MERRILL LYNCH
FEDERAL
SECURITIES TRUST
FUND LOGO
Annual Report
August 31, 1996
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.
Statements and other information herein are as dated and are subject
to change.
<PAGE>
Merrill Lynch
Federal Securities Trust
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
MERRILL LYNCH FEDERAL SECURITIES TRUST
DEAR SHAREHOLDER
Economic Environment
During the August quarter, interest rates fluctuated but were
essentially unchanged by quarter-end. This illustrates the
countervailing forces of economic growth and little inflation. The
threat of recession is a distant memory since second-quarter 1996
gross domestic product (GDP) growth was 4.8% and consumer confidence
is at a six-year high. With consumer activity representing two-
thirds of GDP, it appears that the economy may be strong well into
the second half of 1996.
The Leading Economic Indicators Index (LEI), which foreshadows
economic growth six months in advance, was reported at +0.2% for the
September 3, 1996 release and has been positive every month since
January. This is a significant turnaround from 1995 when the Index
was negative for eight of the 12 months and was strongly indicating
a pending recession.
Similarly, the National Association of Purchasing Managers (NAPM)
Index was below 50 for seven months in 1995, indicating a
contraction in the manufacturing sector. Since May 1996, the NAPM
Index has been above 50 with the September 3, 1996 release at 52.6.
This reflects a growing economy. Just as important is that prices
paid by manufacturers have been declining, which is good news
relative to the building up of inflationary pressures.
Inflation continues to be quite muted. Whether measured by the
Consumer Price Index or the Producer Price Index, inflation
continues to be held in check. Concerns of inflation continue but
the expectation is for the Federal Reserve Board to raise interest
rates at the first sign of an overheating economy.
<PAGE>
Fiscal Year in Review
During the Trust's fiscal year ended August 31, 1996, the yield on
the ten-year Treasury note increased by 65 basis points (0.65%) to
6.94% while the yield on the three-month Treasury bill declined by
16 basis points to 5.28%. Although this reflects a curve steepening,
most of the steepening was at the very short portion of the yield
curve. The two-year--ten-year spread remained relatively flat at
just 60 basis points.
As interest rates move higher, prices decline offsetting yield and
reducing total rates of return. Five-year and ten-year Treasury
notes returned +2.92% and +1.18%, respectively, for the 12-month
period. By comparison, Federal National Mortgage Association 7.50%
and 6% coupon mortgage-backed securities (MBS), which have
comparable average lives, had returns of +5.06% and +2.67%,
respectively, reflecting the better performance of MBS. MBS
outperformed because of the higher yields plus the tightening of
yield spreads as prepayment fears diminished.
Maintaining our view that real interest rates (adjusted for
inflation) are attractive, the portfolio is fully invested with only
1% of net assets in short-term securities. In addition, with yield
spreads between MBS and similar average life Treasury securities
relatively wide, there remains an overweighted position (87% of net
assets) in MBS. The portfolio continues to focus on high-quality,
high-yielding MBS, as adverse prepayment events seem very unlikely
given the current portfolio structure and the current interest rate
environment. The most significant portfolio allocation (32% of net
assets) is in MBS with a 7.50% coupon. These securities trade at a
discount price of $97 per $100 of face value (8% MBS are currently
par priced) and therefore prepayments actually increase portfolio
yield. Also for these homeowners a viable refinancing incentive is
with a decline in mortgage rates of 1% or more.
The strategy of holding some very high-coupon MBS (10%--13%) has
worked quite well as prepayments on these securities have been
relatively slow. The high coupon coupled with a lower paydown loss
nets an attractive yield on investment. Also, these securities are
less sensitive to price changes and in fact price declines were
quite muted during the backup in interest rates. This means that
total return, as well as yield, was attractive. It is expected that
these homeowners will remain insensitive to refinancing
opportunities as there have already been several during the past
five years.
<PAGE>
The Trust's minimal Treasury position is mostly at the short-term
end of the yield curve and, along with the high-coupon MBS, helps
offset the longer durations of the lower-coupon MBS. Also, real
interest rates seem most out of line with the shorter maturity
securities. Should the yield curve steepen as expected, with short-
term interest rates declining by more than the decline in longer-
term interest rates, these securities could perform quite well.
In Conclusion
We thank you for your investment in Merrill Lynch Federal Securities
Trust, and we look forward to reviewing our outlook and strategy
with you again in our next report to shareholders.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Gregory Mark Maunz)
Gregory Mark Maunz
Vice President and Portfolio Manager
September 30, 1996
PERFORMANCE DATA
About Fund Performance
Investors are able to purchase shares of the Trust through the
Merrill Lynch Select Pricing SM System, which offers four pricing
alternatives:
<PAGE>
* 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. (There is no initial
sales charge for automatic share conversions.)
* 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).
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.
<TABLE>
Recent Performance Results
<CAPTION>
12 Month 3 Month
8/31/96 5/31/96 8/31/95 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares* $9.40 $9.41 $9.61 -2.19% -0.11%
Class B Shares* 9.40 9.40 9.61 -2.19 +0.00
Class C Shares* 9.40 9.40 9.61 -2.19 +0.00
Class D Shares* 9.40 9.40 9.61 -2.19 +0.00
Class A Shares--Total Return* +4.55(1) +1.60(2)
Class B Shares--Total Return* +3.72(3) +1.51(4)
Class C Shares--Total Return* +3.67(5) +1.50(6)
Class D Shares--Total Return* +4.28(7) +1.64(8)
Class A Shares--Standardized 30-day Yield 6.42%
Class B Shares--Standardized 30-day Yield 5.91%
Class C Shares--Standardized 30-day Yield 5.86%
Class D Shares--Standardized 30-day Yield 6.18%
<PAGE>
<FN>
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included.
(1)Percent change includes reinvestment of $0.647 per share ordinary
income dividends.
(2)Percent change includes reinvestment of $0.156 per share ordinary
income dividends.
(3)Percent change includes reinvestment of $0.572 per share ordinary
income dividends.
(4)Percent change includes reinvestment of $0.138 per share ordinary
income dividends.
(5)Percent change includes reinvestment of $0.568 per share ordinary
income dividends.
(6)Percent change includes reinvestment of $0.137 per share ordinary
income dividends.
(7)Percent change includes reinvestment of $0.623 per share ordinary
income dividends.
(8)Percent change includes reinvestment of $0.150 per share ordinary
income dividends.
</TABLE>
PERFORMANCE DATA (continued)
Total Return Based on a $10,000 Investment--Class A Shares and Class
C Shares
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** 8/96
ML Federal Securities Trust++-- $ 9,600 $11,197
Class A Shares*
ML Federal Securities Trust++--
Class C Shares* $10,000 $11,487
Salomon Brothers Mortgage Index++++ $10,000 $11,816
Total Return Based on a $10,000 Investment--Class B Shares
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:
<PAGE>
12/23/91** 8/96
ML Federal Securities Trust++--
Class B Shares* $10,000 $12,406
Salomon Brothers Mortgage Index++++ $10,000 $13,322
Total Return Based on a $10,000 Investment--Class D Shares
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:
8/86 8/96
ML Federal Securities Trust++--
Class D Shares* $ 9,600 $19,643
Salomon Brothers Mortgage Index++++ $10,000 $23,146
[FN]
*Assuming maximum sales charge, transactions 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)
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
<PAGE>
Year Ended 6/30/96 +5.43% +1.22%
Inception (10/21/94)
through 6/30/96 +9.30 +6.69
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 6/30/96 +4.62% +0.68%
Inception (12/23/91)
through 6/30/96 +4.84 +4.84
[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 % Return
Without CDSC With CDSC**
Class C Shares*
Year Ended 6/30/96 +4.46% +3.47%
Inception (10/21/94)
through 6/30/96 +8.35 +8.35
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Year Ended 6/30/96 +5.06% +0.86%
Five Years Ended 6/30/96 +6.56 +5.69
Ten Years Ended 6/30/96 +7.75 +7.31
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
<PAGE>
<TABLE>
Performance Summary--Class A Shares***
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
10/21/94--12/31/94 $9.16 $9.08 -- $0.129 + 0.54%
1995 9.08 9.78 -- 0.665 +15.46
1/1/96--8/31/96 9.78 9.40 -- 0.410 + 0.46
------
Total $1.204
Cumulative total return as of 8/31/96: +16.63%**
<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 Trust outstanding prior to
October 21, 1994 were redesignated to Class D Shares.
</TABLE>
<TABLE>
Performance Summary--Class B Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <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
1995 9.08 9.77 -- 0.592 +14.47
1/1/96--8/31/96 9.77 9.40 -- 0.362 + 0.05
------
Total $2.596
Cumulative total return as of 8/31/96: +24.06%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the payable date, and do not
reflect deduction of any sales charge; results would be lower if
sales charge was deducted.
</TABLE>
<PAGE>
PERFORMANCE DATA (concluded)
<TABLE>
Performance Summary--Class C Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
10/21/94--12/31/94 $9.16 $9.07 -- $0.115 + 0.28%
1995 9.07 9.77 -- 0.586 +14.53
1/1/96--8/31/96 9.77 9.40 -- 0.359 + 0.02
------
Total $1.060
Cumulative total return as of 8/31/96: +14.87%**
<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**
<S> <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
1995 9.08 9.77 -- 0.641 +15.06
1/1/96--8/31/96 9.77 9.40 -- 0.395 + 0.40
------ ------
Total $0.848 Total $9.076
<PAGE>
Cumulative total return as of 8/31/96: +181.83%**
<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 Trust outstanding prior to
October 21, 1994 were 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--11.51%
<S> <C> <C> <S> <C>
United States Treasury Notes $ 18,000,000 5.875 % 4/30/1998 $ 17,893,080
175,000,000 8.875 2/15/1999 184,488,500
42,000,000 6.375 5/15/1999 41,862,240
Total US Government Obligations (Cost--$242,073,555) 244,243,820
US Government Agency Mortgage-Backed Obligations*--87.22%
Federal Home Loan Mortgage Corporation 730 10.00 7/01/2019 791
Participation Certificates 18,828,343 10.50 9/01/2000-9/01/2020 20,646,408
4,497,534 11.00 8/01/2010-9/01/2020 4,988,035
3,749,462 11.50 10/01/1998-6/01/2020 4,202,884
1,708,827 12.00 7/01/1999-6/01/2020 1,945,380
3,929,674 12.50 10/01/1999-7/01/2019 4,536,297
5,137,772 13.00 8/01/1999-10/01/2015 6,003,127
<PAGE>
Federal Home Loan Mortgage Corporation 432,643 6.00 4/01/2009 409,522
Participation Certificates--Gold Program 92,702,139 6.50 8/01/2010-6/01/2011 89,038,407
9,897,911 7.225(2) 11/01/1997 9,952,040
180,493,478 7.50 1/01/2020-7/01/2026 177,202,682
103,840,422 8.00 1/01/2007-6/01/2026 105,536,794
14,139,652 8.50 1/01/2025-7/01/2025 14,409,154
6,653,927 10.50 1/01/2020-12/01/2020 7,256,906
Federal Home Loan Mortgage Trust 134 2,352,315 9.00(1) 4/15/2022 650,556
Corporation REMICs** Trust 1220 106,720,856 10.00 2/15/2022 12,289,213
Federal National Mortgage 70,011,905 6.00 2/01/2026-5/01/2026 62,712,245
Association Mortgage-Backed 89,627,066 6.50 12/01/2008-8/01/2026 82,852,029
Securities 110,176,742 7.00 6/01/2007-5/01/2026 106,276,078
224,685,680 7.50 12/01/2007-8/01/2026 219,535,074
48,517,004 8.00 6/01/2006-1/01/2020 48,786,086
85,656,422 8.50 5/01/2010-11/01/2025 87,256,075
33,773,225 8.50(3) 7/15/2023 34,554,231
27,733,013 9.50 3/01/2020 29,552,992
15,736 10.50 9/01/2000 16,622
42,527,798 11.00 2/01/2011-11/01/2020 47,617,524
137,124 11.50 1/01/2015-6/01/2015 154,608
2,186,969 13.00 8/01/2010-6/01/2015 2,563,521
Federal National Mortgage 93-123-S 15,529,411 8.55156++ 7/25/2000 14,898,529
Association REMICs** 94-M4-A 24,631,410 9.03795 6/25/2023 25,224,103
Government National Mortgage 10,804,270 6.50 2/15/2026 9,933,122
Association Mortgage-Backed 101,042,740 7.00 4/15/2023-3/15/2026 95,840,321
Securities 296,171,633 7.50 1/15/2007-4/15/2026 289,479,465
154,466,723 8.00 5/15/2023-6/15/2026 154,582,980
10,465,750 8.50 2/15/2023-3/15/2026 10,684,798
62,548,298 10.00 12/15/2015-12/15/2021 68,508,918
317,728 10.50 10/15/2014-4/15/2021 352,875
871 11.00 1/15/2016 980
14,897 11.50 8/15/2013-4/15/2015 16,936
Total US Government Agency Mortgage-Backed Obligations (Cost--$1,872,478,881) 1,850,468,308
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Face Value
Amount Issue (Note 1a)
<PAGE>
Repurchase Agreements***--4.17%
<C> <S> <C>
$88,500,000 Nikko Securities Co., purchased on 8/30/1996 to yield 5.26%
to 9/03/1996 $ 88,500,000
Total Repurchase Agreements (Cost--$88,500,000) 88,500,000
US Government & Agency Discount Obligations****--4.93%
Federal Home Loan Mortgage Corporation:
39,705,000 5.23% due 9/16/1996 39,630,013
45,000,000 5.23% due 9/17/1996 44,908,475
20,000,000 Federal National Mortgage Association, 5.18% due 9/18/1996 19,956,833
Total US Government & Agency Discount Obligations (Cost--$104,495,321) 104,495,321
<CAPTION>
Par Strike Callable
Value Price From
Options Purchased--0.09%
<S> <C> <S> <C> <S> <C>
Call Options $169,023,769 Federal Home Loan Mortgage
Purchased Corporation--Gold Program,
15-Year, 7% 100 August 1996 1,306,356
100,000,000 Government National Mortgage
Association,30-Year, 6%
Adjustable Rate Mortgage 100 10/20/1996(4) 130,000
32,000,000 United States Treasury Notes,
6.875% due 5/15/2006 98.156 9/11/1996(4) 475,008
Total Options Purchased (Cost--$3,929,420) 1,911,364
Total Investment (Cost--$2,311,477,177)--107.92% 2,289,618,813
Options Written--(0.04%)
Call Options 50,000,000 Government National Mortgage
Written Association, 30-Year, 8% 99 9/11/1996(4) (781,250)
Put Options 100,000,000 Government National Mortgage
Written Association, 30-Year, 6%
Adjustable Rate Mortgage 100 10/20/1996(4) (10,000)
Total Options Written (Premiums Received--$525,625) (791,250)
Total Investments, Net of Options Written (Cost--$2,310,951,552)--107.88% 2,288,827,563
Liabilities in Excess of Other Assets--(7.88%) (167,231,298)
---------------
Net Assets--100.00% $ 2,121,596,265
===============
<PAGE>
<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.
(4)Represents European call options callable only on notification
date.
++Adjustable Rate Security. The interest rate resets periodically
and inversely. The interest rate shown is the rate in effect as of
August 31, 1996.
*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.
****Certain US Government & Agency Obligations are traded on a
discount basis; the interest rates shown are the discount rates paid
at the time of purchase by the Trust.
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of August 31, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$2,307,547,757) (Note 1a) $ 2,287,707,449
Call options purchased, at value (cost--$3,929,420)
(Notes 1a & 1c) 1,911,364
Cash 47,174
Receivables:
Securities sold $ 325,724,207
Interest 15,339,584
Beneficial interest sold 1,541,541
Principal paydowns 1,024,983
Extended deliveries 181,138 343,811,453
---------------
Prepaid registration fees and other assets (Note 1f) 132,409
---------------
Total assets 2,633,609,849
---------------
<PAGE>
Liabilities: Call options written, at value (premiums received--$525,625)
(Notes 1a & 1c) 791,250
Payables:
Securities purchased (Note 1h) 499,363,732
Beneficial interest redeemed 6,491,120
Dividends to shareholders (Note 1g) 2,641,077
Investment adviser (Note 2) 891,943
Distributor (Note 2) 872,626 510,260,498
---------------
Accrued expenses and other liabilities 961,836
---------------
Total liabilities 512,013,584
---------------
Net Assets: Net assets $ 2,121,596,265
===============
Net Assets Class A Shares of beneficial interest, $0.10 par value,
Consist of: unlimited number of shares authorized $ 2,464,430
Class B Shares of beneficial interest, $0.10 par value,
unlimited number of shares authorized 9,840,439
Class C Shares of beneficial interest, $0.10 par value,
unlimited number of shares authorized 241,255
Class D Shares of beneficial interest, $0.10 par value,
unlimited number of shares authorized 10,026,982
Paid-in capital in excess of par 2,437,058,649
Accumulated realized capital losses on investments--net
(Note 5) (315,911,501)
Unrealized depreciation on investments--net (22,123,989)
---------------
Net assets $ 2,121,596,265
===============
Net Asset Value: Class A--Based on net assets of $231,651,242 and 24,644,296
shares of beneficial interest outstanding $ 9.40
===============
Class B--Based on net assets of $924,884,437 and 98,404,386
shares of beneficial interest outstanding $ 9.40
===============
Class C--Based on net assets of $22,672,290 and 2,412,552
shares of beneficial interest outstanding $ 9.40
===============
Class D--Based on net assets of $942,388,296 and 100,269,823
shares of beneficial interest outstanding $ 9.40
===============
See Notes to Financial Statements.
</TABLE>
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations for the Year Ended August 31, 1996
<S> <S> <C>
Investment Interest and discount earned $ 170,261,306
Income Other 666,948
(Note 1e): ---------------
Total income 170,928,254
---------------
Expenses: Investment advisory fees (Note 2) 10,650,590
Account maintenance and distribution fees--Class B (Note 2) 8,505,832
Account maintenance fees--Class D (Note 2) 2,400,905
Transfer agent fees--Class B (Note 2) 1,527,866
Transfer agent fees--Class D (Note 2) 1,094,301
Custodian fees 426,340
Accounting services (Note 2) 286,168
Transfer agent fees--Class A (Note 2) 266,280
Printing and shareholder reports 186,751
Account maintenance and distribution fees--Class C (Note 2) 162,070
Professional fees 123,578
Registration fees (Note 1f) 108,434
Trustees' fees and expenses 80,471
Transfer agent fees--Class C (Note 2) 26,277
Other 59,131
---------------
Total expenses 25,904,994
---------------
Investment income--net 145,023,260
---------------
Realized & Realized gain on investments--net 17,428,212
Unrealized Change in unrealized appreciation/depreciation on investments--net (66,407,293)
Gain (Loss) on ---------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 96,044,179
(Notes 1c, 1e & 3): ===============
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<PAGE>
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Year Ended August 31,
Increase (Decrease) in Net Assets: 1996 1995
<S> <S> <C> <C>
Operations: Investment income--net $ 145,023,260 $ 170,805,573
Realized gain (loss) on investments--net 17,428,212 (48,775,962)
Change in unrealized appreciation/depreciation on
investments--net (66,407,293) 92,170,478
--------------- ---------------
Net increase in net assets resulting from operations 96,044,179 214,200,089
--------------- ---------------
Dividends to Investment income--net:
Shareholders Class A (15,541,226) (12,352,715)
(Note 1g): Class B (66,689,844) (84,089,808)
Class C (1,181,094) (348,549)
Class D (61,490,784) (73,437,660)
--------------- ---------------
Net decrease in net assets resulting from dividends
to shareholders (144,902,948) (170,228,732)
--------------- ---------------
Beneficial Interest Net decrease in net assets derived from beneficial
Transactions interest transactions (307,548,996) (420,304,775)
(Notes 1i & 4): --------------- ---------------
Net Assets: Total decrease in net assets (356,407,765) (376,333,418)
Beginning of year 2,478,004,030 2,854,337,448
--------------- ---------------
End of year $ 2,121,596,265 $ 2,478,004,030
=============== ===============
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights
<CAPTION>
Class A++++
The following per share data and ratios have been derived For the For the Period
from information provided in the financial statements. Year Ended Oct. 21, 1994++
August 31, to August 31,
Increase (Decrease) in Net Asset Value: 1996 1995
<S> <S> <C> <C>
Per Share Net asset value, beginning of period $ 9.61 $ 9.16
Operating --------------- ---------------
Performance: Investment income--net .64 .58
Realized and unrealized gain (loss) on investments--net (.21) .45
--------------- ---------------
Total from investment operations .43 1.03
--------------- ---------------
Less dividends from investment income--net (.64) (.58)
--------------- ---------------
Net asset value, end of period $ 9.40 $ 9.61
=============== ===============
<PAGE>
Total Investment Based on net asset value per share 4.55% 11.56%+++
Return:** =============== ===============
Ratios to Average Expenses .62% .64%*
Net Assets: =============== ===============
Investment income--net 6.64% 7.21%*
=============== ===============
Supplemental Net assets, end of period (in thousands) $ 231,651 $ 223,237
Data: =============== ===============
Portfolio turnover 204.14% 260.34%
=============== ===============
<CAPTION>
Class B
The following per share data and ratios have been derived For the Period
from information provided in the financial statements. Dec. 23, 1991++
For the Year Ended August 31, to August 31,
Increase (Decrease) in Net Asset Value: 1996++++ 1995++++ 1994 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of
Operating period $ 9.61 $ 9.41 $ 10.14 $ 9.92 $ 9.92
Performance: ---------- ---------- ---------- ---------- ----------
Investment income--net .57 .60 .48 .52 .44
Realized and unrealized gain
(loss) on investments--net (.21) .20 (.73) .22 --
---------- ---------- ---------- ---------- ----------
Total from investment operations .36 .80 (.25) .74 .44
---------- ---------- ---------- ---------- ----------
Less dividends from investment
income--net (.57) (.60) (.48) (.52) (.44)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 9.40 $ 9.61 $ 9.41 $ 10.14 $ 9.92
========== ========== ========== ========== ==========
Total Investment Based on net asset value per share 3.72% 8.91% (2.55%) 7.80% 4.54%+++
Return:** ========== ========== ========== ========== ==========
<PAGE>
Ratios to Average Expenses 1.39% 1.41% 1.33% 1.30% 1.33%*
Net Assets: ========== ========== ========== ========== ==========
Investment income--net 5.87% 6.39% 4.90% 5.27% 6.45%*
========== ========== ========== ========== ==========
Supplemental Net assets, end of period
Data: (in thousands) $ 924,885 $1,262,985 $1,497,358 $2,151,917 $1,921,893
========== ========== ========== ========== ==========
Portfolio turnover 204.14% 260.34% 322.68% 224.35% 230.83%
========== ========== ========== ========== ==========
<FN>
++Commencement of Operations.
++++Based on average shares outstanding 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++++
The following per share data and ratios have been derived For the For the Period
from information provided in the financial statements. Year Ended Oct. 21, 1994++
August 31, to August 31,
Increase (Decrease) in Net Asset Value: 1996 1995
<S> <S> <C> <C>
Per Share Net asset value, beginning of period $ 9.61 $ 9.16
Operating --------------- ---------------
Performance: Investment income--net .56 .51
Realized and unrealized gain (loss) on investments--net (.21) .45
--------------- ---------------
Total from investment operations .35 .96
--------------- ---------------
Less dividends from investment income--net (.56) (.51)
--------------- ---------------
Net asset value, end of period $ 9.40 $ 9.61
=============== ===============
Total Investment Based on net asset value per share 3.67% 10.80%+++
Return:** =============== ===============
Ratios to Average Expenses 1.43% 1.47%*
Net Assets: =============== ===============
Investment income--net 5.82% 6.28%*
=============== ===============
<PAGE>
Supplemental Net assets, end of period (in thousands) $ 22,672 $ 15,621
Data: =============== ===============
Portfolio turnover 204.14% 260.34%
=============== ===============
<CAPTION>
The following per share data and ratios have been derived Class D
from information provided in the financial statements.
For the Year Ended August 31,
Increase (Decrease) in Net Asset Value: 1996++++ 1995++++ 1994 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 9.61 $ 9.41 $ 10.14 $ 9.92 $ 9.66
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income--net .62 .64 .52 .57 .70
Realized and unrealized gain
(loss) on investments--net (.21) .20 (.73) .22 .26
---------- ---------- ---------- ---------- ----------
Total from investment operations .41 .84 (.21) .79 .96
---------- ---------- ---------- ---------- ----------
Less dividends from investment
income--net (.62) (.64) (.52) (.57) (.70)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 9.40 $ 9.61 $ 9.41 $ 10.14 $ 9.92
========== ========== ========== ========== ==========
Total Investment Based on net asset value per share 4.28% 9.48% (2.06%) 8.35% 10.16%
Return:** ========== ========== ========== ========== ==========
Ratios to Average Expenses .87% .89% .83% .79% .80%
Net Assets: ========== ========== ========== ========== ==========
Investment income--net 6.39% 6.91% 5.41% 5.80% 7.17%
========== ========== ========== ========== ==========
Supplemental Net assets, end of year
Data: (in thousands) $ 942,388 $ 976,161 $1,356,979 $1,836,100 $2,048,037
========== ========== ========== ========== ==========
Portfolio turnover 204.14% 260.34% 322.68% 224.35% 230.83%
========== ========== ========== ========== ==========
<FN>
++Commencement of Operations.
++++Based on average shares outstanding for the period.
*Annualized.
**Total investment returns exclude the effects of sales loads.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Federal Securities Trust (the "Trust") is registered
under the Investment Company Act of 1940 as a diversified, open-end
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 one or more dealers that make markets in the securities.
Interest rate futures contracts and options thereon, which are
traded on exchanges, are valued at their last sale price as of the
close of such exchanges. Securities with a remaining maturity of
sixty days or less are valued on an amortized cost basis, which
approximates market value. Securities and assets for which market
quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Trustees
of the Trust.
<PAGE>
(b) Repurchase agreements--The Trust invests in US Government
securities pursuant to repurchase 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 is 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.
<PAGE>
(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, 1996 was $61,612,358.
(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%
<PAGE>
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
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 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.
NOTES TO FINANCIAL STATEMENTS (concluded)
<PAGE>
For the year ended August 31, 1996, 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 $ 548 $ 7,280
Class D $20,058 $170,668
For the year ended August 31, 1996, MLPF&S received contingent
deferred sales charges of $1,283,799 and $37,766 relating to
transactions in Class B and Class C Shares, respectively.
During the year ended August 31, 1996, the Trust paid MLSPS $2,330
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, 1996 were $4,779,399,805 and
$5,066,445,637, respectively.
Net realized and unrealized gains (losses) as of August 31, 1996
were as follows:
Realized
Gains Unrealized
(Losses) Losses
Long-term investments $ 17,885,147 $(19,840,308)
Short-term investments (1,708) --
Options purchased (2,013,430) (2,018,056)
Options written 1,558,203 (265,625)
------------ ------------
Total $ 17,428,212 $(22,123,989)
============ ============
As of August 31, 1996, net unrealized depreciation for Federal
income tax purposes aggregated $35,589,527, of which $12,448,470
related to appreciated securities and $48,037,997 related to
depreciated securities. The aggregate cost of investments, including
options written and purchased, at August 31, 1996 for Federal income
tax purposes was $2,324,417,090.
<PAGE>
Transactions in call options written for the year ended August 31,
1996 were as follows:
Face
Amount Premiums
Call Options Written Subject to Put Received
Outstanding put options
written, beginning of year -- --
Options written $317,500,000 $ 2,552,344
Options closed (50,000,000) (1,671,484)
Options expired (217,500,000) (365,235)
------------ ------------
Outstanding put options
written, end of year $ 50,000,000 $ 515,625
============ ============
Transactions in put options written for the year ended August 31,
1996 were as follows:
Face
Amount Premiums
Put Options Written Subject to Put Received
Outstanding put options
written, beginning of year $ 32,100,000 $ 300,938
Options written 100,000,000 10,000
Options closed (32,100,000) (300,938)
------------ ------------
Outstanding put options
written, end of year $100,000,000 $ 10,000
============ ============
4. Shares of Beneficial Interest:
Net decrease in net assets derived from beneficial interest
transactions was $307,548,996 and $420,304,775 for the years ended
August 31, 1996 and August 31, 1995, respectively.
Transactions in shares of beneficial interest for each class were as
follows:
<PAGE>
Class A Shares for the Year Dollar
Ended August 31, 1996 Shares Amount
Shares sold 11,032,271 $105,977,427
Shares issued to shareholders
in reinvestment of dividends 213,992 2,055,029
------------ ------------
Total issued 11,246,263 108,032,456
Shares redeemed (9,834,489) (94,194,820)
------------ ------------
Net increase 1,411,774 $ 13,837,636
============ ============
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 shareholders
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, 1996 Shares Amount
Shares sold 16,843,373 $ 161,838,398
Shares issued to shareholders
in reinvestment of dividends 4,018,944 38,574,345
------------- -------------
Total issued 20,862,317 200,412,743
Automatic conversion of
shares (9,718,045) (107,029,876)
Shares redeemed (44,194,562) (408,856,018)
------------- -------------
Net decrease (33,050,290) $(315,473,151)
============= =============
Class B Shares for the Year Dollar
Ended August 31, 1995 Shares Amount
<PAGE>
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 C Shares for the Year Dollar
Ended August 31, 1996 Shares Amount
Shares sold 2,160,634 $ 20,825,991
Shares issued to shareholders
in reinvestment of dividends 75,534 723,024
------------ ------------
Total issued 2,236,168 21,549,015
Shares redeemed (1,449,722) (13,905,461)
------------ ------------
Net increase 786,446 $ 7,643,554
============ ============
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, 1996 Shares Amount
<PAGE>
Shares sold 24,780,817 $ 222,390,773
Automatic conversion of
shares 9,718,045 107,029,876
Shares issued to shareholders
in reinvestment of dividends 3,084,645 29,564,190
------------- -------------
Total issued 37,583,507 358,984,839
Shares redeemed (38,921,835) (372,541,874)
------------- -------------
Net decrease (1,338,328) $ (13,557,035)
============= =============
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 shareholders
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)
============= =============
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 to Class D Shares. There were 119,438,530
shares redesignated amounting to $1,423,379,743.
5. Capital Loss Carryforward:
At August 31, 1996, the Trust had a net capital loss carryforward of
approximately $302,395,000, of which $68,370,000 expires in 1997,
$39,147,000 expires in 1998, $178,146,000 expires in 2003, and
$16,732,000 expires in 2004. This amount will be available to offset
like amounts of any future taxable gains. Expired capital loss
carryforward in the amount of $98,649,523 has been reclassified to
paid-in capital in excess of par.
<AUDIT-REPORT>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders,
Merrill Lynch Federal Securities Trust:
<PAGE>
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, 1996, 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, 1996 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, 1996, 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 7, 1996
</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, 1996
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.
<PAGE>
Listed below are the percentages of the Trust's total assets
invested in Federal obligations* as of the end of each quarter of
the fiscal year.
For the Quarter Ended
November 30, 1995 14.43%
February 29, 1996 16.34%
May 31, 1996 9.90%
August 31, 1996 8.19%
Of the Trust's ordinary income dividends paid monthly during the
year ended August 31, 1996, 16.16% 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, US Treasury Bonds, and US Savings
Bonds. Also included are obligations issued by the following
agencies: Banks for Cooperatives, Federal Intermediate Credit Banks,
Federal Land Banks, Federal Home Loan Banks, and the Student Loan
Marketing Association. Repurchase agreements are not included in
this calculation.
OFFICERS AND TRUSTEES
Arthur Zeikel, President and Trustee
Joe Grills, Trustee
Walter Mintz, Trustee
Robert S. Salomon Jr., Trustee
Melvin R. Seiden, Trustee
Stephen B. Swensrud, 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
Ira P. Shapiro, Secretary
Custodian
The Bank of New York
90 Washington Street, 12th Floor
New York, New York 10286
<PAGE>
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
(800) 637-3863
