders of record
plus beneficial owners whose shares are held of record by Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch").
ITEM 27. INDEMNIFICATION.
Reference is made to Article VI of the Registrant's Articles of
Incorporation, Article VI of the Registrant's By-Laws, Section 2-418 of the
Maryland General Corporation Law and Section 9 of the Class A, Class B, Class C
and Class D Distribution Agreements.
Insofar as the conditional advancing of indemnification moneys for actions
based on the Investment Company Act of 1940, as amended, may be concerned,
Article VI of the Registrant's By-Laws provides that such payments will be made
only on the following conditions: (i) advances may be made only on receipt of a
C-3
<PAGE> 148
written affirmation of such person's good faith belief that the standard of
conduct necessary for indemnification has been met and a written undertaking to
repay any such advance if it is ultimately determined that the standard of
conduct has not been met; and (ii)(a) such promise must be secured by a security
for the undertaking in form and amount acceptable to the Registrant, (b) the
Registrant is insured against losses arising by receipt by the advance, or (c) a
majority of a quorum of the Registrant's disinterested non-party Directors, or
an independent legal counsel in a written opinion, shall determine, based upon a
review of readily available facts, that at the time the advance is proposed to
be made, there is reason to believe that the person seeking indemnification will
ultimately be found to be entitled to indemnification.
In Section 9 of the Class A, Class B, Class C and Class D Shares
Distribution Agreements relating to the securities being offered hereby, the
Registrant agrees to indemnify the Distributor and each person, if any, who
controls the Distributor within the meaning of the Securities Act of 1933, as
amended (the "Securities Act"), against certain types of civil liabilities
arising in connection with the Registration Statement or Prospectus and
Statement of Additional Information.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to Directors, officers and controlling persons of the
Registrant and the principal underwriter pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a Director, officer,
or controlling person of the Registrant and the principal underwriter in
connection with the successful defense of any action, suit or proceeding) is
asserted by such Director, officer or controlling person or the principal
underwriter in connection with the shares being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF MANAGER.
Merrill Lynch Asset Management, L.P. (the "Manager" or "MLAM"), an
affiliate of FAM, acts as investment adviser for the following open-end
registered investment companies: Merrill Lynch Adjustable Rate Securities Fund,
Inc., Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset Builder
Program, Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income
Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Convertible Fund,
Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch Dragon
Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc.,
Merrill Lynch Fund For Tomorrow, Inc., Merrill Lynch Global Allocation Fund,
Inc., Merrill Lynch Global Bond Fund for Investment and Retirement, Merrill
Lynch Global Convertible Fund, Inc., Merrill Lynch Global Holdings, Merrill
Lynch Global Resources Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill
Lynch Global Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill
Lynch Growth Fund, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch
Intermediate Government Bond Fund, Merrill Lynch International Equity Fund,
Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund,
Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch Pacific Fund, Inc.,
Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Series Trust, Merrill
Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc.,
Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc.,
Merrill Lynch U.S.A. Government Reserves, Merrill Lynch U.S. Treasury Money
Fund, Merrill Lynch Utility Income Fund, Inc., Merrill Lynch Variable Series
Funds, Inc. and Hotchkis and Wiley Funds (advised by Hotchkis and Wiley, a
division of MLAM); and the following closed-end registered investment companies:
Merrill Lynch High Income Municipal Bond Fund, Inc. and Merrill Lynch Senior
Floating Rate Fund, Inc. MLAM also acts as sub-adviser to Merrill Lynch World
Strategy Portfolio and Merrill Lynch Basic Value Equity Portfolio, two
investment portfolios of EQ Advisory Trust.
Fund Asset Management, L.P. ("FAM"), an affiliate of MLAM, acts as the
investment adviser for the following open-end registered investment companies:
CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State
Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate
Fund Accumulation Program, Inc., Financial Institutions Series Trust, Merrill
Lynch
C-4
<PAGE> 149
Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust, Merrill
Lynch Corporate Bond Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc.,
Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for Institutions
Series, Merrill Lynch Multi-State Limited Maturity Municipal Series Trust,
Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch Municipal Bond
Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value Fund,
Inc., Merrill Lynch World Income Fund, Inc. and The Municipal Fund Accumulation
Program, Inc.; and the following closed-end registered investment companies:
Apex Municipal Fund, Inc., Corporate High Yield Fund, Inc., Corporate High Yield
Fund II, Inc., Debt Strategies Fund, Inc., Income Opportunities Fund 1999, Inc.,
Income Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund,
Inc., MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniHoldings Fund, Inc.,
MuniHoldings California Insured Fund, Inc., MuniHoldings New York Insured Fund,
Inc., MuniHoldings Florida Insured Fund, MuniInsured Fund, Inc., MuniVest Fund,
Inc., MuniVest Fund II, Inc., MuniVest Florida Fund, MuniVest Michigan Insured
Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest Pennsylvania Insured Fund,
MuniYield Arizona Fund, Inc., MuniYield California Fund, Inc., MuniYield
California Insured Fund, Inc., MuniYield California Insured Fund II, Inc.,
MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc.,
MuniYield Insured Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan
Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey
Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New York
Insured Fund II, Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund,
Inc., MuniYield Quality Fund II, Inc., Senior High Income Portfolio, Inc.,
Taurus MuniCalifornia Holdings, Inc., Taurus MuniNew York Holdings, Inc. and
Worldwide DollarVest Fund, Inc.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011. The address of Merrill Lynch Funds for
Institutions Series is One Financial Center, 15th Floor, Boston, Massachusetts
02111-2646. The address of the Manager, FAM, Princeton Services, Inc.
("Princeton Services") and Princeton Administrators L.P. is also P.O. Box 9011,
Princeton, New Jersey 08543-9011. The address of Merrill Lynch Funds
Distributor, Inc. ("MLFD") is P.O. Box 9081, Princeton, New Jersey 08543-9011.
The address of Merrill Lynch and Merrill Lynch & Co., Inc. ("ML & Co.") is World
Financial Center, North Tower, 250 Vesey Street, New York, New York 10281. The
address of Merrill Lynch Financial Data Services, Inc. ("MLFDS") is 4800 Deer
Lake Drive East, Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or employment
of a substantial nature in which each such person or entity has been engaged
since December 1, 1994 for his, her or its own account or in the capacity of
director, officer, partner or trustee. In addition, Mr. Zeikel is President, Mr.
Glenn is Executive Vice President and Mr. Richard is Treasurer of all or
substantially all of the investment companies described in the preceding
paragraphs and Messrs. Giordano, Harvey, Kirstein and Monagle are directors,
trustees or officers of one or more of such companies.
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
POSITION WITH PROFESSION, VOCATION
NAME INVESTMENT ADVISER OR EMPLOYMENT
- -------------------------------- -------------------------- -------------------------------
<S> <C> <C>
ML & Co. ....................... Limited Partner Financial Services Holding
Company; Limited Partner of
MLAM.
Princeton Services.............. General Partner General Partner of MLAM.
Arthur Zeikel................... President President of MLAM; President
and Director of Princeton
Services; Executive Vice
President of ML & Co.; Director
of MLFD.
Terry K. Glenn.................. Executive Vice President Executive Vice President of
MLAM; Executive Vice President
and Director of Princeton
Services; President and
Director of MLFD; Director of
MLFDS; President of Princeton
Administrators, L.P.
</TABLE>
C-5
<PAGE> 150
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
POSITION WITH PROFESSION, VOCATION
NAME INVESTMENT ADVISER OR EMPLOYMENT
- -------------------------------- -------------------------- -------------------------------
<S> <C> <C>
Vincent R. Giordano............. Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services.
Elizabeth Griffin............... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services.
Norman R. Harvey................ Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services.
Michael J. Hennewinkel.......... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services.
Philip L. Kirstein.............. Senior Vice President, Senior Vice President, General
General Counsel and Counsel and Secretary of MLAM;
Secretary Senior Vice President, General
Counsel, Director and Secretary
of Princeton Services; Director
of MLFD.
Ronald M. Kloss................. Senior Vice President and Senior Vice President and
Controller Controller of MLAM; Senior Vice
President and Controller of
Princeton Services.
Stephen M.M. Miller............. Senior Vice President Executive Vice President of
Princeton Administrators, L.P.;
Senior Vice President of
Princeton Services.
Joseph T. Monagle, Jr. ......... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services.
Michael L. Quinn................ Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services; Managing
Director and First Vice
President of Merrill Lynch from
1989 to 1995.
Richard L. Reller............... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services.
Gerald M. Richard............... Senior Vice President and Senior Vice President and
Treasurer Treasurer of MLAM; Senior Vice
President and Treasurer of
Princeton Services; Vice
President and Treasurer of
MLFD.
Ronald L. Welburn............... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services.
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant. MLFD acts as
the principal underwriter for each of the open-end investment companies referred
to in Item 28, except CMA Money Fund, CMA Government Securities Fund, CMA
Tax-Exempt Fund, CBA Money Fund, CMA Multi-State Municipal Series Trust, CMA
Treasury Fund, The Corporate Fund Accumulation Program, Inc., The Municipal Fund
C-6
<PAGE> 151
Accumulation Program, Inc., and also acts as principal underwriter for the
following closed-end funds: Merrill Lynch High Income Municipal Bond Fund, Inc.,
Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch Senior Floating
Rate Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9081,
Princeton, New Jersey 08543-9081, except that the address of Messrs. Crook,
Aldrich, Breen, Fatseas and Wasel is One Financial Center, 23rd Floor, Boston,
Massachusetts 02111-2665.
<TABLE>
<CAPTION>
POSITIONS AND OFFICES POSITIONS AND OFFICES
NAME WITH UNDERWRITER WITH REGISTRANT
- -------------------------------------- ----------------------------- -------------------------
<S> <C> <C>
Terry K. Glenn........................ President Executive Vice President
Arthur Zeikel......................... Director President and Director
Philip Kirstein....................... Director None
William E. Aldrich.................... Senior Vice President None
Michael G. Clark...................... Vice President None
Robert W. Crook....................... Senior Vice President None
Michael J. Brady...................... Vice President None
William M. Breen...................... Vice President None
James T. Fatseas...................... Vice President None
Debra W. Landsman-Yaros............... Vice President None
Michelle T. Lau....................... Vice President None
Gerald M. Richard..................... Vice President and Treasurer Treasurer
Salvatore Venezia..................... Vice President None
William Wasel......................... Vice President None
Robert Harris......................... Secretary None
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the rules
thereunder will be maintained at the offices of the Registrant, 800 Scudders
Mill Road, Plainsboro, New Jersey 08536, and MLFDS, 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the
Fund -- Management and Advisory Arrangements" in the Prospectus constituting
Part A of the Registration Statement and under the caption "Management of the
Fund -- Management and Advisory Arrangements" in the Statement of Additional
Information constituting Part B of the Registration Statement, Registrant is not
a party to any management-related services contract.
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders
upon request and without charge.
C-7
<PAGE> 152
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for this Post-Effective Amendment to its Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this Amendment to its Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Township of Plainsboro and State
of New Jersey on the 7th day of October, 1997.
MERRILL LYNCH MUNICIPAL BOND FUND,
INC.
(Registrant)
By: /s/ GERALD M. RICHARD
------------------------------------
Gerald M. Richard, Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following person in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- --------------------------- --------------------
<C> <S> <C>
ARTHUR ZEIKEL* President and Director
- --------------------------------------------- (Principal Executive
Arthur Zeikel Officer)
/s/ GERALD M. RICHARD Treasurer (Principal October 7, 1997
- --------------------------------------------- Financial and Accounting
(Gerald M. Richard) Officer)
RONALD W. FORBES* Director
- ---------------------------------------------
(Ronald W. Forbes)
CYNTHIA A. MONTGOMERY* Director
- ---------------------------------------------
(Cynthia A. Montgomery)
CHARLES C. REILLY* Director
- ---------------------------------------------
(Charles C. Reilly)
KEVIN A. RYAN* Director
- ---------------------------------------------
(Kevin A. Ryan)
RICHARD R. WEST* Director
- ---------------------------------------------
(Richard R. West)
*By: /s/ GERALD M. RICHARD October 7, 1997
- ---------------------------------------------
Gerald M. Richard, Attorney-in-fact
</TABLE>
C-8
<PAGE> 153
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------
<C> <S>
11 Consent of Deloitte & Touche LLP Independent Auditors
17(a) Financial Data Schedule for each class of shares of the National Portfolio
(b) Financial Data Schedule for each class of shares of the Insured Portfolio
(c) Financial Data Schedule for each class of shares of the Limited Maturity Portfolio
</TABLE>
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Municipal Bond Fund, Inc.:
We consent to the use in Post-Effective Amendment No. 22 to Registration
Statement No. 2-57354 of our report dated August 15, 1997 appearing in the
Statement of Additional Information, which is part of a such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is part of such Registration Statement.
Deloitte & Touche LLP
Princeton, New Jersey
October 6, 1997
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