MERRILL LYNCH
FEDERAL
SECURITIES TRUST
FUND LOGO
Annual Report
August 31, 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
DEAR SHAREHOLDER
Economic Environment
In the May 31, 1995 quarterly shareholder letter, we noted that the
economy showed signs of weakness, and it has continued to do so.
Second-quarter gross domestic product growth was 1.1%, down from
2.7% in the first quarter, and 5.1% in fourth quarter 1994. This is
well within the boundary of noninflationary growth which is
considered to be in the 2.5%--3% range. Inflation continues to be
subdued with year-to-date (as of August 31, 1995) Consumer and
Producer Price Indexes at 2.6% and 1.3%, respectively. As expected,
the Federal Reserve Board elected not to ease monetary policy by
reducing interest rates at its August 27, 1995 meeting.
However, with continued evidence of a sluggish economy, many
economists are forecasting another reduction in interest rates at
the September Federal Open Market Committee meeting. The Federal
Reserve Board, vigilant in keeping inflation in check, must remain
cognizant of recession risks. The Leading Economic Indicators Index
(LEI) again turned negative for the fifth time in six months. As
stated in our last quarterly report, three consecutive declines in
the LEI is a predictor of recession. Although a recession does not
always follow, this Index accurately predicted all nine post-war
recessions.
Other recent economic releases that portend a weak economy were the
July declines in durable goods sales of 1.7%, and the third decline
in four months in the National Association of Purchasing Managers
Index (NAPM). As of August 31, 1995, the NAPM stood at 46.9. A level
below 50 indicates that the manufacturing sector of the economy is
in decline.
Declining interest rates in Japan and Germany reduced the pressure
on the value of the US dollar. The dollar rebounded significantly
against the yen from its 1995 low of 80.63 to an exchange rate of
97.46 at August 31, 1995. This development also gives the Federal
Reserve Board more latitude in cutting interest rates.
Fiscal Year in Review
When one considers real interest rates--that is nominal or actual
interest rates adjusted for inflation--it appears that the short end
of the yield curve needs adjustment. Some of this adjustment started
to take place during the August quarter. The 30-year Treasury and 10-
year Treasury note yields were unchanged for the quarter. Two-year
and five-year Treasury notes changed by only a single basis point
(.01%). However, one-year yields declined by 15 basis points.
The anticipated adjustment perhaps is more clear when put into the
context of yearly changes in interest rates. For the 12-month period
ended August 31, 1995, five-year and ten-year yields declined by 67
basis points and 82 basis points, respectively. During the same
period, one-year rates actually increased by 27 basis points. The
yield curve (one year--ten year) flattened from a spread of 174
basis points to only 65 basis points.
Overall, the portfolio structure over the past year emphasized
coupon flow and yield curve positioning at the short end and
intermediate sections of the yield curve. This strategy provided the
Fund with an attractive yield as well as a generous total rate of
return. (For complete performance information, see pages 3-6 of this
report to shareholders.) However, this strategy did not allow us to
fully participate in the decline in interest rates at the longer end
of the yield curve. Generally, price increases are greatest for
longer term assets such as lower coupon mortgage-backed securities
(MBS). The tradeoff is coupon flow versus potential price
appreciation. Going forward, as we approach the cyclical lows in
interest rates for 1995, more and more of the Fund's incremental
return will come from our emphasis toward coupon flow, relative
value, and a yield curve steepening, as opposed to a simple shift in
interest rates.
The portfolio is well-structured for a decline in short-term
interest rates with balloon mortgages, Treasury securities and
shorter collateralized mortgage obligation structures. Also, because
of the normal cash flow structure of mortgages, MBS tend to perform
well in a steepening yield curve environment.
We will continue our strategy of yield enhancement by holding
"seasoned" high couponed MBS (those at 10% and above) which consist
of securities issued eight or nine years ago. These homeowners did
not take advantage of the 1992/1993 refinancing opportunity, and we
believe it is unlikely they will do so at this time.
For a myriad of reasons, refinancing activity will not remotely
approach the levels reached in 1992/1993. At the present time, MBS
yields look attractive relative to prepayment risk. We continue to
believe that prepayment concern is exaggerated and this period of
wide MBS yield spreads will prove to be an opportunity to add high-
quality, high-yielding MBS to the Fund's portfolio.
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
October 2, 1995
PERFORMANCE DATA
About Fund Performance
Since October 21, 1994, investors have been able to purchase shares
of the Trust 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
detailed 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.
* 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 all of the Fund's shares are presented in the
"Total Return Based on a $10,000 Investment" graphs on page 4 and
the "Recent Performance Results" table on page 5. Data for the
Fund's Class B Shares and Class D Shares are presented in the
"Performance Summary" and the "Average Annual Total Return" tables
on pages 5 and 6. Data for Class A Shares and Class C Shares are
also presented in the "Aggregate Total Return" table on page 5.
The "Recent Performance Results" table shows investment results
before the deduction of any sales charges for Class B and Class D
Shares for the 12-month and 3-month periods ended August 31, 1995
and for Class A and Class C Shares for the since inception and 3-
month periods ended August 31, 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.
PERFORMANCE DATA (continued)
Total Return Based on a $10,000 Investment
A line graph depicting the growth of an investment in the fund's
Class A Shares and Class C Shares compared to growth of an
investment in the Salomon Brothers Mortgage Index. Beginning and
ending values are:
10/21/94** 8/95
ML Federal Securities Trust++--
Class A Shares* $ 9,600 $10,709
ML Federal Securities Trust++--
Class C Shares* $10,000 $10,980
Salomon Brothers Mortgage
Index++++ $10,000 $11,249
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** 8/95
ML Federal Securities Trust++--
Class B Shares* $10,000 $11,863
Salomon Brothers Mortgage
Index++++ $10,000 $11,538
A line graph depicting the growth of an investment in the fund's
Class D Shares compared to growth of an investment in the Salomon
Brothers Mortgage Index. Beginning and ending values are:
8/85** 8/95
ML Federal Securities Trust++--
Class D Shares* $ 9,600 $22,112
Salomon Brothers Mortgage
Index++++ $10,000 $23,968
[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.
Past performance is not predictive of future performance.
PERFORMANCE DATA (continued)
<TABLE>
Recent Performance Results
<CAPTION>
12 Month 3 Month
8/31/95 5/31/95 8/31/94++ % Change++ % Change
<S> <C> <C> <C> <C> <C>
Class A Shares* $9.61 $9.62 $9.16 + 4.91% -0.10%
Class B Shares* 9.61 9.62 9.41 + 2.13 -0.10
Class C Shares* 9.61 9.62 9.16 + 4.91 -0.10
Class D Shares* 9.61 9.62 9.41 + 2.13 -0.10
Class A Shares--Total Return* +11.56(1) +1.66(2)
Class B Shares--Total Return* + 8.91(3) +1.57(4)
Class C Shares--Total Return* +10.80(5) +1.55(6)
Class D Shares--Total Return* + 9.48(7) +1.60(8)
Class A Shares--Standardized 30-day Yield 6.53%
Class B Shares--Standardized 30-day Yield 6.03%
Class C Shares--Standardized 30-day Yield 5.97%
Class D Shares--Standardized 30-day Yield 6.29%
<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 $0.557 per share ordinary
income dividends.
(2)Percent change includes reinvestment of $0.168 per share ordinary
income dividends.
(3)Percent change includes reinvestment of $0.593 per share ordinary
income dividends.
(4)Percent change includes reinvestment of $0.150 per share ordinary
income dividends.
(5)Percent change includes reinvestment of $0.492 per share ordinary
income dividends.
(6)Percent change includes reinvestment of $0.148 per share ordinary
income dividends.
(7)Percent change includes reinvestment of $0.641 per share ordinary
income dividends.
(8)Percent change includes reinvestment of $0.162 per share ordinary
income dividends.
</TABLE>
Aggregate Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Inception (10/21/94)
through 6/30/95 +10.25% +5.84%
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Inception (10/21/94)
through 6/30/95 +9.65% +8.65%
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced
to 0% after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
Average Annual Total Return
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 6/30/95 +9.58% +5.58%
Inception (12/23/91)
through 6/30/95 +4.90 +4.65
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced
to 0% after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Year Ended 6/30/95 +10.15% +5.75%
Five Years Ended 6/30/95 + 7.77 +6.89
Ten Years Ended 6/30/95 + 8.83 +8.39
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
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--8/31/95 9.08 9.61 -- 0.381 +10.42
------
Total $2.023
Cumulative total return as of 8/31/95: +19.60%**
<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--8/31/95 9.08 9.61 -- 0.413 +10.78
------ ------
Total $0.848 Total $8.453
Cumulative total return as of 8/31/95: +170.26%**
<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, 1994were redesignated to Class D Shares.
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Face Interest Maturity Value
Issue Amount Rate Date(s) (Note 1a)
US Government Obligations--21.06%
<S> <C> <C> <C> <C>
United States Treasury Notes $ 45,000,000 8.25 % 7/15/1998 $ 47,657,700
200,000,000 8.875 2/15/1999 217,624,000
100,000,000 6.25 5/31/2000 100,641,000
50,000,000 5.875 6/30/2000 49,586,000
5,000,000 6.125 7/31/2000 5,007,050
100,000,000 6.50 5/15/2005 101,266,000
Total US Government Obligations (Cost--$512,336,775) 521,781,750
US Government Agency Mortgage-Backed Obligations*--77.13%
Federal Home Loan Mortgage Corporation 748 10.00 7/01/2019 807
Participation Certificates 24,140,740 10.50 9/01/2000-9/01/2020 26,215,154
6,003,718 11.00 8/01/2010-9/01/2020 6,581,576
5,173,580 11.50 10/01/1998-6/01/2020 5,700,613
2,252,190 12.00 7/01/1999-6/01/2020 2,498,513
5,090,710 12.50 10/01/1999-7/01/2019 5,650,688
6,605,692 13.00 8/01/1999-2/01/2016 7,365,346
Federal Home Loan Mortgage Corporation 476,505 6.00 4/01/2009 461,314
Participation Certificates-- 51,590,784 7.00(2) 4/01/1997-1/01/2000 52,154,671
Gold Program 50,000,000 7.00 2/01/2005-5/01/2024 49,140,500
91,818,989 8.00 1/01/2007-5/01/2025 93,993,230
22,530,689 8.50 7/01/2008-7/01/2025 23,255,726
8,622,704 10.50 10/01/2020-12/01/2020 9,428,323
Federal Home Loan Mortgage 1423-DD 43,116,000 6.38 1/15/2006 42,091,995
Corporation REMICs** 93-1604-E 105,716,536 5.50 3/15/2007 101,950,384
GN29P 50,000,000 7.00 2/25/2018 50,250,000
190-F 732,257 9.20 10/15/2021 732,256
Trust 1220-A 14,265,814 6.29 2/15/2022 14,265,814
Trust 1220-B 115,982,210 0.47++ 2/15/2022 1,309,439
Trust 134 2,979,125 9.00(1) 4/15/2022 695,417
Trust 171 81,521,120 8.00 7/15/2024 83,176,814
Federal National Mortgage Association 865 6.50 12/01/2008 852
Mortgage-Backed Securities 50,173,180 7.00 6/01/2025-8/01/2025 49,310,703
111,535,653 7.50 12/01/2006-8/01/2025 112,599,188
195,809,791 8.00 7/01/2009-1/01/2025 200,650,092
178,638,760 8.50 3/01/2005-4/01/2025 184,339,589
40,483,293 8.50(3) 7/15/2023 41,419,671
22,182 10.50 9/01/2000 23,305
55,657,484 11.00 2/01/2011-12/01/2020 61,744,743
139,794 11.50 1/01/2015-6/01/2015 156,045
2,861,654 13.00 8/01/2010-6/01/2015 3,190,744
Federal National Mortgage 93-123-S 15,529,411 6.825++ 7/25/2000 13,821,176
Association REMICs** 94-M4-A 28,363,148 9.055 8/25/2026 29,586,309
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Face Interest Maturity Value
Issue Amount Rate Date(s) (Note 1a)
US Government Agency Mortgage-Backed Obligations* (concluded)
<S> <C> <C> <C> <C>
Government National Mortgage Association $ 46,277,305 7.00 % 2/15/2022-6/15/2024 $ 45,481,798
Mortgage-Backed Securities 247,610,714 7.50 8/15/2021-2/15/2025 249,002,287
141,131,710 8.00 6/15/2017-6/15/2025 144,614,841
68,514,583 8.50 3/15/2017-6/15/2025 71,169,524
33,829,260 9.50 4/15/2016-10/15/2018 36,418,890
80,542,332 10.00 12/15/2015-12/15/2021 87,845,941
416,868 10.50 10/15/2014-4/15/2021 459,726
2,215,677 11.00 1/15/2010-12/15/2017 2,471,853
24,605 11.50 8/15/2013-4/15/2015 27,757
Total US Government Agency Mortgage-Backed Obligations (Cost--$1,876,399,353) 1,911,253,614
<CAPTION>
Face
Amount Issue
Repurchase Agreements***--4.64%
<C> <S> <C>
$97,000,000 Nikko Securities Co., purchased on 8/31/1995 to yield 5.84% to 9/01/1995 97,000,000
18,000,000 Paine Webber Incorporated, purchased on 8/31/1995 to yield 5.81% to 9/01/1995 18,000,000
Total Repurchase Agreements (Cost--$115,000,000) 115,000,000
<CAPTION>
Par Strike Expiration
Value Issue Price Date
Options Purchased--0.01%
<S> <C> <S> <C> <C> <C>
Call Options $100,056,859 Government National Mortgage
Purchased Association, 6% Adjustable
Rate Mortgage 101.5 12/15/1995 330,188
Put Options 50,000,000 Federal National Mortgage
Purchased Association, 30-Year, 7.50% 99.69 9/07/1995 31,250
Total Options Purchased (Cost--$660,781) 361,438
Total Investment (Cost--$2,504,396,909)--102.84% 2,548,396,802
Options Written--0.00%
Put Options 32,100,000 United States Treasury Notes,
Written 6.50% due 5/15/2005 99.97 9/07/1995 (17,527)
Total Options Written (Cost--$300,938) (17,527)
Total Investments Net of Options Written (Cost--$2,504,095,971)--102.84% 2,548,379,275
Liabilities in Excess of Other Assets--(2.84%) (70,375,245)
--------------
Net Assets--100.00% $2,478,004,030
==============
<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.
(3)Federal Housing Administration/Veterans' Administration Mortgages
packaged by the Federal National Mortgage Association.
++Adjustable Rate Security. The interest rate resets periodically
and inversely. The interest rate shown is the rate in effect as of
August 31, 1995.
*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 August 31, 1995
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$2,503,736,128) (Note 1a) $ 2,548,035,364
Options purchased, at value (cost--$660,781) (Notes 1a & 1c) 361,438
Cash 2,495,587
Receivables:
Securities sold $ 48,468,750
Interest 18,031,674
Beneficial interest sold 3,543,293
Principal paydowns 1,276,638
Loaned securities and extended deliveries (Note 6) 97,322 71,417,677
---------------
Prepaid registration fees and other assets (Note 1f) 120,799
---------------
Total assets 2,622,430,865
---------------
Liabilities: Options written, at value (premiums received--$300,938)
(Notes 1a & 1c) 17,527
Payables:
Securities purchased 131,693,516
Beneficial interest redeemed 5,243,272
Dividends to shareholders (Note 1g) 4,367,174
Distributor (Note 2) 1,020,710
Investment adviser (Note 2) 945,600 143,270,272
---------------
Accrued expenses and other liabilities 1,139,036
---------------
Total liabilities 144,426,835
---------------
Net Assets: Net assets $ 2,478,004,030
===============
Net Assets Class A Shares of beneficial interest, $0.10 par value,
Consist of: unlimited number of shares authorized $ 2,323,252
Class B Shares of beneficial interest, $0.10 par value,
unlimited number of shares authorized 13,145,468
Class C Shares of beneficial interest, $0.10 par value,
unlimited number of shares authorized 162,611
Class D Shares of beneficial interest, $0.10 par value,
unlimited number of shares authorized 10,160,815
Paid-in capital in excess of par 2,840,038,128
Accumulated realized capital losses on investments--net (Note 5) (432,109,548)
Unrealized appreciation on investments--net 44,283,304
---------------
Net assets $ 2,478,004,030
===============
Net Asset Value: Class A--Based on net assets of $223,236,939 and 23,232,522
shares of beneficial interest outstanding $ 9.61
===============
Class B--Based on net assets of $1,262,985,320 and 131,454,676
shares of beneficial interest outstanding $ 9.61
===============
Class C--Based on net assets of $15,620,610 and 1,626,106
shares of beneficial interest outstanding $ 9.61
===============
Class D--Based on net assets of $976,161,161 and 101,608,151
shares of beneficial interest outstanding $ 9.61
===============
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations for the Year Ended August 31, 1995
<S> <S> <C>
Investment Interest and discount earned $ 199,574,230
Income Other 432,339
(Note 1e): ---------------
Total income 200,006,569
---------------
Expenses: Investment advisory fees (Note 2) 11,490,071
Account maintenance and distribution fees--Class B (Note 2) 9,900,024
Account maintenance fees--Class D (Note 2) 2,666,871
Transfer agent fees--Class B (Note 2) 1,934,031
Transfer agent fees--Class D (Note 2) 1,350,193
Custodian fees 579,870
Accounting services (Note 2) 410,006
Printing and shareholder reports 328,719
Transfer agent fees--Class A (Note 2) 223,349
Professional fees 107,091
Registration fees (Note 1f) 72,413
Account maintenance and distribution fees--Class C (Note 2) 44,545
Trustees' fees and expenses 35,336
Transfer agent fees--Class C (Note 2) 8,785
Other 49,692
---------------
Total expenses 29,200,996
---------------
Investment income--net 170,805,573
---------------
Realized & Realized loss on investments--net (48,775,962)
Unrealized Change in unrealized appreciation/depreciation on
Gain (Loss) on investments--net 92,170,478
Investments--Net ---------------
(Notes 1c, 1e Net Increase in Net Assets Resulting from Operations $ 214,200,089
& 3): ===============
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Year Ended August 31,
Increase (Decrease) in Net Assets: 1995 1994
<S> <S> <S> <S>
Operations: Investment income--net $ 170,805,573 $ 174,250,833
Realized loss on investments--net (48,775,962) (118,401,781)
Change in unrealized appreciation/depreciation on
investments--net 92,170,478 (133,557,622)
--------------- ---------------
Net increase (decrease) in net assets resulting from
operations 214,200,089 (77,708,570)
--------------- ---------------
Dividends to Investment income--net:
Shareholders Class A (12,352,715) --
(Note 1g): Class B (84,089,808) (88,957,069)
Class C (348,549) --
Class D (73,437,660) (85,293,764)
--------------- ---------------
Net decrease in net assets resulting from dividends
to shareholders (170,228,732) (174,250,833)
--------------- ---------------
Beneficial Interest Net decrease in net assets derived from beneficial interest
Transactions transactions (420,304,775) (881,720,587)
(Notes 1i & 4): --------------- ---------------
Net Assets: Total decrease in net assets (376,333,418) (1,133,679,990)
Beginning of year 2,854,337,448 3,988,017,438
--------------- ---------------
End of year $ 2,478,004,030 $ 2,854,337,448
=============== ===============
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights
<CAPTION>
Class A Class B
For the For the
Period Period
The following per share data and ratios have been derived Oct. 21, Dec. 23,
from information provided in the financial statements. 1994++ to 1991++ to
Aug. 31, For the Year Ended Aug. 31, Aug. 31,
Increase (Decrease) in Net Asset Value: 1995++++ 1995++++ 1994 1993 1992
<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 .58 .60 .48 .52 .44
Realized and unrealized gain (loss)
on investments--net .45 .20 (.73) .22 --
---------- ---------- ---------- ---------- ----------
Total from investment operations 1.03 .80 (.25) .74 .44
---------- ---------- ---------- ---------- ----------
Less dividends from investment
income--net (.58) (.60) (.48) (.52) (.44)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 9.61 $ 9.61 $ 9.41 $ 10.14 $ 9.92
========== ========== ========== ========== ==========
Total Investment Based on net asset value per share 11.56%+++ 8.91% (2.55%) 7.80% 4.54%+++
Return:** ========== ========== ========== ========== ==========
Ratios to Average Expenses, excluding account
Net Assets: maintenance and distribution fees .64%* .66% .58% .55% .58%*
========== ========== ========== ========== ==========
Expenses .64%* 1.41% 1.33% 1.30% 1.33%*
========== ========== ========== ========== ==========
Investment income--net 7.21%* 6.39% 4.90% 5.27% 6.45%*
========== ========== ========== ========== ==========
Supplemental Net assets, end of period
Data: (in thousands) $ 223,237 $1,262,985 $1,497,358 $2,151,917 $1,921,893
========== ========== ========== ========== ==========
Portfolio turnover 260.34% 260.34% 322.68% 224.35% 230.83%
========== ========== ========== ========== ==========
<FN>
++Commencement of Operations.
++++Based on average outstanding shares for the period.
*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 C Class D
For the
The following per share data and ratios Period
have been derived from information provided Oct. 21,
in the financial statements. 1994++ to
Aug. 31, For the Year Ended Aug. 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 .51 .64 .52 .57 .70 .81
Realized and unrealized gain
(loss) on investments--net .45 .20 (.73) .22 .26 .38
---------- ---------- ---------- ---------- ---------- ----------
Total from investment
operations .96 .84 (.21) .79 .96 1.19
---------- ---------- ---------- ---------- ---------- ----------
Less dividends from
investment income--net (.51) (.64) (.52) (.57) (.70) (.81)
---------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of
period $ 9.61 $ 9.61 $ 9.41 $ 10.14 $ 9.92 $ 9.66
========== ========== ========== ========== ========== ==========
Total Investment Based on net asset value
Return:** per share 10.80%+++ 9.48% (2.06%) 8.35% 10.16% 13.40%
========== ========== ========== ========== ========== ==========
Ratios to Expenses, excluding account
Average Net maintenance and distribution
Assets: fees .67%* .64% .58% .54% .57% .60%
========== ========== ========== ========== ========== ==========
Expenses 1.47%* .89% .83% .79% .80% .78%
========== ========== ========== ========== ========== ==========
Investment income--net 6.28%* 6.91% 5.41% 5.80% 7.17% 8.62%
========== ========== ========== ========== ========== ==========
Supplemental Net assets, end of period
Data: (in thousands) $ 15,621 $ 976,161 $1,356,979 $1,836,100 $2,048,037 $2,230,619
========== ========== ========== ========== ========== ==========
Portfolio turnover 260.34% 260.34% 322.68% 224.35% 230.83% 311.04%
========== ========== ========== ========== ========== ==========
<FN>
++Commencement of Operations.
++++Based on average outstanding shares for the period.
*Annualized.
**Total investment returns exclude the effects of sales loads.
+++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 company. 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
distribution expenditures. 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.
(b) Repurchase agreements--The Trust invests in US Government
securities pursuant to repurchase agreements 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 movements 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
contract, 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.
* 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 the cost of the
closing transaction exceeds the premiums paid or received).
Written and purchased options are non-income producing investments.
(d) Income taxes--It is the Trust's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(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.
(h) 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, 1995 was $16,212,732.
(i) Reclassification--Certain amounts have been reclassified as a
result of permanent book-tax differences.
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 & 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.
FAM is responsible for the management of the Trust's portfolio and
provides the necessary personnel, facilities, 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 rate:
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.
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 on-
going 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:
NOTES TO FINANCIAL STATEMENTS (concluded)
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.50%
Class C 0.25% 0.55%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to the
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 year ended August 31, 1995, MLFD earned underwriting
discounts and direct commissions 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 $ 1,123 $ 18,020
Class D $23,539 $248,456
For the year ended August 31, 1995, MLPF&S received contingent
deferred sales charges of $2,992,727 and $6,138 relating to
transactions in Class B and Class C Shares, respectively.
During the year ended August 31, 1995, the Trust paid MLSPS $2,080
for security price quotations to compute the net asset value of the
Trust.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), 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, PSI, MLFD, MLPF&S, MLFDS, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended August 31, 1995 were $6,460,392,807 and
$6,767,430,991, respectively.
Net realized and unrealized gains (losses) as of August 31, 1995
were as follows:
Realized Unrealized
Gains Gains
(Losses) (Losses)
Long-term investments $(48,530,535) $ 44,299,236
Short-term investments 1,292 --
Options purchased 1,386,119 (299,343)
Options written (1,632,838) 283,411
------------ ------------
Total $(48,775,962) $ 44,283,304
============ ============
As of August 31, 1995, net unrealized appreciation for Federal
income tax purposes aggregated $24,726,096, of which $31,865,381
related to appreciated securities and $7,139,285 related to
depreciated securities. The aggregate cost of investments, including
options purchased less premiums received for options written, at
August 31, 1995 for Federal income tax purposes was $2,523,653,179.
Transactions in put options written for the year ended August 31,
1995 were as follows:
Face
Amount Premiums
Put Options Written Subject to Put Received
Outstanding options
written, beginning of year -- --
Options written $119,100,000 $ 1,578,126
Options exercised (87,000,000) (1,277,188)
------------ ------------
Outstanding options
written, end of year $ 32,100,000 $ 300,938
============ ============
4. Shares of Beneficial Interest:
Net decrease in net assets derived from beneficial
interest transactions was $420,304,775 and $881,720,587 for the
years ended August 31, 1995 and August 31, 1994, respectively.
Transactions in shares of beneficial interest for each class were as
follows:
Class A Shares for the Period Dollar
Oct. 21, 1994++ to Aug. 31, 1995 Shares Amount
Shares sold 30,530,411 $282,054,026
Shares issued to share-
holders in reinvestment
of dividends 455,652 4,239,634
------------ ------------
Total issued 30,986,063 286,293,660
Shares redeemed (7,753,541) (72,945,956)
------------ ------------
Net increase 23,232,522 $213,347,704
============ ============
[FN]
++Commencement of Operations.
Class B Shares for the Year Dollar
Ended August 31, 1995 Shares Amount
Shares sold 21,572,051 $ 201,569,458
Shares issued to shareholders
in reinvestment of dividends 5,141,582 47,944,155
------------ -------------
Total issued 26,713,633 249,513,613
Automatic conversion of
shares (142,436) (1,332,622)
Shares redeemed (54,176,662) (503,689,288)
------------ -------------
Net decrease (27,605,465) $(255,508,297)
============ =============
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)
============ =============
Class C Shares for the Period Dollar
Oct. 21, 1994++ to Aug. 31, 1995 Shares Amount
Shares sold 1,942,998 $ 18,329,377
Shares issued to shareholders
in reinvestment of dividends 22,508 213,166
------------ ------------
Total issued 1,965,506 18,542,543
Shares redeemed (339,400) (3,229,586)
------------ ------------
Net increase 1,626,106 $ 15,312,957
============ ============
[FN]
++Commencement of Operations.
Class D Shares for the
Year Ended Dollar
August 31, 1995 Shares Amount
Shares sold 4,559,726 $ 42,599,935
Automatic conversion of
shares 142,436 1,332,622
Shares issued to share-
holders in reinvestment
of dividends 3,722,044 34,698,654
------------ -------------
Total issued 8,424,206 78,631,211
Shares redeemed (50,970,271) (471,652,190)
------------ -------------
Net decrease (42,546,065) $(393,020,979)
============ =============
Class D Shares for the
Year Ended Dollar
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)
============ =============
As a result of implementation of the Merrill Lynch Select Pricing SM
System, Class A Shares of the Fund outstanding prior to October 21,
1994 were redesignated Class D Shares. There were 119,438,530 shares
redesignated amounting to $1,423,379,743.
5. Capital Loss Carryforward:
At August 31, 1995, the Trust had a net capital loss carryforward of
approximately $384,313,000, of which $98,650,000 expires in 1996,
$68,370,000 expires in 1997, $39,147,000 expires in 1998, and
$178,145,000 expires in 2003. This amount will be available to
offset like amounts of any future taxable gains.
6. Loaned Securities:
At August 31, 1995, the Trust held US Treasury Notes having an
aggregate value of approximately $55,988,000 as collateral for
portfolio securities loaned having a market value of approximately
$55,640,000.
<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 investments, of Merrill Lynch
Federal Securities Trust as of August 31, 1995, 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 generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of securities owned at August
31, 1995 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of
Merrill Lynch Federal Securities Trust as of August 31, 1995, 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
October 2, 1995
</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,
1995, 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 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, 1994 19.13%
February 28, 1995 18.96%
May 31, 1995 19.08%
August 31, 1995 19.53%
Of the Trust's ordinary income dividends paid monthly during the
year ended August 31, 1995, 22.34% 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.
[FN]
*For purposes of this calculation, Federal obligations include US
Treasury Notes, US Treasury Bills, USTreasury 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
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
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
(800) 637-3863
