MERRILL
LYNCH
FEDERAL
SECURITIES TRUST
FUND LOGO
Annual Report * August 31, 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
<PAGE>
MERRILL LYNCH FEDERAL SECURITIES TRUST
DEAR SHAREHOLDER
Economic Environment
The US economy has continued to expand at a
moderate pace. Gross domestic product (GDP) grew
at an annual rate of 3.50% for the first half of 1994
with little sign of emerging inflation. Consumers
have done their part in the expansion as measures of
personal income and consumption have risen steadily
for 11 months of the past year. The improving
economy, combined with declining unemployment,
has enabled Americans to feel more secure as far
as their jobs are concerned, and the confidence level
of consumers is highly optimistic as measured by
the Conference Board. This increased confidence
translates into greater consumer activity, which is
the driving force behind any expansion. The housing
sector remains a focal point for consumer participa-
tion. Sales of existing single family homes through
July are up 12% over the same period last year, and
new home sales are exceeding last year's pace by
4.50%. With the strong housing sector, it is not
surprising that GDP has remained on its expansionary
course.
The demand from the consumer sector is also stimu-
lating activity in the industrial sector. Increases in
retail sales thus far in 1994 exceed the same period
of a year ago, and durable goods orders have averaged
increases of 1% per month over the past year. In
addition, confidence in the business sector is hearten-
ing as surveys of the National Association of Purchas-
ing Managers have revealed continuous monthly
increases in business activity since August 1993, which
was also the last monthly decrease in the Index of
Leading Economic Indicators. Therefore, it is no
surprise that higher factory orders, high industrial
production and capacity utilization have fueled
improved earnings in the business sector. As expected
in an expanding economy, there has been positive
news on the employment front. Unemployment,
peaking at 7.7% after the last recession, has declined
to 6.1% as non-farm payrolls have increased in 22
months of the past 24 months. In addition, initial job-
less claims have declined significantly during the
same period.
<PAGE>
An expanding economy and full employment are
events which traditionally cause investors to conclude
that the rate of inflation is increasing. The financial
markets are reflecting this view, since interest rates
have risen on average 200 basis points (2.00%) since
October 1993. However, the rate of inflation has
actually declined over the past year. Prices have
increased 1.50%--2.50% for the past year, depending
on whether producer or consumer prices are meas-
ured. Regardless of which inflation index is referenced,
with the long-term bond at 7.50% investors are now
offered real (inflation-adjusted) yields of 5%, which
far exceed historical averages.
By far, the highlight of the past year has been on the
monetary policy front. The Federal Reserve Board
acted numerous times, beginning on February 4,
1994, by increasing short-term interest rates.
Federal Reserve Board Chairman Alan Greenspan
has characterized the economy as the best it has been
in decades. By tightening credit, the central bank is
attempting to extend these "ideal" conditions as
long as possible. The plan appears to be to restrain the
expansion to its non-inflationary potential (approx-
imately 2%--3% GDP) by acting before inflation
appears in the system.
However, problems remain in the economy. Fiscally,
the ever-present budget deficit is constantly deteri-
orating as revenue inflows at the Federal level have
been insufficient to cover the capital required for
years. Furthermore, bold endeavors such as healthcare
reform will most likely exacerbate this situation. As
far as trade is concerned, the monthly trade deficit is
nearly $10 billion per month, up 50% from a year
ago. This undermines the value of the US dollar.
Looking ahead, we believe it is likely that conditions
will deteriorate slightly from the current steady
growth, low inflation environment. In our opinion,
the risk is that the rate of expansion could ease from
current levels. On an ongoing basis, the current
expansion is increasingly funded by consumer credit,
which has risen $11 billion per month for the past
four months. This is historically unprecedented and
barring other developments will eventually slow and
impede growth. Also, there is little room for inflation
to improve further from current levels. In fact, it is
likely the inflation rate will rise in response to the
growth the economy has already experienced.
<PAGE>
Fiscal Year in Review
During the fiscal year ended August 31, 1994, interest
rates rose dramatically. The 30-year Treasury bond
increased 151 basis points from 5.95% to 7.46%. As an
illustration of the flattening of the yield curve, the
ten-year and five-year Treasury notes increased 187
and 215 basis points, respectively. The one-year
Treasury bill increased the most, by 229 basis points.
When interest rates rise, bond prices fall; the total
rate of return on five-year and ten-year Treasury
notes (interest plus the price change) was -2.30%
and -6.54%, respectively. Similarly, Merrill Lynch
Federal Securities Trust had negative returns of
- -2.06% and -2.55% for Class A and Class B Shares,
respectively.
Two major strategies contributed to the Trust's
performance. First, when the yield curve was very
steep, we increased our weighting in Treasury notes
to take advantage of "rolling down" the yield curve.
Then as the yield curve started to flatten in early
1994, we increased investments in mortgage-backed
securities (MBS) to take advantage of their higher
yields. This not only enhanced the Portfolio's yield,
but also allowed us to benefit from MBS price out-
performance relative to Treasuries. As interest rates
rose, mortgage production declined significantly. The
lack of supply, coupled with a slowdown in prepay-
ments from refinancing, led to the better price
performance of MBS.
Second, the Trust benefited from having securities
with a more stable duration. To avoid the high prepay-
ments that existed for most of 1993, we shifted to
lower-coupon MBS. However, we focused heavily on
15-year MBS to minimize extension risk. Although
as a result of the backup in interest rates all securities
declined in price, 15-year MBS significantly out-
performed the MBS with 30-year maturities.
At this time we are focusing on yield. The portfolio
has reestablished its exposure to 30-year MBS since
prepayment risk, and therefore extension risk, is
minimal. We have also swapped into current coupon
(par priced) MBS in order to increase current yield.
In the event of a bond market rally, these securities
would participate and yet they hold greater downside
protection than discounts if interest rates were to
rise. The portfolio holds 7% in high coupon securities
since they are showing little in prepayment activity.
<PAGE>
The Trust's portfolio maintains a 12% position in
real estate mortgage investment conduits, most of
which represent conservatively structured planned
amortization classes. The Trust's Treasury position
measures 25% focused in the five-year sector to take
advantage of rolling down the still steep yield curve.
Pass-throughs account for 55% of the Trust, with 50%
in 30-year products and 5% in 15-year products. The
Trust's cash position (including sales pending settle-
ment) stood at 8% on August 31, 1994.
In Conclusion
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.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Gregory Mark Maunz)
Gregory Mark Maunz
Vice President and Portfolio Manager
September 22, 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.
Total Return Based on a $10,000 Investment
GRAPHIC MATERIAL APPEARS HERE.
SEE APPENDIX GRAPHIC AND IMAGE MATERIAL ITEM 1.
<PAGE>
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 6/30/94 -2.04% -5.96%
Five Years Ended 6/30/94 +7.60 +6.72
Inception (9/28/84)
through 6/30/94 +9.51 +9.05
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 6/30/94 -2.53% -6.24%
Inception (12/23/91)
through 6/30/94 +3.10 +2.39
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
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--8/31/94 9.98 9.41 -- 0.343 - 2.17
------ ------
Total $0.848 Total $7.812
Cumulative total return as of 8/31/94: +146.87%**
<PAGE>
<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--8/31/94 9.98 9.41 -- 0.312 - 2.48
------
Total $1.431
Cumulative total return as of 8/31/94: + 9.81%**
<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>
<TABLE>
Recent Performance Results
<CAPTION>
12 Month 3 Month
8/31/94 5/31/94 8/31/93 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares* $9.41 $9.40 $10.14 -7.20% +0.11%
Class B Shares* 9.41 9.40 10.14 -7.20 +0.11
Class A Shares--Total Return* -2.06(1) +1.55(2)
Class B Shares--Total Return* -2.55(3) +1.42(4)
Class A Shares--Standardized 30-day Yield 5.98%
Class B Shares--Standardized 30-day Yield 5.72%
<FN>
*Investment results shown do not reflect sales charges; results would be lower if a
sales charge was included.
(1)Percent change includes reinvestment of $0.524 per share ordinary income dividends.
(2)Percent change includes reinvestment of $0.134 per share ordinary income dividends.
(3)Percent change includes reinvestment of $0.475 per share ordinary income dividends.
(4)Percent change includes reinvestment of $0.123 per share ordinary income dividends.
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Face Interest Maturity Value
Issue Amount Rate Dates (Note 1a)
US Government & Agency Obligations--25.52%
<S> <C> <C> <C> <C>
United States Treasury Notes $ 105,000,000 6.50 % 8/15/1997 $ 105,164,115
30,000,000 5.625 1/31/1998 29,146,890
225,000,000 8.25 7/15/1998 237,023,550
105,000,000 6.75 6/30/1999 104,737,500
125,000,000 6.875 7/31/1999 125,273,500
50,000,000 6.875 8/31/1999 50,164,062
75,000,000 7.50 11/15/2001 76,945,350
Total US Government & Agency Obligations (Cost--$731,675,983) 728,454,967
<CAPTION>
US Government Agency Mortgage-Backed Obligations*--67.38%
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation 44,430 9.00 10/01/2019 45,901
Participation Certificates 764 10.00 7/01/2019 807
29,827,117 10.50 9/01/2000-12/01/2020 31,980,039
7,943,912 11.00 8/01/2010-9/01/2020 8,643,930
7,025,381 11.50 10/01/1998-6/01/2020 7,714,712
2,659,479 12.00 7/01/1999-6/01/2020 2,923,751
6,781,197 12.50 10/01/1999-7/01/2019 7,739,041
8,245,056 13.00 8/01/1999-2/01/2016 9,492,120
Federal Home Loan Mortgage Corporation 503,468 6.00 4/01/2009 469,323
Participation Certificates--Gold Program 51,072,444 6.50 6/01/2008-5/01/2024 48,693,038
66,678,086 7.00 1/01/2005-5/01/2024 63,072,802
25,376,864 7.50 5/01/2024 24,670,879
50,000,000 8.00 Sept. Settlement(3) 49,828,000
4,046,079 8.50 7/01/2008-12/01/2021 4,119,394
10,516,058 10.50 10/01/2000-12/01/2020 11,367,123
<S> <C> <C> <C> <C> <C>
Federal Home Loan Mortgage 93-1635-E 40,030,243 5.45 1/15/2008 36,802,805
Corporation REMICs** 93-1604-E 105,716,536 5.50 3/15/2007 97,292,250
94-1684-F 80,394,132 5.75 8/15/2020 71,701,516
93-1518-C 40,009,200 7.00 3/15/2019 37,421,105
94-Trust 171 84,882,275 0.00(1) 7/15/2024 51,751,662
94-Trust 171 84,882,275 8.00(2) 7/15/2024 32,812,304
92-Trust 134 3,430,649 9.00(2) 4/15/2022 1,059,213
90-190-F 3,653,709 9.20 10/15/2021 3,674,261
<PAGE>
Federal National Mortgage 51,260,353 6.50 8/01/2008-5/01/2024 48,843,872
Association Mortgage-Backed 70,688,828 7.50 1/01/2008-6/01/2024 68,680,918
Securities 118,658,635 8.00 6/01/2006-8/01/2024 118,552,468
112,243,381 8.50 9/01/2004-7/01/2024 114,236,324
32,996 10.50 9/01/2000 35,429
70,954,791 11.00 2/01/2011-12/01/2020 78,227,657
142,149 11.50 1/01/2015-6/01/2015 158,141
3,659,980 13.00 8/01/2010-6/01/2015 4,186,103
Federal National Mortgage 93-214-EA 94,726,978 5.30 3/25/2007 86,171,948
Association REMICs** 93-123-S 15,529,411 10.684++ 7/25/2000 13,476,617
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Face Interest Maturity Value
Issue Amount Rate Dates (Note 1a)
US Government Agency Mortgage-Backed Obligations* (concluded)
<S> <C> <C> <C> <C>
Government National Mortgage $ 22,942,035 6.50% 5/15/2008-7/15/2008 $ 21,809,15
Association Mortgage-Backed 166,250,321 7.00 10/15/2017-6/15/2024 155,287,775
Securities 318,027,154 7.50 1/15/2007-6/15/2024 306,994,792
211,179,717 8.00 9/15/2005-5/15/2024 209,792,266
45,716,542 8.50 11/15/2004-7/15/2024 46,516,581
19,113 10.00 2/15/2016 20,565
712,594 10.50 10/15/2014-4/15/2021 778,730
41,408,473 11.00 11/15/2009-4/15/2021 46,170,447
31,856 11.50 8/15/2013-4/15/2015 35,998
Total US Government Agency Mortgage-Backed Obligations (Cost-$1,967,917,922) 1,923,251,764
<CAPTION>
Face
Amount Issue
Repurchase Agreements***--2.31%
<C> <S> <C>
$ 66,000,000 Nikko Securities Co., purchased on 8/31/1994 to yield 4.85% to 9/01/1994 66,000,000
Total Repurchase Agreements (Cost--$66,000,000) 66,000,000
Total Investments (Cost--$2,765,593,905)--95.21% 2,717,706,731
Other Assets Less Liabilities--4.79% 136,630,717
--------------
Net Assets--100.0% $2,854,337,448
==============
<PAGE>
<FN>
*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 principal only portion of a mortgage-backed obligation.
(2)Represents the interest only portion of a mortgage-backed obligation.
(3)Represents a "to-be-announced" (TBA) transaction. The Trust has
committed to purchasing securities for which all specific
information is not available at this time.
++Adjustable Rate Security. The interest rate resets periodically and inversely.
The interest rate shown is the rate in effect as of August 31, 1994.
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of August 31, 1994
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$2,765,593,905) (Note 1a) $2,717,706,731
Cash 2,102,348
Receivables:
Securities sold $ 506,449,451
Interest 19,444,221
Beneficial interest sold 4,616,535
Principal paydowns 2,631,446
Loaned securities and extended deliveries 414,325 533,555,978
--------------
Prepaid registration fees and other assets (Note 1g) 228,318
--------------
Total assets 3,253,593,375
--------------
Liabilities: Payables:
Securities purchased 374,500,819
Beneficial interest redeemed 17,064,235
Dividends to shareholders (Note 1h) 4,373,784
Distributor (Note 2) 1,258,464
Investment adviser (Note 2) 1,079,723 398,277,025
--------------
Accrued expenses and other liabilities 978,902
--------------
Total liabilities 399,255,927
--------------
<PAGE>
Net Assets: Net assets $2,854,337,448
==============
Net Assets Class A Shares of beneficial interest, $0.10 par value, unlimited number
Consist of: of shares authorized $ 14,415,422
Class B Shares of beneficial interest, $0.10 par value, unlimited number
of shares authorized 15,906,014
Paid-in capital in excess of par 3,255,813,614
Accumulated realized capital losses--net (Note 5) (383,910,428)
Unrealized depreciation on investments--net (47,887,174)
--------------
Net assets $2,854,337,448
==============
Net Asset Class A--Based on net assets of $1,356,979,482 and 144,154,216 shares of
Value: beneficial interest outstanding $ 9.41
==============
Class B--Based on net assets of $1,497,357,966 and 159,060,141 shares of
beneficial interest outstanding $ 9.41
==============
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations for the Year Ended August 31, 1994
<S> <S> <C>
Investment Interest and discount earned $196,471,253
Income Extended delivery fees 15,088,640
(Note 1f): Other 14,097
------------
Total income 211,573,990
------------
<PAGE>
Expenses: Investment advisory fees (Note 2) 14,571,755
Distribution fees--Class B (Note 2) 13,626,986
Maintenance fees--Class A (Note 2) 3,940,109
Transfer agent fees--Class B (Note 2) 1,818,388
Transfer agent fees--Class A (Note 2) 1,484,273
Custodian fees 706,003
Accounting services (Note 2) 347,725
Printing and shareholder reports 264,736
Professional fees 175,620
Registration fees (Note 1g) 171,114
Trustees' fees and expenses 138,935
Other 77,513
------------
Total expenses 37,323,157
------------
Investment income--net 174,250,833
------------
Realized & Realized loss on investments--net (118,401,781)
Unrealized Change in unrealized appreciation/depreciation on investments--net (133,557,622)
Loss on ------------
Investments-- Net Decrease in Net Assets Resulting from Operations $(77,708,570)
Net (Notes 1f ============
& 3):
</TABLE>
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Year Ended August 31,
Increase (Decrease) in Net Assets: 1994 1993
<S> <S> <C> <C>
Operations: Investment income--net $ 174,250,833 $ 226,775,086
Realized gain (loss) on investments--net (118,401,781) 54,262,755
Change in unrealized appreciation/depreciation on investments--net (133,557,622) 31,634,997
-------------- --------------
Net increase (decrease) in net assets resulting from operations (77,708,570) 312,672,838
-------------- --------------
Dividends to Investment income--net:
Shareholders Class A (85,293,764) (112,844,737)
(Note 1h): Class B (88,957,069) (113,930,349)
-------------- --------------
Net decrease in net assets resulting from dividends to shareholders (174,250,833) (226,775,086)
-------------- --------------
<PAGE>
Beneficial Net decrease in net assets derived from capital
Interest share transactions (881,720,587) (67,810,049)
Transactions -------------- --------------
(Note 4):
Net Assets: Total increase (decrease) in net assets (1,133,679,990) 18,087,703
Beginning of year 3,988,017,438 3,969,929,735
-------------- --------------
End of year $2,854,337,448 $3,988,017,438
============== ==============
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements.
Class A
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 year $ 10.14 $ 9.92 $ 9.66 $ 9.28 $ 9.28
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income--net .52 .57 .70 .81 .86
Realized and unrealized gain (loss)
on investments--net (.73) .22 .26 .38 --
---------- ---------- ---------- ---------- ----------
Total from investment operations (.21) .79 .96 1.19 .86
---------- ---------- ---------- ---------- ----------
Less dividends:
Investment income--net (.52) (.57) (.70) (.81) (.86)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 9.41 $ 10.14 $ 9.92 $ 9.66 $ 9.28
========== ========== ========== ========== ==========
<PAGE>
Total Based on net asset value per share (2.06)% 8.35% 10.16% 13.40% 9.61%
Investment ========== ========== ========== ========== ==========
Return:*
Ratios to Expenses, excluding maintenance fees .58% .54% .57% .60% .59%
Average ========== ========== ========== ========== ==========
Net Assets: Expenses .83% .79% .80% .78% .77%
========== ========== ========== ========== ==========
Investment income--net 5.41% 5.80% 7.17% 8.62% 9.19%
========== ========== ========== ========== ==========
Supplemental Net assets, end of year (in thousands) $1,356,979 $1,836,100 $2,048,037 $2,230,619 $2,353,328
Data: ========== ========== ========== ========== ==========
Portfolio turnover 322.68% 224.35% 230.83% 311.04% 324.74%
========== ========== ========== ========== ==========
<FN>
*Total investment returns exclude the effects of sales loads.
See Notes to Financial Statements.
</TABLE>
<PAGE>
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights (concluded)
<CAPTION>
Class B
For the
Period
The following per share data and ratios have been derived Dec. 23,
from information provided in the financial statements. For the Year Ended 1991++ to
August 31, August 31,
Increase (Decrease) in Net Asset Value: 1994 1993 1992
<S> <S> <C> <C> <C>
Per Share Net asset value, beginning of year $ 10.14 $ 9.92 $ 9.92
Operating ---------- ---------- ----------
Performance: Investment income--net .48 .52 .44
Realized and unrealized gain (loss) on investments--net (.73) .22 --
---------- ---------- ----------
Total from investment operations (.25) .74 .44
---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.48) (.52) (.44)
---------- ---------- ----------
Net asset value, end of year $ 9.41 $ 10.14 $ 9.92
========== ========== ==========
Total Based on net asset value per share (2.55)% 7.80% 4.54%+++
Investment ========== ========== ==========
Return:**
Ratios to Expenses, excluding distribution fees .58% .55% .58%*
Average ========== ========== ==========
Net Assets: Expenses 1.33% 1.30% 1.33%*
========== ========== ==========
Investment income--net 4.90% 5.27% 6.45%*
========== ========== ==========
Supplemental Net assets, end of year (in thousands) $1,497,358 $2,151,917 $1,921,893
Data: ========== ========== ==========
Portfolio turnover 322.68% 224.35% 230.83%
========== ========== ==========
<FN>
++Commencement of Operations.
+++Aggregate total investment return.
*Annualized.
**Total investment returns exclude the effects of sales loads.
See Notes to Financial Statements.
</TABLE>
<PAGE>
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 ongoing account
maintenance fees and the distribution of such shares
and have exclusive voting rights with respect to matters
relating to such distribution expenditures. On Septem-
ber 27, 1994, shareholders approved the implementation
of the Merrill Lynch Select PricingSM System, which will
offer two new classes of shares, Class C and Class D.
The following is a summary of significant accounting
policies followed by the Trust.
(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. The Trust
employs Merrill Lynch Securities Pricing Service
("MLSPS"), an affiliate of Fund Asset Management, L.P.
("FAM"), to provide mortgage-backed securities prices
for the Trust. 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 value.
Securities and assets for which market quotations are
not readily available are valued at fair value as determined
in good faith by or under the direction of the Trustees
of the Trust.
<PAGE>
(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 premiums paid or received).
Written and purchased options are non-income
producing investments.
(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.
<PAGE>
(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.
NOTES TO FINANCIAL STATEMENTS (continued)
(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--$46,945,771 has been reclassified from
accumulated realized capital losses--net, to paid-in
capital in excess of par as a result of permanent book-tax
differences.
(j) Dollar rolls--The Trust sells mortgage-backed securities for
delivery in the current month and simultaneously contracts to
repurchase substantially similar (same type, coupon and maturity)
securities on a specific future date. The repurchase amount as
of August 31, 1994 was $68,017,152.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Trust has entered into an Investment Advisory
Agreement with 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. ("PSI"), an indirect wholly-owned subsidiary of
ML & Co. The limited partners are ML & Co. and Fund
Asset Management, Inc. ("FAMI"), which is also an
indirect wholly-owned subsidiary of ML & Co. The Trust
has also entered into a Distribution Agreement and a
Distribution Plan with Merrill Lynch Funds Distributor
Inc. ("MLFD" or "Distributor"), a wholly-owned sub-
sidiary of ML & Co.
<PAGE>
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. 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.
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.
<PAGE>
As authorized by the Distribution Plans, the Distributor
has entered into agreements with Merrill Lynch, Pierce,
Fenner & Smith Inc. ("MLPF&S"), which provide for
the compensation of MLPF&S in connection with
account maintenance activities for Class A Shares and
for providing distribution-related services to the Trust for
Class B Shares.
For the year ended August 31, 1994, MLFD earned
$3,940,109 and $13,626,986 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 year ended August 31, 1994, MLFD earned under-
writing discounts of $51,423, and MLPF&S earned dealer
concessions of $659,680 on sales of the Trust's Class A
Shares.
The Trust also received contingent deferred sales
charges of $4,398,541 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 FAM, FAMI, MLFD, FDS, PSI,
MLPF&S, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-
term securities, for the year ended August 31, 1994
were $10,835,228,783 and $11,806,301,916, respectively.
Net realized and unrealized losses as of August 31, 1994
were as follows:
Realized Unrealized
Losses Losses
Long-term investments $(118,397,155) $ (47,887,174)
Short-term investments (4,626) --
------------- -------------
Total $(118,401,781) $ (47,887,174)
============= =============
<PAGE>
As of August 31, 1994, net unrealized depreciation for
Federal income tax purposes aggregated $60,589,901, of
which $3,793,058 related to appreciated securities and
$64,382,959 related to depreciated securities. The
aggregate cost of investments at August 31, 1994 for
Federal income tax purposes was $2,778,296,632.
Transactions in put options written for the year ended
August 31, 1994, were as follows:
Face Amount Premiums
Put Options Written Subject to Put Received
Outstanding put options
written at beginning of year -- --
Options written $ 50,000,000 $ 234,375
Options exercised (50,000,000) (234,375)
------------- -------------
Outstanding put options
written at end of year $ -- $ --
============= =============
4. Shares of Beneficial Interest:
Net decrease in net assets derived from beneficial
interest transactions was $881,720,587 and $67,810,049
for the years ended August 31, 1994 and August 31,
1993, respectively.
Transactions in shares of beneficial interest for Class A
and Class B Shares were as follows:
Class A Shares for the Year Dollar
Ended August 31, 1994 Shares Amount
Shares sold 14,555,924 $ 141,925,143
Shares issued to share-
holders in reinvestment
of dividends 4,202,561 40,918,356
------------- -------------
Total issued 18,758,485 182,843,499
Shares redeemed (55,745,563) (545,019,212)
------------- -------------
Net decrease (36,987,078) $(362,175,713)
============= =============
<PAGE>
Class A Shares for the Year Dollar
Ended August 31, 1993 Shares Amount
Shares sold 17,415,517 $ 173,299,062
Shares issued to share-
holders 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 Year Dollar
Ended August 31, 1994 Shares Amount
Shares sold 25,174,866 $ 246,237,057
Shares issued to share-
holders in reinvestment
of dividends 5,183,921 50,451,702
------------- -------------
Total issued 30,358,787 296,688,759
Shares redeemed (83,589,212) (816,233,633)
------------- -------------
Net decrease (53,230,425) $(519,544,874)
============= =============
Class B Shares for the Year Dollar
Ended August 31, 1993 Shares Amount
Shares sold 71,078,764 $ 706,033,341
Shares issued to share-
holders 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>
NOTES TO FINANCIAL STATEMENTS (concluded)
5. Capital Loss Carryforward:
At August 31, 1994, the Trust had a net capital loss
carryforward of approximately $206,167,000
($98,650,000 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 August 31, 1994, the Trust held US Treasury Notes
having an aggregate value of approximately $230,013,000
as collateral for portfolio securities loaned having a
market value of approximately $239,876,000.
<AUDIT-REPORT>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders,
Merrill Lynch Federal Securities Trust:
We have audited the accompanying statement of
assets and liabilities, including the schedule of invest-
ments, of Merrill Lynch Federal Securities Trust as of
August 31, 1994, 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 Trust'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 gener-
ally 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 proce-
dures included confirmation of securities owned at
August 31, 1994 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 over-
all financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
<PAGE>
In our opinion, such financial statements and finan-
cial highlights present fairly, in all material respects,
the financial position of Merrill Lynch Federal
Securities Trust as of August 31, 1994, the results of
its operations, the changes in its net assets, and the
financial highlights for the respective stated periods
in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Princeton, New Jersey
September 29, 1994
</AUDIT-REPORT>
IMPORTANT TAX INFORMATION (unaudited)
None of the ordinary income distributions paid
monthly by Merrill Lynch Federal Securities Trust
during the year ended August 31, 1994 qualify for
the dividends-received deduction for corporations.
Additionally, there were no long-term capital gains
distributions during the year.
The law varies in each state as to whether and what
percentage of dividend income attributable to
Federal obligations is exempt from state income tax.
We recommend that you consult your tax adviser to
determine if any portion of the dividends you received
is exempt from state income tax.
Listed below are the percentages of the Trust's total
assets invested in Federal obligations* as of the end
of each quarter of the fiscal year.
For the Quarter Ended
November 30, 1993 18.24%
February 28, 1994 16.99%
May 31, 1994 14.52%
August 31, 1994 22.39%
Of the Trust's dividends paid monthly during the year
ended August 31, 1994, 21.10% was attributable to
Federal obligations. In calculating the foregoing
percentage, expenses of the Trust have been allocated
on a pro rata basis.
Please retain this information for your records.
<PAGE>
[FN]
*For purposes of this calculation, Federal obligations include
US Treasury Notes, US Treasury Bills, US Treasury Bonds, and
US Savings Bonds. Also included are obligations issued by the
following agencies: Banks for Cooperatives, Federal Intermediate
Credit Banks, Federal Land Banks, Federal Home Loan Banks, and
the Student Loan Marketing Association. Repurchase agreements
are not included in this calculation.
OFFICERS AND TRUSTEES
Arthur Zeikel, President and Trustee
Joe Grills, 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
<PAGE>
APPENDIX GRAPHIC AND IMAGE MATERIAL.
ITEM 1:
Total Return Based on a $10,000 Investment
A line graph depicting the growth of an investment in the fund's
Class A Shares compared to growth of an investment in the Salomon
Brothers Mortgage Index. Beginning and ending values are:
9/28/84** 8/94
ML Federal Securities Trust++--
Class A Shares* $9,600 $23,699
Salomon Brothers Mortgage
Index++++ $10,000 $29,570
A line graph depicting the growth of an investment in the fund's
Class B Shares compared to growth of an investment in the Salomon
Brothers Mortgage Index. Beginning and ending values are:
12/23/91** 8/94
ML Federal Securities Trust++--
Class B Shares* $10,000 $10,793
Salomon Brothers Mortgage
Index++++ $10,000 $11,432
[FN]
*Assuming maximum sales charge, transaction costs and other
operating expenses including advisory fees.
**Commencement of Operations.
++The Trust invests primarily in US Government and Government
Agency securities, including GNMA mortgage-backed certificates
and other mortgage-backed Government securities.
++++This unmanaged Index reflects the performance of a capital
market weighting of the outstanding agency-issued mortgage-
backed securities.
