MERRILL LYNCH
FEDERAL
SECURITIES TRUST
FUND LOGO
Annual Report
August 31, 1999
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
US economic growth paused briefly in the second quarter of 1999 as
gross domestic product (GDP) growth rose just 1.8% compared to 4.3%
in the first quarter. Much of the second quarter decline was
attributable to reduced business inventories and decreased
Government spending, which subtracted 1.5% from GDP growth. Consumer
spending, although down slightly from the first quarter, still rose
a healthy 4.6% in the second quarter and remains the most important
catalyst in the ongoing six-year economic expansion. We expect GDP
growth to rebound in the third quarter because of continued strong
consumer demand and a reversal of the business inventory depletion
in the second quarter.
US interest rates rose during the quarter ended August 31, 1999, as
the US Federal Reserve Board tightened monetary policy. Citing
"continuing strains within the labor markets" coupled with
"uncertainty over future productivity gains," Federal Reserve Board
Chairman Alan Greenspan raised interest rates on two separate
occasions from 4.75% to 5.25% during the period. While current broad
market inflationary indicators show overall inflation to be near
33-year lows, the Federal Reserve Board raised interest rates in a pre-
emptive measure to counter potential future inflationary pressures
resulting from imbalances within the US labor market. The core
consumer price index, a widely watched inflation index that excludes
the volatile food and energy sectors, was up just 1.6% in 1999 on an
annualized basis through August. This is the slowest rate of
inflation since 1966.
Nonetheless, we see some sectors of the US economy that are stressed
and could experience inflationary pressures. First, with the US
unemployment rate near a 30-year low of 4.2%, labor markets remain
tight. Although average hourly earnings in 1999 are up a modest 3.7%
through August, there are pockets within the economy where labor
shortages exist and wage gains are well exceeding the average
earnings rate. Second, crude oil prices have risen more than 60%
year-to-date through August 1999. While oil prices are typically
volatile, we would expect these higher prices to ultimately affect
the energy-dependent sectors of the US economy, such as
transportation, should these price advances hold. Finally, despite
rising interest rates in 1999, the US housing market remains strong.
New home sales reached their second-highest level ever recorded in
July 1999. More important, new home construction appears to be
constrained by capacity shortages rather than slowing demand, which
is being reflected in rising home prices. According to the national
home price index, home prices rose 5.4% year-to-date through June
1999, compared with a yearly average price gain of just 3.0% in the
1990s.
We expect the Federal Reserve Board to remain vigilant in its watch
over inflation, and we believe it could ultimately raise interest
rates again this year. However, we do not expect a protracted series
of interest rate hikes at this time. In addition, we feel the United
States is well along in the remediation of potential computer-
related Year 2000 problems. As such, we are hopeful there will not
be major Year 2000 disruptions in the United States at year-end.
However, we believe there are some regions of the world where Year
2000-related problems could possibly develop. Should these Year 2000
difficulties become magnified and fears of a global recession
spread, it may be possible for US interest rates to move lower in a
"flight to quality" toward the US financial markets. In any event,
we expect the Federal Reserve Board to provide sufficient liquidity
to the US financial system at year end should credit strains develop
from Year 2000-related events.
Fiscal Year In Review
During the year ended August 31, 1999, yield spreads on mortgage-
backed securities (MBS) were, and continue to be, very attractive.
For example, while five-year and 10-year Treasury note yields ended
the fiscal year at 5.87% and 5.98%, respectively, a Government
National Mortgage Association (GNMA) 7.00% MBS traded at a discount
price, just below $97. Favorable factors such as attractive coupons,
discount prices, and any prepayments that come in at $100 are all
capable of enhancing MBS yield spreads. As a result, for most of the
fiscal year the Fund was almost entirely invested in MBS with little
or no Treasury or cash positions.
Merrill Lynch Federal Securities Trust
August 31, 1999
The Trust benefited from our strategy to be heavily weighted in MBS
since the MBS market outperformed Treasury issues for the fiscal
year ended August 31, 1999. The unmanaged Salomon Smith Barney (SSB)
Mortgage Index, the benchmark for MBS performance, outperformed the
unmanaged SSB Treasury Index by 183 basis points (1.83%). The SSB
Mortgage Index also outperformed the unmanaged SSB Broad Index and
the unmanaged SSB Corporate Index by 102 basis points and 69 basis
points, respectively. The Trust further benefited from a heavy
allocation in 15-year MBS, as these shorter-term MBS significantly
outperformed their 30-year MBS counterparts. The super-seasoned,
high-coupon MBS also performed well as actual prepayment speeds
slowed and prepayment fears subsided.
However, interest rates generally moved higher during the fiscal
year. Five-year and ten-year Treasury notes moved higher by
approximately 100 basis points. Short-term interest rates (one year
and less) moved higher but the move was less than half that of
longer-term interest rates. Thus, the yield curve steepened
significantly. With interest rates moving higher, prices declined--
all but offsetting the coupon return. For example, a GNMA 7% MBS had
a total return of just +1.72%, comparing favorably to the total
returns of five-year and ten-year Treasury notes of +0.36% and
- -3.37% respectively, during the 12 months ended August 31, 1999.
As we begin a new fiscal year, we believe that interest rates will
move moderately lower, allowing coupon income to be the most
significant component of total return. Additionally, we anticipate
the very wide yield spread between MBS and comparable average life
Treasury securities may narrow to more historical norms, and this
could provide an incremental total return advantage to MBS. In these
circumstances, MBS could perform well relative to Treasury issues.
In Conclusion
We thank you for your continued investment in Merrill Lynch Federal
Securities Fund, and we look forward to discussing our outlook and
strategy with you in our next report to shareholders.
Sincerely,
(Terry K. Glenn)
Terry K. Glenn
President and Trustee
(Gregory Mark Maunz)
Gregory Mark Maunz
Senior Vice President and Portfolio Manager
October 4, 1999
Merrill Lynch Federal Securities Trust
August 31, 1999
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/
12 Month 3 Month Since Inception Standardized
As of August 31, 1999 Total Return Total Return Total Return 30-Day Yield
<S> <C> <C> <C> <C>
ML Federal Securities Trust Class A Shares +1.24% -0.92% +39.96% 6.22%
ML Federal Securities Trust Class B Shares +0.46 -1.22 +45.35 5.70
ML Federal Securities Trust Class C Shares +0.41 -1.23 +34.39 5.65
ML Federal Securities Trust Class D Shares +0.98 -1.09 +97.39 5.98
<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/since inception periods are from 10/21/94 for Class
A & Class C Shares, from 12/23/91 for Class B Shares and ten years
for Class D Shares.
</TABLE>
Merrill Lynch Federal Securities Trust
August 31, 1999
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:
10/21/94** 8/99
ML Federal Securities Trust++--
Class A Shares* $ 9,600 $13,436
ML Federal Securities Trust++--
Class C Shares* $10,000 $14,439
Salomon Brothers Mortgage
Index++++ $10,000 $14,475
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** 8/99
ML Federal Securities Trust++--
Class B Shares* $10,000 $14,535
Salomon Brothers Mortgage
Index++++ $10,000 $16,269
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 8/99
ML Federal Securities Trust++--
Class D Shares* $ 9,600 $18,950
Salomon Brothers Mortgage
Index++++ $10,000 $21,854
[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, 1999
PERFORMANCE DATA (concluded)
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 6/30/99 +3.36% -0.77%
Inception (10/21/94)
through 6/30/99 +7.58 +6.65
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 6/30/99 +2.57% -1.33%
Five Years Ended 6/30/99 +6.29 +6.29
Inception (12/23/91)
through 6/30/99 +5.21 +5.21
[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 6/30/99 +2.52% +1.55%
Inception (10/21/94)
through 6/30/99 +6.69 +6.69
[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 6/30/99 +3.10% -1.02%
Five Years Ended 6/30/99 +6.84 +5.97
Ten Years Ended 6/30/99 +7.22 +6.78
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
Merrill Lynch Federal Securities Trust
August 31, 1999
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Face Interest Original Maturity Value
Issue Amount Rate Date(s) (Note 1a)
US Government Agency Mortgage-Backed Obligations*--100.4%
<S> <C> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation #W10002 $ 98,696,800 6.775(2)% 11/01/2003 $ 98,079,945
Mortgage-Backed Securities--Multi-Family+++
Federal Home Loan Mortgage Corporation 549 10.00 7/01/2019 592
Participation Certificates 7,565,079 10.50 9/01/2000--9/01/2020 8,192,439
1,850,569 11.00 8/01/2010--9/01/2020 2,019,786
1,842,386 11.50 12/01/2011--6/01/2020 2,028,399
820,092 12.00 5/01/2010--6/01/2020 906,829
1,488,569 12.50 10/01/1999--7/01/2019 1,644,292
2,261,030 13.00 12/01/2004--2/01/2016 2,522,641
Federal Home Loan Mortgage Corporation 112,445 5.50 8/01/2000 111,763
Participation Certificates--Gold Program 258,849 6.00 4/01/2009 249,723
186,559 6.50 9/01/2013 181,451
53,025,686 6.50 10/01/2028--7/01/2029 50,230,372
11,374,323 7.00 8/01/2011--2/01/2013 11,297,846
16,388,624 7.00 9/01/2028 15,941,580
14,484,383 7.50 5/01/2009--10/01/2011 14,630,381
459,381 7.50 8/01/2017 459,602
14,100,777 8.00 1/01/2007--7/01/2012 14,480,758
114,244 8.00 10/01/2027 115,986
4,029,176 8.50 1/01/2025--7/01/2025 4,158,384
2,467,076 10.50 10/01/2020--12/01/2020 2,681,309
Federal Home Loan Mortgage Trust 177 34,480,987 7.00 7/01/2026 33,875,239
Corporation REMICs** Trust 134 909,646 9.00(1) 4/15/2022 219,452
Trust 1220 4,600,528 10.00 2/15/2022 4,641,858
Federal National Mortgage Association 109,081 5.50(7) 4/01/2000 108,407
3,998,473 6.00(7) 12/01/1999--8/01/2000 3,974,554
180,008,471 6.00 11/01/2023--3/01/2029 165,633,396
339,455,140 6.50 12/01/2008--9/01/2028 326,081,157
69,100,000 7.00 TBA(11) 68,473,263
385 7.50 1/01/2025 384
625,615 8.00 9/01/2024--9/01/2027 634,441
6,872,829 8.50 5/01/2010--5/01/2018 7,125,068
13,630,129 8.50(3) 7/15/2023 13,970,882
9,208,775 9.50 3/01/2020 9,818,857
3,129 10.50 9/01/2000 3,198
16,600,087 11.00 2/01/2011--11/01/2020 18,500,817
16,454 11.50 6/01/2015 18,305
1,034,068 13.00 8/01/2010--4/01/2015 1,170,424
Federal National Mortgage Association #0160465 33,363,625 6.16(8) 8/01/2013 31,200,861
Mortgage-Backed Securities-- #0380332 9,512,335 6.195(7) 6/01/2005 9,156,718
Multi-Family+++ #0375610 13,763,109 6.465(7) 6/01/2004 13,490,589
#0380021 6,257,516 6.49(9) 1/01/2008 6,214,495
#0073240 4,858,558 6.50(7) 11/01/2002 4,790,299
#0073809 10,403,820 6.515(10) 12/01/2001 10,315,816
#0073894 973,702 6.525(7) 12/01/2003 956,341
#0073885 877,230 6.545(9) 1/01/2007 852,903
#0073873 756,369 6.625(9) 2/01/2007 738,542
#0073221 1,443,092 6.715(7) 10/01/2005 1,420,324
#0375015 19,077,637 6.79(7) 4/01/2004 18,880,910
</TABLE>
Merrill Lynch Federal Securities Trust
August 31, 1999
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
Face Interest Original 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 #0073915 $ 1,497,416 6.87(9) % 1/01/2007 $ 1,480,248
Mortgage-Backed Securities-- #0073910 11,662,506 6.875(9) 1/01/2007 11,527,657
Multi-Family+++ #0375043 3,525,485 6.895(9) 4/01/2007 3,487,435
(concluded) #0375007 11,924,150 6.94(9) 3/01/2007 11,824,015
#0375012 3,232,410 6.95(9) 4/01/2007 3,206,986
#0073944 13,672,462 6.96(9) 1/01/2007 13,575,240
#0073952 2,744,225 6.96(9) 1/01/2007 2,725,110
#0073946 5,330,226 6.97(9) 2/01/2007 5,295,350
#0073969 7,880,610 7.05(9) 2/01/2007 7,862,281
#0073962 4,628,146 7.085(9) 2/01/2007 4,625,268
#0073967 4,499,033 7.105(9) 2/01/2007 4,480,756
#0073992 2,556,468 7.115(9) 2/01/2007 2,558,934
#0375069 1,064,934 7.122(9) 4/01/2007 1,062,272
#0073943 1,432,967 7.18(4) 2/01/2019 1,410,129
#0073608 4,780,255 7.49(9) 8/01/2006 4,875,502
#0375052 4,674,480 7.50(9) 3/01/2027 4,604,363
#0109076 2,142,231 7.59(9) 8/01/2006 2,194,741
#0160024 5,075,535 7.625(9) 11/01/2003 5,096,155
#0160095 7,094,633 7.66(9) 3/01/2004 7,218,177
Federal National Mortgage Association 98-M1-IO2 97,532,940 0.66779(1) 2/25/2013 4,510,898
Mortgage Backed Securities-- 94-M1-IO 74,117,361 0.87(1) 10/25/2003 2,038,227
REMICs**--Multi-Family+++ 98-M3-B 10,960,597 6.45 8/17/2013 10,256,817
94-M2-A 5,254,760 6.625 2/25/2001 5,258,176
97-M8-A2 19,135,000 7.16 1/25/2022 19,024,591
96-M3-A2 40,500,000 7.41 3/25/2021 40,221,563
94-M3-B 6,349,503 7.71 4/25/2006 6,283,214
94-M4-A 3,249,963 9.11 8/25/2026 3,227,619
Federal National Mortgage 94-56-TB 5,239,230 6.50(1) 7/25/2022 1,547,819
Association REMICs** Trust 273 4,261,351 7.00(1) 7/01/2026 1,271,615
96-W1-AL 9,329,292 7.25 3/25/2026 9,297,852
93-123-S 7,524,562 8.95781++ 7/25/2000 7,475,126
97-5-SB 4,810,619 9.00 3/17/2019 4,849,663
Government National 92,812,673 6.50 10/15/2023--7/15/2029 87,585,318
Mortgage Association 193,207,865 7.00 4/15/2023--5/15/2029 187,335,105
77,876,509 7.50 1/15/2007--6/15/2028 77,485,243
57,607,679 8.00 1/15/2024--8/15/2026 58,464,839
23,181,784 10.00 12/15/2015--12/15/2021 25,320,727
73,625 10.50 1/15/2016--4/15/2021 81,526
279 11.00 1/15/2016 313
6,214 11.50 8/15/2013 7,005
Total US Government Agency Mortgage-Backed Obligations (Cost--$1,691,292,585) 1,632,855,453
<CAPTION>
Face
Amount Issue
Repurchase Agreements***--0.6%
<C> <S> <C>
$10,781,000 Morgan Stanley and Co., purchased on 8/31/1999 to yield 5.35% to 9/01/1999 10,781,000
Total Repurchase Agreements (Cost--$10,781,000) 10,781,000
</TABLE>
Merrill Lynch Federal Securities Trust
August 31, 1999
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Face Value
Amount Issue (Note 1a)
US Government Agency Discount Obligations****--4.3%
<C> <S> <C>
$70,000,000 Federal National Mortgage Association, 5.09% due 9/20/1999 $ 69,806,100
Total US Government Agency Discount Obligations (Cost--$69,811,953) 69,806,100
<CAPTION>
Nominal Value Strike Notification
Issue Covered by Options Price Date
Options Purchased--0.0%
<C> <C> <C> <C> <C> <C>
Call Options 33,750,521 Government National Mortgage Association,
Purchased 30-Year, 6.625% Adjustable Rate Mortgage(5)(6) 100 9/20/2011(5) 27,000
Total Options Purchased (Cost--$0) 27,000
Total Investments (Cost--$1,771,885,538)--105.3% 1,713,469,553
Options Written--0.0%
Put Options 33,750,521 Government National Mortgage Association,
Written 30-Year, 6.625% Adjustable Rate Mortgage(5)(6) 100 9/20/2011(5) (33,751)
Total Options Written (Premiums Received--$0) (33,751)
Total Investments, Net of Options Written (Cost--$1,771,885,538)--105.3% 1,713,435,802
Liabilities in Excess of Other Assets--(5.3%) (86,908,333)
--------------
Net Assets--100.0% $1,626,527,469
==============
<FN>
(1)Represents the interest only portion of a mortgage-backed
obligation.
(2)Represents balloon mortgages that are non-amortizing and have 7-
year original 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 original matuities.
(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,
6.625% Adjustable Rate Mortgage pools as of September 20, 2011. For
this commitment, the Trust receives a net .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 original maturities.
(8)Represents balloon mortgages that amortize on a 15-year schedule
and have 15-year original maturities.
(9)Represents balloon mortgages that amortize on a 25 or 30-year
schedule and have 10-year original maturities.
(10)Represents balloon mortgages that amortize on a 30-year schedule
and have 5-year original maturities.
(11)Represents a "to-be-announced" (TBA) transaction. The Trust has
committed to purchasing securities for which all specific infor-
mation 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
August 31, 1999.
+++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 Discount 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, 1999
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of August 31, 1999
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$1,771,885,538)
(Note 1a) $ 1,713,442,553
Options purchased, at value (cost--$0) (Notes 1a & 1c) 27,000
Receivables:
Interest $ 10,152,189
Beneficial interest sold 1,694,653
Principal paydowns 372,732 12,219,574
---------------
Prepaid registration fees and other assets (Note 1f) 142,418
---------------
Total assets 1,725,831,545
---------------
Liabilities: Options written, at value (premiums received--$0)
(Notes 1a & 1c) 33,751
Payables:
Securities purchased 86,050,429
Beneficial interest redeemed 6,159,794
Custodian bank (Note 1i) 2,207,452
Dividends to shareholders (Note 1g) 2,060,602
Investment adviser (Note 2) 637,537
Distributor (Note 2) 555,443 97,671,257
---------------
Accrued expenses and other liabilities 1,599,068
---------------
Total liabilities 99,304,076
---------------
Net Assets: Net assets $ 1,626,527,469
===============
Net Assets Class A Shares of beneficial interest, $.10 par value, unlimited
Consist of: number of shares authorized $ 2,265,073
Class B Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized 6,108,772
Class C Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized 497,898
Class D Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized 8,499,606
Paid-in capital in excess of par 1,865,312,762
Accumulated realized capital losses on investments--net (Note 5) (197,706,906)
Unrealized depreciation on investments--net (58,449,736)
---------------
Net assets $ 1,626,527,469
===============
Net Asset Value: Class A--Based on net assets of $212,130,955 and 22,650,733
shares of beneficial interest outstanding $ 9.37
===============
Class B--Based on net assets of $571,968,878 and 61,087,715
shares of beneficial interest outstanding $ 9.36
===============
Class C--Based on net assets of $46,614,553 and 4,978,981
shares of beneficial interest outstanding $ 9.36
===============
Class D--Based on net assets of $795,813,083 and 84,996,057
shares of beneficial interest outstanding $ 9.36
===============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Federal Securities Trust
August 31, 1999
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations for the Year Ended August 31, 1999
<S> <S> <C> <C>
Investment Interest and discount earned $ 116,068,495
Income Other 294,587
(Note 1e): ---------------
Total income 116,363,082
---------------
Expenses: Investment advisory fees (Note 2) $ 8,460,586
Account maintenance and distribution fees--Class B (Note 2) 4,949,318
Account maintenance fees--Class D (Note 2) 2,115,972
Transfer agent fees--Class D (Note 2) 1,378,861
Transfer agent fees--Class B (Note 2) 1,189,307
Transfer agent fees--Class A (Note 2) 414,647
Account maintenance and distribution fees--Class C (Note 2) 413,623
Custodian fees 335,166
Accounting services (Note 2) 328,944
Printing and shareholder reports 197,882
Professional fees 135,751
Transfer agent fees--Class C (Note 2) 92,478
Registration fees (Note 1f) 79,811
Trustees' fees and expenses 75,527
Pricing fees 31,244
Loan interest expense 16,544
Other 25,621
---------------
Total expenses 20,241,282
---------------
Investment income--net 96,121,800
---------------
Realized & Realized gain on investments--net 212,585
Unrealized Gain Change in unrealized appreciation/depreciation on
(Loss) on investments--net (79,217,590)
Investments--Net ---------------
(Notes 1c, Net Increase in Net Assets Resulting from Operations $ 17,116,795
1e & 3): ===============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Federal Securities Trust
August 31, 1999
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Year Ended August 31,
Increase (Decrease) in Net Assets: 1999 1998
<S> <S> <C> <C>
Operations: Investment income--net $ 96,121,800 $ 106,153,243
Realized gain on investments--net 212,585 20,630,277
Change in unrealized appreciation/depreciation on
investments--net (79,217,590) 10,231,032
--------------- ---------------
Net increase in net assets resulting from operations 17,116,795 137,014,552
--------------- ---------------
Dividends to Investment income--net:
Shareholders Class A (14,637,036) (17,554,956)
(Note 1g): Class B (32,646,717) (33,639,686)
Class C (2,533,956) (1,555,581)
Class D (46,304,091) (53,403,020)
--------------- ---------------
Net decrease in net assets resulting from dividends
to shareholders (96,121,800) (106,153,243)
--------------- ---------------
Beneficial Net decrease in net assets derived from beneficial
Interest interest transactions (108,904,158) (123,547,460)
Transactions --------------- ---------------
(Note 4):
Net Assets: Total decrease in net assets (187,909,163) (92,686,151)
Beginning of year 1,814,436,632 1,907,122,783
--------------- ---------------
End of year $ 1,626,527,469 $ 1,814,436,632
=============== ===============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Federal Securities Trust
August 31, 1999
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: 1999 1998 1997 1996++++ 1995++++
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.80 $ 9.64 $ 9.40 $ 9.61 $ 9.16
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income--net .55 .60 .64 .64 .58
Realized and unrealized gain (loss) on
investments--net (.43) .16 .24 (.21) .45
---------- ---------- ---------- ---------- ----------
Total from investment operations .12 .76 .88 .43 1.03
---------- ---------- ---------- ---------- ----------
Less dividends from investment
income--net (.55) (.60) (.64) (.64) (.58)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 9.37 $ 9.80 $ 9.64 $ 9.40 $ 9.61
========== ========== ========== ========== ==========
Total Investment Based on net asset value per share 1.24% 8.10% 9.66% 4.55% 11.56%+++
Return:** ========== ========== ========== ========== ==========
Ratios to Average Expenses .70% .68% .65% .62% .64%*
Net Assets: ========== ========== ========== ========== ==========
Investment income--net 5.71% 6.18% 6.73% 6.64% 7.21%*
========== ========== ========== ========== ==========
Supplemental Net assets, end of period
Data: (in thousands) $ 212,131 $ 277,568 $ 278,103 $ 231,651 $ 223,237
========== ========== ========== ========== ==========
Portfolio turnover 58.16% 301.88% 349.05% 204.14% 260.34%
========== ========== ========== ========== ==========
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. Class B
For the Year Ended August 31,
Increase (Decrease) in Net Asset Value: 1999 1998 1997 1996++++ 1995++++
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 9.79 $ 9.63 $ 9.40 $ 9.61 $ 9.41
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income--net .48 .53 .57 .57 .60
Realized and unrealized gain
(loss) on investments--net (.43) .16 .23 (.21) .20
---------- ---------- ---------- ---------- ----------
Total from investment operations .05 .69 .80 .36 .80
---------- ---------- ---------- ---------- ----------
Less dividends from investment
income--net (.48) (.53) (.57) (.57) (.60)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 9.36 $ 9.79 $ 9.63 $ 9.40 $ 9.61
========== ========== ========== ========== ==========
Total Investment Based on net asset value per
Return:** share .46% 7.28% 8.71% 3.72% 8.91%
========== ========== ========== ========== ==========
Ratios to Average Expenses 1.46% 1.45% 1.42% 1.39% 1.41%
Net Assets: ========== ========== ========== ========== ==========
Investment income--net 4.95% 5.42% 5.98% 5.87% 6.39%
========== ========== ========== ========== ==========
Supplemental Net assets, end of year
Data: (in thousands) $ 571,969 $ 627,818 $ 672,541 $ 924,885 $1,262,985
========== ========== ========== ========== ==========
Portfolio turnover 58.16% 301.88% 349.05% 204.14% 260.34%
========== ========== ========== ========== ==========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales charges.
++Commencement of operations.
++++Based on average shares outstanding.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Federal Securities Trust
August 31, 1999
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: 1999 1998 1997 1996++++ 1995++++
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.79 $ 9.63 $ 9.40 $ 9.61 $ 9.16
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income--net .48 .52 .56 .56 .51
Realized and unrealized gain (loss)
on investments--net (.43) .16 .23 (.21) .45
---------- ---------- ---------- ---------- ----------
Total from investment operations .05 .68 .79 .35 .96
---------- ---------- ---------- ---------- ----------
Less dividends from investment
income--net (.48) (.52) (.56) (.56) (.51)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 9.36 $ 9.79 $ 9.63 $ 9.40 $ 9.61
========== ========== ========== ========== ==========
Total Investment Based on net asset value per share .41% 7.23% 8.66% 3.67% 10.80%+++
Return:** ========== ========== ========== ========== ==========
Ratios to Average Expenses 1.51% 1.51% 1.47% 1.43% 1.47%*
Net Assets: ========== ========== ========== ========== ==========
Investment income--net 4.90% 5.35% 5.91% 5.82% 6.28%*
========== ========== ========== ========== ==========
Supplemental Net assets, end of period
Data: (in thousands) $ 46,614 $ 43,038 $ 28,723 $ 22,672 $ 15,621
========== ========== ========== ========== ==========
Portfolio turnover 58.16% 301.88% 349.05% 204.14% 260.34%
========== ========== ========== ========== ==========
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. Class D
For the Year Ended August 31,
Increase (Decrease) in Net Asset Value: 1999 1998 1997 1996++++ 1995++++
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 9.79 $ 9.63 $ 9.40 $ 9.61 $ 9.41
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income--net .53 .58 .62 .62 .64
Realized and unrealized gain (loss) on
investments--net (.43) .16 .23 (.21) .20
---------- ---------- ---------- ---------- ----------
Total from investment operations .10 .74 .85 .41 .84
---------- ---------- ---------- ---------- ----------
Less dividends from investment
income--net (.53) (.58) (.62) (.62) (.64)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 9.36 $ 9.79 $ 9.63 $ 9.40 $ 9.61
========== ========== ========== ========== ==========
Total Investment Based on net asset value per share .98% 7.84% 9.27% 4.28% 9.48%
Return:** ========== ========== ========== ========== ==========
Ratios to Average Expenses .95% .93% .90% .87% .89%
Net Assets: ========== ========== ========== ========== ==========
Investment income--net 5.47% 5.94% 6.49% 6.39% 6.91%
========== ========== ========== ========== ==========
Supplemental Net assets, end of year (in
Data: thousands) $ 795,813 $ 866,013 $ 927,756 $ 942,388 $ 976,161
========== ========== ========== ========== ==========
Portfolio turnover 58.16% 301.88% 349.05% 204.14% 260.34%
========== ========== ========== ========== ==========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales charges.
++Commencement of operations.
++++Based on average shares outstanding.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Federal Securities Trust
August 31, 1999
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's financial statements are
prepared in accordance with generally accepted accounting
principles, which may require the use of management accruals and
estimates. 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 written or purchased are valued at the last sale price in
the case of exchange-traded options. In the case of options traded
in the over-the-counter market, valuation is the last asked price
(options written) or the last bid price (options purchased).
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 margin 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, 1999
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, 1999, no
dollar rolls were in effect.
(i) Custodian bank--The Fund recorded an amount payable to the
Custodian Bank reflecting an overnight overdraft which resulted from
management estimates of available cash.
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 the "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 .500%
In excess of $500 million but not
exceeding $1 billion .475%
In excess of $1 billion but not
exceeding $1.5 billion .450%
In excess of $1.5 billion but not
exceeding $2 billion .425%
In excess of $2 billion but not
exceeding $2.5 billion .400%
In excess of $2.5 billion but not
exceeding $3.5 billion .375%
In excess of $3.5 billion but not
exceeding $5 billion .350%
In excess of $5 billion but not
exceeding $6.5 billion .325%
Exceeding $6.5 billion .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 .25% .50%
Class C .25% .55%
Class D .25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("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, 1999
NOTES TO FINANCIAL STATEMENTS (concluded)
For the year ended August 31, 1999, 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 $1,003 $ 7,262
Class D $9,300 $79,530
For the year ended August 31, 1999, MLPF&S received contingent
deferred sales charges of $1,122,692 and $40,079 relating to
transactions in Class B and Class C Shares, respectively.
Furthermore, MLPF&S received contingent deferred sales charges of
$32,048 relating to transactions subject to front-end sales charge
waivers in Class D Shares.
During the year ended August 31, 1999, the Trust paid MLSPS $20,131
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, 1999 were $1,034,673,670 and
$1,098,726,450, respectively.
Net realized gains for the year ended August 31, 1999 and net
unrealized gains (losses) as of August 31, 1999 were as follows:
Realized Unrealized
Gains Gains (Losses)
Long-term investments $ 212,585 $(58,437,132)
Short-term investments -- (5,853)
Options purchased -- 27,000
Options written -- (33,751)
--------- ------------
Total $ 212,585 $(58,449,736)
========= ============
As of August 31, 1999, net unrealized depreciation for Federal
income tax purposes aggregated $59,202,412, of which $7,354,197
related to appreciated securities and $66,556,609 related to
depreciated securities. The aggregate cost of investments, including
options, at August 31, 1999 for Federal income tax purposes was
$1,772,644,965.
Transactions in call options written for the year ended August 31,
1999 were as follows:
Nominal Value
Covered by Premiums
Call Options Written Options Received
Outstanding call options
written, beginning of year 5,000,000 $ 43,750
Options exercised (5,000,000) (43,750)
------------ -----------
Outstanding call options
written, end of year -- $ --
============ ===========
Transactions in put options written for the year ended August 31,
1999 were as follows:
Nominal Value
Covered by Premiums
Put Options Written Options Received
Outstanding put options
written, beginning of year 62,307,095 $ --
Options expired (28,556,574) --
------------ -----------
Outstanding put options
written, end of year 33,750,521 $ --
============ ===========
4. Shares of Beneficial Interest:
Net decrease in net assets derived from beneficial interest
transactions was $108,904,158 and $123,547,460 for the years ended
August 31, 1999 and August 31, 1998, respectively.
Transactions in shares of beneficial interest for each class were as
follows:
Class A Shares for the Year Dollar
Ended August 31, 1999 Shares Amount
Shares sold 12,813,289 $124,580,867
Shares issued to share-
holders in reinvestment
of dividends 166,732 1,617,633
------------ ------------
Total issued 12,980,021 126,198,500
Shares redeemed (18,663,271) (181,013,495)
------------ ------------
Net decrease (5,683,250) $(54,814,995)
============ ============
Merrill Lynch Federal Securities Trust
August 31, 1999
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)
============ ============
Class B Shares for the Year Dollar
Ended August 31, 1999 Shares Amount
Shares sold 27,185,080 $265,154,843
Shares issued to share-
holders in reinvestment of
dividends 1,975,204 19,124,825
------------ ------------
Total issued 29,160,284 284,279,668
Automatic conversion of
shares (2,637,770) (25,588,976)
Shares redeemed (29,540,384) (285,824,416)
------------ ------------
Net decrease (3,017,870) $(27,133,724)
============ ============
Class B Shares for the Year Dollar
Ended August 31, 1998 Shares Amount
Shares sold 19,836,450 $193,489,767
Shares issued to share-
holders 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 C Shares for the Year Dollar
Ended August 31, 1999 Shares Amount
Shares sold 4,011,973 $ 39,152,041
Shares issued to share-
holders in reinvestment of
dividends 188,808 1,826,208
------------ ------------
Total issued 4,200,781 40,978,249
Shares redeemed (3,616,701) (35,058,808)
------------ ------------
Net increase 584,080 $ 5,919,441
============ ============
Class C Shares for the Year Dollar
Ended August 31, 1998 Shares Amount
Shares sold 3,350,763 $ 32,718,073
Shares issued to share-
holders 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 D Shares for the Year Dollar
Ended August 31, 1999 Shares Amount
Shares sold 12,696,069 $123,050,803
Automatic conversion of
shares 2,637,770 25,588,976
Shares issued to share-
holders in reinvestment of
dividends 2,234,700 21,633,063
------------ ------------
Total issued 17,568,539 170,272,842
Shares redeemed (21,002,540) (203,147,722)
------------ ------------
Net decrease (3,434,001) $(32,874,880)
============ ============
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 share-
holders 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)
============ ============
5. Capital Loss Carryforward:
At August 31, 1999, the Trust had a net capital loss carryforward of
approximately $192,441,000, of which $175,708,000 expires in 2003
and $16,733,000 expires in 2004. This amount will be available to
offset like amounts of any future taxable gains.
Merrill Lynch Federal Securities Trust
August 31, 1999
<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, 1999, 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, 1999 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, 1999, the
results of its operations, the changes in its net assets, and the
financial highlights for the respective stated periods in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
October 7, 1999
</AUDIT-REPORT>
Merrill Lynch Federal Securities Trust
August 31, 1999
OFFICERS AND TRUSTEES
Terry K. Glenn, President and Trustee
Joe Grills, Trustee
Walter Mintz, Trustee
Robert S. Salomon Jr., Trustee
Melvin R. Seiden, Trustee
Stephen B. Swensrud, Trustee
Arthur Zeikel, Trustee
Gregory Mark Maunz, Senior Vice President
Joseph T. Monagle Jr., Senior Vice President
Jeffrey B. Hewson, Vice President
Donald C. Burke, Vice President and 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
