MERRILL LYNCH
FEDERAL
SECURITIES TRUST
FUND LOGO
Semi-Annual Report
February 29, 2000
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
Economic data releases in January and February 2000 continued to
demonstrate that the economy remains remarkably robust. In January,
unemployment was reported at 4%, the lowest rate since January 1970.
This, coupled with strong income growth (0.7% in February) and the
wealth effect from the strength in the stock market, pushed consumer
confidence higher in January. These factors translated into
spending, which propelled gross domestic product (GDP) growth to an
astonishing 6.9% in February.
Despite this, inflation remains benign. In February, the producer
price index (PPI) and the consumer price index were reported at 0%
and 0.2%, respectively, while the PPI excluding food and energy was
- -0.2%. Strong economic growth, low unemployment and low inflation
challenges the age-old economic principle of the Phillips Curve,
which contends that there are trade-offs between inflation and
unemployment.
The Federal Reserve Board seems intent on its preemptive fight
against inflation. After raising short-term interest rates three
times in 1999, the trend continued in 2000 as the Federal Funds rate
rose another 25 basis points (0.25%) at the February Federal Open
Market Committee meeting. Investors were pricing in yet another
expected increase, which occurred at the March meeting. The latest
increase in short-term interest rates, coupled with the 30-year
Treasury bond performing relatively well in response to the
Treasury's announcement of its buy-back program, created an
interesting anomaly--one-year and 30-year Treasury yields are
essentially the same. Interest rates for intermediate-term
maturities are slightly higher. This has caused the two-year--
30-year section of the yield curve to be inverted for the first time
in over ten years.
Portfolio Strategy
During the six months ended February 29, 2000, interest rates moved
higher, as illustrated by the five-year Treasury note which rose 71
basis points from 5.87% to 6.58%. In this environment, it is typical
for the mortgage-backed securities (MBS) index to perform well
relative to the Treasury and aggregate bond indexes. In fact, the
MBS index outperformed the Treasury and aggregate bond indexes by 59
basis points and 47 basis points, respectively, for the six months
ended February 29, 2000. In a general sense, our overweighting in
MBS benefited the Trust's performance.
Our focus on 15-year MBS during the period also helped the Trust's
relative performance. This can best be illustrated by comparing the
+1.96% return on 30-year 6.50% Fannie Mae (FNMA) MBS to the +2.54%
return on 15-year 6.50% FNMA MBS, a 58 basis point difference.
Our ongoing strategy is to avoid a heavy weighting in slight premium
securities. These securities offer an attractive yield at current
prepayment speeds but carry a higher prepayment risk. If interest
rates decline and prepayments increase, the actual yield can drop
quite dramatically. We do not find this risk/reward ratio
attractive. However, in the current environment in which interest
rates moved higher, their downward price movement was dampened and
subsequently these issues outperformed lower-coupon MBS.
Looking ahead, we continue to favor MBS and are almost 100% invested
in MBS. The ten-year Treasury note yield was 6.41% at the end of
February. By comparison, a Government National Mortgage Association
(GNMA) 7.50% MBS, with principal and interest fully guaranteed by
the US Government, traded at $98. At current prepayment speeds, the
GNMA 7.50% MBS has a yield of 7.90%, almost 150 basis points more
than the Treasury note.
Merrill Lynch Federal Securities Trust
February 29, 2000
There is always interest rate risk with fixed-income securities. As
interest rates move higher, prices decline. However, on a relative
basis, MBS appear extremely attractive, and we plan to remain fully
invested. While we expect the Federal Reserve Board to raise short-
term interest rates, we think longer-term interest rates may be more
stable. Additionally, if yield spreads between MBS and Treasury
securities tighten to more historical norms, this may help offset
the effects of any interest rate increase or could generate total
return should interest rates stay the same or decline.
In Conclusion
We thank you for your continued investment in Merrill Lynch Federal
Securities Trust, 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
April 13, 2000
On April 12, 2000, the Trust's Board of Trustees approved a change
in the Trust's name from Merrill Lynch Federal Securities Trust to
Merrill Lynch U.S. Government Mortgage Fund. The Trust's management
believes that the new name better portrays the Trust's main
investment strategies. The change in the Trust's name does not
connote a change in its investment objective, which remains the
same: to seek high current return through investments in US
Government securities and US Government agency securities, including
Government National Mortgage Association mortgage-backed securities
and other mortgage-backed Government securities. The new name takes
effect on April 17, 2000.
Merrill Lynch Federal Securities Trust
February 29, 2000
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/
6 Month 12 Month Since Inception Standardized
As of February 29, 2000 Total Return Total Return Total Return 30-Day Yield
<S> <C> <C> <C> <C>
ML Federal Securities Trust Class A Shares +1.89% +1.31% +42.61% 6.11%
ML Federal Securities Trust Class B Shares +1.50 +0.53 +47.53 5.61
ML Federal Securities Trust Class C Shares +1.48 +0.49 +36.38 5.56
ML Federal Securities Trust Class D Shares +1.76 +1.06 +92.58 5.88
<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 from 10/21/94 for Class A &
Class C Shares; from 12/23/91 for Class B Shares; and for ten years
for Class D Shares.
</TABLE>
Merrill Lynch Federal Securities Trust
February 29, 2000
PERFORMANCE DATA (concluded)
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 12/31/99 +0.99% -3.05%
Five Years Ended 12/31/99 +7.18 +6.31
Inception (10/21/94)
through 12/31/99 +7.01 +6.71
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 12/31/99 +0.22% -3.59%
Five Years Ended 12/31/99 +6.36 +6.36
Inception (12/23/91)
through 12/31/99 +4.96 +4.96
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Year Ended 12/31/99 +0.17% -0.78%
Five Years Ended 12/31/99 +6.33 +6.33
Inception (10/21/94)
through 12/31/99 +6.14 +6.14
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Year Ended 12/31/99 +0.73% -3.29%
Five Years Ended 12/31/99 +6.91 +6.04
Ten Years Ended 12/31/99 +6.75 +6.32
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
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
Merrill Lynch Federal Securities Trust
February 29, 2000
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Face Interest Original
Issue Amount Rate Maturity Date(s) Value
US Government Agency Mortgage-Backed Obligations*--99.6%
<S> <C> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation #W10002 $ 98,696,800 6.775(2) % 11/01/2003 $ 96,439,821
Mortgage-Backed Securities--
Multi-Family+++
Federal Home Loan Mortgage Corporation 535 10.00 7/01/2019 567
Participation Certificates 6,602,081 10.50 9/01/2000--9/01/2020 7,032,607
1,671,795 11.00 8/01/2010--9/01/2020 1,796,961
1,528,833 11.50 12/01/2011--6/01/2020 1,660,250
714,635 12.00 5/01/2010--6/01/2020 783,241
1,218,151 12.50 9/01/2014--7/01/2019 1,342,969
1,966,254 13.00 11/01/2009--2/01/2016 2,172,620
Federal Home Loan Mortgage Corporation 105,102 5.50 8/01/2000 104,268
Participation Certificates--Gold Program 243,388 6.00 4/01/2009 231,219
175,343 6.50 9/01/2013 168,383
51,636,493 6.50 10/01/2028--7/01/2029 48,325,441
18,455,988 7.00 8/01/2011--2/01/2013(11) 18,117,978
41,447,333 7.00 9/01/2028--1/01/2030 39,760,991
12,911,743 7.50 5/01/2009--10/01/2011 12,940,213
412,048 7.50 8/01/2017 407,588
12,538,159 8.00 1/01/2007--7/01/2012 12,736,937
102,618 8.00 10/01/2027 103,033
3,489,461 8.50 1/01/2025--7/01/2025 3,582,660
2,083,120 10.50 10/01/2020--12/01/2020 2,220,455
Federal Home Loan Mortgage Trust 134 762,035 9.00(1) 4/01/2022 200,034
Corporation REMICs** Trust 1220 3,863,919 10.00 2/15/2022 3,794,023
Federal National Mortgage Association 107,804 5.50(7) 4/01/2000 106,826
2,783,551 6.00(7) 7/01/2000--8/01/2000 2,760,586
155,408,854 6.00 11/01/2023--3/01/2029 141,125,683
322,451,804 6.50 12/01/2008--9/01/2028 306,113,309
9,791,927 7.00 11/01/2013--8/01/2029 9,630,727
381 7.50 1/01/2025 376
592,485 8.00 9/01/2024--9/01/2027 594,408
493,688 8.50 5/01/2010--8/01/2012 508,068
12,116,281 8.50(3) 7/15/2023 12,271,521
8,192,134 9.50 3/01/2020 8,530,060
1,690 10.50 9/01/2000 1,706
13,873,508 11.00 2/01/2011--11/01/2020 15,140,324
15,397 11.50 6/01/2015 16,926
917,804 13.00 8/01/2010--4/01/2015 1,022,695
Federal National Mortgage Association #0160465 33,196,135 6.16(8) 8/01/2013 30,693,551
Mortgage-Backed Securities-- #0380332 9,461,129 6.195(7) 6/01/2005 8,974,036
Multi-Family+++ #0375610 13,686,396 6.465(7) 6/01/2004 13,274,855
#0380021 6,208,807 6.49(9) 1/01/2008 5,867,323
#0073240 4,828,688 6.50(7) 11/01/2002 4,726,677
#0073809 10,343,308 6.515(10) 12/01/2001 10,215,680
#0073894 968,162 6.525(7) 12/01/2003 940,737
#0073885 872,292 6.545(9) 1/01/2007 833,207
#0073873 752,201 6.625(9) 2/01/2007 721,422
#0073221 1,434,355 6.715(7) 10/01/2005 1,386,498
#0375015 18,917,346 6.79(7) 4/01/2004 18,484,398
#0073915 1,484,868 6.87(9) 1/01/2007 1,440,874
#0073910 11,601,921 6.875(9) 1/01/2007 11,257,406
</TABLE>
Merrill Lynch Federal Securities Trust
February 29, 2000
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Face Interest Original
Issue Amount Rate Maturity Date(s) Value
USGovernment Agency Mortgage-Backed Obligations* (concluded)
<S> <C> <C> <C> <C> <C>
Federal National Mortgage Association #0375043 $ 3,507,640 6.895(9) % 4/01/2007 $ 3,406,252
Mortgage-Backed Securities-- #0375007 11,863,835 6.94(9) 3/01/2007 11,547,496
Multi-Family+++ (concluded) #0375012 3,216,211 6.95(9) 4/01/2007 3,132,055
#0073944 13,600,988 6.96(9) 1/01/2007 13,253,637
#0073952 2,721,179 6.96(9) 1/01/2007 2,652,063
#0073946 5,292,229 6.97(9) 2/01/2007 5,159,951
#0073969 7,814,578 7.05(9) 2/01/2007 7,649,991
#0073962 4,605,171 7.085(9) 2/01/2007 4,515,660
#0073967 4,476,291 7.105(9) 2/01/2007 4,334,308
#0073992 2,543,846 7.115(9) 2/01/2007 2,498,172
#0375069 1,056,524 7.122(9) 4/01/2007 1,035,724
#0073943 1,417,826 7.18(4) 2/01/2019 1,364,657
#0073608 4,757,144 7.49(9) 8/01/2006 4,754,656
#0375052 4,652,657 7.50(9) 3/01/2027 4,523,255
#0109076 2,126,450 7.59(9) 8/01/2006 2,134,474
#0160024 5,041,299 7.625(9) 11/01/2003 4,976,707
#0160095 7,048,639 7.66(9) 3/01/2004 7,074,013
Federal National Mortgage Association 98-M1-IO2 94,625,572 0.64979(1) 2/25/2013 4,302,502
Mortgage-Backed Securities-- 94-M1-IO 73,536,963 0.87(1) 10/25/2003 1,746,503
REMICs**--Multi-Family+++ 98-M3-B 10,960,597 6.45 8/17/2013 10,077,831
94-M2-A 3,705,648 6.625 2/25/2001 3,682,858
97-M8-A2 19,135,000 7.16 1/25/2022 18,531,865
96-M3-A2 40,500,000 7.41 3/25/2021 39,183,750
Federal National Mortgage Association 94-56-TB 5,239,230 6.50(1) 7/25/2022 1,348,002
REMICs** Trust 273 4,011,664 7.00(1) 7/01/2026 1,263,617
93-123-S 5,929,943 7.23125++ 7/25/2000 5,755,721
96-W1-AL 8,838,425 7.25 3/25/2026 8,655,558
97-5-SB 3,451,022 9.00 3/17/2019 3,501,247
Government National Mortgage Association 90,716,722 6.50 10/15/2023--7/15/2029 84,584,265
184,116,755 7.00 4/15/2023--5/15/2029 176,520,827
71,735,590 7.50 1/15/2007--6/15/2028 70,579,506
42,540,043 8.00 1/15/2024--8/15/2026 42,783,885
20,036,403 10.00 12/15/2015--12/15/2021 21,344,010
69,363 10.50 1/15/2016--4/15/2021 74,581
165 11.00 1/15/2016 180
2,933 11.50 8/15/2013 3,247
Total US Government Agency Mortgage-Backed Obligations (Cost--$1,512,464,399) 1,438,515,164
Face
Amount Issue
Repurchase Agreements***--0.3%
$4,000,000 Donaldson, Lufkin & Jenrette Securities Corp., purchased on 2/29/2000 to yield
5.70% to 3/01/2000 4,000,000
Total Repurchase Agreements (Cost--$4,000,000) 4,000,000
</TABLE>
Merrill Lynch Federal Securities Trust
February 29, 2000
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Nominal Value Strike Notification
Covered by Options Issue Price Date Value
Options Purchased--0.0%
<S> <C> <S> <C> <C> <C>
Call Options 29,149,960 Government National Mortgage Association,
Purchased 30-Year, 6.625% Adjustable Rate Mortgage(5)(6) 100 9/20/2011(5) $ 23,320
Total Options Purchased (Cost--$0) 23,320
Total Investments (Cost--$1,516,464,399)--99.9% 1,442,538,484
Options Written--0.0%
Put Options 29,149,960 Government National Mortgage Association,
Written 30-Year, 6.625% Adjustable Rate Mortgage(5)(6) 100 9/20/2011(5) (29,150)
Total Options Written (Premiums Received--$0) (29,150)
Total Investments, Net of Options Written (Cost--$1,516,464,399)--99.9% 1,442,509,334
Other Assets Less Liabilities--0.1% 1,538,730
--------------
Net Assets--100.0% $1,444,048,064
==============
(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 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,
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-year 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)Includes a "to-be-announced" transaction. The Trust has
committed to purchasing securities for which all specific
information is not available at this time.
++Adjustable Rate Security. The interest rate resets periodically
and inversely. The interest rate shown is the rate in effect as of
February 29, 2000.
+++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.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Federal Securities Trust
February 29, 2000
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of February 29, 2000
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$1,516,464,399) $ 1,442,515,164
Options purchased, at value (cost--$0) 23,320
Cash 237,327
Receivables:
Securities sold $ 26,042,353
Interest 8,603,204
Beneficial interest sold 1,493,864
Principal paydowns 246,939 36,386,360
---------------
Prepaid registration fees and other assets 142,417
---------------
Total assets 1,479,304,588
---------------
Liabilities: Options written, at value (premiums received--$0) 29,150
Payables:
Securities purchased 25,920,798
Beneficial interest redeemed 5,861,722
Dividends to shareholders 1,737,477
Distributor 461,398
Investment adviser 434,877 34,416,272
---------------
Accrued expenses and other liabilities 811,102
---------------
Total liabilities 35,256,524
---------------
Net Assets: Net assets $ 1,444,048,064
===============
Net Assets Class A Shares of beneficial interest, $.10 par value, unlimited
Consist of: number of shares authorized $ 2,016,120
Class B Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized 5,142,685
Class C Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized 402,673
Class D Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized 8,058,411
Paid-in capital in excess of par 1,703,701,679
Accumulated realized capital losses on investments--net (201,318,439)
Unrealized depreciation on investments--net (73,955,065)
---------------
Net assets $ 1,444,048,064
===============
Net Asset Value: Class A--Based on net assets of $186,429,549 and 20,161,197
shares of beneficial interest outstanding $ 9.25
===============
Class B--Based on net assets of $475,427,112 and 51,426,845
shares of beneficial interest outstanding $ 9.24
===============
Class C--Based on net assets of $37,223,467 and 4,026,727
shares of beneficial interest outstanding $ 9.24
===============
Class D--Based on net assets of $744,967,936 and 80,584,112
shares of beneficial interest outstanding $ 9.24
===============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Federal Securities Trust
February 29, 2000
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations for the Six Months Ended February 29, 2000
<S> <S> <C> <C>
Investment Interest and discount earned $ 54,755,890
Income: Other 205,049
---------------
Total income 54,960,939
---------------
Expenses: Investment advisory fees $ 3,660,348
Account maintenance and distribution fees--Class B 1,987,229
Account maintenance fees--Class D 970,332
Transfer agent fees--Class D 710,563
Transfer agent fees--Class B 534,355
Transfer agent fees--Class A 181,292
Accounting services 173,683
Account maintenance and distribution fees--Class C 171,758
Custodian fees 157,858
Pricing fees 87,032
Printing and shareholder reports 67,802
Professional fees 57,270
Transfer agent fees--Class C 42,834
Registration fees 41,431
Trustees' fees and expenses 37,457
Loan interest expense 33,448
Other 16,675
---------------
Total expenses 8,931,367
---------------
Investment income--net 46,029,572
---------------
Realized & Realized loss on investments--net (3,611,533)
Unrealized Loss on Change in unrealized depreciation on investments--net (15,505,329)
Investments--Net: ---------------
Net Increase in Net Assets Resulting from Operations $ 26,912,710
===============
See Notes to Financial Statements.
</TABLE>
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Six For the
Months Ended Year Ended
Increase (Decrease) in Net Assets: Feb. 29, 2000 Aug. 31, 1999
<S> <S> <C> <C>
Operations: Investment income--net $ 46,029,572 $ 96,121,800
Realized gain (loss) on investments--net (3,611,533) 212,585
Change in unrealized appreciation/depreciation on
investments--net (15,505,329) (79,217,590)
--------------- ---------------
Net increase in net assets resulting from operations 26,912,710 17,116,795
--------------- ---------------
Dividends to Investment income--net:
Shareholders: Class A (6,306,339) (14,637,036)
Class B (14,810,021) (32,646,717)
Class C (1,189,130) (2,533,956)
Class D (23,724,082) (46,304,091)
--------------- ---------------
Net decrease in net assets resulting from dividends to
shareholders (46,029,572) (96,121,800)
--------------- ---------------
Beneficial Net decrease in net assets derived from beneficial interest
Interest transactions (163,362,543) (108,904,158)
Transactions: --------------- ---------------
Net Assets: Total decrease in net assets (182,479,405) (187,909,163)
Beginning of period 1,626,527,469 1,814,436,632
--------------- ---------------
End of period $ 1,444,048,064 $ 1,626,527,469
=============== ===============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Federal Securities Trust
February 29, 2000
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights
<CAPTION>
Class A
The following per share data and ratios have been derived For the Six
from information provided in the financial statements. Months Ended
February 29, For the Year Ended August 31,
Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997 1996++
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.37 $ 9.80 $ 9.64 $ 9.40 $ 9.61
Operating --------- --------- --------- --------- ---------
Performance: Investment income--net .29 .55 .60 .64 .64
Realized and unrealized gain (loss) on
investments--net (.11) (.43) .16 .24 (.21)
--------- --------- --------- --------- ---------
Total from investment operations .18 .12 .76 .88 .43
--------- --------- --------- --------- ---------
Less dividends from investment
income--net (.30) (.55) (.60) (.64) (.64)
--------- --------- --------- --------- ---------
Net asset value, end of period $ 9.25 $ 9.37 $ 9.80 $ 9.64 $ 9.40
========= ========= ========= ========= =========
Total Investment Based on net asset value per share 1.89%+++ 1.24% 8.10% 9.66% 4.55%
Return:** ========= ========= ========= ========= =========
Ratios to Average Expenses .74%* .70% .68% .65% .62%
Net Assets: ========= ========= ========= ========= =========
Investment income--net 6.34%* 5.71% 6.18% 6.73% 6.64%
========= ========= ========= ========= =========
Supplemental Net assets, end of period (in thousands) $ 186,430 $ 212,131 $ 277,568 $ 278,103 $ 231,651
Data: ========= ========= ========= ========= =========
Portfolio turnover 14.34% 58.16% 301.88% 349.05% 204.14%
========= ========= ========= ========= =========
<CAPTION>
Class B
The following per share data and ratios have been derived For the Six
from information provided in the financial statements. Months Ended
February 29, For the Year Ended August 31,
Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997 1996++
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.36 $ 9.79 $ 9.63 $ 9.40 $ 9.61
Operating --------- --------- --------- --------- ---------
Performance: Investment income--net .26 .48 .53 .57 .57
Realized and unrealized gain (loss) on
investments--net (.12) (.43) .16 .23 (.21)
--------- --------- --------- --------- ---------
Total from investment operations .14 .05 .69 .80 .36
--------- --------- --------- --------- ---------
Less dividends from investment
income--net (.26) (.48) (.53) (.57) (.57)
--------- --------- --------- --------- ---------
Net asset value, end of period $ 9.24 $ 9.36 $ 9.79 $ 9.63 $ 9.40
========= ========= ========= ========= =========
Total Investment Based on net asset value per share 1.50%+++ .46% 7.28% 8.71% 3.72%
Return:** ========= ========= ========= ========= =========
Ratios to Average Expenses 1.51%* 1.46% 1.45% 1.42% 1.39%
Net Assets: ========= ========= ========= ========= =========
Investment income--net 5.57%* 4.95% 5.42% 5.98% 5.87%
========= ========= ========= ========= =========
Supplemental Net assets, end of period (in thousands) $ 475,427 $ 571,969 $ 627,818 $ 672,541 $ 924,885
Data: ========= ========= ========= ========= =========
Portfolio turnover 14.34% 58.16% 301.88% 349.05% 204.14%
========= ========= ========= ========= =========
++Based on average shares outstanding
+++Aggregate total investment return.
*Annualized.
**Total investment returns exclude the effects of sales charges.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Federal Securities Trust
February 29, 2000
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights (concluded)
<CAPTION>
Class C
The following per share data and ratios have been derived For the Six
from information provided in the financial statements. Months Ended
February 29, For the Year Ended August 31,
Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997 1996++
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.36 $ 9.79 $ 9.63 $ 9.40 $ 9.61
Operating --------- --------- --------- --------- ---------
Performance: Investment income--net .26 .48 .52 .56 .56
Realized and unrealized gain (loss) on
investments--net (.12) (.43) .16 .23 (.21)
--------- --------- --------- --------- ---------
Total from investment operations .14 .05 .68 .79 .35
--------- --------- --------- --------- ---------
Less dividends from investment
income--net (.26) (.48) (.52) (.56) (.56)
--------- --------- --------- --------- ---------
Net asset value, end of period $ 9.24 $ 9.36 $ 9.79 $ 9.63 $ 9.40
========= ========= ========= ========= =========
Total Investment Based on net asset value per share 1.48%+++ .41% 7.23% 8.66% 3.67%
Return:** ========= ========= ========= ========= =========
Ratios to Average Expenses 1.56%* 1.51% 1.51% 1.47% 1.43%
Net Assets: ========= ========= ========= ========= =========
Investment income--net 5.52%* 4.90% 5.35% 5.91% 5.82%
========= ========= ========= ========= =========
Supplemental Net assets, end of period (in thousands) $ 37,223 $ 46,614 $ 43,038 $ 28,723 $ 22,672
Data: ========= ========= ========= ========= =========
Portfolio turnover 14.34% 58.16% 301.88% 349.05% 204.14%
========= ========= ========= ========= =========
<CAPTION>
Class D
The following per share data and ratios have been derived For the Six
from information provided in the financial statements. Months Ended
February 29, For the Year Ended August 31,
Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997 1996++
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.36 $ 9.79 $ 9.63 $ 9.40 $ 9.61
Operating --------- --------- --------- --------- ---------
Performance: Investment income--net .29 .53 .58 .62 .62
Realized and unrealized gain (loss) on
investments--net (.13) (.43) .16 .23 (.21)
--------- --------- --------- --------- ---------
Total from investment operations .16 .10 .74 .85 .41
--------- --------- --------- --------- ---------
Less dividends from investment
income--net (.28) (.53) (.58) (.62) (.62)
--------- --------- --------- --------- ---------
Net asset value, end of period $ 9.24 $ 9.36 $ 9.79 $ 9.63 $ 9.40
========= ========= ========= ========= =========
Total Investment Based on net asset value per share 1.76%+++ .98% 7.84% 9.27% 4.28%
Return:** ========= ========= ========= ========= =========
Ratios to Average Expenses .99%* .95% .93% .90% .87%
Net Assets: ========= ========= ========= ========= =========
Investment income--net 6.10%* 5.47% 5.94% 6.49% 6.39%
========= ========= ========= ========= =========
Supplemental Net assets, end of period (in thousands) $ 744,968 $ 795,813 $ 866,013 $ 927,756 $ 942,388
Data: ========= ========= ========= ========= =========
Portfolio turnover 14.34% 58.16% 301.88% 349.05% 204.14%
========= ========= ========= ========= =========
++Based on average shares outstanding
+++Aggregate total investment return.
*Annualized.
**Total investment returns exclude the effects of sales charges.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Federal Securities Trust
February 29, 2000
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. These unaudited financial statements reflect all
adjustments, which are, in the opinion of management, necessary to a
fair statement of the results for the interim period presented. All
such adjustments are of a normal recurring nature. The Trust offers
four classes of shares under the Merrill Lynch Select Pricingsm
System. Shares of Class A and Class D are sold with a front-end
sales charge. Shares of Class B and Class C may be subject to a
contingent deferred sales charge. All classes of shares have
identical voting, dividend, liquidation and other rights and the
same terms and conditions, except that Class B, Class C and Class D
Shares bear certain expenses related to the account maintenance of
such shares, and Class B and Class C Shares also bear certain
expenses related to the distribution of such shares. Each class has
exclusive voting rights with respect to matters relating to its
account maintenance and distribution expenditures. The following is
a summary of significant accounting policies followed by the Trust.
(a) Valuation of investments--Securities traded in the over-the-
counter market are valued at the last available bid price in the
over-the-counter market or on the basis of yield equivalents as
obtained from one or more dealers that make markets in the
securities. The Trust employs Merrill Lynch Securities Pricing
Service ("MLSPS"), an affiliate of Fund Asset Management, L.P.
("FAM"), to provide mortgage-backed securities prices for the Trust.
Options 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. If the counterparty defaults and
the fair value of the collateral declines, liquidation of the
collateral by the Trust may be delayed or limited.
(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 it 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
February 29, 2000
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 February 29, 2000, 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 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.
For the six months ended February 29, 2000, 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 $ 30 $ 388
Class D $4,918 $36,190
Merrill Lynch Federal Securities Trust
February 29, 2000
NOTES TO FINANCIAL STATEMENTS (concluded)
For the six months ended February 29, 2000, MLPF&S received
contingent deferred sales charges of $516,216 and $14,475 relating
to transactions in Class B and Class C Shares, respectively.
Furthermore, MLPF&S received contingent deferred sales charges of
$288 relating to transactions subject to front-end sales charge
waivers in Class D Shares.
During the six months ended February 29, 2000, the Trust paid MLSPS
$5,292 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 six months ended February 29, 2000 were $221,967,834 and
$396,266,157, respectively.
Net realized losses for the six months ended February 29, 2000 and
net unrealized gains (losses) as of February 29, 2000 were as
follows:
Realized Unrealized
Losses Gains (Losses)
Long-term investments $ (3,461,366) $(73,949,235)
Short-term investments (167) --
Options purchased -- 23,320
Options written -- (29,150)
Financial futures contracts (150,000) --
------------ ------------
Total $ (3,611,533) $(73,955,065)
============ ============
As of February 29, 2000, net unrealized depreciation for Federal
income tax purposes aggregated $73,955,065, of which $855,424
related to appreciated securities and $74,810,489 related to
depreciated securities. The aggregate cost of investments, including
options, at February 29, 2000 for Federal income tax purposes was
$1,516,464,399.
Transactions in put options written for the six months ended
February 29, 2000 were as follows:
Nominal Value
Covered by Premiums
Put Options Written Options Received
Outstanding put options
written, beginning of
period 33,750,521 $ --
Options expired (4,600,561) --
------------ -----------
Outstanding put options
written, end of period 29,149,960 $ --
============ ===========
4. Shares of Beneficial Interest:
Net decrease in net assets derived from beneficial interest
transactions was $163,362,543 and $108,904,158 for the six months
ended February 29, 2000 and the year ended August 31, 1999,
respectively.
Transactions in shares of beneficial interest for each class were as
follows:
Class A Shares for the Six Months Dollar
Ended February 29, 2000 Shares Amount
Shares sold 3,096,850 $ 28,924,642
Shares issued to share-
holders in reinvestment
of dividends . 63,760 595,777
------------ ------------
Total issued 3,160,610 29,520,419
Shares redeemed (5,650,146) (52,824,224)
------------ ------------
Net decrease (2,489,536) $(23,303,805)
============ ============
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
February 29, 2000
Class B Shares for the Six Months Dollar
Ended February 29, 2000 Shares Amount
Shares sold 4,942,269 $ 46,224,439
Shares issued to share-
holders in reinvestment
of dividends 882,186 8,238,635
------------ ------------
Total issued 5,824,455 54,463,074
Automatic conversion of
shares (1,257,152) (11,742,914)
Shares redeemed (14,228,173) (132,827,079)
------------ ------------
Net decrease (9,660,870) $(90,106,919)
============ ============
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 C Shares for the Six Months Dollar
Ended February 29, 2000 Shares Amount
Shares sold 523,604 $ 4,909,069
Shares issued to share-
holders in reinvestment of
dividends 85,168 795,477
------------ ------------
Total issued 608,772 5,704,546
Shares redeemed (1,561,026) (14,564,739)
------------ ------------
Net decrease (952,254) $ (8,860,193)
============ ============
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 D Shares for the Six Months Dollar
Ended February 29, 2000 Shares Amount
Shares sold 7,034,994 $ 65,822,456
Automatic conversion of
shares 1,257,153 11,742,914
Shares issued to share-
holders in reinvestment of
dividends 1,089,430 10,170,895
------------ ------------
Total issued 9,381,577 87,736,265
Shares redeemed (13,793,522) (128,827,891)
------------ ------------
Net decrease (4,411,945) $(41,091,626)
============ ============
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)
============ ============
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.
