MERRILL LYNCH
FEDERAL
SECURITIES TRUST
FUND LOGO
Semi-Annual Report
February 28, 1995
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
Recent releases of fundamental economic statistics
reveal areas of slowing activity. Total growth, as
measured by the 4.6% rate of expansion in fourth-
quarter gross domestic product (GDP), was the most
robust of 1994. However, recent economic data has
surfaced which may result in a mid-cycle slowdown or
possibly threaten the current recovery, now in its
forty-eighth month.
Consumers account for two-thirds of GDP, and housing
and housing-related items represent a major portion
of consumer expenditures. Measurements of housing
activity have moderated markedly over the Trust's
most recent fiscal quarter. For example, year-on-year
sales of existing single family houses have fallen to
3.6 million units, a decline of 15% from levels of one
year ago. Additionally, the rate of new housing con-
struction declined nearly 10% in January, the third
decline in four months, giving further support for
consumer retrenchment.
Beyond the housing sector, there are sporadic
pockets of data which support observations of an
imminent soft landing of the economy. Unemployment
jumped 0.3% to 5.7% in January. Retail activity has
slowed recently as the holiday period was not as
robust as expected and the growth of consumer
credit expanded by $7.4 billion in December, a
dramatic decline from the previous four-month
average of $12.3 billion.
While small fissures may be appearing in the current
expansion, overall the economy remains remarkably
healthy. The personal income growth rate is expand-
ing, creating an environment where disposable
income and the savings rate are increasing. These
developments have enabled consumer confidence
levels to remain extraordinarily high, 20% higher than
a year ago. However, inflation seems to be well
contained as compared with historical standards.
Producer prices increased less than 2% in 1994 and
have increased at a 1.3% annual pace over the past
three months. Consumer prices rose a mere 2.6% in
1994 and are currently still rising at that pace. While
we expect inflation to increase in 1995 from its very
low 1994 base, at this time we do not anticipate a
substantial increase in inflationary pressures.
<PAGE>
In a move that most investors increasingly believe to
be the final or next-to-final increase in interest rates
of this cycle, the Federal Reserve Board raised inter-
est rates for the seventh time in the past 12 months
by increasing the Federal Funds rate and the discount
rate by 50 basis points (0.50%) on February 1, 1995.
Although the Federal Reserve Board has stated that
additional restrictive moves would be implemented if
growth continued at the current pace, the central
bank also stated its belief that recently released
economic indicators show that subtle signs of a
slowing economy are emerging. The Federal Reserve
Board even alluded to implementing accommodative
monetary policies in a preemptive strike at potential
recession in the event an economic slowdown progresses
too quickly, at least on a theoretical basis.
Investment Environment
In our November report to shareholders, we expressed
the opinion that fixed-income markets represented
extraordinary value on a fundamental basis. Growth
appeared to be peaking and real (inflation-adjusted)
interest rates were historically attractive. During
the February quarter, investors took advantage of this
relationship, generating a significant fixed-income
rally which resulted in yield declines in all maturities
of six months and longer. Investor anticipation of
limited further increases in short-term interest rates
by the Federal Reserve Board, and the turbulence in
the emerging debt markets precipitated by the deval-
uation of the Mexican peso, gave further support to
the US markets.
On US Treasury securities, long-term bond yields de-
clined from 8.00% to 7.44% and generated a total return
of 7.92% for the February quarter. Declines in yields
were more dramatic in the intermediate sector as the
ten-year Treasury note fell 70 basis points to 7.20%,
the five-year Treasury note declined 75 basis points
to 7.04% and the three-year note fell 73 basis points
to close the February quarter at 6.875%. The quarterly
total returns for these securities measured 6.73%,
4.83% and 3.65%, respectively.
<PAGE>
Performance in the mortgage-backed sector was
equally impressive. The best performers were
Government National Mortgage Association (GNMA)
discount mortgage-backed securities (MBS) which
tightened 5 basis points to comparable average life
Treasury securities. GNMA 7% generated a total return
of 7.50% for the three-month period ended February
28, 1995. By contrast, Federal National Mortgage
Association (FNMA) 7% MBS, a slightly shorter-term
security than GNMA 7%, returned 6.58% for the
February quarter. High coupon MBS, which trade off
shorter maturity Treasury securities, underperformed
because of their high dollar price and the remaining
refinance incentive of the underlying mortgages.
For an example, FNMA 10% MBS appreciated 1.625
points in price as concern for higher prepayments on
this product limited participation in the rally. During
the same period, the five-year Treasury note increased
3 points in price.
Portfolio Matters
Looking forward, the technicals are positive for the
MBS market. The vast majority of homeowners have
already refinanced their mortgages and interest rates
are at levels far from where a refinancing incentive
would take place. In fact, interest rates would have
to fall significantly below the most recent cyclical
lows for refinancing to become a major issue. Most
Wall Street firms are currently projecting prepay-
ments at levels that may well be below the minimal
speeds for non-economic prepayments such as
relocation and death, for example. This of course
creates opportunities.
The current portfolio structure is heavily weighted in
MBS. Reduced housing and refinance activity coupled
with high demand are likely to cause yield spreads
to tighten and MBS to outperform comparable Treasury
securities. Faster prepayments than Wall Street
projections should favor low coupon mortgages that
are priced at a substantial discount. The Trust is
therefore heavily weighted in coupons 8% and below.
The Trust also has positions in seasoned high coupon
(10.50% and above) MBS because these homeowners
failed to take advantage of the past refinancing
incentives, therefore they are less likely to do
so if rates declined today. Collateralized mortgage
obligations and Treasury positions are at the short
end of the yield curve and are to offset duration
and provide liquidity.
<PAGE>
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
March 28, 1995
PERFORMANCE DATA
About Fund Performance
Since October 21, 1994, investors have been able to
purchase shares of the Fund through the Merrill
Lynch Select Pricing SM System, which offers four
pricing alternatives:
* Class A Shares incur a maximum initial sales
charge (front-end load) of 4% and bear no ongoing
distribution or account maintenance fees. Class A
Shares are available only to eligible investors, as de-
tailed in the Fund's prospectus. If you were a Class A
shareholder prior to October 21, 1994, your Class A
Shares were redesignated to Class D Shares on October
21, 1994, which, in the case of certain eligible investors,
were simultaneously exchanged for Class A Shares.
* Class B Shares are subject to a maximum contingent
deferred sales charge of 4% if redeemed during the
first year, decreasing 1% each year thereafter to 0%
after the fourth year. In addition, Class B Shares are
subject to a distribution fee of 0.50% and an account
maintenance fee of 0.25%. These shares automatically
convert to Class D Shares after approximately 10 years.
<PAGE>
* Class C Shares are subject to a distribution fee of
0.55% and an account maintenance fee of 0.25%. In
addition, Class C Shares are subject to a 1% contingent
deferred sales charge if redeemed within one year
of purchase.
* Class D Shares incur a maximum initial sales charge
of 4% and an account maintenance fee of 0.25% (but
no distribution fee).
Performance data for the Fund's Class B Shares and
Class D Shares are presented in the "Performance Sum-
mary," "Recent Performance Results" and the "Average
Annual Total Return" on pages 4 and 5. Data for Class A
Shares and Class C Shares are also presented in the
"Recent Performance Results" and "Aggregate Total
Return" tables on page 4.
The "Recent Performance Results" table shows invest-
ment results before the deduction of any sales charges
for Class B and Class D Shares for the 12-month and
3-month periods ended February 28, 1995 and for
Class A and Class C Shares for the since inception and
3-month periods ended February 28, 1995. All data
in this table assume imposition of the actual total
expenses incurred by each class of shares during the
relevant period.
None of the past results shown should 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. Dividends paid to
each class of shares will vary because of the different
levels of account maintenance, distribution and
transfer agency fees applicable to each class, which
are deducted from the income available to be paid
to shareholders.
<PAGE>
PERFORMANCE DATA (continued)
<TABLE>
Recent Performance Results
<CAPTION>
12 Month 3 Month
2/28/95 11/30/94 2/28/94++ % Change++ % Change
<S> <C> <C> <C> <C> <C>
Class A Shares* $9.36 $9.06 $9.16 +2.18% +3.31%
Class B Shares* 9.36 9.06 9.89 -5.36 +3.31
Class C Shares* 9.36 9.06 9.16 +2.18 +3.31
Class D Shares* 9.36 9.06 9.89 -5.36 +3.31
Class A Shares--Total Return* +4.80(1) +5.13(2)
Class B Shares--Total Return* +0.34(3) +4.93(4)
Class C Shares--Total Return* +4.52(5) +4.91(6)
Class D Shares--Total Return* +0.85(7) +5.07(8)
Class A Shares--Standardized 30-day Yield 6.96%
Class B Shares--Standardized 30-day Yield 6.48%
Class C Shares--Standardized 30-day Yield 6.43%
Class D Shares--Standardized 30-day Yield 6.72%
<FN>
*Investment results shown do not reflect sales charges; results shown
would be lower if a sales charge was included.
++Investment results shown for Class A and Class C Shares are since inception (10/21/94).
(1)Percent change includes reinvestment of $0.222 per share ordinary income dividends.
(2)Percent change includes reinvestment of $0.171 per share ordinary income dividends.
(3)Percent change includes reinvestment of $0.543 per share ordinary income dividends.
(4)Percent change includes reinvestment of $0.153 per share ordinary income dividends.
(5)Percent change includes reinvestment of $0.197 per share ordinary income dividends.
(6)Percent change includes reinvestment of $0.151 per share ordinary income dividends.
(7)Percent change includes reinvestment of $0.591 per share ordinary income dividends.
(8)Percent change includes reinvestment of $0.165 per share ordinary income dividends.
</TABLE>
Average Annual Total Return
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 12/31/94 -3.81% -7.44%
Inception (12/23/91)
through 12/31/94 +2.70 +2.41
[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>
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Year Ended 12/31/94 -3.32% -7.19%
Five Years Ended 12/31/94 +6.60 +5.73
Ten Years Ended 12/31/94 +8.89 +8.44
[FN]
*Maximum sales charge is 4%. On 10/21/94, Class A Shares were redesignated
to Class D Shares.
**Assuming maximum sales charge.
Aggregate Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Inception (10/21/94)
through 12/31/94 +0.54% -3.48%
[FN]
*Maximum sales charge is 4%. On 10/21/94, Class A Shares were redesigned
to Class D Shares.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Inception (10/21/94)
through 12/31/94 +0.28% -0.71%
[FN]
*Maximum contingent deferred sales charge is 1% and reduced to 0% after
one year.
**Assuming payment of applicable contingent deferred sales charge.
<PAGE>
PERFORMANCE DATA (concluded)
<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
1994 9.98 9.08 -- 0.523 - 3.81
1/1/95--2/28/95 9.08 9.36 -- 0.083 + 4.13
------
Total $1.725
Cumulative total return as of 2/28/95: +12.79%**
<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>
Performance Summary--Class D 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
1994 9.98 9.08 -- 0.571 - 3.32
1/1/95--2/28/95 9.08 9.36 -- 0.089 + 4.20
------ ------
Total $0.848 Total $8.129
Cumulative total return as of 2/28/95: +154.22%**
<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.
***As a result of the implementation of the Merrill Lynch Select Pricing SM System,
Class A Shares of the Fund outstanding prior to October 21, 1994 have been
redesignated to Class D Shares.
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Face Interest Maturity Value
Issue Amount Rate Date(s) (Note 1a)
<S> <C> <C> <C> <C>
US Government Agency Discount Obligations*--6.57%
Federal Home Loan Bank $ 67,000,000 5.85% 3/10/1995 $ 66,902,013
Federal National Mortgage Corporation 100,000,000 5.85 3/15/1995 99,772,500
Total US Government Agency Discount Obligations
(Cost--$166,674,513) 166,674,513
US Government Obligations--17.59%
United States Treasury Notes 225,000,000 8.25 7/15/1998 233,649,000
200,000,000 8.875 2/15/1999 212,688,000
Total US Government Obligations (Cost--$446,275,593) 446,337,000
US Government Agency Mortgage-Backed Obligations**--78.84%
Federal Home Loan Mortgage Corporation 757 10.00 7/01/2019 801
Participation Certificates 26,745,403 10.50 9/01/2000-9/01/2020 28,483,855
6,682,836 11.00 8/01/2010-9/01/2020 7,173,556
5,717,260 11.50 10/01/1998-6/01/2020 6,160,348
2,406,458 12.00 7/01/1999-6/01/2020 2,615,507
5,831,369 12.50 10/01/1999-7/01/2019 6,582,158
7,248,182 13.00 8/01/1999-2/01/2016 8,253,867
Federal Home Loan Mortgage Corporation 491,758 6.00 4/01/2009 457,335
Participation Certificates--Gold Program 114,656,073 7.00(2) 2/01/1998-11/01/1999 113,401,736
99,732,636 8.00 6/01/2024-10/01/2024 99,109,307
3,640,861 8.50 7/01/2008-12/01/2021 3,690,923
9,369,132 10.50 10/01/2020-12/01/2020 10,048,394
<PAGE>
Federal Home Loan Mortgage 93-1635-E 43,530,243 5.45 1/15/2008 39,979,808
Corporation REMICs*** 93-1604-E 105,716,536 5.50 3/15/2007 97,424,395
GN29P 50,000,000 7.00 2/25/2018 48,500,000
Trust 171 83,605,762 8.00 7/15/2024 83,083,226
Trust 134 3,169,356 9.00(1) 4/15/2022 1,015,176
90-190-F 1,973,281 9.20 10/15/2021 1,975,131
Federal National Mortgage 905 6.50 12/01/2008 859
Association Mortgage-Backed 59,700,031 7.50 8/01/2023-3/01/2025 57,927,537
Securities 241,922,874 8.00 6/01/2009-2/01/2025 241,962,889
145,436,928 8.50 3/01/2008-2/01/2025 147,279,444
25,463 10.50 9/01/2000 26,990
62,275,013 11.00 2/01/2011-12/01/2020 67,607,000
141,006 11.50 1/01/2015-6/01/2015 153,696
2,960,047 13.00 8/01/2010-6/01/2015 3,352,253
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Face Interest Maturity Value
Issue Amount Rate Date(s) (Note 1a)
<S> <S> <C> <C> <C> <C>
US Government Agency Mortgage-Backed Obligations** (concluded)
Federal National Mortgage 93-214-EA $ 94,726,978 5.30 % 3/25/2007 $ 86,319,959
Association REMICs*** 93-123-S 15,529,411 6.825++ 7/25/2000 11,973,176
Trust 267 63,563,457 8.50 10/25/2024 64,358,000
94-M4-A 29,028,819 9.055 8/25/2026 29,808,969
Government National Mortgage 148,762,556 7.00 9/15/2008-6/15/2024 140,957,569
Association Mortgage-Backed 309,048,306 7.50 1/15/2007-6/15/2024 298,905,340
Securities 165,766,689 8.00 11/15/2020-12/15/2024 164,782,035
114,675,222 8.50 3/15/2017-12/15/2024 116,574,244
517,701 10.50 10/15/2014-4/15/2021 563,647
9,317,761 11.00 12/15/2009-1/15/2021 10,258,202
26,536 11.50 8/15/2013-4/15/2015 29,322
Total US Government Agency Mortgage-Backed Obligations (Cost--$2,000,741,146) 2,000,796,654
Face
Amount Issue
Repurchase Agreements****--2.95%
$75,000,000 Nikko Securities Co., purchased on 2/28/1995 to yield 6.10% to 3/01/1995 75,000,000
<PAGE>
Total Repurchase Agreements (Cost--$75,000,000) 75,000,000
Total Investments (Cost--$2,688,691,252)--105.95% 2,688,808,167
Liabilities in Excess of Other Assets--(5.95%) (151,079,180)
--------------
Net Assets--100.00% $2,537,728,987
==============
<FN>
(1)Represents the interest only portion of a mortgage-backed obligation.
(2)Represents balloon mortgages that amortize on a 30-year schedule
and have 5-year maturities.
++Adjustable Rate Security. The interest rate resets periodically and
inversely. The interest rate shown is the rate in effect as of
February 28, 1995.
*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.
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of February 28, 1995
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$2,688,691,252) (Note 1a) $2,688,808,167
Receivables:
Interest $ 15,464,691
Beneficial interest sold 5,642,147
Principal paydowns 1,122,718
Loaned securities and extended deliveries 287,906 22,517,462
--------------
Prepaid registration fees and other assets (Note 1f) 115,416
--------------
Total assets 2,711,441,045
--------------
<PAGE>
Liabilities: Payables:
Securities purchased 153,670,358
Beneficial interest redeemed 9,863,834
Dividends to shareholders (Note 1g) 3,486,091
Distributor (Note 2) 941,174
Investment adviser (Note 2) 867,592 168,829,049
--------------
Accrued expenses and other liabilities 4,883,009
--------------
Total liabilities 173,712,058
--------------
Net Assets: Net assets $2,537,728,987
==============
Net Assets Class A Shares of beneficial interest, $0.10 par value, unlimited number
Consist of: of shares authorized $ 2,156,546
Class B Shares of beneficial interest, $0.10 par value, unlimited number
of shares authorized 13,894,663
Class C Shares of beneficial interest, $0.10 par value, unlimited number
of shares authorized 47,324
Class D Shares of beneficial interest, $0.10 par value, unlimited number
of shares authorized 11,016,952
Paid-in capital in excess of par 2,964,819,563
Accumulated investment loss--net (124,089)
Accumulated realized capital losses--net (Note 5) (454,198,887)
Unrealized appreciation on investments--net 116,915
--------------
Net assets $2,537,728,987
==============
Net Asset Class A--Based on net assets of $201,833,716 and 21,565,459 shares of
Value: beneficial interest outstanding $ 9.36
==============
Class B--Based on net assets of $1,300,422,669 and 138,946,632 shares of
beneficial interest outstanding $ 9.36
==============
Class C--Based on net assets of $4,427,965 and 473,237 shares of
beneficial interest outstanding $ 9.36
==============
Class D--Based on net assets of $1,031,044,637 and 110,169,520 shares of
beneficial interest outstanding $ 9.36
==============
See Notes to Financial Statements.
</TABLE>
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations for the Six Months Ended February 28, 1995
<S> <S> <C>
Investment Interest and discount earned $ 100,331,137
Income Other 1,665,601
(Note 1e): --------------
Total income 101,996,738
--------------
Expenses: Investment advisory fees (Note 2) 5,784,901
Distribution fees--Class B (Note 2) 5,035,209
Account maintenance fees--Class D (Note 2) 1,394,132
Transfer agent fees--Class B (Note 2) 914,745
Transfer agent fees--Class D (Note 2) 653,283
Custodian fees 290,519
Printing and shareholder reports 173,718
Accounting services (Note 2) 145,903
Registration fees (Note 1f) 134,686
Transfer agent fees--Class A (Note 2) 81,275
Professional fees 60,786
Trustees' fees and expenses 41,123
Distribution fees--Class C (Note 2) 5,406
Transfer agent fees--Class C (Note 2) 1,121
Other 32,286
--------------
Total expenses 14,749,093
--------------
Investment income--net 87,247,645
--------------
Realized & Realized loss on investments--net (70,985,612)
Unrealized Change in unrealized appreciation/depreciation on investments--net 48,004,089
Gain(Loss) --------------
on Net Increase in Net Assets Resulting from Operations $ 64,266,122
Investments-- ==============
Net (Notes 1c,
1e & 3):
</TABLE>
<PAGE>
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Six For the Year
Months Ended Ended
Increase (Decrease) in Net Assets: Feb. 28, 1995 Aug. 31, 1994
<S> <S> <C> <C>
Operations: Investment income--net $ 87,247,645 $ 174,250,833
Realized loss on investments--net (70,985,612) (118,401,781)
Change in unrealized appreciation/depreciation on investments--net 48,004,089 (133,557,622)
-------------- --------------
Net increase (decrease) in net assets resulting from operations 64,266,122 (77,708,570)
-------------- --------------
Dividends to Investment income--net:
Shareholders Class A (4,788,665) --
(Note 1g): Class B (43,175,585) (88,957,069)
Class C (44,648) --
Class D (38,665,683) (85,293,764)
-------------- --------------
Net decrease in net assets resulting from dividends to shareholders (86,674,581) (174,250,833)
-------------- --------------
Beneficial Net decrease in net assets derived from beneficial interest transactions (294,200,002) (881,720,587)
Interest -------------- --------------
Transactions
(Note 4):
Net Assets: Total decrease in net assets (316,608,461) (1,133,679,990)
Beginning of period 2,854,337,448 3,988,017,438
-------------- --------------
End of period $2,537,728,987 $2,854,337,448
============== ==============
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<PAGE>
<TABLE>
Financial Highlights
<CAPTION>
Class A Class B
For the For the
The following per share data and ratios have Period For the Six Period
been derived from information provided in the Oct. 21, Months Dec. 23,
financial statements. 1994++ to Ended For the Year Ended 1991++ to
Feb. 28, Feb. 28, August 31, Aug. 31,
1995 1995 1994 1993 1992
Increase (Decrease) in Net Asset Value:
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.16 $ 9.41 $ 10.14 $ 9.92 $ 9.92
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income--net .24 .29 .48 .52 .44
Realized and unrealized gain (loss)
on investments--net .20 (.05) (.73) .22 --
---------- ---------- ---------- ---------- ----------
Total from investment operations .44 .24 (.25) .74 .44
---------- ---------- ---------- ---------- ----------
Less dividends from investment
income--net (.24) (.29) (.48) (.52) (.44)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 9.36 $ 9.36 $ 9.41 $ 10.14 $ 9.92
========== ========== ========== ========== ==========
Total Based on net asset value per share 4.80%+++ 2.71%+++ (2.55)% 7.80% 4.54%+++
Investment ========== ========== ========== ========== ==========
Return:**
Ratios to Expenses, excluding distribution fees .65%* .65%* .58% .55% .58%*
Average ========== ========== ========== ========== ==========
Net Assets: Expenses .65%* 1.40%* 1.33% 1.30% 1.33%*
========== ========== ========== ========== ==========
Investment income--net 7.41%* 6.47%* 4.90% 5.27% 6.45%*
========== ========== ========== ========== ==========
Supplemental Net assets, end of period
Data: (in thousands) $ 201,834 $1,300,423 $1,497,358 $2,151,917 $1,921,893
========== ========== ========== ========== ==========
Portfolio turnover 182.92% 182.92% 322.68% 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>
<PAGE>
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights (concluded)
<CAPTION>
Class C Class D
The following per share data and ratios For the For the Six
have been derived from information provided Period Months
in the financial statements. Oct. 21, 1994++ Ended
to Feb. 28, Feb. 28, For the Year Ended August 31,
Increase (Decrease) in Net Asset Value: 1995 1995 1994 1993 1992 1991
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning
Operating of period $ 9.16 $ 9.41 $ 10.14 $ 9.92 $ 9.66 $ 9.28
Performance: ---------- ---------- ---------- ---------- ---------- ----------
Investment income--net .21 .32 .52 .57 .70 .81
Realized and unrealized gain
(loss) on investments--net .20 (.05) (.73) .22 .26 .38
---------- ---------- ---------- ---------- ---------- ----------
Total from investment
operations .41 .27 (.21) .79 .96 1.19
---------- ---------- ---------- ---------- ---------- ----------
Less dividends from
investment income--net (.21) (.32) (.52) (.57) (.70) (.81)
---------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 9.36 $ 9.36 $ 9.41 $ 10.14 $ 9.92 $ 9.66
========== ========== ========== ========== ========== ==========
Total Based on net asset value
Investment per share 4.52%+++ 2.98%+++ (2.06)% 8.35% 10.16% 13.40%
Return:** ========== ========== ========== ========== ========== ==========
Ratios to Expenses, excluding account
Average Net maintenance and distribution
Assets: fees .69%* .63%* .58% .54% .57% .60%
========== ========== ========== ========== ========== ==========
Expenses 1.49%* .88%* .83% .79% .80% .78%
========== ========== ========== ========== ========== ==========
Investment income--net 6.65%* 6.98%* 5.41% 5.80% 7.17% 8.62%
========== ========== ========== ========== ========== ==========
Supplemental Net assets, end of period
Data: (in thousands) $ 4,428 $1,031,045 $1,356,979 $1,836,100 $2,048,037 $2,230,619
========== ========== ========== ========== ========== ==========
Portfolio turnover 182.92% 182.92% 322.68% 224.35% 230.83% 311.04%
========== ========== ========== ========== ========== ==========
<PAGE>
<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 management investment com-
pany. These unaudited financial statements reflect all
adjustments which are, in the opinion of management,
necessary to a fair statement of the results for the
interim period presented. All such adjustments are of a
normal recurring nature. The Trust offers 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 distri-
bution expenditures. The following is a summary of
significant accounting 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. 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.
(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) Derivative financial instruments--The Trust may
engage in various portfolio strategies to seek to increase
its return by hedging its portfolio against adverse move-
ments in the debt and currency markets. Losses may
arise due to changes in the value of the contract or if
the counterparty does not perform under the contract.
* 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 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.
<PAGE>
* Options--The trust is authorized to write and purchase
call and put options. When the Trust writes 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 produc-
ing investments.
(d) 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 shareholders.
Therefore, no Federal income tax provision is required.
(e) 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.
(f) Prepaid registration fees--Prepaid registration fees
are charged to expense as the related shares are issued.
(g) 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 Trust has entered into an Investment Advisory
Agreement with FAM. The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch and Co., Inc. ("ML & Co."),
which is the limited partner. The Trust 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.
<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 $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.
Pursuant to the 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 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:
Account
Maintenance Fee Distribution Fee
Class B 0.25% 0.50%
Class C 0.25% 0.55%
Class D 0.25% --
<PAGE>
Pursuant to a sub-agreement with the Distributor, Merrill
Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S"), a
subsidiary of ML & Co., also provides account mainte-
nance and distribution services to the Trust. 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 six months ended February 28, 1995, MLFD
earned underwriting discounts, and MLPF&S earned
dealer concessions on sales of the Trust's Class A and
Class D Shares as follows:
MLFD MLPF&S
Class A $ 595 $ 14,076
Class D $8,048 $101,526
MLPF&S received contingent deferred sales charges of
$1,959,127 relating to transactions in Class B Shares and
$370 relating to transactions in Class C Shares for the
six months ended February 28, 1995.
During the six months ended February 28, 1995, the
Trust paid MLSPS $2,106 for security price quotations
to compute the Net Asset Value of the Trust.
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.
NOTES TO FINANCIAL STATEMENTS (concluded)
Certain officers and/or trustees of the Trust are officers
and/or directors of FAM, PSI, MLFD, MLPF&S, FDS,
and/or ML & Co.
<PAGE>
3. Investments:
Purchases and sales of investments, excluding short-term
securities, for the six months ended February 28, 1995
were $4,597,267,194 and $4,777,184,794, respectively.
Net realized and unrealized losses as of February 28, 1995
were as follows:
Realized Unrealized
Losses Gains
Long-term investments $ (70,548,112) $ 116,915
Options written (437,500) --
------------- -------------
Total $ (70,985,612) $ 116,915
============= =============
As of February 28, 1995, net unrealized appreciation
for Federal income tax purposes aggregated $119,915, of
which $40,095,620 related to appreciated securities and
$39,978,705 related to depreciated securities. The
aggregate cost of investments at February 28, 1995 for
Federal income tax purposes was $2,688,691,252.
Transactions in put options written for the six months
ended February 28, 1995 were as follows:
Face Amount Premiums
Put Options Written Subject to Put Received
Outstanding put options
written, beginning of
period -- --
Options written $ 100,000,000 $ 968,750
Options exercised (100,000,000) (968,750)
------------- -------------
Outstanding put options
written, end of period $ -- $ --
============= =============
4. Shares of Beneficial Interest:
Net decrease in net assets derived from
beneficial interest transactions was $294,200,002
and $881,720,587 for the six months ended February
28, 1995 and the year ended August 31, 1994, respectively.
<PAGE>
Transactions in capital shares for each class were as
follows:
Class A Shares for the Period Dollar
October 21, 1994++ to February 28, 1995 Shares Amount
Shares sold 23,698,475 $ 216,939,011
Shares issued to share-
holders in reinvestment of
dividends 263,040 2,408,904
------------- -------------
Total issued 23,961,515 219,347,915
Shares redeemed (2,396,056) (21,838,415)
------------- -------------
Net increase 21,565,459 $ 197,509,500
============= =============
[FN]
++Commencement of Operations.
Class B Shares for the Six Months Dollar
Ended February 28, 1995 Shares Amount
Shares sold 10,442,664 $ 95,735,095
Shares issued to share-
holders in reinvestment of
dividends 2,713,258 24,824,764
------------- -------------
Total issued 13,155,922 120,559,859
Shares redeemed (33,269,431) (304,806,608)
------------- -------------
Net decrease (20,113,509) $(184,246,749)
============= =============
Class B Shares for the Year Dollar
Ended August 31, 1994 Shares Amount
Shares sold 25,174,866 $ 246,237,057
Shares issued to shareholders
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)
============= =============
<PAGE>
Class C Shares for the
Period October 21, 1994++ to Dollar
February 28, 1995 Shares Amount
Shares sold 496,801 $ 4,535,502
Shares issued to share-
holders in reinvestment of
dividends 3,462 31,702
------------- -------------
Total issued 500,263 4,567,204
Shares redeemed (27,026) (246,603)
------------- -------------
Net increase 473,237 $ 4,320,601
============= =============
[FN]
++Commencement of Operations.
Class D Shares for the
Six Months Ended Dollar
February 28, 1995 Shares Amount
Shares sold 2,566,956 $ 23,595,612
Shares issued to share-
holders in reinvestment of
dividends 1,995,970 18,265,603
------------- -------------
Total issued 4,562,926 41,861,215
Shares redeemed (38,547,622) (353,208,427)
------------- -------------
Net decrease (33,984,696) $(311,347,212)
============= =============
Class D Shares for the Year Dollar
Ended August 31, 1994 Shares Amount
Shares sold 14,555,924 $ 141,925,143
Shares issued to shareholders
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>
As a result of the implementation of the Merrill Lynch
Select Pricing SM System, Class A Shares of the Fund
outstanding prior to October 21, 1994 have been
redesignated Class D Shares. There were 119,438,530
shares redesignated amounting to $1,423,379,743.
5. Capital Loss Carryforward:
At August 31, 1994, the Trust had a net capital
loss carryforward of approximately $206,167,000, of which
$98,650,000 expires in 1996, $68,370,000 expires
in 1997, and $39,147,000 expires in 1998. This amount
will be available to offset like amounts of any future
taxable gains.
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
90 Washington Street, 12th Floor
New York, New York 10286
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
(800) 637-3863
