MERRILL LYNCH
FEDERAL
SECURITIES TRUST
FUND LOGO
Semi-Annual Report
February 29, 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
MERRILL LYNCH FEDERAL SECURITIES TRUST
DEAR SHAREHOLDER
Economic Environment
The US economy continued to exhibit signs of weakness during the
three months ended February 29, 1996. Gross domestic product (GDP)
was reported up just 0.9% in the fourth quarter of 1995, after
rising 3.6% in the third quarter. For all of 1995, GDP rose just
1.4%, well below the US economy's long-term non-inflationary growth
potential, estimated at 2.0%--2.5%. In December 1995, the US
Department of Commerce revised its measure of GDP by replacing its
fixed-weight measure with a new chain-weighted GDP measure. The new
chain measure uses current and prior year prices to calculate GDP,
rather than fixed prices. As a result, it provides a more accurate
gauge of output trends. Much of the economic sluggishness in the
fourth quarter is attributable to the consumer sector, which
accounts for nearly two-thirds of GDP. Real consumer spending rose
just 0.8% in the fourth quarter and just 1.9% for all of 1995.
Preliminary data indicate consumer spending is likely to remain weak
into 1996, as consumers continue to be income and debt constrained.
Other areas of the economy also continue to be weak. The industrial
sector still is mired in near-recessionary conditions. The National
Association of Purchasing Managers Index rose to 45.2 in February,
but stayed below 50 for the seventh consecutive month. An index
below 50 is indicative of a contraction in the manufacturing sector.
In addition, capacity utilization rates fell for the fifth
consecutive month to 82.1% in January, the lowest rate in 26 months.
The Index of Leading Economic Indicators, a broad measure of overall
economic activity, fell 0.5% in January, the ninth decline in the
past 12 months. As reported in past shareholder reports, this index
is still predicting a recession.
<PAGE>
Despite overall slow economic growth, intermediate-term and long-
term interest rates rose during the past two months, as the
financial markets reacted negatively to two events. First, housing
starts were reported to have risen 4.4% in January despite severe
weather-related effects. However, a closer look reveals most of the
pickup reflected an 18% jump in multi-unit dwellings. On the other
hand, single-family housing starts were relatively flat over the
last seven months, despite falling mortgage rates. Second, in his
February 1996 Humphrey-Hawkins testimony before the US Senate
Banking Committee, Federal Reserve Board Chairman Alan Greenspan
downplayed the risk of recession and asserted that the current
weakness in the economy was temporary. Bond investors pushed
interest rates higher, believing the Federal Reserve Board will
refrain from additional interest rate cuts. The same scenario
occurred when the bond market reacted negatively following
Greenspan's July 1995 Humphrey-Hawkins testimony. However, the bond
market subsequently rebounded with yields declining to new 1995
lows. While we believe there are signs economic growth will pick up
later in 1996 primarily in response to the reduction of business
inventories in 1995, it is unlikely a robust expansion will take
place. Consumer spending is likely to remain sluggish since consumer
indebtedness is at an all-time high and wage growth remains weak.
Portfolio Strategy
1995 was a strong bull market for fixed-income securities with year-
end yields at the lows for the year. This was a significant reversal
from 1994, which was the worst bond market environment in over 50
years. But while the 30-year US Treasury bond rallied to less than
20 basis points (0.20%) above the 1993 low, the one-year Treasury
bill rate was almost 200 basis points above the 1993 low. This
illustrates the dramatic shift in the flattening of the yield curve.
For the first two months of 1996 this flattening came to an end.
However, this occurred because short-term interest rates were
relatively unchanged while longer-term interest rates increased over
50 basis points.
Real interest rates (adjusted for inflation) are attractive across
the yield curve but especially at the short and intermediate parts
of the yield curve. Therefore, mortgage-backed securities (MBS) with
front-loaded cash flows are attractive investments. In our November
quarterly report to shareholders, we mentioned that prepayment fears
and the flat yield curve limited MBS price appreciation during 1995.
But thus far in 1996 the yield curve has steepened and mortgage
rates have increased. With premium prices on MBS lessening and
prepayment fears diminishing, MBS have started to outperform
Treasury securities. For the last two months, the ten-year US
Treasury rate declined over 4 points in price. The decline in a
Federal National Mortgage Association 7% MBS declined less than half
that amount.
<PAGE>
Our strategy continued to focus on the attractive yield advantages
of MBS. Nearly 80% of the portfolio is in MBS with 17% in Treasury
securities and 4% in cash equivalents. Within the MBS sector we
continue to hold 10% in seasoned high-coupon MBS. As expected,
prepayments have been relatively slow and those seasoned securities
currently command significant premium prices over generic non-
seasoned securities with the same coupon. Coupon flow and yield
curve positioning are primary considerations as we continue to
expect a steeper yield curve with a decline in short-term interest
rates. With a steeper yield curve, we would look to add to the
Fund's portfolio Treasury issues and collateralized mortgage
obligations that "roll down" the yield curve (or benefit from an
upward movement in price without a movement in yield) for
incremental return.
This recent backup in interest rates appears to be an aberration
which presents us with an opportunity to shift the portfolio into
lower-coupon MBS. This move will add both duration (extend the
average life) in order to increase total rate of return opportunity
should interest rates decline and reduce the exposure to prepayment
risk from mortgage refinancing.
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
April 1, 1996
PERFORMANCE DATA
About Fund Performance
<PAGE>
Investors are 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).
None of the past results shown should be considered a representation
of future performance. Investment return and principal value of
shares will fluctuate so that shares, when redeemed, may be worth
more or less than their original cost. Dividends paid to each class
of shares will vary because of the different levels of account
maintenance, distribution and transfer agency fees applicable to
each class, which are deducted from the income available to be paid
to shareholders.
<PAGE>
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 12/31/95 +15.46% +10.85%
Inception (10/21/94)
through 12/31/95 +13.31 + 9.50
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 12/31/95 +14.47% +10.47%
Inception (12/23/91)
through 12/31/95 + 5.52 + 5.52
[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 12/31/95 +14.53% +13.53%
Inception (10/21/94)
through 12/31/95 +12.29 +12.29
[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 12/31/95 +15.06% +10.46%
Five Years Ended 12/31/95 + 7.48 + 6.60
Ten Years Ended 12/31/95 + 8.44 + 8.00
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
<PAGE>
PERFORMANCE DATA (continued)
<TABLE>
Performance Summary--Class A Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<C> <C> <C> <C> <C> <C>
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--2/29/96 9.78 9.66 -- 0.086 - 0.15
------
Total $0.880
Cumulative total return as of 2/29/96: +15.92%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital
gains distributions at net asset value on the payable date,
and do not include sales charge; results would be lower if
sales charge was included.
</TABLE>
<TABLE>
Performance Summary--Class B Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<C> <C> <C> <C> <C> <C>
12/23/91--12/31/91 $9.92 $9.94 -- $0.019 + 0.39%
1992 9.94 9.81 -- 0.619 + 5.10
1993 9.81 9.98 -- 0.481 + 6.73
1994 9.98 9.08 -- 0.523 - 3.81
1995 9.08 9.77 -- 0.592 +14.47
1/1/96--2/29/96 9.77 9.66 -- 0.076 - 0.25
------
Total $2.310
Cumulative total return as of 2/29/96: +23.68%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital
gains distributions at net asset value on the payable date,
and do not reflect deduction of any sales charge; results
would be lower if sales charge was deducted.
</TABLE>
<PAGE>
<TABLE>
Performance Summary--Class C Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<C> <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--2/29/96 9.77 9.66 -- 0.075 - 0.26
------
Total $0.776
Cumulative total return as of 2/29/96: +14.55%**
<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>
PERFORMANCE DATA (concluded)
<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
1995 9.08 9.77 -- 0.641 +15.06
1/1/96--2/29/96 9.77 9.66 -- 0.083 - 0.08
------ ------
Total $0.848 Total $8.764
<PAGE>
Cumulative total return as of 2/29/96: +180.49%**
<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>
Recent Performance Results
<CAPTION>
12 Month 3 Month
2/29/96 11/30/95 2/28/95 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares* $9.66 $9.72 $9.36 + 3.21% -0.62%
Class B Shares* 9.66 9.71 9.36 + 3.21 -0.51
Class C Shares* 9.66 9.71 9.36 + 3.21 -0.51
Class D Shares* 9.66 9.71 9.36 + 3.21 -0.51
Class A Shares--Total Return* +10.61(1) +1.02(2)
Class B Shares--Total Return* + 9.66(3) +0.83(4)
Class C Shares--Total Return* + 9.60(5) +0.82(6)
Class D Shares--Total Return* +10.34(7) +1.06(8)
Class A Shares--Standardized 30-day Yield 6.41%
Class B Shares--Standardized 30-day Yield 5.89%
Class C Shares--Standardized 30-day Yield 5.84%
Class D Shares--Standardized 30-day Yield 6.16%
<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 $0.658 per share ordinary
income dividends.
(2)Percent change includes reinvestment of $0.160 per share ordinary
income dividends.
(3)Percent change includes reinvestment of $0.584 per share ordinary
income dividends.
(4)Percent change includes reinvestment of $0.141 per share ordinary
income dividends.
(5)Percent change includes reinvestment of $0.579 per share ordinary
income dividends.
(6)Percent change includes reinvestment of $0.140 per share ordinary
income dividends.
(7)Percent change includes reinvestment of $0.634 per share ordinary
income dividends.
(8)Percent change includes reinvestment of $0.154 per share ordinary
income dividends.
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Face Interest Maturity Value
Issue Amount Rate Date(s) (Note 1a)
US Government Obligations--17.47%
<S> <C> <C> <C> <C>
United States Treasury Notes $ 20,000,000 5.875 % 8/15/1998 $ 20,162,400
175,000,000 8.875 2/15/1999 190,503,250
50,000,000 5.25 1/31/2001 49,023,500
50,000,000 5.625 2/15/2006 48,172,000
United States Treasury STRIPS++++ 150,000,000 5.72(4) 11/15/2001 107,646,000
Total US Government Obligations (Cost--$408,592,440) 415,507,150
US Government Agency Mortgage-Backed Obligations*--79.90%
Federal Home Loan Mortgage Corporation 740 10.00 7/01/2019 815
Participation Certificates 21,546,211 10.50 9/01/2000-9/01/2020 23,667,005
5,348,585 11.00 8/01/2010-9/01/2020 5,951,959
4,341,523 11.50 10/01/1998-2/01/2021 4,877,397
2,053,029 12.00 7/01/1999-6/01/2020 2,334,027
4,535,552 12.50 10/01/1999-12/01/2023 5,222,961
5,898,590 13.00 8/01/1999-2/01/2020 6,869,970
Federal Home Loan Mortgage Corporation 458,317 6.00 4/01/2009 444,710
Participation Certificates--Gold Program 95,038,783 6.50 2/01/2009-11/01/2010 94,088,395
47,736,149 7.00(2) 8/01/1998-1/01/2000 48,228,309
9,949,941 7.23(2) 11/01/1997 10,091,417
48,705,544 7.50 8/01/1998-1/01/2000 49,192,599
82,268,848 8.00 8/01/2025-10/01/2025 84,639,195
16,641,214 8.50 1/01/2025-7/01/2025 17,280,735
7,525,115 10.50 2/15/2017-12/01/2020 8,303,438
Federal Home Loan Mortgage Trust 171 76,708,471 8.00 7/01/2024 78,697,522
Corporation REMICs** Trust 134 2,683,331 9.00(1) 4/15/2022 657,416
Trust 1220 12,794,559 10.00 2/15/2022 14,103,141
Federal National Mortgage Association 99,500,038 6.00 5/01/2009-1/01/2020 96,452,352
Mortgage-Backed Securities 132,753,670 7.00 3/25/2002-10/01/2025 132,065,496
78,209,591 7.50 12/01/2006-1/01/2026 79,168,577
146,896,930 8.00 7/01/2009-1/01/2025 151,437,184
134,850,943 8.50 5/01/2010-11/01/2025 140,106,844
37,371,030 8.50(3) 7/15/2023 38,784,178
20,805,984 9.50 11/01/2025 22,392,440
17,319 10.50 9/01/2000 18,385
48,975,929 11.00 2/01/2011-12/01/2020 55,311,945
138,492 11.50 1/01/2015-6/01/2015 157,837
2,383,117 13.00 8/01/2010-6/01/2015 2,793,442
Federal National Mortgage 93-123-S 15,529,411 8.145++ 7/25/2000 15,684,705
Association REMICs** 94-M4-A 25,090,955 9.03867 6/25/2023 26,165,161
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
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 $ 1,365,604 7.00% 4/15/2023-10/15/2025 $ 1,349,804
Mortgage-Backed Securities 357,611,380 7.50 1/15/2007-12/15/2025 361,409,212
162,801,465 8.00 6/15/2017-1/15/2026 167,379,442
62,450,619 8.50 3/15/2017-6/01/2025 65,143,489
9,161,423 9.50 6/15/2016-10/15/2018 9,967,262
72,099,062 10.00 12/15/2015-12/15/2021 79,877,735
345,377 10.50 10/15/2014-4/15/2021 382,826
1,257 11.00 1/15/2016 1,419
19,798 11.50 8/15/2013-4/15/2015 22,594
Total US Government Agency Mortgage-Backed Obligations (Cost--$1,870,471,977) 1,900,723,340
<CAPTION>
Face
Amount Issue
Repurchase Agreements***--3.03%
<C> <S> <C>
$72,000,000 Nikko Securities Co., purchased on 2/29/1996 to yield 5.41% to 3/01/1996 72,000,000
Total Repurchase Agreements (Cost--$72,000,000) 72,000,000
US Government & Agency Discount Obligations****--1.26%
$30,000,000 Federal Farm Credit Bank, 5.12% due 3/01/1996 30,000,000
Total US Government & Agency Obligations (Cost--$30,000,000) 30,000,000
<CAPTION>
Par Strike Callable
Value Issue Price From
<S> <C> <S> <C> <S> <C>
Call Options $70,024,204 Federal Home Loan Corporation 100 March 1996 1,008,349
Purchased 49,476,115 Federal Home Loan Corporation 100 April 1996 722,351
20,922,014 Federal Home Loan Corporation 100 May 1996 315,922
28,601,436 Federal Home Loan Corporation 100 September 1996 409,001
Total Options Purchased (Cost--$3,409,420) 2,455,623
Total Investments (Cost--$2,384,473,837)--101.76% 2,420,686,113
Liabilities in Excess of Other Assets--(1.76%) (41,760,847)
--------------
Net Assets--100.00% $2,378,925,266
==============
<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/Veteran's Administration Mortgages
packaged by the Federal National Mortgage Association.
(4)Represents a zero coupon bond; the interest rate shown is the
effective yield at the time of purchase by the Trust.
++Adjustable Rate Security. The interest rate resets periodically
and inversely. The interest rate shown is the rate in effect as of
February 29, 1996.
++++STRIPS--Separate Trading of Registered Interest and
PrincipalSecurities.
*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 rate shown is the discount rate 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 February 29, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$2,381,064,417)
(Note 1a) $ 2,418,230,490
Call options purchased, at value (cost--$3,409,420)
(Notes 1a & 1c) 2,455,623
Cash 926,595
Receivables:
Securities sold $ 105,692,251
Interest 13,369,482
Beneficial interest sold 4,240,463
Principal paydowns 913,755
Loaned securities and extended deliveries (Note 6) 61,125 124,277,076
---------------
Prepaid registration fees and other assets (Note 1f) 83,590
---------------
Total assets 2,545,973,374
---------------
<PAGE>
Liabilities: Payables:
Securities purchased 152,325,736
Beneficial interest redeemed 8,025,920
Dividends to shareholders (Note 1g) 3,720,228
Distributor (Note 2) 911,641
Investment adviser (Note 2) 861,063 165,844,588
---------------
Accrued expenses and other liabilities 1,203,520
---------------
Total liabilities 167,048,108
---------------
Net Assets: Net assets $ 2,378,925,266
===============
Net Assets Class A Shares of beneficial interest, $0.10 par value,
Consist of: unlimited number of shares authorized $ 2,498,167
Class B Shares of beneficial interest, $0.10 par value, unlimited
number of shares authorized 12,197,637
Class C Shares of beneficial interest, $0.10 par value, unlimited
number of shares authorized 224,628
Class D Shares of beneficial interest, $0.10 par value, unlimited
number of shares authorized 9,710,827
Paid-in capital in excess of par 2,728,783,020
Accumulated realized capital losses on investments--net (Note 5) (410,701,289)
Unrealized appreciation on investments--net 36,212,276
---------------
Net assets $ 2,378,925,266
===============
Net Asset Value: Class A--Based on net assets of $241,310,627 and 24,981,673
shares of beneficial interest outstanding $ 9.66
===============
Class B--Based on net assets of $1,178,087,547 and 121,976,368
shares of beneficial interest outstanding $ 9.66
===============
Class C--Based on net assets of $21,691,454 and 2,246,279
shares of beneficial interest outstanding $ 9.66
===============
Class D--Based on net assets of $937,835,638 and 97,108,263
shares of beneficial interest outstanding $ 9.66
===============
See Notes to Financial Statements.
</TABLE>
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations for the Six Months Ended February 29, 1996
<S> <S> <C>
Investment Interest and discount earned $ 87,645,989
Income Other 533,550
(Note 1e): ---------------
Total income 88,179,539
---------------
Expenses: Investment advisory fees (Note 2) 5,470,576
Account maintenance and distribution fees--Class B (Note 2) 4,573,485
Account maintenance fees--Class D (Note 2) 1,196,164
Transfer agent fees--Class B (Note 2) 848,986
Transfer agent fees--Class D (Note 2) 573,803
Custodian fees 224,997
Accounting services (Note 2) 213,956
Printing and shareholder reports 144,735
Transfer agent fees--Class A (Note 2) 138,046
Account maintenance and distribution fees--Class C (Note 2) 70,556
Professional fees 60,899
Registration fees (Note 1f) 44,788
Trustees' fees and expenses 41,328
Transfer agent fees--Class C (Note 2) 12,110
Other 28,932
---------------
Total expenses 13,643,361
---------------
Investment income--net 74,536,178
---------------
Realized & Realized gain on investments--net 21,606,306
Unrealized Change in unrealized appreciation on investments--net (8,071,028)
Gain (Loss) on ---------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 88,071,456
(Notes 1c, 1e & 3): ===============
See Notes to Financial Statements.
</TABLE>
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Six For the
Months Ended Year Ended
February 29, August 31,
Increase (Decrease) in Net Assets: 1996 1995
<S> <S> <C> <C>
Operations: Investment income--net $ 74,536,178 $ 170,805,573
Realized gain (loss) on investments--net 21,606,306 (48,775,962)
Change in unrealized appreciation/depreciation on
investments--net (8,071,028) 92,170,478
--------------- ---------------
Net increase in net assets resulting from operations 88,071,456 214,200,089
--------------- ---------------
Dividends to Investment income--net:
Shareholders Class A (7,662,168) (12,352,715)
(Note 1g): Class B (35,905,073) (84,089,808)
Class C (513,902) (348,549)
Class D (30,653,082) (73,437,660)
--------------- ---------------
Net decrease in net assets resulting from dividends to
shareholders (74,734,225) (170,228,732)
--------------- ---------------
Beneficial Interest Net decrease in net assets derived from beneficial interest
Transactions transactions (112,415,995) (420,304,775)
(Notes 1i & 4): --------------- ---------------
Net Assets: Total decrease in net assets (99,078,764) (376,333,418)
Beginning of period 2,478,004,030 2,854,337,448
--------------- ---------------
End of period $ 2,378,925,266 $ 2,478,004,030
=============== ===============
See Notes to Financial Statements.
</TABLE>
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights
<CAPTION>
Class A++++
The following per share data and ratios have been derived For the Six For the Period
from information provided in the financial statements. Months Ended Oct. 21, 1994++
February 29, to August 31,
Increase (Decrease) in Net Asset Value: 1996 1995
<S> <S> <S> <S>
Per Share Net asset value, beginning of period $ 9.61 $ 9.16
Operating --------------- ---------------
Performance: Investment income--net .32 .58
Realized and unrealized gain on investments--net .05 .45
--------------- ---------------
Total from investment operations .37 1.03
--------------- ---------------
Less dividends from investment income--net (.32) (.58)
---------------- ---------------
Net asset value, end of period $ 9.66 $ 9.61
=============== ===============
Total Investment Based on net asset value per share 3.91%+++ 11.56%+++
Return:** =============== ===============
Ratios to Average Expenses .63%* .64%*
Net Assets: =============== ===============
Investment income--net 6.62%* 7.21%*
=============== ===============
Supplemental Net assets, end of period (in thousands) $ 241,311 $ 223,237
Data: =============== ===============
Portfolio turnover 54.63% 260.34%
=============== ===============
<FN>
++Commencement of Operations.
++++Based on average shares outstanding during the period.
*Annualized.
**Total investment returns exclude the effects of sales loads.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights (continued)
<CAPTION>
Class B
The following per share data and ratios have been derived For the Six For the Period
from information provided in the financial statements. Months Ended Dec. 23, 1991++
February 29, 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 period $ 9.61 $ 9.41 $ 10.14 $ 9.92 $ 9.92
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income--net .28 .60 .48 .52 .44
Realized and unrealized gain
(loss) on investments--net .05 .20 (.73) .22 --
---------- ---------- ---------- ---------- ----------
Total from investment operations .33 .80 (.25) .74 .44
---------- ---------- ---------- ---------- ----------
Less dividends from investment income--net (.28) (.60) (.48) (.52) (.44)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 9.66 $ 9.61 $ 9.41 $ 10.14 $ 9.92
========== ========== ========== ========== ==========
Total Investment Based on net asset value per share 3.41%+++ 8.91% (2.55%) 7.80% 4.54%+++
Return:** ========== ========== ========== ========== ==========
Ratios to Average Expenses 1.40%* 1.41% 1.33% 1.30% 1.33%*
Net Assets: ========== ========== ========== ========== ==========
Investment income--net 5.86%* 6.39% 4.90% 5.27% 6.45%*
========== ========== ========== ========== ==========
Supplemental Net assets, end of period (in thousands) $1,178,087 $1,262,985 $1,497,358 $2,151,917 $1,921,893
Data: ========== ========== ========== ========== ==========
Portfolio turnover 54.63% 260.34% 322.68% 224.35% 230.83%
========== ========== ========== ========== ==========
<FN>
++Commencement of Operations.
++++Based on average shares outstanding during the period.
*Annualized.
**Total investment returns exclude the effects of sales loads.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights (continued)
<CAPTION>
Class C++++
The following per share data and ratios have been derived For the Six For the Period
from information provided in the financial statements. Months Ended Oct. 21, 1994++
February 29, 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 .28 .51
Realized and unrealized gain on investments--net .05 .45
--------------- ---------------
Total from investment operations .33 .96
--------------- ---------------
Less dividends from investment income--net (.28) (.51)
--------------- ---------------
Net asset value, end of period $ 9.66 $ 9.61
=============== ===============
Total Investment Based on net asset value per share 3.39%+++ 10.80%+++
Return:** =============== ===============
Ratios to Average Expenses 1.45%* 1.47%*
Net Assets: =============== ===============
Investment income--net 5.79%* 6.28%*
=============== ===============
Supplemental Net assets, end of period (in thousands) $ 21,691 $ 15,621
Data: =============== ===============
Portfolio turnover 54.63% 260.34%
=============== ===============
<FN>
++Commencement of Operations.
++++Based on average shares outstanding during the period.
*Annualized.
**Total investment returns exclude the effects of sales loads.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
<PAGE>
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights (concluded)
<CAPTION>
Class D
The following per share data and ratios have been derived For the Six
from information provided in the financial statements. Months Ended
February 29, 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 period $ 9.61 $ 9.41 $ 10.14 $ 9.92 $ 9.66
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income--net .31 .64 .52 .57 .70
Realized and unrealized gain
(loss) on investments--net .05 .20 (.73) .22 .26
---------- ---------- ---------- ---------- ----------
Total from investment operations .36 .84 (.21) .79 .96
---------- ---------- ---------- ---------- ----------
Less dividends from investment income--net (.31) (.64) (.52) (.57) (.70)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 9.66 $ 9.61 $ 9.41 $ 10.14 $ 9.92
========== ========== ========== ========== ==========
Total Investment Based on net asset value per share 3.79%+++ 9.48% (2.06%) 8.35% 10.16%
Return:** ========== ========== ========== ========== ==========
Ratios to Average Expenses .88%* .89% .83% .79% .80%
Net Assets: ========== ========== ========== ========== ==========
Investment income--net 6.37%* 6.91% 5.41% 5.80% 7.17%
========== ========== ========== ========== ==========
Supplemental Net assets, end of period (in thousands) $ 937,836 $ 976,161 $1,356,979 $1,836,100 $2,048,037
Data: ========== ========== ========== ========== ==========
Portfolio turnover 54.63% 260.34% 322.68% 224.35% 230.83%
========== ========== ========== ========== ==========
<FN>
++Based on average shares outstanding during 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. These unaudited financial statements
reflect all adjustments which are, in the opinion of management,
necessary to a fair statement of the results for the interim period
presented. All such adjustments are of a normal recurring nature.
The Trust offers four classes of shares under the Merrill Lynch
Select Pricing SM System. Shares of Class A and Class D are sold
with a front-end sales charge. Shares of Class B and Class C may be
subject to a contingent deferred sales charge. All classes of
shares have identical voting, dividend, liquidation and other rights
and the same terms and conditions, except that Class B, Class C and
Class D Shares bear certain expenses related to the account
maintenance of such shares, and Class B and Class C Shares also bear
certain expenses related to the distribution of such shares. Each
class has exclusive voting rights with respect to matters relating
to its account maintenance and 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.
<PAGE>
(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).
NOTES TO FINANCIAL STATEMENTS (continued)
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.
<PAGE>
(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
February 29, 1996 was $48,000,000.
(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%
<PAGE>
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
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.
For the six months ended February 29, 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:
<PAGE>
MLFD MLPF&S
Class A $ 354 $ 4,783
Class D $10,880 $119,979
For the six months ended February 29, 1996, MLPF&S received
contingent deferred sales charges of $648,048 and $18,444 relating
to transactions in Class B and Class C Shares, respectively.
During the six months ended February 29, 1996, the Trust paid MLSPS
$1,070 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 six months ended February 29, 1996 were $1,291,034,803 and
$1,528,143,359, respectively.
Net realized and unrealized gains (losses) as of February 29, 1996
were as follows:
Realized Unrealized
Gains Gains
(Losses) (Losses)
Long-term investments $ 21,875,783 $ 37,166,073
Short-term investments (500) --
Options purchased (569,915) (953,797)
Options written 300,938 --
------------ ------------
Total $ 21,606,306 $ 36,212,276
============ ============
As of February 29, 1996, net unrealized appreciation for Federal
income tax purposes aggregated $36,212,276 of which $54,046,056
related to appreciated securities and $17,833,780 related to
depreciated securities. The aggregate cost of investments, including
options purchased at February 29, 1996
for Federal income tax purposes was
$2,384,473,837.
<PAGE>
Transactions in put options written for the six months ended
February 29, 1996 were as follows:
Face
Amount Premiums
Put Options Written Subject to Put Received
Outstanding put options
written, beginning of period $32,100,000 $ 300,938
Options exercised (32,100,000) (300,938)
----------- ------------
Outstanding put options
written, end of period $ -- $ --
=========== ============
4. Shares of Beneficial Interest:
Net decrease in net assets derived from beneficial
interest transactions was $112,415,995 and $420,304,775 for the six
months ended February 29, 1996 and for the year ended August 31,
1995, respectively.
Transactions in shares of beneficial interest for each class were as
follows:
Class A Shares for the
Six Months Ended Dollar
February 29, 1996 Shares Amount
Shares sold 6,390,906 $ 61,945,004
Shares issued to shareholders
in reinvestment of dividends 116,522 1,130,424
------------ ------------
Total issued 6,507,428 63,075,428
Shares redeemed (4,758,277) (46,029,842)
------------ ------------
Net increase 1,749,151 $ 17,045,586
============ ============
Class A Shares for the Period
October 21, 1994++ to Dollar
August 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
============ ============
<PAGE>
[FN]
++Commencement of Operations.
NOTES TO FINANCIAL STATEMENTS (concluded)
Class B Shares for the
Six Months Ended Dollar
February 29, 1996 Shares Amount
Shares sold 9,483,009 $ 92,007,312
Shares issued to shareholders
in reinvestment of dividends 2,131,546 20,668,778
------------ -------------
Total issued 11,614,555 112,676,090
Automatic conversion of
shares (300,656) (2,928,180)
Shares redeemed (20,792,207) (201,629,263)
------------ -------------
Net decrease (9,478,308) $ (91,881,353)
============ =============
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 C Shares for the
Six Months Ended Dollar
February 29, 1996 Shares Amount
Shares sold 1,422,434 $ 13,803,731
Shares issued to shareholders
in reinvestment of dividends 31,658 307,157
------------ ------------
Total issued 1,454,092 14,110,888
Shares redeemed (833,919) (8,076,233)
------------ ------------
Net increase 620,173 $ 6,034,655
------------ ------------
<PAGE>
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 Six Months Dollar
Ended February 29, 1996 Shares Amount
Shares sold 8,690,262 $ 84,613,648
Automatic conversion of
shares 300,656 2,928,180
Shares issued to shareholders
in reinvestment of dividends 1,509,221 14,630,535
------------ -------------
Total issued 10,500,139 102,172,363
Shares redeemed (15,000,027) (145,787,246)
------------ -------------
Net decrease (4,499,888) $ (43,614,883)
------------ -------------
Class D Shares for the Year Dollar
Ended 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.
<PAGE>
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 February 29, 1996, the Trust held US Treasury Notes having an
aggregate value of approximately $100,000,000 as collateral for
portfolio securities loaned having a market value of approximately
$97,196,000.
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
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
<PAGE>
