MERRILL LYNCH
FEDERAL
SECURITIES TRUST
FUND LOGO
Annual Report
August 31, 1998
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
During the quarter ended August 31, 1998, mounting global financial
concerns prompted an enormous flight to quality toward the US
Treasury market, pushing US Treasury bond yields to their lowest
levels in 30 years. The effects of the economic crisis in Asia began
to impact other regional economies as well. As a result,
deteriorating economic fundamentals in Russia caused the ruble to
decline by more than 90% and sharply increased the risks of
contagion in the emerging market economies of Latin America and
South America.
Despite heightened global economic turmoil, the US economy continued
to exhibit an impressive resiliency during the second quarter of
1998. US gross domestic product (GDP) rose 1.6% during the second
quarter, although there was a sharp reduction in inventory
accumulation and the worst trade deficit reported in US history,
which subtracted 2.1% from second-quarter GDP. Consumer spending,
which rose 5.8% in the second quarter, remains the driving force
behind US economic growth. Housing also continues to surge, as new
housing starts rose to a 1.72 million unit annual rate in July, the
highest level in more than 11 years. In addition, more single-family
homes are being built now than at any time since 1979. Retail sales
have also been strong and reflect the high volume of new home sales,
since the demand for furniture and appliances soared. Consequently,
retail sales (excluding automobile sales) rose at a robust 4.9%
annual rate over the three-month period ended July 31, 1998. Despite
strong consumer demand, inflationary pressures remain stagnant. The
consumer price index for July was up just 1.7% from a year ago,
while the producer price index for July fell 0.3% compared to the
same period last year.
As a result of a degenerating set of global economic fundamentals,
increased world stock market volatility put greater pressure on
global liquidity. Consequently, the risks of a future downturn in US
economic growth increased as the Asian region remains mired in a
recession. Deteriorating political and economic conditions forced
the Russian government to devalue its currency and default on its
debt payments in August, spurring a massive flight to quality toward
the US Treasury market and intensifying the global credit crunch by
raising the risk premium for all emerging market economies. In
addition, Canada raised interest rates in August to support its
weakening currency, which could slow economic activity. Since South
America, Latin America and Canada account for approximately 40% of
US exports, any extensive economic downturn in these regions could
depress future US economic growth.
In spite of the current reports of strong economic growth in the
United States, we believe the Federal Reserve Board has focused its
attention toward the deepening instability in the world's financial
markets and the resulting liquidity crunch. Ultimately, restrictive
financial conditions, coupled with deflationary forces, could
eventually hamper US economic growth prospects. As a result, we
believe the Federal Reserve Board could begin easing monetary policy
and lower interest rates. (The Federal Reserve Board did lower the
Federal Funds rate by 25 basis points (0.25%) to 5.25% at the end of
September.) We would expect this scenario to have positive
ramifications for the US bond market.
Fiscal Year in Review
During the year ended August 31, 1998, interest rates moved
substantially lower. US Treasury securities with maturities of 5
years, 10 years and 30 years were all lower in yield by
approximately 140 basis points. The one-year Treasury bill fell by
71 basis points while the three-month bill moved 38 basis points
lower. The yield curve continued to flatten, creating a yield
differential of just 42 basis points between the three-month
Treasury bill (4.83%) and the 30-year Treasury bond (5.25%) by
August 31, 1998. This established a difficult environment for
mortgage-backed securities (MBS).
During the 12-month period, low interest rates, coupled with
mortgage banker sophistication in terms of refinancing, led to
prepayment fears and an underperformance of MBS compared to Treasury
securities. Compounding the problem was the decoupling between
Treasury yields and yields on MBS, as global concerns and the
resulting flight to quality caused yield spreads to widen. Corporate
securities and other credit-sensitive issues were the hardest hit,
but MBS were also affected, even those issued by Government National
Mortgage Association (GNMA), Federal National Mortgage Association
(FNMA) and Federal Home Loan Mortgage Corporation (FHLMC).
Merrill Lynch Federal Securities Trust
August 31, 1998
Throughout the period, the Fund was well positioned for the decline
in interest rates and was generally structured to avoid those MBS
with the greatest prepayment uncertainty. The Fund had large
positions in low-coupon MBS with little or no refinancing incentive,
and significant holdings in multi-family MBS that have prepayment
lockouts and yield maintenance provisions. Also, the Fund maintained
a strong focus on GNMA MBS, which are comprised of Federal Housing
Administration/Veteran's Administration mortgages that tend to
prepay slower than conventional mortgages. The Fund also had a small
position in super-seasoned, high-coupon MBS where the homeowner has
not responded to past refinancing incentives.
For most of the year, we focused on establishing a balance between
yield and total return characteristics. Although performance was
good during the year, it was hampered by our focus on MBS, which
lagged Treasury performance. Also, we shifted 30-year MBS to 15-year
MBS, expecting the yield curve to steepen. However, the yield curve
flattened, and 30-year MBS outperformed 15-year MBS. Lastly, a
significant portion of the Fund was invested in FNMA and FHLMC multi-
family MBS. These securities were purchased as Treasury surrogates
for their excellent convexity characteristics (good price
appreciation during declining interest rates) because of prepayment
lockouts and yield maintenance provisions. However, as spreads
widened, these securities did not perform as well as Treasury
securities.
Portfolio Strategy
We continue to believe that MBS offer attractive investment
opportunities. For example, a FNMA 6.50% MBS that trades just above
par at about $100.50 would seem very attractive when compared to
five-year and ten-year Treasury security yields of 4.79% and 4.97%,
respectively. This wide yield spread is especially attractive at
current low interest rate levels. The Fund is capturing this
relative value by being 98% invested in MBS. Of that percentage, 22%
is invested in multi-family MBS. While this structure offers a high
yield, yield pays out over time, whereas price movements are
immediate. However, a significant further decline in longer-term
interest rates does not appear as likely as a spread tightening at
this time. We believe the Fund is well-positioned if yield spreads
do tighten because we have locked in attractive yields and would
receive better price movement as well.
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,
(Arthur Zeikel)
Arthur Zeikel
President
(Gregory Mark Maunz)
Gregory Mark Maunz
Senior Vice President and
Portfolio Manager
October 8, 1998
Merrill Lynch Federal Securities Trust
August 31, 1998
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. However, in the case of certain
eligible investors, the shares were simultaneously exchanged for
Class A Shares.
* Class B Shares are subject to a maximum contingent deferred sales
charge of 4% if redeemed during the first year, decreasing 1% each
year thereafter to 0% after the fourth year. In addition, Class B
Shares are subject to a distribution fee of 0.50% and an account
maintenance fee of 0.25%. These shares automatically convert to
Class D Shares after approximately 10 years. (There is no initial
sales charge for automatic share conversions.)
* Class C Shares are subject to a distribution fee of 0.55% and an
account maintenance fee of 0.25%. In addition, Class C Shares are
subject to a 1% contingent deferred sales charge if redeemed within
one year of purchase.
* Class D Shares incur a maximum initial sales charge of 4% and an
account maintenance fee of 0.25% (but no distribution fee).
None of the past results shown should be considered a representation
of future performance. Figures shown in the "Recent Performance
Results" and "Average Annual Total Return" 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>
Recent Performance Results*
<CAPTION>
Ten Years/ Standardized
12 Month 3 Month Since Inception 30-Day Yield
Total Return Total Return Total Return As of 8/31/98
<S> <C> <C> <C> <C>
ML Federal Securities Trust Class A Shares +8.10% +1.92% + 38.25% 5.56%
ML Federal Securities Trust Class B Shares +7.28 +1.62 + 44.68 5.02
ML Federal Securities Trust Class C Shares +7.23 +1.60 + 33.84 4.96
ML Federal Securities Trust Class D Shares +7.84 +1.75 +117.92 5.32
<FN>
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included. Total
investment returns are based on changes in net asset values for the
periods shown, and assume reinvestment of all dividends and capital
gains distributions at net asset value on the payable date. The
Trust's ten-year/inception periods are: Class A & Class C Shares,
from 10/21/94 to 8/31/98; Class B Shares, from 12/23/91 to 8/31/98;
and Class D Shares, for the ten years ended 8/31/98.
</TABLE>
Merrill Lynch Federal Securities Trust
August 31, 1998
PERFORMANCE DATA (continued)
Total Return Based on a $10,000 Investment
A line graph depicting the growth of an investment in the
Fund's Class A Shares and Class C Shares compared to growth
of an investment in the Salomon Brothers Mortgage Index.
Beginning and ending values are:
12/21/94** 8/98
ML Federal Securities Trust++--
Class A Shares* $ 9,600 $13,273
ML Federal Securities Trust++-- $10,000 $13,384
Class C Shares*
Salomon Brothers Mortgage
Index++ $10,000 $14,205
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** 8/98
ML Federal Securities Trust++--
Class B Shares* $10,000 $14,468
Salomon Brothers Mortgage
Index++ $10,000 $15,966
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:
8/88 8/98
ML Federal Securities Trust++--
Class D Shares* $ 9,600 $20,920
Salomon Brothers Mortgage
Index++ $10,000 $24,209
[FN]
*Assuming maximum sales charge, transaction costs and other
operating expenses, including advisory fees.
**Commencement of operations.
++The Trust invests primarily in US Government and Government agency
securities, including GNMA mortgage-backed certificates and other
mortgage-backed Government securities.
++++This unmanaged Index reflects the performance of a capital
market weighting of the outstanding agency-issued mortgage-backed
securities. The starting date for the Index in the Class B Shares
graph is from 12/31/91.
Past performance is not predictive of future performance.
Merrill Lynch Federal Securities Trust
August 31, 1998
PERFORMANCE DATA (concluded)
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 6/30/98 +8.47% +4.13%
Inception (10/21/94)
through 6/30/98 +8.76 +7.56
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 6/30/98 +7.53% +3.53%
Five Years Ended 6/30/98 +5.21 +5.21
Inception (12/23/91)
through 6/30/98 +5.62 +5.62
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Year Ended 6/30/98 +7.48% +6.48%
Inception (10/21/94)
through 6/30/98 +7.85 +7.85
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Year Ended 6/30/98 +8.09% +3.77%
Five Years Ended 6/30/98 +5.76 +4.90
Ten Years Ended 6/30/98 +7.96 +7.52
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
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
Gregory Mark Maunz, Senior Vice President
Joseph T. Monagle Jr., Senior Vice President
Donald C. Burke, Vice President
Jeffrey B. Hewson, 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
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
Merrill Lynch Federal Securities Trust
August 31, 1998
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Face Interest Maturity Value
Issue Amount Rate Date(s) (Note 1a)
<S> <C> <C> <C> <C> <C>
US Government Obligations--0.30%
United States Treasury Notes $ 5,000,000 6.625 % 5/15/2007 $ 5,519,550
Total US Government Obligations (Cost--$5,457,813) 5,519,550
US Government Agency Mortgage-Backed Obligations*--98.15%
Federal Home Loan Mortgage #W10002 100,000,000 6.775(2) 11/01/2003 104,531,250
Corporation Mortgage-Backed Securities--
Multi-Family+++
Federal Home Loan Mortgage Corporation 576 10.00 7/01/2019 626
Participation Certificates 10,688,537 10.50 9/01/2000-9/01/2020 11,828,815
2,654,584 11.00 8/01/2010-9/01/2020 2,971,244
2,395,670 11.50 12/01/2011-6/01/2020 2,729,652
1,046,512 12.00 7/01/1999-6/01/2020 1,200,752
2,076,292 12.50 10/01/1999-7/01/2019 2,405,912
2,985,403 13.00 8/01/1999-2/01/2016 3,496,256
Federal Home Loan Mortgage Corporation 331,883 6.00 4/01/2009 334,047
Participation Certificates--Gold Program 906,570 6.50 1/01/2013 918,183
175,882,185 7.00 1/01/2008-3/01/2013 180,190,137
81,363,437 7.50 5/01/2009-6/01/2028 83,630,108
22,931,041 8.00 1/01/2007-10/01/2027 23,659,061
7,174,019 8.50 1/01/2025-7/01/2025 7,485,658
3,794,533 10.50 10/01/2020-12/01/2020 4,209,541
Federal Home Loan Mortgage Trust 1220 7,234,625 10.00 2/15/2022 7,302,188
Corporation REMICs**
Federal National Mortgage Association 371,124,635 6.50 12/01/2008-8/01/2028 374,267,707
66,000,000 7.00 9/25/2028 67,195,920
717 7.50 1/01/2025 736
955,870 8.00 9/01/2024-9/01/2027 989,998
10,680,211 8.50 5/01/2010-5/01/2018 11,121,144
20,531,377 8.50(3) 7/15/2023 21,455,289
15,079,625 9.50 3/01/2020 16,135,199
7,347 10.50 9/01/2000 7,568
23,823,326 11.00 2/01/2011-11/01/2020 26,910,493
35,493 11.50 6/01/2015 40,424
1,338,505 13.00 8/01/2010-6/01/2015 1,600,145
Federal National Mortgage Association #0380332 9,609,469 6.195(7) 6/01/2005 9,831,688
Mortgage-Backed Securities-- #0375610 13,908,596 6.465(7) 6/01/2004 13,978,139
Multi-Family+++ #0380021 6,349,506 6.49(9) 1/01/2008 6,381,254
#0073240 4,915,020 6.50(7) 11/01/2002 5,013,615
#0073809 10,518,388 6.515(10) 12/01/2001 10,741,903
#0073894 984,181 6.525(7) 12/01/2003 1,019,127
#0073885 886,570 6.545(9) 1/01/2007 931,998
#0073873 764,246 6.625(9) 2/01/2007 807,137
#0073221 1,459,589 6.715(7) 10/01/2005 1,540,140
#0375015 19,380,475 6.79(7) 4/01/2004 19,961,889
#0073915 1,521,093 6.87(9) 1/01/2007 1,624,042
#0073910 11,776,709 6.875(9) 1/01/2007 12,596,144
#0375043 3,559,117 6.895(9) 4/01/2007 3,779,338
#0375007 12,037,787 6.94(9) 3/01/2007 12,935,578
#0375012 3,262,927 6.95(9) 4/01/2007 3,508,309
</TABLE>
Merrill Lynch Federal Securities Trust
August 31, 1998
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Face Interest Maturity Value
Issue Amount Rate Date(s) (Note 1a)
US Government Agency Mortgage-Backed Obligations* (concluded)
<S> <C> <C> <C> <C> <C>
Federal National Mortgage Association #0073944 $ 13,807,224 6.96(9) % 1/01/2007 $ 14,839,051
Mortgage-Backed Securities-- #0073952 2,787,711 6.96(9) 1/01/2007 2,992,632
Multi-Family+++ #0073946 5,402,026 6.97(9) 2/01/2007 5,806,060
(concluded) #0073969 8,005,245 7.05(9) 2/01/2007 8,636,491
#0073962 4,671,387 7.085(9) 2/01/2007 5,059,290
#0073967 4,541,867 7.105(9) 2/01/2007 4,814,379
#0073992 2,580,218 7.115(9) 2/01/2007 2,799,264
#0375069 1,080,772 7.122(9) 4/01/2007 1,140,214
#0073943 1,461,445 7.18(4) 2/01/2019 1,563,746
#0073608 4,823,621 7.49(9) 8/01/2006 5,322,128
#0375052 4,715,462 7.50(9) 3/01/2027 4,904,080
#0109076 2,171,739 7.59(9) 8/01/2006 2,404,445
#0160024 5,139,987 7.625(9) 11/01/2003 5,541,549
#0160095 7,181,137 7.66(9) 3/01/2004 7,734,832
Federal National Mortgage Association 98-M1-IO2 98,976,527 0.68635(1) 2/25/2013 4,995,222
Mortgage-Backed Securities-- 94-M1-IO 75,212,481 0.87(1) 10/25/2003 2,514,917
REMICs**--Multi-Family+++ 98-M3-B 10,960,597 6.45 8/17/2013 11,152,407
97-M8-A2 19,135,000 7.16 1/25/2022 19,738,948
96-M3-A2 40,500,000 7.41 3/25/2021 42,018,750
94-M3-B 14,032,130 7.71 4/25/2006 14,154,911
94-M4-A 13,381,769 9.06015 8/25/2026 13,682,859
Federal National Mortgage Association 94-56-TB 5,239,230 6.50(1) 7/25/2022 1,529,368
REMICs** Trust 273 5,997,870 7.00(1) 7/01/2026 1,100,921
93-123-S 13,524,364 7.84062++ 7/25/2000 13,870,858
Trust 134 1,431,578 9.00(1) 4/15/2022 275,579
Government National Mortgage Association 50,000,000 6.50 9/01/2028 50,367,188
221,683,662 7.00 4/15/2022-7/15/2028 226,266,447
111,647,630 7.50 1/15/2007-6/15/2028 114,982,742
86,372,295 8.00 1/15/2024-8/15/2026 89,613,877
36,066,604 10.00 12/15/2015-12/15/2021 39,591,534
117,684 10.50 10/15/2014-4/15/2021 129,395
286 11.00 1/15/2016 322
6,379 11.50 8/15/2013 7,222
Total US Government Agency Mortgage-Backed Obligations (Cost--$1,760,118,346) 1,780,819,982
Face
Amount Issue
Repurchase Agreements***--3.91%
$ 70,935,000 Nikko Securities Co., purchased on 8/31/1998 to yield 5.85% to 9/01/1998 70,935,000
Total Repurchase Agreements (Cost--$70,935,000) 70,935,000
US Government Agency Discount Obligations****--10.01%
66,000,000 Federal Home Loan Mortgage Corporation, 5.43% due 9/10/1998 65,910,405
116,000,000 Federal National Mortgage Association, 5.43% due 9/14/1998 115,772,363
Total US Government Agency Discount Obligations (Cost--$181,682,768) 181,682,768
</TABLE>
Merrill Lynch Federal Securities Trust
August 31, 1998
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Nominal Value Strike Notification Value
Covered by Options Issue Price Date (Note 1a)
Options Purchased--0.00%
<S> <C> <S> <C> <C> <C>
Call Options 62,307,095 Government National Mortgage Association,
Purchased 30-Year, 7% Adjustable Rate Mortgage(5)(6) 100 9/20/2011(5) $ 49,846
Total Options Purchased (Cost--$0) 49,846
Total Investments (Cost--$2,018,193,927)--112.38% 2,039,007,146
Options Written--0.00%
Call Options 5,000,000 United States Treasury Notes, 6.625% due
Written 5/15/2007 109.9453 9/28/1998(8) (45,500)
Put Options 62,307,095 Government National Mortgage Association,
Written 30-Year, 7% Adjustable Rate Mortgage(5)(6) 100 9/20/2011(5) (43,615)
Total Options Written (Premiums Received--$43,750) (89,115)
Total Investments, Net of Options Written (Cost--$2,018,150,177)--112.37% 2,038,918,031
Liabilities in Excess of Other Assets--(12.37%) (224,481,399)
--------------
Net Assets--100.00% $1,814,436,632
==============
<FN>
(1)Represents the interest only portion of a mortgage-backed
obligation.
(2)Represents balloon mortgages that are non-amortizing and have 7-
year maturities.
(3)Federal Housing Administration/Veterans' Administration Mortgages
packaged by the Federal National Mortgage Association.
(4)Represents balloon mortgages that amortize on a 22-year schedule
and have 22-year maturities.
(5)Represents European style options which can be exercised only on
the notification 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,
7% 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 European style options which can be exercised only on
the notification date.
(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 30-year schedule
and have 5-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, 1998.
+++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 rate shown reflects the discount rate
paid at the time of purchase by the Trust.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Federal Securities Trust
August 31, 1998
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of August 31, 1998
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$2,018,193,927)(Note 1a) $ 2,038,957,300
Options purchased, at value (cost--$0) (Notes 1a & 1c) 49,846
Cash 293,863
Receivables:
Beneficial interest sold $ 19,876,715
Interest 9,825,961
Principal paydowns 503,443
Options written (Notes 1a &1c) 194,785
Loaned securities 141,877 30,542,781
---------------
Prepaid registration fees and other assets (Note 1f) 108,366
---------------
Total assets 2,069,952,156
---------------
Liabilities: Options written, at value (premiums received--$43,750)
(Notes 1a & 1c) 89,115
Payables:
Securities purchased 244,815,121
Beneficial interest redeemed 6,452,493
Dividends to shareholders (Note 1g) 1,762,220
Investment adviser (Note 2) 650,947
Distributor (Note 2) 541,178
Options purchased (Notes 1a &1c) 142,969 254,364,928
---------------
Accrued expenses and other liabilities 1,061,481
---------------
Total liabilities 255,515,524
---------------
Net Assets: Net assets $ 1,814,436,632
===============
Net Assets Class A Shares of beneficial interest, $0.10 par value,
Consist of: unlimited number of shares authorized $ 2,833,398
Class B Shares of beneficial interest, $0.10 par value,
unlimited number of shares authorized 6,410,559
Class C Shares of beneficial interest, $0.10 par value,
unlimited number of shares authorized 439,490
Class D Shares of beneficial interest, $0.10 par value,
unlimited number of shares authorized 8,843,006
Paid-in capital in excess of par 1,973,061,816
Accumulated realized capital losses on investments--net (Note 5) (197,919,491)
Unrealized appreciation on investments--net 20,767,854
---------------
Net assets $ 1,814,436,632
===============
Net Asset Value: Class A--Based on net assets of $277,567,579 and 28,333,983
shares of beneficial interest outstanding $ 9.80
===============
Class B--Based on net assets of $627,817,627 and 64,105,585
shares of beneficial interest outstanding $ 9.79
===============
Class C--Based on net assets of $43,038,463 and 4,394,901
shares of beneficial interest outstanding $ 9.79
===============
Class D--Based on net assets of $866,012,963 and 88,430,058
shares of beneficial interest outstanding $ 9.79
===============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Federal Securities Trust
August 31, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations for the Year Ended August 31, 1998
<S> <S> <C> <C>
Investment Interest and discount earned $ 125,464,352
Income Other 484,493
(Note 1e): ---------------
Total income 125,948,845
---------------
Expenses: Investment advisory fees (Note 2) $ 8,536,593
Account maintenance and distribution fees--Class B (Note 2) 4,652,983
Account maintenance fees--Class D (Note 2) 2,248,302
Transfer agent fees--Class D (Note 2) 1,415,940
Transfer agent fees--Class B (Note 2) 1,097,692
Transfer agent fees--Class A (Note 2) 447,312
Custodian fees 372,630
Accounting services (Note 2) 254,086
Account maintenance and distribution fees--Class C (Note 2) 232,559
Printing and shareholder reports 149,755
Registration fees (Note 1f) 121,038
Professional fees 112,106
Trustees' fees and expenses 75,251
Transfer agent fees--Class C (Note 2) 51,862
Pricing fees 4,241
Other 23,252
---------------
Total expenses 19,795,602
---------------
Investment income--net 106,153,243
---------------
Realized & Realized gain on investments--net 20,630,277
Unrealized Gain on Change in unrealized appreciation on investments--net 10,231,032
Investments--Net ---------------
(Notes 1c, 1e & 3): Net Increase in Net Assets Resulting from Operations $ 137,014,552
===============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Federal Securities Trust
August 31, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Year Ended August 31,
Increase (Decrease) in Net Assets: 1998 1997
<S> <S> <C> <C>
Operations: Investment income--net $ 106,153,243 $ 126,285,677
Realized gain on investments--net 20,630,277 18,221,792
Change in unrealized appreciation/depreciation
on investments--net 10,231,032 32,660,811
--------------- ---------------
Net increase in net assets resulting from operations 137,014,552 177,168,280
--------------- ---------------
Dividends to Investment income--net:
Shareholders Class A (17,554,956) (16,892,973)
(Note 1g): Class B (33,639,686) (46,437,460)
Class C (1,555,581) (1,493,291)
Class D (53,403,020) (61,461,953)
--------------- ---------------
Net decrease in net assets resulting from dividends
to shareholders (106,153,243) (126,285,677)
--------------- ---------------
Beneficial Net decrease in net assets derived from beneficial interest
Interest transactions (123,547,460) (265,356,085)
Transactions --------------- ---------------
(Note 4):
Net Assets: Total decrease in net assets (92,686,151) (214,473,482)
Beginning of year 1,907,122,783 2,121,596,265
--------------- ---------------
End of year $ 1,814,436,632 $ 1,907,122,783
=============== ===============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Federal Securities Trust
August 31, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights
<CAPTION>
Class A
The following per share data and ratios have been derived For the Period
from information provided in the financial statements. Oct. 21, 1994++
For the Year Ended August 31, to August 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996++++ 1995++++
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.64 $ 9.40 $ 9.61 $ 9.16
Operating ---------- ---------- ---------- ----------
Performance: Investment income--net .60 .64 .64 .58
Realized and unrealized gain (loss) on
investments--net .16 .24 (.21) .45
---------- ---------- ---------- ----------
Total from investment operations .76 .88 .43 1.03
---------- ---------- ---------- ----------
Less dividends from investment income--net (.60) (.64) (.64) (.58)
---------- ---------- ---------- ----------
Net asset value, end of period $ 9.80 $ 9.64 $ 9.40 $ 9.61
========== ========== ========== ==========
Total Investment Based on net asset value per share 8.10% 9.66% 4.55% 11.56%+++
Return:** ========== ========== ========== ==========
Ratios to Average Expenses .68% .65% .62% .64%*
Net Assets: ========== ========== ========== ==========
Investment income--net 6.18% 6.73% 6.64% 7.21%*
========== ========== ========== ==========
Supplemental Net assets, end of period (in thousands) $ 277,568 $ 278,103 $ 231,651 $ 223,237
Data: ========== ========== ========== ==========
Portfolio turnover 301.88% 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,
Increase (Decrease) in Net Asset Value: 1998 1997 1996++++ 1995++++ 1994
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of year $ 9.63 $ 9.40 $ 9.61 $ 9.41 $ 10.14
Performance: ---------- ---------- ---------- ---------- ----------
Investment income--net .53 .57 .57 .60 .48
Realized and unrealized gain
(loss) on investments--net .16 .23 (.21) .20 (.73)
---------- ---------- ---------- ---------- ----------
Total from investment operations .69 .80 .36 .80 (.25)
---------- ---------- ---------- ---------- ----------
Less dividends from investment
income--net (.53) (.57) (.57) (.60) (.48)
---------- ---------- ---------- ---------- ----------
Net asset value,
end of year $ 9.79 $ 9.63 $ 9.40 $ 9.61 $ 9.41
========== ========== ========== ========== ==========
Total Investment Based on net asset value
Return:** per share 7.28% 8.71% 3.72% 8.91% (2.55%)
========== ========== ========== ========== ==========
Ratios to Average Expenses 1.45% 1.42% 1.39% 1.41% 1.33%
Net Assets: ========== ========== ========== ========== ==========
Investment income--net 5.42% 5.98% 5.87% 6.39% 4.90%
========== ========== ========== ========== ==========
Supplemental Net assets, end of year
Data: (in thousands) $ 627,818 $ 672,541 $ 924,885 $1,262,985 $1,497,358
========== ========== ========== ========== ==========
Portfolio turnover 301.88% 349.05% 204.14% 260.34% 322.68%
========== ========== ========== ========== ==========
<FN>
++Commencement of operations.
++++Based on average shares outstanding.
*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, 1998
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights (concluded)
<CAPTION>
Class C
The following per share data and ratios have been derived For the Period
from information provided in the financial statements. Oct. 21, 1994++
For the Year Ended August 31, to August 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996++++ 1995++++
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.63 $ 9.40 $ 9.61 $ 9.16
Operating ---------- ---------- ---------- ----------
Performance: Investment income--net .52 .56 .56 .51
Realized and unrealized gain (loss) on
investments--net .16 .23 (.21) .45
---------- ---------- ---------- ----------
Total from investment operations .68 .79 .35 .96
---------- ---------- ---------- ----------
Less dividends from investment income--net (.52) (.56) (.56) (.51)
---------- ---------- ---------- ----------
Net asset value, end of period $ 9.79 $ 9.63 $ 9.40 $ 9.61
========== ========== ========== ==========
Total Investment Based on net asset value per share 7.23% 8.66% 3.67% 10.80%+++
Return:** ========== ========== ========== ==========
Ratios to Average Expenses 1.51% 1.47% 1.43% 1.47%*
Net Assets: ========== ========== ========== ==========
Investment income--net 5.35% 5.91% 5.82% 6.28%*
========== ========== ========== ==========
Supplemental Net assets, end of period (in thousands) $ 43,038 $ 28,723 $ 22,672 $ 15,621
Data: ========== ========== ========== ==========
Portfolio turnover 301.88% 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,
Increase (Decrease) in Net Asset Value: 1998 1997 1996++++ 1995++++ 1994
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of year $ 9.63 $ 9.40 $ 9.61 $ 9.41 $ 10.14
Performance: ---------- ---------- ---------- ---------- ----------
Investment income--net .58 .62 .62 .64 .52
Realized and unrealized gain
(loss) on investments--net .16 .23 (.21) .20 (.73)
---------- ---------- ---------- ---------- ----------
Total from investment operations .74 .85 .41 .84 (.21)
---------- ---------- ---------- ---------- ----------
Less dividends from investment
income--net (.58) (.62) (.62) (.64) (.52)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 9.79 $ 9.63 $ 9.40 $ 9.61 $ 9.41
========== ========== ========== ========== ==========
Total Investment Based on net asset value
Return:** per share 7.84% 9.27% 4.28% 9.48% (2.06%)
========== ========== ========== ========== ==========
Ratios to Average Expenses .93% .90% .87% .89% .83%
Net Assets: ========== ========== ========== ========== ==========
Investment income--net 5.94% 6.49% 6.39% 6.91% 5.41%
========== ========== ========== ========== ==========
Supplemental Net assets, end of year
Data: (in thousands) $ 866,013 $ 927,756 $ 942,388 $ 976,161 $1,356,979
========== ========== ========== ========== ==========
Portfolio turnover 301.88% 349.05% 204.14% 260.34% 322.68%
========== ========== ========== ========== ==========
<FN>
++Commencement of operations.
++++Based on average shares outstanding.
*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, 1998
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Federal Securities Trust (the "Trust") is registered
under the Investment Company Act of 1940 as a diversified, open-end
management investment company. The Trust offers four classes of
shares under the Merrill Lynch Select Pricing SM System. Shares of
Class A and Class D are sold with a front-end sales charge. Shares
of Class B and Class C may be subject to a contingent deferred sales
charge. All classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions,
except that Class B, Class C and Class D Shares bear certain
expenses related to the account maintenance of such shares, and
Class B and Class C Shares also bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights
with respect to matters relating to its account maintenance and
distribution expenditures. The following is a summary of significant
accounting policies followed by the Trust.
(a) Valuation of investments--Securities traded in the over-the-
counter market are valued at the last available bid price in the
over-the-counter market or on the basis of yield equivalents as
obtained from one or more dealers that make markets in the
securities. The Trust employs Merrill Lynch Securities Pricing
Service ("MLSPS"), an affiliate of Fund Asset Management, L.P.
("FAM"), to provide mortgage-backed securities prices for the Trust.
Options on US Government securities, which are traded on exchanges,
are valued at their last bid price in the case of options purchased
by the Trust and their last asked price in the case of options
written by the Trust. An option traded on the over-the-counter
market is valued at its last bid price or asked price as obtained by
one or more dealers that make markets in the securities. Financial
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. Under such agreements,
the counterparty 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 additional securities daily to ensure that the
contract is fully collateralized.
(c) Derivative financial instruments--The Trust may engage in
various portfolio strategies to seek to increase its return by
hedging its portfolio against adverse movements in the debt and
currency markets. Losses may arise due to changes in the value of
the contract or if the counterparty does not perform under the
contract.
* Futures contracts--The Trust may purchase or sell financial
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).
Merrill Lynch Federal Securities Trust
August 31, 1998
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. As of August 31, 1998, no
dollar rolls were in effect.
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 ("MLFD" or "Distributor"), a
division of Princeton Funds Distributor, Inc. ("PFD"), which is 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 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.
Merrill Lynch Federal Securities Trust
August 31, 1998
NOTES TO FINANCIAL STATEMENTS (concluded)
For the year ended August 31, 1998, 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 $ 979 $ 6,999
Class D $10,481 $113,793
For the year ended August 31, 1998, MLPF&S received contingent
deferred sales charges of $843,602 and $13,550 relating to
transactions in Class B and Class C Shares, respectively.
During the year ended August 31, 1998, the Trust paid MLSPS $27,991
for security price quotations to compute the net asset value of the
Trust.
Financial Data Services, Inc. ("FDS"), 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, PFD, FDS, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended August 31, 1998 were $5,425,139,067 and
$5,545,323,326, respectively.
Net realized gains (losses) for the year ended August 31, 1998 and
net unrealized gains (losses) as of August 31, 1998 were as follows:
Realized Unrealized
Gains (Losses) Gains (Losses)
Long-term investments $ 20,476,452 $ 20,763,373
Short-term investments (12,714) --
Options purchased (141,274) 49,846
Options written 307,813 (45,365)
------------ ------------
Total $ 20,630,277 $ 20,767,854
============ ============
As of August 31, 1998, net unrealized appreciation for Federal
income tax purposes aggregated $18,269,288, of which $24,279,400
related to appreciated securities and $6,010,112 related to
depreciated securities. The aggregate cost of investments, including
options, at August 31, 1998 for Federal income tax purposes was
$2,020,648,743.
Transactions in call options written for the year ended August 31,
1998 were as follows:
Nominal Value
Covered by Premiums
Call Options Written Options Received
Outstanding call options
written, beginning of year -- $ --
Options written 6,550,000 494,532
Options closed (50,000) (142,969)
Options expired (1,500,000) (307,813)
------------ ------------
Outstanding call options
written, end of year 5,000,000 $ 43,750
============ ============
Transactions in put options written for the year ended August 31,
1998 were as follows:
Nominal Value
Covered by Premiums
Put Options Written Options Received
Outstanding put options
written, beginning of year 96,419,387 $ --
Options expired (34,112,292) --
------------ ------------
Outstanding put options
written, end of year 62,307,095 $ --
============ ============
4. Shares of Beneficial Interest:
Net decrease in net assets derived from beneficial interest
transactions was $123,547,460 and $265,356,085 for the years ended
August 31, 1998 and August 31, 1997, respectively.
Transactions in shares of beneficial interest for each class were as
follows:
Class A Shares for the Year Dollar
Ended August 31, 1998 Shares Amount
Shares sold 13,202,465 $128,750,132
Shares issued to share-
holders in reinvestment
of dividends 254,895 2,485,246
------------ ------------
Total issued 13,457,360 131,235,378
Shares redeemed (13,982,880) (136,346,353)
------------ ------------
Net decrease (525,520) $ (5,110,975)
============ ============
Merrill Lynch Federal Securities Trust
August 31, 1998
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 B Shares for the Year Dollar
Ended August 31, 1998 Shares Amount
Shares sold 19,836,450 $ 193,489,767
Shares issued to shareholders
in reinvestment of dividends 1,975,074 19,252,425
------------ -------------
Total issued 21,811,524 212,742,192
Automatic conversion of
shares (3,018,862) (29,418,409)
Shares redeemed (24,498,009) (238,728,047)
------------ -------------
Net decrease (5,705,347) $ (55,404,264)
============ =============
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 C Shares for the Year Dollar
Ended August 31, 1998 Shares Amount
Shares sold 3,350,763 $ 32,718,073
Shares issued to shareholders
in reinvestment of dividends 104,882 1,022,406
------------ ------ ------
Total issued 3,455,645 33,740,479
Shares redeemed (2,042,370) (19,919,667)
------------ -------------
Net increase 1,413,275 $ 13,820,812
============ =============
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 D Shares for the Year Dollar
Ended August 31, 1998 Shares Amount
Shares sold 12,691,687 $123,584,021
Automatic conversion of
shares 3,019,197 29,418,409
Shares issued to shareholders
in reinvestment of dividends 2,664,814 25,974,732
------------ ------------
Total issued 18,375,698 178,977,162
Shares redeemed (26,253,382) (255,830,195)
------------ ------------
Net decrease (7,877,684) $(76,853,033)
============ ============
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)
============ ============
5. Capital Loss Carryforward:
At August 31, 1998, the Trust had a net capital loss carryforward of
approximately $194,878,000, of which $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 $30,072,560 has been reclassified
to paid-in capital in excess of par.
Merrill Lynch Federal Securities Trust
August 31, 1998
<AUDIT-REPORT>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders,
Merrill Lynch Federal Securities Trust:
We have audited the accompanying statement of assets and
liabilities, including the schedule of investments, of Merrill Lynch
Federal Securities Trust as of August 31, 1998, 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, 1998 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, 1998, 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 14, 1998
</AUDIT-REPORT>
Merrill Lynch Federal Securities Trust
August 31, 1998
IMPORTANT TAX INFORMATION (unaudited)
None of the ordinary income distributions paid monthly by Merrill
Lynch Federal Securities Trust during the year ended August 31,
1998, 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, 1997 6.82%
February 28, 1998 10.24%
May 31, 1998 9.35%
August 31, 1998 0.27%
Of the Trust's ordinary income dividends paid during the year ended
August 31, 1998, 6.81% was attributable to Federal obligations. In
calculating the foregoing percentage, expenses of the Trust have
been allocated on a pro rata basis.
Please retain this information for your records.
[FN]
*For purposes of this calculation, Federal obligations include US
Treasury Notes, US Treasury Bills, 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.
