MERRILL LYNCH
FEDERAL
SECURITIES TRUST
[FUND LOGO]
STRATEGIC
Performance
Annual Report
August 31, 1997
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.
Merrill Lynch
Federal Securities Trust
Box 9011
Princeton, NJ
08543-9011 #10280 -- 8/97
[RECYCLE LOGO]
Printed on post-consumer recycled paper
MERRILL LYNCH FEDERAL SECURITIES TRUST
DEAR SHAREHOLDER
Economic Environment
In our May 1997 letter to shareholders, we stated that Federal Reserve
Board (FRB) Chairman Alan Greenspan had indicated that the acceptable,
or noninflationary, level of economic growth is in the range of 2% --
2.5%. During the May quarter, the level of gross domestic product (GDP)
growth was well out of this range. While GDP rose 3.6% during the second
quarter and has now exceeded the targeted range in four of the past five
quarters, inflation remained subdued. In fact, inflation (actually
deflation) at the wholesale level, as measured by the Producer Price
Index, was -0.1% for July. This is the seventh consecutive monthly
decline. Similarly, the core Consumer Price Index (excluding the more
volatile food and energy components) is up just 2.4% from a year ago.
This is a 32-year low in inflation.
The concept of a new paradigm regarding the level of noninflationary
growth is attracting greater attention. The economy is strong. Consumer
confidence is at the highest level since 1969. Consumer spending was up
0.8% in July, the largest gain in six months. The housing market, buoyed
by attractive mortgage rates, remains strong. New and existing home
sales are at the highest level in 20 years. The manufacturing sector is
also strong as the National Purchasing Managers Index reached a three-
year high in July. These factors have led to a tight labor market.
Unemployment is at 4.9%, just 0.1% above its 24-year low reached in
July. However, labor pressures are absent as the employment cost index
is up just 2.8%. A strong dollar makes imports attractive, thus limiting
domestic pricing flexibility for passing increased costs through to
consumers. We believe that the FRB must continue to keep a vigilant eye
on aggregate consumer demand and the tight labor markets, which could
lead to demand "pull" or cost "push" inflation. However, it seems as
though monetary policy will remain on hold through year-end 1997,
in our view.
Fiscal Year in Review
During the Trust's fiscal year ended August 31, 1997, interest rates
declined marginally and the yield curve flattened. The two-year Treasury
note declined by 38 basis points (0.38%) from 6.34% to 5.96%, while the
ten-year Treasury note declined by 60 basis points from 6.94% to 6.34%.
The flattened yield curve can be seen in the two-year -- ten-year yield
spread of just 38 basis points. A year ago the yield curve was
considered flat with a spread of 60 basis points.
As interest rates move lower, bond prices generally move higher. In
general, longer-term securities outperform securities with shorter terms
to maturity, and low-coupon mortgage-backed securities (MBS) outperform
high-coupon MBS. During the fiscal year ended August 31, 1997, MBS
outperformed Treasury securities across the maturity curve. To
illustrate, the ten-year Treasury note returned +10.58% while Federal
National Mortgage Association (FNMA) 6% returned +11.87%. The return on
the five-year Treasury note was +8.36% as compared to +10.95% for FNMA
7.5%. The return on the three-year Treasury note was +7.67% as compared
to +9.97% for FNMA 8.5%. In general, Government National Mortgage
Association (GNMA) securities (those mortgages backed by the Federal
Housing Administration and Veterans Administration) outperformed FNMA
and Federal Home Loan Mortgage Corporation securities (conventional
mortgages), especially those with lower coupons.
In a bull market, duration is always a major contributor to performance.
Unfortunately, we did not significantly lengthen duration. However,
many other factors benefited the Fund's performance. We were fully
invested with minimal liquidity and held approximately 93% of the
portfolio in MBS and just 6% in Treasury securities. In addition, we
focused investments in low-coupon MBS and increased our allocation to
GNMAs.
We continue to find MBS attractive, and our current focus is on
discount-coupon MBS where homeowners do not have refinancing incentives,
and multi-family mortgages that have prepayment penalties. These
securities are likely to perform well if interest rates decline. Within
the MBS sector, we increased the allocation to 15-year MBS because we
expect them to outperform their 30-year counterparts should interest
rate volatility increase.
The Treasury yield curve remains fairly flat. Until the yield curve
steepens, our Treasury position will be held at a minimum. If and when
this occurs, the value of Treasury securities "rolling down" the yield
curve will help make them more attractive relative to MBS on a total
rate of return basis. However, although real interest rates (adjusted
for inflation) are attractive at the short end of the yield curve, it
does not seem that a change is likely by year-end. Therefore, high-
quality, high-yielding MBS will most likely continue to be our preferred
investment through the balance of 1997.
In Conclusion
We thank you for your continued investment in
Merrill Lynch Federal Securities Trust, and we look forward to reviewing
our outlook and strategy with you in our upcoming quarterly report to
shareholders.
Sincerely,
/S/ARTHUR ZEIKEL
Arthur Zeikel
President
/S/GREGORY MARK MAUNZ
Gregory Mark Maunz
Vice President and Portfolio Manager
September 29, 1997
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
Joseph T. Monagle Jr., 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, NY 10286
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
Merrill Lynch Federal Securities Trust August 31, 1997
PERFORMANCE DATA
About Fund Performance
Investors are able to purchase shares of the Trust through the Merrill
Lynch Select PricingSM System, which offers four pricing alternatives:
[bullet] 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. However, in the case of certain
eligible investors, the shares were simultaneously exchanged for Class A
Shares.
[bullet] 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.)
[bullet] 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.
[bullet] 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. Figures shown in the "Average Annual Total Return"
tables as well as the total returns and cumulative total returns in the
"Performance Summary" tables assume reinvestment of all dividends and
capital gains distributions at net asset value on the payable date.
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>
<CAPTION>
Recent Performance Results
12 Month 3 Month
8/31/97 5/31/97 8/31/96 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares* $9.64 $9.53 $9.40 +2.55% +1.15%
Class B Shares* 9.63 9.53 9.40 +2.45 +1.05
Class C Shares* 9.63 9.53 9.40 +2.45 +1.05
Class D Shares* 9.63 9.53 9.40 +2.45 +1.05
Class A Shares -- Total Return* +9.66(1) +2.84(2)
Class B Shares -- Total Return* +8.71(3) +2.54(4)
Class C Shares -- Total Return* +8.66(5) +2.53(6)
Class D Shares -- Total Return* +9.27(7) +2.67(8)
Class A Shares -- Standardized 30-day Yield 5.72%
Class B Shares -- Standardized 30-day Yield 5.19%
Class C Shares -- Standardized 30-day Yield 5.14%
Class D Shares -- Standardized 30-day Yield 5.49%
* 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 $0.643 per share ordinary income dividends.
(2) Percent change includes reinvestment of $0.157 per share ordinary income dividends.
(3) Percent change includes reinvestment of $0.569 per share ordinary income dividends.
(4) Percent change includes reinvestment of $0.138 per share ordinary income dividends.
(5) Percent change includes reinvestment of $0.565 per share ordinary income dividends.
(6) Percent change includes reinvestment of $0.137 per share ordinary income dividends.
(7) Percent change includes reinvestment of $0.619 per share ordinary income dividends.
(8) Percent change includes reinvestment of $0.151 per share ordinary income dividends.
</TABLE>
[GRAPHIC LINE CHART OMITTED: TOTAL RETURN BASED ON A $10,000 INVESTMENT]
Merrill Lynch Federal Securities Trust
Total Return Based on a $10,000 Investment
A line graph depicting the growth of an investment in the Fund's Class
A Shares and Class C Shares compared to growth of an investment in the
Salomon Brothers Mortgage Index:
10/21/94** 8/97
ML Federal Securities Trust+--
Class A Shares* $9,600 $12,279
ML Federal Securities Trust+--
Class C Shares* $10,000 $12,481
Salomon Brothers Mortgage
Index++ $10,000 $13,042
A line graph depicting the growth of an investment in the Fund's Class
B Shares compared to growth of an investment in the Salomon Brothers
Mortgage Index. Beginning and ending values are:
12/23/91** 8/97
ML Federal Securities Trust+--
Class B Shares* $10,000 $13,486
Salomon Brothers Mortgage
Index++ $10,000 $14,706
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:
8/87 8/97
ML Federal Securities Trust+--
Class D Shares* $9,600 $20,955
Salomon Brothers Mortgage
Index++ $10,000 $24,462
Footnote reads:
* Assuming maximum sales charge, transaction costs and other operating
expenses, including advisory fees.
** Commencement of Operations.
+ The Trust invests primarily in US Government and Government agency
securities, including GNMA mortgage-backed certificates and other
mortgage-backed Government securities.
++++ This unmanaged Index reflects the performance of a capital market
weighting of the outstanding agency-issued mortgage-backed securities.
Past performance is not predictive of future performance.
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 6/30/97 +8.11% +3.79%
Inception (10/21/94)
through 6/30/97 +8.86 +7.23
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 6/30/97 +7.29% +3.29%
Five Years Ended 6/30/97 +5.24 +5.24
Inception (12/23/91)
through 6/30/97 +5.28 +5.28
* 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 6/30/97 +7.35% +6.35%
Inception (10/21/94)
through 6/30/97 +7.98 +7.98
* 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 6/30/97 +7.96% +3.64%
Five Years Ended 6/30/97 +5.76 +4.90
Ten Years Ended 6/30/97 +7.91 +7.47
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
<TABLE>
<CAPTION>
Performance Summary -- Class A Shares
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
1996 9.78 9.58 -- 0.638 + 4.71
1/1/97 -- 8/31/97 9.58 9.64 -- 0.415 + 5.21
Total $1.847
Cumulative total return as of 8/31/97: +27.89%**
* Figures may include short-term capital gains distributions.
** Figures do not include sales charge; results would be lower if sales charge was included.
</TABLE>
<TABLE>
<CAPTION>
Performance Summary -- Class B Shares
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
1996 9.77 9.58 -- 0.565 + 4.02
1/1/97 -- 8/31/97 9.58 9.63 -- 0.367 + 4.56
Total $3.166
Cumulative total return as of 8/31/97: +34.86%**
* Figures may include short-term capital gains distributions.
** Figures do not reflect deduction of any sales charge; results would be lower if sales charge was deducted.
</TABLE>
<TABLE>
<CAPTION>
Performance Summary -- Class C Shares
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
1996 9.77 9.58 -- 0.560 + 3.97
1/1/97 -- 8/31/97 9.58 9.63 -- 0.364 + 4.53
Total $1.625
Cumulative total return as of 8/31/97: +24.81%**
* Figures may include short-term capital gains distributions.
** Figures do not reflect deduction of any sales charge; results would be lower if sales charge was deducted.
</TABLE>
<TABLE>
<CAPTION>
Performance Summary -- Class D Shares
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 + 5.10%
1985 9.64 9.96 0.344 1.051 +19.45
1986 9.96 9.87 0.440 0.862 +12.75
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
1996 9.77 9.58 -- 0.614 + 4.56
1/1/97 -- 8/31/97 9.58 9.63 -- 0.399 + 4.92
Total $0.848 Total $9.694
Cumulative total return as of 8/31/97: +207.96%**
* Figures may include short-term capital gains distributions.
** Figures do not include sales charge; results would be lower if sales charge was included.
</TABLE>
<TABLE>
<CAPTION>
Merrill Lynch Federal Securities Trust August 31, 1997
SCHEDULE OF INVESTMENTS
Face Interest Maturity Value
Issue Amount Rate Date(s) (Note 1a)
<S> <C> <C> <C> <C> <C>
US Government Obligations -- 6.00%
United States Treasury Notes $30,000,000 6.00 % 7/31/2002 $29,718,600
79,000,000 6.375 5/15/2000 79,579,860
5,000,000 6.625 5/15/2007 5,085,950
--------------
Total US Government Obligations (Cost -- $114,479,688) 114,384,410
==============
US Government Agency Mortgage-Backed
Obligations* -- 92.78%
Federal Home Loan Mortgage 100,000,000 6.775(7) 11/01/2003 100,875,000
Corporation -- Multi-Family++ 9,797,143 7.225(2) 11/01/1997 9,869,091
Federal Home Loan Mortgage Corporation 600 10.00 7/01/2019 656
Participation Certificates 14,839,464 10.50 9/01/2000-9/01/2020 16,476,405
3,384,508 11.00 8/01/2010-9/01/2020 3,800,160
3,015,087 11.50 10/01/1998-6/01/2020 3,420,224
1,419,837 12.00 7/01/1999-6/01/2020 1,634,133
2,857,307 12.50 10/01/1999-7/01/2019 3,334,105
4,041,608 13.00 8/01/1999-2/01/2016 4,770,351
Federal Home Loan Mortgage Corporation 373,771 6.00 4/01/2009 365,242
Participation Certificates -- Gold Program 146,030,709 6.50 4/01/2011-7/01/2012 144,186,204
49,300,000 6.50(7) 7-Year TBA(8) 48,991,875
199,273,801 7.00 6/01/2011-8/01/2012 200,236,195
21,386,205 7.00(2) 10/01/1999 21,626,158
33,336,655 7.50 5/01/2009-9/01/2026 34,007,271
32,731,734 8.00 1/01/2007-11/01/2025 33,828,834
11,998,833 8.50 1/01/2025-7/01/2025 12,527,502
5,105,236 10.50 10/01/2020-12/01/2020 5,649,250
Federal Home Loan Mortgage Trust 273 6,798,489 7.00(1) 7/01/2026 2,364,623
Corporation REMICs** Trust 134 1,998,672 9.00(1) 4/15/2022 539,641
Trust 1220 9,889,070 10.00 2/15/2022 10,137,011
Federal National Mortgage Association 65,965,489 6.50 12/01/2008-5/01/2026 63,662,272
Mortgage-Backed Securities 142,385,883 7.00 3/01/2024-12/01/2026 141,723,471
71,736,417 7.50 1/01/2025-11/01/2026 72,472,936
64,329,092 8.50 5/01/2010-11/01/2025 67,063,158
28,988,564 8.50(3) 7/15/2023 30,158,006
21,566,171 9.50 3/01/2020 23,102,761
12,244 10.50 9/01/2000 13,147
32,848,709 11.00 2/01/2011-11/01/2020 37,344,712
97,780 11.50 1/01/2015-6/01/2015 111,836
1,748,839 13.00 8/01/2010-6/01/2015 2,077,288
Federal National Mortgage Association #0073894 993,907 6.525(7) 12/01/2003 986,453
Mortgage-Backed Securities -- #0073885 895,236 6.545(9) 1/01/2007 882,926
Multi-Family++ #0073873 771,550 6.625(9) 2/01/2007 763,352
#0073221 1,474,867 6.715(7) 10/01/2005 1,473,484
#0375015 19,661,106 6.79(7) 4/01/2004 19,771,700
#0073915 1,542,992 6.87(9) 1/01/2007 1,554,082
#0073910 11,882,210 6.875(9) 1/01/2007 11,698,407
#0375043 3,590,182 6.895(9) 4/01/2007 3,611,498
#0375007 12,142,700 6.94(9) 3/01/2007 12,267,922
#0375012 3,291,099 6.95(9) 4/01/2007 3,322,982
Federal National Mortgage Association #0073944 13,931,763 6.96(9) 1/01/2007 13,933,939
Mortgage-Backed Securities -- #0073952 2,827,939 6.96(9) 2/01/2007 2,827,056
Multi-Family++ (concluded) #0073946 5,468,574 6.97(9) 2/01/2007 5,471,992
#0073969 8,120,592 7.05(9) 2/01/2007 8,166,270
#0073962 4,711,251 7.085(9) 2/01/2007 4,751,003
#0073967 4,581,395 7.105(9) 3/01/2007 4,675,887
#0073992 2,602,107 7.115(9) 2/01/2007 2,657,402
#0375069 1,095,385 7.122(9) 3/01/2007 1,119,004
#0073943 1,487,673 7.18(10) 2/01/2019 1,523,935
#0073608 4,863,439 7.49(9) 8/01/2006 5,076,215
#0375052 4,753,132 7.50(11) 3/01/2027 4,831,856
#0109076 2,198,706 7.59(9) 8/01/2006 2,281,157
#0160024 5,894,757 7.625(9) 11/01/2003 6,163,706
#0160095 7,260,814 7.66(9) 3/01/2004 7,621,586
Federal National Mortgage Association 94-M1-IO 78,531,170 0.87(1) 10/25/2003 3,043,083
Mortgage-Backed Securities -- 94-M4-A 19,180,160 9.0492 8/25/2026 19,875,441
REMICs** -- Multi-Family++ 96-M3-AZ 10,500,000 7.41 3/25/2021 10,867,500
Federal National Mortgage Association 94-56-TB 5,239,230 6.50(1) 7/25/2022 1,909,044
REMICs** 93-123-S 15,529,411 7.94218+ 7/25/2000 14,905,808
Government National Mortgage Association 50,163,336 7.00 4/15/2023-12/15/2025 49,568,430
Mortgage-Backed Securities 211,004,378 7.50 1/15/2007-6/15/2027 212,988,860
172,499,508 8.00 5/15/2023-9/15/2026 177,493,216
49,176,117 10.00 12/15/2015-12/15/2021 54,720,554
237,197 10.50 10/15/2014-4/15/2021 267,587
856 11.00 1/15/2016 982
6,526 11.50 8/15/2013 7,568
--------------
Total US Government Agency Mortgage-Backed Obligations (Cost -- $1,757,365,838) 1,769,451,405
==============
<CAPTION>
Face
Amount Issue
Repurchase Agreements*** -- 2.60%
<S> <C> <C>
$49,653,000 Nikko Securities Co., purchased on 8/29/1997 to yield 5.55% to 9/02/1997 49,653,000
--------------
Total Repurchase Agreements (Cost -- $49,653,000) 49,653,000
==============
US Government Agency Discount Obligations**** -- 11.52%
20,000,000 Federal Farm Credit Banks, 5.39% due 9/11/1997 19,973,050
Federal Home Loan Mortgage Corporation:
50,000,000 5.38% due 9/11/1997 49,932,750
50,000,000 5.42% due 9/11/1997 49,932,250
50,000,000 5.37% due 9/16/1997 49,895,583
50,000,000 5.37% due 9/22/1997 49,850,834
--------------
Total US Government Agency Discount Obligations (Cost -- $219,584,467) 219,584,467
==============
<CAPTION>
Nominal Value Strike Notification Value
Covered by Options Issue Price Date (Note 1a)
Options Purchased -- 0.08%
<S> <C> <C> <C> <C> <C>
Call Options 138,880,257 Federal Home Loan Mortgage Corporation --
Purchased Gold Program, 15-year, 7% 100 8/1997(4) $1,454,532
96,419,387 Government National Mortgage Association,
30-Year, 6% Adjustable Rate Mortgage(6) 100 9/20/2011(5) 28,926
--------------
Total Options Purchased (Cost -- $2,801,938) 1,483,458
==============
Total Investments (Cost -- $2,143,884,931) -- 112.98% 2,154,556,740
==============
Options Written -- (0.01%)
Put Options 96,419,387 Government National Mortgage Association,
Written 30-Year, 6% Adjustable Rate Mortgage(6) 100 9/20/2011(5) (134,987)
--------------
Total Options Written (Premiums Received -- $0) (134,987)
==============
Total Investments, Net of Options Written (Cost -- $2,143,884,931) -- 112.97% 2,154,421,753
==============
Liabilities in Excess of Other Assets -- (12.97%) (247,298,970)
--------------
Net Assets -- 100.00% $1,907,122,783
==============
(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) The option is callable from this date.
(5) Represents European style options which can be exercised only on the expiration date. These options, when combined,
represent a standby purchase commitment whereby the Trust is obligated to purchase the outstanding principal amount of
specific GNMA, 30-year, 6% Adjustable Rate Mortgage pools as of September 20, 2011. For this commitment, the Trust
receives a net 0.12% per annum based on the nominal value covered by the options.
(6) Adjustable Rate Security. The interest rate resets annually at the 1-year Constant Maturing Treasury rate plus 1.5%,
subject to a 1% annual adjustment cap and an 11% life cap.
(7) Represents balloon mortgages that amortize on a 30-year schedule and have 7-year maturities.
(8) Represents a "to-be-announced" (TBA) transaction. The Trust has committed to purchasing securities for which all
specific information is not available at this time.
(9) Represents balloon mortgages that amortize on a 25-year or 30-year schedule and have 10-year maturities.
(10) Represents balloon mortgages that amortize on a 22-year schedule and have 22-year maturities.
(11) Represents balloon mortgages that amortize on a 30-year schedule and have 30-year maturities.
+ Adjustable Rate Security. The interest rate resets periodically and inversely. The interest rate shown is the rate in
effect as of August 31, 1997.
++ Underlying multi-family loans have prepayment protection by means of lockout periods and/or yield maintenance premiums.
* 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>
<TABLE>
<CAPTION>
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of August 31, 1997
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $2,141,082,993) (Note 1a) $2,153,073,282
Options purchased, at value (cost -- $2,801,938) (Notes 1a & 1c) 1,483,458
Receivables:
Securities sold $439,820,353
Interest 13,451,300
Beneficial interest sold 1,633,746
Principal paydowns 771,423
Loaned securities 2,187 455,679,009
--------------
Prepaid registration fees and other assets (Note 1f) 222,746
--------------
Total assets 2,610,458,495
==============
Liabilities: Options written, at value (premiums received -- $0)
(Notes 1a & 1c) 134,987
Payables:
Securities purchased (Note 1h) 694,247,443
Beneficial interest redeemed 4,169,597
Dividends to shareholders (Note 1g) 2,172,757
Investment adviser (Note 2) 781,637
Distributor (Note 2) 671,675 702,043,109
--------------
Accrued expenses and other liabilities. 1,157,616
--------------
Total liabilities 703,335,712
--------------
Net Assets: Net assets $1,907,122,783
==============
Net Assets Class A Shares of beneficial interest, $0.10 par value, unlimited
Consist of: number of shares authorized $2,885,950
Class B Shares of beneficial interest, $0.10 par value, unlimited
number of shares authorized 6,981,093
Class C Shares of beneficial interest, $0.10 par value, unlimited
number of shares authorized 298,163
Class D Shares of beneficial interest, $0.10 par value, unlimited
number of shares authorized 9,630,774
Paid-in capital in excess of par 2,125,412,309
Accumulated realized capital losses on investments -- net (Note 5) (248,622,328)
Unrealized appreciation on investments -- net 10,536,822
--------------
Net assets $1,907,122,783
==============
Net Asset Value: Class A -- Based on net assets of $278,103,013 and 28,859,503
shares of beneficial interest outstanding $9.64
==============
Class B -- Based on net assets of $672,540,764 and 69,810,932
shares of beneficial interest outstanding $9.63
==============
Class C -- Based on net assets of $28,723,400 and 2,981,626
shares of beneficial interest outstanding $9.63
==============
Class D -- Based on net assets of $927,755,606 and 96,307,742
shares of beneficial interest outstanding $9.63
==============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations for the Year Ended August 31, 1997
<S> <C> <C>
Investment Interest and discount earned $147,697,898
Income Other 139,349
(Note 1e): -------------
Total income 147,837,247
-------------
Expenses: Investment advisory fees (Note 2) 9,241,448
Account maintenance and distribution fees -- Class B (Note 2) 5,827,036
Account maintenance fees -- Class D (Note 2) 2,368,452
Transfer agent fees -- Class D (Note 2) 1,248,644
Transfer agent fees -- Class B (Note 2) 1,183,063
Custodian fees 356,954
Transfer agent fees -- Class A (Note 2) 328,369
Accounting services (Note 2) 246,701
Account maintenance and distribution fees -- Class C (Note 2) 202,066
Printing and shareholder reports 142,889
Professional fees 108,550
Registration fees (Note 1f) 107,039
Trustees' fees and expenses 75,297
Transfer agent fees -- Class C (Note 2) 37,375
Other 77,687
-------------
Total expenses 21,551,570
-------------
Investment income -- net 126,285,677
-------------
Realized & Realized gain on investments -- net 18,221,792
Unrealized Gain on Change in unrealized depreciation on investments -- net 32,660,811
Investments -- Net -------------
(Notes 1c, 1e & 3): Net Increase in Net Assets Resulting from Operations $177,168,280
=============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
For the Year Ended August 31,
Increase (Decrease) in Net Assets: 1997 1996
<S> <C> <C> <C>
Operations: Investment income -- net $126,285,677 $145,023,260
Realized gain on investments -- net 18,221,792 17,428,212
Change in unrealized appreciation/depreciation on investments -- net 32,660,811 (66,407,293)
-------------- --------------
Net increase in net assets resulting from operations 177,168,280 96,044,179
-------------- --------------
Dividends to Investment income -- net:
Shareholders Class A (16,892,973) (15,541,226)
(Note 1g): Class B (46,437,460) (66,689,844)
Class C (1,493,291) (1,181,094)
Class D (61,461,953) (61,490,784)
-------------- --------------
Net decrease in net assets resulting from dividends to shareholders (126,285,677) (144,902,948)
-------------- --------------
Beneficial Interest Net decrease in net assets derived from beneficial interest
Transactions transactions (265,356,085) (307,548,996)
(Note 4): -------------- --------------
Net Assets: Total decrease in net assets (214,473,482) (356,407,765)
Beginning of year 2,121,596,265 2,478,004,030
-------------- --------------
End of year $1,907,122,783 $2,121,596,265
============== ==============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
Class A
For the For the Period
The following per share data and ratios have been derived Year Ended Oct. 21, 1994+
from information provided in the financial statements. August 31, to August 31,
1997 1996++ 1995++
Increase (Decrease) in Net Asset Value:
<S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $9.40 $9.61 $9.16
Operating ----------- ----------- -----------
Performance: Investment income -- net .64 .64 .58
Realized and unrealized gain (loss) on investments
-- net .24 (.21) .45
----------- ----------- -----------
Total from investment operations .88 .43 1.03
----------- ----------- -----------
Less dividends from investment income -- net (.64) (.64) (.58)
----------- ----------- -----------
Net asset value, end of period $9.64 $9.40 $9.61
=========== =========== ===========
Total Investment Based on net asset value per share 9.66% 4.55% 11.56%++++
Return:** =========== =========== ===========
Ratios to Average Expenses .65% .62% .64%*
Net Assets: =========== =========== ===========
Investment income -- net 6.73% 6.64% 7.21%*
=========== =========== ===========
Supplemental Net assets, end of period (in thousands) $278,103 $231,651 $223,237
Data: =========== =========== ===========
Portfolio turnover 349.05% 204.14% 260.34%
=========== =========== ===========
<CAPTION>
The following per share data and ratios have been derived Class B
from information provided in the financial statements. For the Year Ended August 31,
1997 1996++ 1995++ 1994 1993
Increase (Decrease) in Net Asset Value:
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $9.40 $9.61 $9.41 $10.14 $9.92
Operating ---------- ---------- ---------- ---------- ----------
Performance:
Investment income -- net .57 .57 .60 .48 .52
Realized and unrealized gain (loss) on
investments -- net .23 (.21) .20 (.73) .22
---------- ---------- ---------- ---------- ----------
Total from investment operations .80 .36 .80 (.25) .74
---------- ---------- ---------- ---------- ----------
Less dividends from investment
income -- net (.57) (.57) (.60) (.48) (.52)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $9.63 $9.40 $9.61 $ 9.41 $10.14
========== ========== ========== ========== ==========
Total Investment Based on net asset value per share 8.71% 3.72% 8.91% (2.55%) 7.80%
Return:** ========== ========== ========== ========== ==========
Ratios to Average Expenses 1.42% 1.39% 1.41% 1.33% 1.30%
Net Assets: ========== ========== ========== ========== ==========
Investment income -- net 5.98% 5.87% 6.39% 4.90% 5.27%
========== ========== ========== ========== ==========
Supplemental Net assets, end of year (in thousands) $672,541 $924,885 $1,262,985 $1,497,358 $2,151,917
Data: ========== ========== ========== ========== ==========
Portfolio turnover 349.05% 204.14% 260.34% 322.68% 224.35%
========== ========== ========== ========== ==========
+ 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.
<CAPTION>
Class C
For the For the Period
The following per share data and ratios have been derived Year Ended Oct. 21, 1994+
from information provided in the financial statements. August 31, to August 31,
1997 1996++ 1995++
Increase (Decrease) in Net Asset Value:
<S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $9.40 $9.61 $9.16
Operating ----------- ----------- -----------
Performance:
Investment income -- net .56 .56 .51
Realized and unrealized gain (loss) on investments
-- net .23 (.21) .45
----------- ----------- -----------
Total from investment operations .79 .35 .96
----------- ----------- -----------
Less dividends from investment income -- net (.56) (.56) (.51)
----------- ----------- -----------
Net asset value, end of period $9.63 $9.40 $9.61
=========== =========== ===========
Total Investment Based on net asset value per share 8.66% 3.67% 10.80%++++
Return:** =========== =========== ===========
Ratios to Average Expenses 1.47% 1.43% 1.47%*
Net Assets: =========== =========== ===========
Investment income -- net 5.91% 5.82% 6.28%*
=========== =========== ===========
Supplemental Net assets, end of period (in thousands) $28,723 $22,672 $15,621
Data: =========== =========== ===========
Portfolio turnover 349.05% 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,
1997 1996++ 1995++ 1994 1993
Increase (Decrease) in Net Asset Value:
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $9.40 $9.61 $9.41 $10.14 $9.92
Operating ---------- ---------- ---------- ---------- ----------
Performance:
Investment income -- net .62 .62 .64 .52 .57
Realized and unrealized gain (loss) on
investments -- net .23 (.21) .20 (.73) .22
---------- ---------- ---------- ---------- ----------
Total from investment operations .85 .41 .84 (.21) .79
---------- ---------- ---------- ---------- ----------
Less dividends from investment
income -- net (.62) (.62) (.64) (.52) (.57)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $9.63 $9.40 $9.61 $9.41 $10.14
========== ========== ========== ========== ==========
Total Investment Based on net asset value per share 9.27% 4.28% 9.48% (2.06%) 8.35%
Return:** ========== ========== ========== ========== ==========
Ratios to Average Expenses .90% .87% .89% .83% .79%
Net Assets: ========== ========== ========== ========== ==========
Investment income -- net 6.49% 6.39% 6.91% 5.41% 5.80%
========== ========== ========== ========== ==========
Supplemental Net assets, end of year (in thousands) $927,756 $942,388 $976,161 $1,356,979 $1,836,100
Data: ========== ========== ========== ========== ==========
Portfolio turnover 349.05% 204.14% 260.34% 322.68% 224.35%
========== ========== ========== ========== ==========
+ 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>
Merrill Lynch Federal Securities Trust August 31, 1997
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 Pricingsm 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 by 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.
(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.
[bullet] 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.
[bullet] Options -- The Trust is authorized to write and purchase call
and put options. When the Trust writes an option, an amount equal to the
premium received by the Trust is reflected as an asset and an equivalent
liability. The amount of the liability is subsequently marked to market
to reflect the current market value of the option written. When a
security is purchased or sold through an exercise of an option, the
related premium paid (or received) is added to (or deducted from) the
basis of the security acquired or deducted from (or added to) the
proceeds of the security sold. When an option expires (or the Trust
enters into a closing transaction), the Trust realizes a gain or loss on
the option to the extent of the premiums received or paid (or gain or
loss to the extent the cost of the closing transaction exceeds the
premiums paid or received).
Written and purchased options are non-income producing investments.
(d) Income taxes -- It is the Trust's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its taxable
income to its shareholders. Therefore, no Federal income tax provision
is required.
(e) Security transactions and investment income -- Security transactions
are recorded on the dates the transactions are entered into (the trade
dates). Dividend income is recorded on the ex-dividend 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, 1997 was
$397,030,186.
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%
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 year ended August 31, 1997, 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 $338 $3,221
Class D $8,150 $88,008
For the year ended August 31, 1997, MLPF&S received contingent deferred
sales charges of $1,116,277 and $16,193 relating to transactions in
Class B and Class C Shares, respectively.
During the year ended August 31, 1997, the Trust paid MLSPS $13,640 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, MLFDS, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for
the year ended August 31, 1997 were $6,839,079,560 and $7,096,057,885,
respectively.
Net realized and unrealized gains (losses) as of August 31, 1997 were as
follows:
Realized Unrealized
Gains (Losses) Gains (Losses)
Long-term investments $18,837,718 $11,990,289
Short-term investments (8,444) --
Options purchased (607,482) (1,318,480)
Options written -- (134,987)
------------- -------------
Total $18,221,792 $10,536,822
============= =============
As of August 31, 1997, net unrealized depreciation for Federal income
tax purposes aggregated $1,842,268, of which $13,612,195 related to
appreciated securities and $15,454,463 related to depreciated
securities. The aggregate cost of investments, including options, at
August 31, 1997 for Federal income tax purposes was $2,156,264,021.
Transactions in call options written for the year ended August 31, 1997
were as follows:
Nominal
Value Covered Premiums
Call Options Written by Options Received
Outstanding call options
written, beginning of year 50,000,000 $515,625
Options written 148,000,000 926,094
Options exercised (198,000,000) (1,441,719)
------------- -------------
Outstanding call options
written, end of year -- --
============= =============
Transactions in put options written for the year ended August 31, 1997
were as follows:
Nominal
Value Covered Premiums
Put Options Written by Options Received
Outstanding put options
written, beginning of year 100,000,000 $10,000
Options expired (3,580,613) (10,000)
------------- -------------
Outstanding put options
written, end of year 96,419,387 --
============= =============
4. Shares of Beneficial Interest:
Net decrease in net assets derived from beneficial interest transactions
was $265,356,085 and $307,548,996 for the years ended August 31, 1997
and August 31, 1996, respectively.
Transactions in shares of beneficial interest for each class were as
follows:
Class A Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 13,489,212 $128,699,695
Shares issued to shareholders
in reinvestment of dividends 246,217 2,355,483
------------- -------------
Total issued 13,735,429 131,055,178
Shares redeemed (9,520,222) (90,995,776)
------------- -------------
Net increase 4,215,207 $40,059,402
============= =============
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 B Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 13,142,804 $125,442,660
Shares issued to shareholders
in reinvestment of dividends 2,799,110 26,736,766
------------- -------------
Total issued 15,941,914 152,179,426
Automatic conversion
of shares (12,986,542) (123,962,413)
Shares redeemed (31,548,826) (301,267,082)
------------- -------------
Net decrease (28,593,454) $(273,050,069)
============= =============
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 C Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 1,873,927 $17,886,740
Shares issued to shareholders
in reinvestment of dividends 98,146 937,686
------------- -------------
Total issued 1,972,073 18,824,426
Shares redeemed (1,402,999) (13,394,907)
------------- -------------
Net increase 569,074 $5,429,519
============= =============
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 D Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 8,726,557 $83,556,197
Automatic conversion
of shares 12,986,542 123,962,413
Shares issued to shareholders
in reinvestment of dividends 3,129,768 29,893,148
------------- -------------
Total issued 24,842,867 237,411,758
Shares redeemed (28,804,948) (275,206,695)
------------- -------------
Net decrease (3,962,081) $(37,794,937)
============= =============
Class D Shares for the Year Dollar
Ended August 31, 1996 Shares Amount
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)
============= =============
5. Capital Loss Carryforward:
At August 31, 1997, the Trust had a net capital loss carryforward of
approximately $234,025,000, of which $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 $49,067,382
has been reclassified to paid-in capital in excess of par.
6. Loaned Securities:
At August 31, 1997, the Trust held US Treasury Notes having an aggregate
value of approximately $118,516,000 as collateral for portfolio
securities loaned having a market value of approximately $116,150,000.
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders,
Merrill Lynch Federal Securities Trust:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Merrill Lynch Federal
Securities Trust as of August 31, 1997, 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, 1997 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, 1997, 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, 1997
IMPORTANT TAX INFORMATION (UNAUDITED)
None of the ordinary income distributions paid monthly by Merrill Lynch
Federal Securities Trust during the year ended August 31, 1997 qualify
for the dividends-received deduction for corporations. Additionally,
there were no long-term capital gains distributions during the year.
The law varies in each state as to whether and what percentage of
dividend income attributable to Federal obligations is exempt from state
income tax. We recommend that you consult your tax adviser to determine
if any portion of the dividends you received is exempt from state income
tax.
Listed below are the percentages of the Trust's total assets invested in
Federal obligations* as of the end of each quarter of the fiscal year.
For the Quarter Ended
November 30, 1996 4.82%
February 28, 1997 1.91%
May 31, 1997 1.29%
August 31, 1997 5.15%
Of the Trust's ordinary income dividends paid during the year ended
August 31, 1997, 6.60% 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.
*For purposes of this calculation, Federal obligations include US
Treasury Notes, US Treasury Bills, and US Treasury 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.
