MERRILL
LYNCH
FEDERAL
SECURITIES
TRUST
FUND LOGO
Semi-Annual Report February 28, 1994
This report is not authorized for use as an offer of sale
or a solicitation of an offer to buy shares of the Trust
unless accompanied or preceded by the Trust's current
prospectus. Past performance results shown in this report
should not be considered a representation of future
performance. Investment return and principal value of
shares will fluctuate so that shares, when redeemed,
may be worth more or less than their original cost.
Merrill Lynch
Federal Securities Trust
Box 9011
Princeton, NJ
08543-9011
MERRILL LYNCH FEDERAL SECURITIES TRUST
<PAGE>
DEAR SHAREHOLDER
Economic Environment
Alan Greenspan, Chairman of the Federal Reserve
Board, recently referred to the state of the economy
as being the best it has been in decades. An interpre-
tation of this characterization is that the economy
is expanding at a strong pace without the encum-
brances of inflation. An examination of recently
released economic statistics appears to support
Mr. Greenspan's observation. Gross domestic product
was initially reported to grow at an annual rate of
5.9% in the fourth quarter of 1993, the strongest
growth rate since the Reagan Administration. The
Index of Leading Economic Indicators increased
by 0.7% in December, the fifth consecutive month
the Index has expanded, an event which has not
occurred since 1987. In addition, new home sales
are booming as evidenced by the fact that the
862,000 sales figure reported for December is 100%
greater than the sales reported 3 years ago. It would
be expected that the current pace of economic
growth would result in significant inflation pressure.
This has not been the case. In fact, inflation is
benign as demonstrated by a mere 0.4% increase in
producer prices in 1993.
In order to prolong the noninflationary environment,
the Federal Reserve Board voted to increase interest
rates on February 4, 1994 in what was viewed by
some investors as a preemptive strike at inflation.
This was the first move toward tighter monetary
policy in five years, and investors, in anticipation of
further restraint, have reacted by liquidating posi-
tions. As a result, prices on fixed-income securities
fell sharply during the period as interest rates rose.
For example, interest rates increased approximately
100 basis points (1.00%) for US Treasury issues
ranging in maturity from 1 year to 30 years.
This move to higher interest rates took place when
inflation was decelerating. And although it is likely
the Federal Reserve Board will implement additional
increases in short-term interest rates in an attempt to
curb inflationary pressures, we believe the long-term
fundamentals do not currently justify a higher inter-
est rate environment. We do not believe the rate of
economic expansion is sustainable at the current
level. Gains in personal income have not kept pace
with increases in consumer spending. In addition,
although there are indications that inflation will
accelerate in the future, such as high money supply
growth and increases in precious metal prices, the
current level of interest rates (6.65% on the long-
term Treasury bond) could tolerate an inflation rate
of up to 4%, which we believe unlikely at this time.
<PAGE>
Mortgage-Backed Securities Market
During the February quarter, mortgage-backed secu-
rities significantly outperformed their counterparts
in the US Government market. This was a result of
the sell-off in the bond market during the period
which was characterized by an environment of an
expected slowdown in mortgage prepayments. As
investors increased their comfort level with the
inherent call risk associated with mortgages, yield
spreads to comparable average life US Treasury
securities started to narrow, resulting in superior
performances. For example, a Government National
Mortgage Association 6.50% issue outperformed the
ten-year Treasury note by 157 basis points during
the period as the yield spread tightened from 95 basis
points to 81 basis points.
The move to higher interest rates has caused many
mortgage investors to analyze the extension risk
of their mortgage positions. This has not been a
major focus since interest rates started falling
nearly three years ago. In the interim, the combination
of low interest rates, the expansion of mortgage prod-
uct and aggressive banker solicitation resulted in a
massive number of refinancings.
Portfolio Matters
In order to insulate the portfolio from extension risk
which is inherent in a rising interest rate environ-
ment, we have increased the Trust's exposure to the
15-year mortgage collateral sector. This enabled the
Trust to maintain an attractive yield spread to Treasury
securities and remove much of the prepayment risk.
The investor demand for securities which removed
much of the prepayment uncertainty was very strong
during the February quarter. As such, spreads on
Planned Amortization Class (PAC) collateralized
mortgage obligation instruments tightened to histori-
cally narrow levels. As a result, the Trust sold many
PAC positions, some after 35 basis points of spread
tightening, and reallocated the assets to five-year
Treasury securities.
We thank you for your investment in Merrill Lynch
Federal Securities Trust, and we look forward to
reviewing our outlook and strategy with you again in
our next report to shareholders.
<PAGE>
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Gregory Mark Maunz)
Gregory Mark Maunz
Vice President and Portfolio Manager
March 29, 1994
PERFORMANCE DATA
None of the past results shown should be considered a representation
of future performance. Investment return and principal value of Class A
and Class B Shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost.
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 12/31/93 + 7.27% + 2.98%
Five Years Ended 12/31/93 +10.10 + 9.20
Inception (9/28/84)
through 12/31/93 +10.51 +10.02
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 12/31/93 +6.73% +2.73%
Inception (12/23/91)
through 12/31/93 +6.12 +4.70
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
<PAGE>
PERFORMANCE DATA (concluded)
<TABLE>
Performance Summary--Class A Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<C> <C> <C> <C> <C> <C>
9/28/84--12/31/84 $9.38 $9.64 $0.022 $0.187 + 4.12%
1985 9.64 9.96 0.344 1.051 + 19.93
1986 9.96 9.87 0.440 0.862 + 13.36
1987 9.87 9.23 0.042 0.834 + 2.35
1988 9.23 9.07 -- 0.849 + 7.67
1989 9.07 9.39 -- 0.863 + 13.64
1990 9.39 9.48 -- 0.835 + 10.43
1991 9.48 9.94 -- 0.787 + 13.75
1992 9.94 9.81 -- 0.669 + 5.64
1993 9.81 9.98 -- 0.532 + 7.27
1/1/94--2/28/94 9.98 9.89 -- 0.070 - 0.10
------ ------
Total $0.848 Total $7.539
Cumulative total return as of 2/28/94: +152.08%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains distributions at net asset value on the payable date, and do not
include sales charge; results would be lower if sales charge was included.
</TABLE>
<TABLE>
Performance Summary--Class B Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<C> <C> <C> <C> <C> <C>
12/23/91--12/31/91 $9.92 $9.94 -- $0.019 + 0.39%
1992 9.94 9.81 -- 0.619 + 5.10
1993 9.81 9.98 -- 0.481 + 6.73
1/1/94--2/28/94 9.98 9.89 -- 0.063 - 0.18
------
Total $1.182
Cumulative total return as of 2/28/94: +12.41%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains distributions at net asset value on the payable date, and do not
reflect deduction of any sales charge; results would be lower if sales charge was deducted.
</TABLE>
<PAGE>
<TABLE>
Recent Performance Results*
<CAPTION>
12 Month 3 Month
2/28/94 11/30/93 2/28/93 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares $9.89 $9.97 $9.99 -1.00% -0.80%
Class B Shares 9.89 9.97 9.99 -1.00 -0.80
Class A Shares--Total Return +4.29(1) +0.44(2)
Class B Shares--Total Return +3.77(3) +0.32(4)
Class A Shares--Standardized 30-day Yield 4.93%
Class B Shares--Standardized 30-day Yield 4.62%
<FN>
*Investment results shown for the 3-month and 12-month periods are before the deduction of any sales charges.
(1)Percent change includes reinvestment of $0.523 per share ordinary income dividends.
(2)Percent change includes reinvestment of $0.125 per share ordinary income dividends.
(3)Percent change includes reinvestment of $0.472 per share ordinary income dividends.
(4)Percent change includes reinvestment of $0.112 per share ordinary income dividends.
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Face Interest Maturity Value
Issue Amount Rate Dates (Note 1a)
US Government & Agency Discount Obligations*--5.8%
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation $100,000,000 3.30% 3/22/1994 $ 99,807,500
Federal National Mortgage Association 100,000,000 3.30 3/21/1994 99,816,667
Total US Government & Agency Discount Obligations (Cost--$199,624,167) 199,624,167
<CAPTION>
US Government & Agency Obligations--22.5%
<C> <C> <C> <C>
United States Treasury Notes 40,000,000 4.00 1/31/1996 39,518,800
30,000,000 7.625 5/31/1996 31,804,800
100,000,000 4.375 8/15/1996 98,891,000
55,000,000 5.625 8/31/1997 55,678,700
100,000,000 5.625 1/31/1998 100,922,000
145,000,000 5.250 7/31/1998 143,594,950
272,000,000 5.00 1/31/1999 265,200,000
30,000,000 7.50 5/15/2002 32,714,100
Total US Government & Agency Obligations (Cost--$776,481,332) 768,324,350
<PAGE>
<CAPTION>
US Government Agency Mortgage-Backed Obligations**-83.5%
<S> <C> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation 54,441 9.00 10/01/2019 57,486
Participation Certificates 4,408,561 9.00(1) 8/15/2022 752,211
878 10.00 7/01/2019 954
37,417,386 10.50 9/01/2000-9/01/2020 40,972,037
10,004,091 11.00 8/01/2010-10/01/2020 11,067,026
9,295,758 11.50 10/01/1998-6/01/2020 10,329,911
3,365,347 12.00 7/01/1999-6/01/2020 3,813,342
8,396,637 12.50 10/01/1999-7/01/2019 9,740,099
9,648,830 13.00 8/01/1999-2/01/2016 11,289,131
Federal Home Loan Mortgage Corporation 26,273,700 3.471 12/01/2023 27,185,069
Participation Certificates--
Adjustable Rate++
Federal Home Loan Mortgage Corporation 159,955,336 6.00 8/01/2008-3/01/2009 156,605,871
Participation Certificates--Gold Program 67,326,587 6.50 6/01/2008-3/01/2009 67,410,746
143,948,378 7.00 2/01/2005-1/01/2024 146,171,500
24,943,809 7.50 12/01/2022-2/01/2023 25,621,781
5,173,205 8.50 7/01/2008-12/01/2021 5,446,402
9,059,876 9.00 6/01/2018-6/01/2022 9,645,869
13,357,451 10.50 10/01/2020-12/01/2020 14,759,983
Federal Home Loan Mortgage 93-1635-E 40,030,243 5.45 1/15/2008 38,641,694
Corporation REMICs*** 93-1604-E 105,716,536 5.50 3/15/2007 102,313,785
93-1518-C 65,009,200 7.00 3/15/2019 65,313,931
90-190-F 8,826,225 9.20 10/15/2021 8,870,356
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Face Interest Maturity Value
Issue Amount Rate Dates (Note 1a)
US Government Agency Mortgage-Backed Obligations (concluded)
<S> <C> <C> <C> <C> <C>
Federal Home Loan Mortgage 93-1468-HA $ 42,824,000 5.00% 2/15/2021 $ 38,327,480
Corporation REMICs***-- 92-1375-E 40,000,000 6.25 3/15/2004 39,712,500
Gold Program 93-1501-H 25,702,000 6.50 11/15/2020 24,866,685
91-1072-G 11,905,800 7.00 5/15/2006 12,062,064
92-1324-C 25,000,000 7.00 1/15/2020 25,437,500
91-1140-K 20,000,000 7.50 9/15/2020 20,412,500
91-1100-K 25,000,000 8.50 4/15/2005 25,625,000
Federal National Mortgage 50,000,000 4.99(2)(3) 2/25/2024 32,593,750
Association Mortgage-Backed 289,994,379 6.00 1/01/2008-2/01/2009 283,376,707
Securities 426,432,646 6.50 9/01/2008-1/01/2009 426,564,840
49,632,217 7.00 2/01/2007-6/01/2023 50,593,234
50,000,000 7.00(1) 2/25/2024 17,500,000
124,667,393 7.50 1/01/2008-2/01/2024 127,940,745
156,678,954 8.00 5/01/2002-2/01/2024 163,597,336
35,866,722 8.50 9/01/2004-12/01/2022 37,883,906
36,599 10.50 9/01/2000 39,138
9,027,485 11.00 2/01/2011-12/01/2020 10,133,352
143,222 11.50 1/01/2015-6/01/2015 161,483
4,504,710 13.00 8/01/2010-6/01/2015 5,174,786
Federal National Mortgage 93-214-EA 94,726,978 5.30 3/25/2007 90,612,275
Association REMICs*** 91-47-H 19,023,000 7.50 5/25/2006 19,546,132
Federal National Mortgage 93-123-S 15,529,411 15.15 7/25/2000 16,694,117
Association REMICs***--
Adjustable Rate++
Government National Mortgage 23,910,761 6.50 5/15/2008-7/15/2008 24,052,552
Association Mortgage-Backed 74,708,327 7.00 4/15/2022-12/15/2023 74,824,872
Securities 74,311,629 7.50 1/15/2007-11/15/2023 76,308,383
97,698,701 8.00 11/15/2006-5/15/2023 102,461,512
48,729,623 8.50 11/15/2004-2/15/2023 51,683,612
124,945,307 9.00 4/15/2009-12/15/2022 133,535,297
22,623,943 9.25 10/15/2023 23,182,472
158,311 9.50 10/15/2017 170,975
661,197 10.00 2/15/2016 728,553
1,018,226 10.50 10/15/2014-4/15/2021 1,143,590
35,053,797 11.00 11/15/2009-4/15/2021 39,961,329
39,876 11.50 8/15/2013-4/15/2015 45,957
Government National Mortgage 101,720,968 5.50 1/20/2024 104,772,597
Association Mortgage-Backed
Securities--Adjustable Rate++
Total US Government Agency Mortgage-Backed Obligations (Cost--$2,881,478,029) 2,857,736,415
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Face Value
Amount Issue (Note 1a)
Repurchase Agreements****--7.3%
<C> <S> <C>
$160,000,000 Kidder Peabody & Co. Inc., purchased on 2/28/1994 to yield 3.45% to 3/01/1994 $ 160,000,000
90,000,000 Nikko Securities Co., purchased on 2/28/1994 to yield 3.45% to 3/01/1994 90,000,000
Total Repurchase Agreements (Cost--$250,000,000) 250,000,000
Total Investments (Cost--$4,107,583,528)--119.1% 4,075,684,932
Put Options Written (Premiums Received--$234,375)--0.0%++++ (234,375)
Liabilities in Excess of Other Assets--(19.1%) (653,423,365)
--------------
Net Assets-100.0% $3,422,027,192
==============
<FN>
*US Government & Agency Discount Obligations are traded on a
discount basis and amortized to maturity. The interest rates shown
are the discount rates paid at the time of purchase by the Trust.
**Mortgage-Backed Obligations are subject to principal paydowns as
a result of prepayments or refinancings of the underlying mortgage
instruments. As a result, the average life may be substantially
less than the original maturity.
***Real Estate Mortgage Investment Conduits (REMICs).
****Repurchase Agreements are fully collateralized by US Government
& Agency Obligations.
(1)Represents the interest only portion of a mortgage-backed obligation.
(2)Represents the principal only portion of a mortgage-backed obligation.
(3)Represents the approximate yield to maturity.
++Coupon rates reset periodically. The coupon rates shown are the rates in
effect as of February 28, 1994.
++++Put options written as of February 28, 1994 are as follows:
<PAGE>
Value
Face Amount Premiums (Notes
Subject to Put Issue Received 1a & 1c)
$50,000,000 Federal National Mortgage Association
Mortgage-Backed Security 6.50%,
strike price $95.625, expiring
5/05/1994 $234,375 $(234,375)
Total Put Options Written $234,375 $(234,375)
======== =========
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Statement of Assets and Liabilities as of February 28, 1994
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$4,107,583,528) (Note 1a) $4,075,684,932
Cash 4,616,256
Receivables:
Securities sold $ 412,252,400
Interest 19,724,789
Beneficial interest sold 5,276,832
Principal paydowns 3,944,917
Loaned securities 197,183 441,396,121
--------------
Prepaid registration fees and other assets (Note 1g) 1,010,527
--------------
Total assets 4,522,707,836
--------------
Liabilities: Put options written, at value (premiums received--$234,375) (Notes 1a
& 1c) 234,375
Payables:
Securities purchased 1,072,968,626
Beneficial interest redeemed 20,712,572
Dividends to shareholders (Note 1h) 3,122,760
Distributor (Note 2) 1,391,830
Investment adviser (Note 2) 1,149,288 1,099,345,076
--------------
Accrued expenses and other liabilities 1,101,193
--------------
Total liabilities 1,100,680,644
--------------
<PAGE>
Net Assets: Net assets $3,422,027,192
==============
Net Assets Class A Shares of beneficial interest, $0.10 par value, unlimited number
Consist of: of shares authorized $ 16,043,633
Class B Shares of beneficial interest, $0.10 par value, unlimited number
of shares authorized 18,568,642
Paid-in capital in excess of par 3,611,238,920
Accumulated realized capital losses--net (Note 5) (191,925,407)
Unrealized depreciation on investments--net (31,898,596)
--------------
Net assets $3,422,027,192
==============
Net Asset Value: Class A--Based on net assets of $1,586,157,001 and 160,436,330 shares of
beneficial interest outstanding $ 9.89
==============
Class B--Based on net assets of $1,835,870,191 and 185,686,421 shares of
beneficial interest outstanding $ 9.89
==============
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statement of Operations for the Six Months Ended February 28, 1994
<S> <S> <C>
Investment Interest and discount earned $ 101,009,000
Income (Note 1f): Extended delivery fees 6,664,710
Other 377,388
-------------
Total income 108,051,098
-------------
<PAGE>
Expenses: Investment advisory fees (Note 2) 7,809,674
Distribution fees--Class B (Note 2) 7,466,970
Maintenance fees--Class A (Note 2) 2,115,530
Transfer agent fees--Class B (Note 2) 953,584
Transfer agent fees--Class A (Note 2) 761,936
Custodian fees 377,787
Accounting services (Note 2) 185,188
Printing and shareholder reports 132,151
Registration fees (Note 1g) 87,170
Trustees' fees and expenses 67,595
Professional fees 55,183
Other 42,411
-------------
Total expenses 20,055,179
-------------
Investment income--net 87,995,919
-------------
Realized Realized gain on investments--net 26,637,468
& Unrealized Change in unrealized appreciation/depreciation on investments--net (117,569,043)
Gain (Loss) on -------------
Investments--Net Net Decrease in Net Assets Resulting from Operations $ (2,935,656)
(Notes 1f & 3): =============
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Six For the Year
Months Ended Ended
Increase (Decrease) in Net Assets: February 28, 1994 August 31, 1993
<S> <S> <C> <C>
Operations: Investment income--net $ 87,995,919 $ 226,775,086
Realized gain on investments--net 26,637,468 54,262,755
Change in unrealized appreciation/depreciation on investments--net (117,569,043) 31,634,997
-------------- --------------
Net increase (decrease) in net assets resulting from operations (2,935,656) 312,672,838
-------------- --------------
Dividends to Investment income--net:
Shareholders Class A (42,746,841) (112,844,737)
(Note 1h): Class B (45,249,078) (113,930,349)
-------------- --------------
Net decrease in net assets resulting from dividends to shareholders (87,995,919) (226,775,086)
-------------- --------------
<PAGE>
Beneficial Net decrease in net assets derived from beneficial
Interest interest transactions (475,058,671) (67,810,049)
Transactions -------------- --------------
(Note 4):
Net Assets: Total increase (decrease) in net assets (565,990,246) 18,087,703
Beginning of period 3,988,017,438 3,969,929,735
-------------- --------------
End of period $3,422,027,192 $3,988,017,438
============== ==============
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights
<CAPTION>
Class A
For the Six
Months
The following per share data and ratios have been derived Ended
from information provided in the financial statements. February 28, For the Year Ended August 31,
Increase (Decrease) in Net Asset Value: 1994 1993 1992 1991 1990
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.14 $ 9.92 $ 9.66 $ 9.28 $ 9.28
Operating ---------- ---------- ---------- ---------- ----------
Performance:
Investment income--net .25 .57 .70 .81 .86
Realized and unrealized gain (loss)
on investments--net (.25) .22 .26 .38 --
---------- ---------- ---------- ---------- ----------
Total from investment operations -- .79 .96 1.19 .86
---------- ---------- ---------- ---------- ----------
Less dividends:
Investment income--net (.25) (.57) (.70) (.81) (.86)
---------- ---------- ---------- ---------- ----------
Total dividends (.25) (.57) (.70) (.81) (.86)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 9.89 $ 10.14 $ 9.92 $ 9.66 $ 9.28
========== ========== ========== ========== ==========
Total Based on net asset value per share 0.01%+++ 8.35% 10.16% 13.40% 9.61%
Investment ========== ========== ========== ========== ==========
Return:**
<PAGE>
Ratios to Expenses, excluding maintenance
Average fees .57%* .54% .57% .60% .59%
Net Assets: ========== ========== ========== ========== ==========
Expenses .82%* .79% .80% .78% .77%
========== ========== ========== ========== ==========
Investment income--net 5.05%* 5.80% 7.17% 8.62% 9.19%
========== ========== ========== ========== ==========
Supplemental Net assets, end of period
Data: (in thousands) $1,586,157 $1,836,100 $2,048,037 $2,230,619 $2,353,328
========== ========== ========== ========== ==========
Portfolio turnover 157.61% 224.35% 230.83% 311.04% 324.74%
========== ========== ========== ========== ==========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights (concluded)
<CAPTION>
Class B
For the Six For the For the
Months Year Period
The following per share data and ratios have been derived Ended Ended Dec. 23, 1991++
from information provided in the financial statements. Feb. 28, Aug. 31, to Aug. 31,
Increase (Decrease) in Net Asset Value: 1994 1993 1992
<S> <S> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.14 $ 9.92 $ 9.92
Operating ---------- ---------- ----------
Performance: Investment income--net .22 .52 .44
Realized and unrealized gain (loss) on investments--net (.25) .22 --
---------- ---------- ----------
Total from investment operations (.03) .74 .44
---------- ---------- ----------
Less dividends:
Investment income--net (.22) (.52) (.44)
---------- ---------- ----------
Total dividends (.22) (.52) (.44)
---------- ---------- ----------
Net asset value, end of period $ 9.89 $ 10.14 $ 9.92
========== ========== ==========
<PAGE>
Total Based on net asset value per share (0.25%)+++ 7.80% 4.54%+++
Investment ========== ========== ==========
Return:**
Ratios to Expenses, excluding distribution fees .57%* .55% .58%*
Average ========== ========== ==========
Net Assets: Expenses 1.32%* 1.30% 1.33%*
========== ========== ==========
Investment income--net 4.54%* 5.27% 6.45%*
========== ========== ==========
Supplemental Net assets, end of period (in thousands) $1,835,870 $2,151,917 $1,921,893
Data: ========== ========== ==========
Portfolio turnover 157.61% 224.35% 230.83%
========== ========== ==========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Federal Securities Trust (the "Trust") is
registered under the Investment Company Act of 1940
as a diversified, open-end investment management com-
pany. The Trust offers both Class A and Class B Shares.
Class A Shares are sold with a front-end sales charge.
Class B Shares may be subject to a contingent deferred
sales charge. Both classes of shares have identical vot-
ing, dividend, liquidation and other rights and the same
terms and conditions, except that Class A Shares bear
certain expenses relating to ongoing account main-
tenance fees and have exclusive voting rights with
respect to matters relating to such fees, and Class B
Shares bear certain expenses related to the distribution
of such shares and have exclusive voting rights with
respect to matters relating to such distribution expendi-
tures. The following is a summary of significant account-
ing policies followed by the Trust.
<PAGE>
(a) Valuation of investments--Securities traded in the
over-the-counter market are valued at the last available
bid price in the over-the-counter market or on the basis
of yield equivalents as obtained from one or more
dealers that make markets in the securities. US Govern-
ment securities are traded in the over-the-counter
market. Options on US Government securities which are
traded on exchanges are valued at their last bid price
in the case of options purchased by the Trust and their
last asked price in the case of options written by the
Trust. An option traded on the over-the-counter market
is valued at its last bid price or asked price as obtained
from at least two independent entities. Interest rate
futures contracts and options thereon, which are traded
on exchanges, are valued at their last sale price as of
the close of such exchanges. Securities with a remaining
maturity of sixty days or less are valued on an amortized
cost basis, which approximates market.
(b) Repurchase agreements--The Trust invests in US
Government securities pursuant to repurchase agree-
ments with a member bank of the Federal Reserve
System or a primary dealer in US Government securities.
Under such agreements, the bank or primary dealer
agrees to repurchase the security at a mutually agreed
upon time and price. The Trust takes possession of the
underlying securities, marks to market such securities
and, if necessary, receives additions to such securities
daily to ensure that the contract is fully collateralized.
(c) Options--When the Trust sells an option, an amount
equal to the premium received by the Trust is reflected
as an asset and an equivalent liability. The amount
of the liability is subsequently marked to market to
reflect the current market value of the option written.
When a security is purchased or sold through an exercise
of an option, the related premium paid (or received) is
added to (or deducted from) the basis of the security
acquired or deducted from (or added to) the proceeds of
the security sold. When an option expires (or the Trust
enters into a closing transaction), the Trust realizes a
gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent that the
cost of the closing transaction is less than or greater than
the premium paid or received).
Written and purchased options are non-income
producing investments.
<PAGE>
(d) Futures contracts--The Trust may purchase or sell
interest rate futures contracts. Upon entering into a
contract, the Trust deposits and maintains as collateral
such initial margins as required by the exchange on
which the transaction is effected. Pursuant to the con-
tract, the Trust agrees to receive from or pay to the
broker an amount of cash equal to the daily fluctuation
in the value of the contract. Such receipts or payments
are known as variation margin, and are recorded by the
Trust as unrealized gains or losses. When the contract is
closed, the Trust records a realized gain or loss equal
to the difference between the value of the contract at
the time it was opened and the value at the time it
was closed.
(e) Income taxes--It is the Trust's policy to comply with
the requirements of the Internal Revenue Code applic-
able to regulated investment companies and to distribute
substantially all of its taxable income to its share-
holders. Therefore, no Federal income tax provision
is required.
(f) Security transactions and investment income--
Security transactions are recorded on the dates the
transactions are entered into (the trade dates). Interest
income (including amortization of discount) and
extended delivery fees are recognized on the accrual
basis. Realized gains and losses on security transactions
are determined on the identified cost basis.
(g) Prepaid registration fees--Prepaid registration fees
are charged to expense as the related shares are issued.
(h) 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.
(i) Reclassifications--Certain 1993 amounts have been
reclassified to conform to the 1994 presentation.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Trust has entered into an Investment Advisory
Agreement with Fund Asset Management, L.P. ("FAM").
Effective January 1, 1994, the investment advisory
business of FAM was reorganized from a corporation to
a limited partnership. Both prior to and after the
reorganization, ultimate control of FAM was vested with
Merrill Lynch & Co., Inc. ("ML & Co."). The general
partner of FAM is Princeton Services, Inc., an indirect
wholly-owned subsidiary of ML & Co. The limited part-
ners are ML & Co. and Merrill Lynch Investment
Management, Inc. ("MLIM"), which is also an indirect
wholly-owned subsidiary of ML & Co.
<PAGE>
The Trust has also entered into a Distribution Agree-
ment and a Distribution Plan with Merrill Lynch Funds
Distributor Inc. ("MLFD" or "Distributor"), a wholly-
owned subsidiary of MLIM.
FAM is responsible for the management of the Trust's
portfolio and provides the necessary personnel, facili-
ties, equipment and certain other services necessary to
the operations of the Trust. For such services, the
Trust pays a monthly fee based upon the average daily
value of the Trust's net assets at the following rates:
Portion of Average Daily Value of Net Assets: Rate
Not exceeding $500 million 0.500%
In excess of $500 million but not exceeding $1 billion 0.475%
In excess of $1 billion but not exceeding $1.5 billion 0.450%
In excess of $1.5 billion but not exceeding $2 billion 0.425%
In excess of $2 billion but not exceeding $2.5 billion 0.400%
In excess of $2.5 billion but not exceeding $3.5 billion 0.375%
In excess of $3.5 billion but not exceeding $5 billion 0.350%
In excess of $5 billion but not exceeding $6.5 billion 0.325%
Exceeding $6.5 billion 0.300%
The Investment Advisory Agreement obligates FAM to
reimburse the Trust to the extent the Trust's expenses
(excluding interest, taxes, distribution fees brokerage
fees and commissions, and extraordinary items) exceed
2.5% of the Trust's first $30 million of average daily net
assets, 2.0% of the next $70 million of average daily
net assets and 1.5% of the average daily net assets in
excess thereof. FAM's obligation to reimburse the Trust
is limited to the amount of the management fee. No fee
payment will be made to FAM during any fiscal year
which will cause such expenses to exceed the pro rata
expense limitation at the time of such payment.
<PAGE>
Pursuant to separate distribution plans (the "Distribution
Plans") adopted by the Trust in accordance with Rule
12b-1 under the Investment Company Act of 1940, the
Trust pays the Distributor (a) an account maintenance
fee relating to Class A Shares, accrued daily and paid
monthly, at the annual rate of 0.25% of the average
daily net assets of the Trust attributable to Class A
Shares in order to compensate the Distributor and
Merrill Lynch in connection with account maintenance
activities (the "Class A Distribution Plan"), and (b) an
ongoing account maintenance fee and a distribution fee
relating to Class B Shares, accrued daily and paid
monthly, at the annual rates of 0.25% and 0.50%,
respectively, of the average daily net assets of the Trust
attributable to Class B Shares. The account maintenance
and distribution fees associated with the Class B Shares
compensate the Distributor and Merrill Lynch for
providing account maintenance and distribution services
and bearing certain distribution-related expenses of the
Trust, including payments to financial consultants for
selling shares of the Trust. As authorized by the
Distribution Plans, the Distributor has entered into
agreements with Merrill Lynch, Pierce, Fenner & Smith
Inc. ("MLPF&S"), which provides for the compensation
of MLPF&S in connection with account maintenance
activities for Class A Shares and for providing distribu-
tion-related services to the Trust for Class B Shares. For
the six months ended February 28, 1994, MLFD earned
$2,115,530 and $7,466,970 for Class A and Class B Shares,
respectively, under the Distribution Plans, all of which
was paid to MLPF&S pursuant to the agreement.
For the six months ended February 28, 1994, MLFD
earned underwriting discounts of $25,099, and MLPF&S
earned dealer concessions of $409,804 on sales of the
Trust's Class A Shares.
The Trust also received contingent deferred sales
charges of $2,077,687 relating to transactions in Class B
Shares for the period.
Financial Data Services, Inc. ("FDS"), a wholly-owned
subsidiary of ML & Co., is the Trust's transfer agent.
Accounting services are provided to the Trust by FAM
at cost.
Certain officers and/or trustees of the Trust are
officers and/or directors of MLIM, FAM, MLPF&S, and/or
ML & Co.
<PAGE>
3. Investments:
Purchases and sales of investments, excluding short-
term securities, for the six months ended February 28,
1994 were $5,855,187,667 and $6,020,691,506,
respectively.
NOTES TO FINANCIAL STATEMENTS (concluded)
Net realized and unrealized gains (losses) as of February
28, 1994 were as follows:
Realized Unrealized
Gains (Losses) Losses
Long-term investments $ 26,640,539 $ (31,898,596)
Short-term investments (3,071) --
------------ -------------
Total $ 26,637,468 $ (31,898,596)
============ =============
Transactions in put options written for the six months
ended February 28, 1994, were as follows:
Face Amount Premiums
Put Options Written Subject to Put Received
Outstanding put options
written at beginning of period -- --
Options written $ 50,000,000 $ 234,375
------------ -------------
Outstanding put options
written at end of period $ 50,000,000 $ 234,375
============ =============
As of February 28, 1994, net unrealized depreciation
for Federal income tax purposes aggregated $31,898,596,
of which $23,425,456 related to appreciated securities
and $55,324,052 related to depreciated securities. The
aggregate cost of investments at February 28, 1994 for
Federal income tax purposes was $4,107,583,528.
4. Shares of Beneficial Interest:
Net decrease in net assets derived from beneficial
interest transactions was $475,058,671 and $67,810,049
for the six months ended February 28, 1994 and the
year ended August 31, 1993, respectively.
<PAGE>
Transactions in shares of beneficial interest for Class A
and Class B Shares were as follows:
Class A Shares for the Six Dollar
Months Ended February 28, 1994 Shares Amount
Shares sold 6,888,022 $ 69,121,101
Shares issued to shareholders
in reinvestment of dividends 2,123,175 21,272,186
------------ -------------
Total issued 9,011,197 90,393,287
Shares redeemed (29,716,161) (298,523,861)
------------ -------------
Net decrease (20,704,964) $(208,130,574)
============ =============
Class A Shares for the Year Dollar
Ended August 31, 1993 Shares Amount
Shares sold 17,415,517 $ 173,299,062
Shares issued to shareholders
in reinvestment of dividends 5,663,682 56,227,559
----------- -------------
Total issued 23,079,199 229,526,621
Shares redeemed (48,353,719) (481,017,802)
----------- -------------
Net decrease (25,274,520) $(251,491,181)
=========== =============
Class B Shares for the Six Dollar
Months Ended February 28, 1994 Shares Amount
Shares sold 13,562,578 $ 136,237,978
Shares issued to shareholders
in reinvestment of dividends 2,581,330 25,860,009
----------- -------------
Total issued 16,143,908 162,097,987
Shares redeemed (42,748,053) (429,026,084)
----------- -------------
Net decrease (26,604,145) $(266,928,097)
=========== =============
Class B Shares for the Year Dollar
Ended August 31, 1993 Shares Amount
Shares sold 71,078,764 $ 706,033,341
Shares issued to shareholders
in reinvestment of dividends 6,584,019 65,374,904
------------ -------------
Total issued 77,662,783 771,408,245
Shares redeemed (59,072,686) (587,727,113)
------------ -------------
Net increase 18,590,097 $ 183,681,132
============ =============
<PAGE>
5. Capital Loss Carryforward:
At August 31, 1993, the Trust had a net capital loss
carryforward of approximately $246,525,000
($139,008,000 expiring in 1996, $68,370,000 expiring in
1997, and $39,147,000 expiring in 1998). This amount
will be available to offset like amounts of any future
taxable gains.
6. Loaned Securities:
At February 28, 1994, the Trust held US Treasury Notes
having an aggregate value of approximately $469,000,000
as collateral for portfolio securities loaned having a
market value of approximately $457,000,000.
OFFICERS AND TRUSTEES
Arthur Zeikel, President and Trustee
Walter Mintz, Trustee
Melvin R. Seiden, Trustee
Stephen B. Swensrud, Trustee
Harry Woolf, Trustee
Terry K. Glenn, Executive Vice President
N. John Hewitt, Senior Vice President
Donald C. Burke, Vice President
Teresa L. Giacino, Vice President
Jeffrey B. Hewson, Vice President
Gregory Mark Maunz, Vice President
Gerald M. Richard, Treasurer
Michael J. Hennewinkel, Secretary
Custodian
The Bank of New York
110 Washington Street
New York, New York 10286
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
(800) 637-3863
