MERRILL LYNCH
FEDERAL
SECURITIES TRUST
FUND LOGO
Semi-Annual Report
February 28, 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
<PAGE>
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
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
Printed on post-consumer recycled paper
MERRILL LYNCH FEDERAL SECURITIES TRUST
DEAR SHAREHOLDER
Economic Environment
The US economy continued to be strong during the three months ended
February 28, 1997. It is anticipated that gross domestic product
(GDP) growth may subside from its 3.9% fourth quarter 1996 growth
spurt to a noninflationary rate of 2.0%--2.5% in 1997. Unemployment
is low, consumer confidence is high and inflation remains at its
lowest level in more than 30 years. However, Federal Reserve Board
Chairman Alan Greenspan remains vigilant in the fight against
inflation. His concerns center on the tightness in labor markets
which could lead to wage inflation and on the tremendous rise in the
stock market which he termed "irrational exuberance."
<PAGE>
In his bi-annual state of the economy report to Congress, Chairman
Greenspan hinted that a preemptive tightening in monetary policy may
be necessary to control the building of inflationary pressures.
This, of course, had an immediate impact on the financial markets.
Short-term interest rates were raised on March 25, 1997. While
further monetary tightening is possible, it appears that it is
likely that current monetary policy is restrictive enough to curb
economic growth. The real funds rate is currently 3.00%, which is
the Federal funds rate of 5.50% adjusted for 2.5% inflation. This is
substantially higher than the longer-term averages. Presently,
financial markets are pricing in further interest rate increases for
sometime in 1997.
Portfolio Strategy
Although short-term interest rates were essentially unchanged during
the February quarter, longer-term interest rates rose significantly.
Two-year and longer Treasury securities all moved higher in yield by
ap-proximately 50 basis points (0.50%). This environment is
favorable for mortgage-backed securities (MBS), relative to Treasury
securities, as refinancing concerns are greatly diminished. The high
yield on MBS, achieved by the effective selling of the embedded call
option, is received without the negative effect of huge payments.
MBS performed impressively and reduced prepayment fears were not the
only factor helping performance over the February quarter. A
significant pickup in collateralized mortgage obligation issuance,
light selling by mortgage bankers and increased demand for yield
spread products all contributed to the performance of MBS. For
example, Federal Home Loan Mortgage Corporation (FHLMC) 7% returned
- -0.01% for the quarter, while a similar average life 10-year
Treasury note returned -2.30%. In addition, yield spreads tightened
to 20-month lows.
The portfolio structure of overweighting MBS was the correct
strategy for 1996 and seems to be thus far for 1997. We expect to
maintain this strategy as investor demand for yield is strong.
However, even if yield spreads remain the same, the incremental
yield from MBS will still be attractive. The Trust continues to
underweight the Treasury sector, but shifted 12% of net assets into
Federal National Mortgage Association (FNMA) and FHLMC multi-family
MBS. Although these securities offer attractive yields and are
guaranteed by FNMA and FHLMC, the real attraction lies in the fact
that there are prepayment restrictions against refinancing.
Therefore, if interest rates decline, the price appreciation on
these securities should be greater than with a residential MBS that
allows for 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.
<PAGE>
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Gregory Mark Maunz)
Gregory Mark Maunz
Vice President and Portfolio Manager
March 27, 1997
PERFORMANCE DATA
About Fund Performance
Investors are able to purchase shares of the Trust through the
Merrill Lynch Select Pricing SM System, which offers four pricing
alternatives:
* Class A Shares incur a maximum initial sales charge (front-end
load) of 4% and bear no ongoing distribution or account maintenance
fees. Class A Shares are available only to eligible investors, as
detailed in the Fund's prospectus. If you were a Class A shareholder
prior to October 21, 1994, your Class A Shares were redesignated to
Class D Shares on October 21, 1994, which, in the case of certain
eligible investors, were simultaneously exchanged for Class A
Shares.
* Class B Shares are subject to a maximum contingent deferred sales
charge of 4% if redeemed during the first year, decreasing 1% each
year thereafter to 0% after the fourth year. In addition, Class B
Shares are subject to a distribution fee of 0.50% and an account
maintenance fee of 0.25%. These shares automatically convert to
Class D Shares after approximately 10 years. (There is no initial
sales charge for automatic share conversions.)
<PAGE>
* Class C Shares are subject to a distribution fee of 0.55% and an
account maintenance fee of 0.25%. In addition, Class C Shares are
subject to a 1% contingent deferred sales charge if redeemed within
one year of purchase.
* Class D Shares incur a maximum initial sales charge of 4% and an
account maintenance fee of 0.25% (but no distribution fee).
None of the past results shown should be considered a representation
of future performance. Investment return and principal value of
shares will fluctuate so that shares, when redeemed, may be worth
more or less than their original cost. Dividends paid to each class
of shares will vary because of the different levels of account
maintenance, distribution and transfer agency fees applicable to
each class, which are deducted from the income available to be paid
to shareholders.
<TABLE>
Recent Performance Results
<CAPTION>
12 Month 3 Month
2/28/97 11/30/96 2/29/96 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares* $9.56 $9.68 $9.66 -1.04% -1.24%
Class B Shares* 9.56 9.68 9.66 -1.04 -1.24
Class C Shares* 9.56 9.68 9.66 -1.04 -1.24
Class D Shares* 9.56 9.68 9.66 -1.04 -1.24
Class A Shares--Total Return* +5.88(1) +0.45(2)
Class B Shares--Total Return* +5.06(3) +0.26(4)
Class C Shares--Total Return* +5.01(5) +0.25(6)
Class D Shares--Total Return* +5.61(7) +0.39(8)
Class A Shares--Standardized 30-day Yield 6.44%
Class B Shares--Standardized 30-day Yield 5.95%
Class C Shares--Standardized 30-day Yield 5.90%
Class D Shares--Standardized 30-day Yield 6.19%
<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 $0.650 per share ordinary
income dividends.
(2)Percent change includes reinvestment of $0.163 per share ordinary
income dividends.
(3)Percent change includes reinvestment of $0.576 per share ordinary
income dividends.
(4)Percent change includes reinvestment of $0.145 per share ordinary
income dividends.
(5)Percent change includes reinvestment of $0.571 per share
ordinary income dividends.
(6)Percent change includes reinvestment of $0.144 per share ordinary
income dividends.
(7)Percent change includes reinvestment of $0.626 per share ordinary
income dividends.
(8)Percent change includes reinvestment of $0.157 per share ordinary
income dividends.
</TABLE>
<PAGE>
PERFORMANCE DATA (continued)
<TABLE>
Performance Summary--Class A Shares***
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
10/21/94--12/31/94 $9.16 $9.08 -- $0.129 + 0.54%
1995 9.08 9.78 -- 0.665 +15.46
1996 9.78 9.58 -- 0.638 + 4.71
1/1/97--2/28/97 9.58 9.56 -- 0.098 + 0.93
------
Total $1.530
Cumulative total return as of 2/28/97: +22.69%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the payable date, and do not
include sales charge; results would be lower if sales charge was
included.
***As a result of the implementation of the Merrill Lynch Select
Pricing SM System, Class A Shares of the Trust outstanding prior to
October 21, 1994 were redesignated to Class D Shares.
</TABLE>
<TABLE>
Performance Summary--Class B Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
12/23/91--12/31/91 $9.92 $9.94 -- $0.019 + 0.39%
1992 9.94 9.81 -- 0.619 + 5.10
1993 9.81 9.98 -- 0.481 + 6.73
1994 9.98 9.08 -- 0.523 - 3.81
1995 9.08 9.77 -- 0.592 +14.47
1996 9.77 9.58 -- 0.565 + 4.02
1/1/97--2/28/97 9.58 9.56 -- 0.087 + 0.80
------
Total $2.886
Cumulative total return as of 2/28/97: +30.01%**
<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**
<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--2/28/97 9.58 9.56 -- 0.086 + 0.79
------
Total $1.347
Cumulative total return as of 2/28/97: +20.35%**
<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**
<S> <C> <C> <C> <C> <C>
9/28/84--12/31/84 $9.38 $9.64 $0.022 $0.187 + 4.07%
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
1996 9.77 9.58 -- 0.614 + 4.56
1/1/97--2/28/97 9.58 9.56 -- 0.094 + 0.88
------ ------
Total $0.848 Total $9.389
<PAGE>
Cumulative total return as of 2/28/97: +195.94%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the payable date, and do not
include sales charge; results would be lower if sales charge was
included.
***As a result of the implementation of the Merrill Lynch Select
Pricing SM System, Class A Shares of the Trust outstanding prior to
October 21, 1994 were redesignated to Class D Shares.
</TABLE>
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 12/31/96 +4.71% +0.52%
Inception (10/21/94)
through 12/31/96 +9.30 +7.29
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 12/31/96 +4.02% +0.09%
Five Years Ended 12/31/96 +5.14 +5.14
Inception (12/23/91)
through 12/31/96 +5.20 +5.20
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
<PAGE>
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Year Ended 12/31/96 +3.97% +2.99%
Inception (10/21/94)
through 12/31/96 +8.42 +8.42
[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 12/31/96 +4.56% +0.37%
Five Years Ended 12/31/96 +5.68 +4.82
Ten Years Ended 12/31/96 +7.57 +7.13
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Face Interest Maturity Value
Issue Amount Rate Date(s) (Note 1a)
<S> <C> <C> <S> <C>
US Government Obligations--2.28%
United States Treasury Notes $ 15,000,000 8.875 % 2/15/1999 $ 15,757,050
30,000,000 6.50 10/15/2006 29,765,700
Total US Government Obligations (Cost--$45,744,520) 45,522,750
US Government Agency Mortgage-Backed Obligations*--93.51%
Federal Home Loan Mortgage 100,000,000 6.775(7)+++ 11/01/2003 99,812,500
Corporation--Multi-Family 9,843,832 7.225(2)+++ 11/01/1997 9,860,751
<PAGE>
Federal Home Loan Mortgage Corporation 718 10.00 7/01/2019 785
Participation Certificates 16,755,131 10.50 9/01/2000-9/01/2020 18,535,364
4,027,412 11.00 8/01/2010-9/01/2020 4,506,916
3,179,932 11.50 10/01/1998-6/01/2020 3,594,309
1,527,431 12.00 7/01/1999-6/01/2020 1,752,727
3,415,653 12.50 10/01/1999-7/01/2019 3,973,873
4,475,445 13.00 8/01/1999-2/01/2016 5,267,017
Federal Home Loan Mortgage Corporation 406,806 6.00 4/01/2009 393,329
Participation Certificates--Gold Program 89,000,000 6.50 15-Year TBA(8) 86,999,962
65,304,572 7.00 4/01/2011-2/10/2012 65,114,351
24,106,738 7.00(2) 10/01/1999 24,333,341
99,230,545 7.50 5/01/2009-9/01/2026 99,669,839
68,034,186 8.00 1/01/2007-11/01/2025 69,713,534
13,116,905 8.50 1/01/2025-7/01/2025 13,596,459
5,676,378 10.50 10/01/2020-12/01/2020 6,258,207
Federal Home Loan Mortgage Trust 273 7,002,030 7.00(1) 7/01/2026 2,397,201
Corporation REMICs** Trust 134 2,186,201 9.00(1) 4/15/2022 590,274
Trust 1220 93,449,362 10.00 2/15/2022 11,279,403
Federal National Mortgage Association 67,708,585 6.50 12/01/2008-5/01/2026 64,417,832
Mortgage-Backed Securities 179,632,619 7.00 6/01/2007-12/01/2026 175,664,650
202,057,783 7.50 1/01/2025-3/01/2027 202,180,916
46,595,866 8.00 6/01/2006-11/01/2026 47,597,813
20,372,482 8.50 8/01/2012-11/01/2025 21,110,682
31,200,335 8.50(3) 7/15/2023 32,156,625
24,690,487 9.50 3/01/2020 26,665,726
14,021 10.50 9/01/2000 14,927
37,686,326 11.00 2/01/2011-11/01/2020 42,938,669
99,054 11.50 1/01/2015-6/01/2015 113,540
1,957,209 13.00 8/01/2010-6/01/2015 2,332,739
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Face Interest Maturity Value
Issue Amount Rate Date(s) (Note 1a)
<S> <C> <C> <S> <C>
US Government Agency Mortgage-Backed Obligations* (concluded)
Federal National Mortgage Association $ 19,750,000 6.79 % 4/01/2004 $ 19,688,281
Mortgage-Backed Securities--Multi-Family+++ 11,931,907 6.875 1/01/2007 11,931,907
12,184,000 6.94 1/01/2007 12,126,888
3,300,000 6.95 3/01/2007 3,285,563
2,850,000 6.96 2/01/2007 2,843,766
13,990,443 6.96 12/01/2006 13,959,839
5,500,000 6.97 2/01/2007 5,491,406
4,730,000 7.085 2/01/2007 4,759,563
4,600,000 7.11 3/01/2007 4,630,187
8,175,000 7.05 12/01/2006 8,206,934
2,211,305 7.59 7/01/2006 2,294,575
<PAGE>
Federal National Mortgage Association 94-M1-IO 79,023,100 0.87(1) 10/25/2003 3,213,400
Mortgage-Backed Securities--REMICs**-- 94-M4-A 23,438,246 9.03512 8/25/2026 24,295,218
Multi-Family+++
Federal National Mortgage 93-123-S 15,529,411 8.55156++ 7/25/2000 14,951,911
Association REMICs**
Government National Mortgage Association 90,215,964 7.00 4/15/2023-12/15/2025 87,877,369
Mortgage-Backed Securities 239,231,789 7.50 1/15/2007-9/15/2026 239,265,204
179,902,891 8.00 5/15/2023-9/15/2026 183,640,182
19,472,551 8.50 6/15/2021-3/15/2026 20,190,504
56,095,053 10.00 12/15/2015-12/15/2021 61,784,652
312,599 10.50 10/15/2014-4/15/2021 351,477
864 11.00 1/15/2016 987
11,391 11.50 8/15/2013-4/15/2015 13,163
Total US Government Agency Mortgage-Backed Obligations (Cost--$1,868,664,577) 1,867,647,237
Face
Amount Issue
Repurchase Agreements***--4.55%
$90,800,000 Nikko Securities Co., purchased on 2/28/1997 to yield
5.37% to 3/03/1997 90,800,000
Total Repurchase Agreements (Cost--$90,800,000) 90,800,000
US Government & Agency Discount Obligations****--10.25%
75,000,000 Federal Home Loan Mortgage Corporation, 5.16% due 3/19/1997 74,828,000
130,000,000 Federal National Mortgage Association, 5.15% due 3/13/1997 129,814,028
Total US Government & Agency Discount Obligations (Cost--$204,642,028) 204,642,028
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Nominal Value Strike Value
Covered by Options Issue Price (Note 1a)
Options Purchased--0.08%
<S> <C> <S> <C> <C> <C>
Call Options 148,907,289 Federal Home Loan Mortgage
Purchased Corporation--Gold Program,
15-Year, 7% 100 2/1997(4) $ 1,498,383
99,016,965 Government National Mortgage
Association, 30-Year, 6%
Adjustable Rate Mortgage (6) 100 9/20/2011(5) 24,754
<PAGE>
Total Options Purchased (Cost--$3,003,719) 1,523,137
Total Investments (Cost--$2,212,854,844)--110.67% 2,210,135,152
Options Written--(0.01%)
Put Options 99,016,965 Government National Mortgage
Written Association, 30-Year, 6%
Adjustable Rate Mortgage (6) 100 9/20/2011 (138,624)
Total Options Written (Premiums Received--$0)(5) (138,624)
Total Investments, Net of Options Written (Cost--$2,212,854,844)--110.66% 2,209,996,528
Liabilities in Excess of Other Assets--(10.66%) (212,858,160)
--------------
Net Assets--100.00% $1,997,138,368
==============
<FN>
(1)Represents the interest only portion of a mortgage-backed
obligation.
(2)Represents balloon mortgages that amortize on a 30-year schedule
and have 5-year maturities.
(3)Federal Housing Administration/Veterans' Administration Mortgages
packaged by the Federal National Mortgage Association.
(4)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.
++Adjustable Rate Security. The interest rate resets periodically
and inversely. The interest rate shown is the rate in effect as of
February 28, 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.
</TABLE>
<PAGE>
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of February 28, 1997
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$2,209,851,125)
(Note 1a) $ 2,208,612,015
Options purchased, at value (cost--$3,003,719)
(Notes 1a & 1c) 1,523,137
Cash 19,378
Receivables:
Securities sold $ 158,127,049
Interest 13,318,556
Beneficial interest sold 2,034,929
Principal paydowns 614,459 174,094,993
---------------
Prepaid registration fees and other assets (Note 1f) 186,319
---------------
Total assets 2,384,435,842
---------------
Liabilities: Options written, at value (premiums received--$0)
(Notes 1a & 1c) 138,624
Payables:
Securities purchased (Note 1h) 378,037,833
Beneficial interest redeemed 4,332,487
Dividends to shareholders (Note 1g) 2,127,715
Investment adviser (Note 2) 713,655
Distributor (Note 2) 651,580
Loaned securities and extended delivery fees (Note 6) 71,983 385,935,253
---------------
Accrued expenses and other liabilities 1,223,597
---------------
Total liabilities 387,297,474
---------------
Net Assets: Net assets $ 1,997,138,368
===============
Net Assets Class A Shares of beneficial interest, $0.10 par value,
Consist of: unlimited number of shares authorized $ 2,569,335
Class B Shares of beneficial interest, $0.10 par value,
unlimited number of shares authorized 8,010,424
Class C Shares of beneficial interest, $0.10 par value,
unlimited number of shares authorized 261,980
Class D Shares of beneficial interest, $0.10 par value,
unlimited number of shares authorized 10,052,365
Paid-in capital in excess of par 2,278,320,343
Accumulated realized capital losses on investments--net
(Note 5) (299,217,763)
Unrealized depreciation on investments--net (2,858,316)
---------------
Net assets $ 1,997,138,368
===============
<PAGE>
Net Asset Value: Class A--Based on net assets of $245,652,244 and
25,693,347 shares of beneficial interest outstanding $ 9.56
===============
Class B--Based on net assets of $765,656,031 and
80,104,235 shares of beneficial interest outstanding $ 9.56
===============
Class C--Based on net assets of $25,039,865 and
2,619,796 shares of beneficial interest outstanding $ 9.56
===============
Class D--Based on net assets of $960,790,228 and
100,523,651 shares of beneficial interest outstanding $ 9.56
===============
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations for the Six Months Ended February 28, 1997
<S> <S> <C> <C>
Investment Interest and discount earned $ 76,911,264
Income Other 64,729
(Note 1e): ---------------
Total income 76,975,993
---------------
Expenses: Investment advisory fees (Note 2) 4,731,759
Account maintenance and distribution fees--Class B (Note 2) 3,174,569
Account maintenance fees--Class D (Note 2) 1,187,136
Transfer agent fees--Class B (Note 2) 653,360
Transfer agent fees--Class D (Note 2) 640,403
Custodian fees 209,228
Transfer agent fees--Class A (Note 2) 158,990
Accounting services (Note 2) 125,186
Account maintenance and distribution fees--Class C (Note 2) 95,695
Printing and shareholder reports 90,521
Registration fees (Note 1f) 75,154
Professional fees 52,640
Trustees' fees and expenses 37,870
Transfer agent fees--Class C (Note 2) 18,112
Other 46,407
---------------
Total expenses 11,297,030
---------------
Investment income--net 65,678,963
---------------
<PAGE>
Realized & Realized gain on investments--net 16,745,708
Unrealized Gain on Change in unrealized depreciation on investments--net 19,265,673
Investments--Net ---------------
(Notes 1c, 1e Net Increase in Net Assets Resulting from Operations $ 101,690,344
and 3): ===============
</TABLE>
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Six For the
Months Ended Year Ended
Increase (Decrease) in Net Assets: Feb. 28, 1997 Aug. 31, 1996
<S> <S> <C> <C>
Operations: Investment income--net $ 65,678,963 $ 145,023,260
Realized gain on investments--net 16,745,708 17,428,212
Change in unrealized appreciation/depreciation on
investments--net 19,265,673 (66,407,293)
--------------- ---------------
Net increase in net assets resulting from operations 101,690,344 96,044,179
--------------- ---------------
Dividends to Investment income--net:
Shareholders Class A (8,059,847) (15,541,226)
(Note 1g): Class B (25,677,631) (66,689,844)
Class C (720,136) (1,181,094)
Class D (31,273,318) (61,490,784)
--------------- ---------------
Net decrease in net assets resulting from dividends to
shareholders (65,730,932) (144,902,948)
--------------- ---------------
Beneficial Interest Net decrease in net assets derived from beneficial
Transactions interest transactions (160,417,309) (307,548,996)
(Note 4): --------------- ---------------
Net Assets: Total decrease in net assets (124,457,897) (356,407,765)
Beginning of period 2,121,596,265 2,478,004,030
--------------- ---------------
End of period $ 1,997,138,368 $ 2,121,596,265
=============== ===============
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 For the Period
from information provided in the financial statements. Months Ended Year Ended Oct. 21, 1994++
February 28, August 31, to August 31,
Increase (Decrease) in Net Asset Value: 1997 1996++++ 1995++++
<S> <S> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.40 $ 9.61 $ 9.16
Operating ---------- ---------- ----------
Performance: Investment income--net .32 .64 .58
Realized and unrealized gain (loss) on
investments--net .16 (.21) .45
---------- ---------- ----------
Total from investment operations .48 .43 1.03
---------- ---------- ----------
Less dividends from investment income--net (.32) (.64) (.58)
---------- ---------- ----------
Net asset value, end of period $ 9.56 $ 9.40 $ 9.61
========== ========== ==========
Total Investment Based on net asset value per share 5.20%+++ 4.55% 11.56%+++
Return:** ========== ========== ==========
Ratios to Average Expenses .66%* .62% .64%*
Net Assets: ========== ========== ==========
Investment income--net 6.83%* 6.64% 7.21%*
========== ========== ==========
Supplemental Net assets, end of period (in thousands) $ 245,652 $ 231,651 $ 223,237
Data: ========== ========== ==========
Portfolio turnover 133.86% 204.14% 260.34%
========== ========== ==========
<PAGE>
<CAPTION>
Class B
The following per share data and ratios have been derived For the Six
from information provided in the financial statements. Months Ended
February 28, For the Year Ended August 31,
Increase (Decrease) in Net Asset Value: 1997 1996++++ 1995++++ 1994 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.40 $ 9.61 $ 9.41 $ 10.14 $ 9.92
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income--net .29 .57 .60 .48 .52
Realized and unrealized gain (loss)
on investments--net .16 (.21) .20 (.73) .22
---------- ---------- ---------- ---------- ----------
Total from investment operations .45 .36 .80 (.25) .74
---------- ---------- ---------- ---------- ----------
Less dividends from investment
income--net (.29) (.57) (.60) (.48) (.52)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 9.56 $ 9.40 $ 9.61 $ 9.41 $ 10.14
========== ========== ========== ========== ==========
Total Investment Based on net asset value per share 4.80%+++ 3.72% 8.91% (2.55%) 7.80%
Return:** ========== ========== ========== ========== ==========
Ratios to Average Expenses 1.43%* 1.39% 1.41% 1.33% 1.30%
Net Assets: ========== ========== ========== ========== ==========
Investment income--net 6.06%* 5.87% 6.39% 4.90% 5.27%
========== ========== ========== ========== ==========
Supplemental Net assets, end of period
Data: (in thousands) $ 765,656 $ 924,885 $1,262,985 $1,497,358 $2,151,917
========== ========== ========== ========== ==========
Portfolio turnover 133.86% 204.14% 260.34% 322.68% 224.35%
========== ========== ========== ========== ==========
<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 C
The following per share data and ratios have been derived For the Six For the For the Period
from information provided in the financial statements. Months Ended Year Ended Oct. 21, 1994++
February 28, August 31, to August 31,
Increase (Decrease) in Net Asset Value: 1997 1996++++ 1995++++
<S> <S> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.40 $ 9.61 $ 9.16
Operating ---------- ---------- ----------
Performance: Investment income--net .29 .56 .51
Realized and unrealized gain (loss) on
investments--net .16 (.21) .45
---------- ---------- ----------
Total from investment operations .45 .35 .96
---------- ---------- ----------
Less dividends from investment income--net (.29) (.56) (.51)
---------- ---------- ----------
Net asset value, end of period $ 9.56 $ 9.40 $ 9.61
========== ========== ==========
Total Investment Based on net asset value per share 4.77%+++ 3.67% 10.80%+++
Return:** ========== ========== ==========
Ratios to Average Expenses 1.47%* 1.43% 1.47%*
Net Assets: ========== ========== ==========
Investment income--net 6.02%* 5.82% 6.28%*
========== ========== ==========
Supplemental Net assets, end of period (in thousands) $ 25,040 $ 22,672 $ 15,621
Data: ========== ========== ==========
Portfolio turnover 133.86% 204.14% 260.34%
========== ========== ==========
<CAPTION>
Class D
<PAGE>
The following per share data and ratios have been derived For the Six
from information provided in the financial statements. Months Ended
February 28, For the Year Ended August 31,
Increase (Decrease) in Net Asset Value: 1997 1996++++ 1995++++ 1994 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of
Operating period $ 9.40 $ 9.61 $ 9.41 $ 10.14 $ 9.92
Performance: ---------- ---------- ---------- ---------- ----------
Investment income--net .31 .62 .64 .52 .57
Realized and unrealized gain (loss)
on investments--net .16 (.21) .20 (.73) .22
---------- ---------- ---------- ---------- ----------
Total from investment operations .47 .41 .84 (.21) .79
---------- ---------- ---------- ---------- ----------
Less dividends from investment
income--net (.31) (.62) (.64) (.52) (.57)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 9.56 $ 9.40 $ 9.61 $ 9.41 $ 10.14
========== ========== ========== ========== ==========
Total Investment Based on net asset value per share 5.07%+++ 4.28% 9.48% (2.06%) 8.35%
Return:** ========== ========== ========== ========== ==========
Ratios to Average Expenses .91%* .87% .89% .83% .79%
Net Assets: ========== ========== ========== ========== ==========
Investment income--net 6.58%* 6.39% 6.91% 5.41% 5.80%
========== ========== ========== ========== ==========
Supplemental Net assets, end of period
Data: (in thousands) $ 960,790 $ 942,388 $ 976,161 $1,356,979 $1,836,100
========== ========== ========== ========== ==========
Portfolio turnover 133.86% 204.14% 260.34% 322.68% 224.35%
========== ========== ========== ========== ==========
<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>
NOTES TO FINANCIAL STATEMENTS
<PAGE>
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 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.
<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).
Written and purchased options are non-income producing investments.
(d) Income taxes--It is the Trust's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(e) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income (including amortization of
discount) and extended delivery fees are recognized on the accrual
basis. Realized gains and losses on security transactions are
determined on the identified cost basis.
(f) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.
<PAGE>
(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 28, 1997 was $154,249,142.
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:
<PAGE>
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.50%
Class C 0.25% 0.55%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to the
Trust. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services to
Class B, Class C and Class D shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing shareholder
and distribution-related services to Class B and Class C
shareholders.
NOTES TO FINANCIAL STATEMENTS (concluded)
For the six months ended February 28, 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 $ 52 $ 1,017
Class D $7,944 $64,423
For the six months ended February 28, 1997, MLPF&S received
contingent deferred sales charges of $551,966 and $9,284 relating to
transactions in Class B and Class C Shares, respectively.
During the six months ended February 28, 1997, the Trust paid MLSPS
$316 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.
<PAGE>
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the six months ended February 28, 1997 were $2,698,378,326 and
$2,913,619,182, respectively.
Net realized and unrealized gains (losses) as of February 28, 1997
were as follows:
Realized Unrealized
Gains (Losses) Losses
Long-term investments $ 17,159,854 $ (1,239,110)
Short-term investments (8,445) --
Options purchased (405,701) (1,480,582)
Options written -- (138,624)
------------ ------------
Total $ 16,745,708 $ (2,858,316)
============ ============
As of February 28, 1997, net unrealized depreciation for Federal
income tax purposes aggregated $2,858,316, of which $10,936,480
related to appreciated securities and $13,794,796 related to
depreciated securities. The aggregate cost of investments, including
options purchased, at February 28, 1997 for Federal income tax
purposes was $2,212,854,844.
Transactions in call options written for the six months ended
February 28, 1997 were as follows:
Nominal Value
Covered by Premiums
Call Options Written Options Received
Outstanding call options
written, beginning of period 50,000,000 $ 515,625
Options written 148,000,000 926,094
Options closed (100,000,000) (820,313)
Options expired (98,000,000) (621,406)
------------ ------------
Outstanding call options
written, end of period -- $ --
============ ============
Transactions in put options written for the year ended February 28,
1997 were as follows:
<PAGE>
Nominal Value
Covered by Premiums
Put Options Written Options Received
Outstanding put options
written, beginning of period 100,000,000 $ 10,000
Options closed (983,035) (10,000)
------------ ------------
Outstanding put options
written, end of period 99,016,965 $ --
============ ============
4. Shares of Beneficial Interest:
Net decrease in net assets derived from beneficial interest
transactions was $160,417,309 and $307,548,996 for the six months
ended February 28, 1997 and for the year ended August 31, 1996
respectively.
Transactions in shares of beneficial interest for each class were as
follows:
Class A Shares for the Six Months Dollar
Ended February 28, 1997 Shares Amount
Shares sold 4,855,966 $ 46,469,465
Shares issued to shareholders
in reinvestment of dividends 115,044 1,100,912
------------ ------------
Total issued 4,971,010 47,570,377
Shares redeemed (3,921,959) (37,499,553)
------------ ------------
Net increase 1,049,051 $ 10,070,824
============ ============
Class A Shares for the
Year Ended Dollar
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
============ ============
<PAGE>
Class B Shares for the
Six Months Ended Dollar
February 28, 1997 Shares Amount
Shares sold 5,317,257 $ 50,856,301
Shares issued to shareholders
in reinvestment of dividends 1,558,715 14,906,475
------------- -------------
Total issued 6,875,972 65,762,776
Automatic conversion
of shares (8,033,282) (76,899,020)
Shares redeemed (17,142,841) (163,887,728)
------------- -------------
Net decrease (18,300,151) $(175,023,972)
============= =============
Class B Shares for the
Year Ended Dollar
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
Six Months Ended Dollar
February 28, 1997 Shares Amount
Shares sold 840,230 $ 8,041,428
Shares issued to shareholders
in reinvestment of dividends 47,277 452,197
------------- -------------
Total issued 887,507 8,493,625
Shares redeemed (680,263) (6,505,741)
------------- -------------
Net increase 207,244 $ 1,987,884
============= =============
<PAGE>
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 Six Months Dollar
Ended February 28, 1997 Shares Amount
Shares sold 3,920,798 $ 37,513,344
Automatic conversion of
shares 8,033,282 76,899,020
Shares issued to shareholders
in reinvestment of dividends 1,586,881 15,178,985
------------- -------------
Total issued 13,540,961 129,591,349
Shares redeemed (13,287,133) (127,043,394)
------------- -------------
Net increase 253,828 $ 2,547,955
============= =============
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, 1996, the Trust had a net capital loss carryforward of
approximately $302,395,000, of which $68,370,000 expires in 1997,
$39,147,000 expires in 1998, $178,146,000 expires in 2003, and
$16,732,000 expires in 2004. This amount will be available to offset
like amounts of any future taxable gains.
<PAGE>
6. Loaned Securities:
At February 28, 1997, the Trust held US Treasury Notes having an
aggregate value of approximately $31,542,000 as collateral for
portfolio securities loaned having a market value of approximately
$29,766,000.
