MERRILL LYNCH
CALIFORNIA
MUNICIPAL
BOND FUND
FUND LOGO
Semi-Annual Report
February 29, 1996
This report is not authorized for use as an offer of sale or a
solicitation of an offer to buy shares of the Fund unless
accompanied or preceded by the Fund'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, maybe worth more or less than their original cost.
Statements and other information herein are as dated and are subject
to change.
<PAGE>
Merrill Lynch California
Municipal Bond Fund
Merrill Lynch California
Municipal Series Trust
Box 9011
Princeton, NJ
08543-9011
TO OUR SHAREHOLDERS
Throughout most of the six-month period ended February 29, 1996, it
appeared that the US economy was losing momentum. Consumer spending
was barely growing and the industrial sector was at a virtual
standstill. With inflationary pressures subdued, the Federal Reserve
Board responded to the slowing economy by continued modest monetary
policy easing. However, toward the end of the six-month period, a
series of economic releases began to suggest that economic activity
would not continue to be as sluggish as originally expected. A surge
in auto sales and factory orders, rising consumer confidence and
strong housing starts led some investors to believe that economic
activity was again accelerating and further easing by the Federal
Reserve Board unlikely. These concerns were highlighted in early
March with the report of a sharp increase in new jobs in February
and a drop in unemployment. In the weeks ahead, it is likely that
investors will continue to monitor economic data releases closely as
they attempt to gauge the US economy's progress.
<PAGE>
The impasse between the Clinton Administration and Congress over the
Federal budget continues. However, both sides have made concessions
since the debate began. It appears that investors are currently
focusing on the progress that has been made rather than on the
differences that remain. Initially, President Clinton proposed
deficits of about $190 billion annually through fiscal year 2002. He
now proposes balanced budgets, as do the Republicans. Furthermore,
even without policy changes, it appears that the US Federal budget
deficit could remain stable at about 2% of gross domestic product
for the rest of the decade. This is far better than is the case for
most Group of Seven industrial nations and a great improvement over
the last 15 years. Nevertheless, current indications are that a
piecemeal budget accord is the most likely outcome. Although this
may fall short of investors' best expectations, it appears that the
Federal budget debate over the past year has resulted in a trend
toward a more conservative fiscal policy.
The Municipal Market
Long-term tax-exempt revenue bond yields continued to decline during
the six months ended February 29, 1996. However, during that period
the municipal bond market reversed the trend seen throughout most of
1995 and significantly outperformed the US Treasury bond market.
Buoyed by investor expectations of continuing mild inflation and
weakening domestic economic growth, tax-exempt bond yields steadily
declined as 1995 ended. As measured by the Bond Buyer Revenue Bond
Index, A-rated municipal revenue bond yields declined over 60 basis
points (0.60%) to 5.63%. Economic indicators released in January and
February 1996 suggested earlier expectations of weaker economic
growth may have been overly optimistic. As investor confidence
waned, tax-exempt bond yields rose somewhat to 5.86% at February 29,
1996. US Treasury bond yields followed a similar, although more
volatile, pattern over the last six months. By the end of 1995, US
Treasury bond yields fell approximately 45 basis points to 6.00%.
Yields rose significantly for the remainder of the period to 6.45%.
For the six months ended February 29, 1996, long-term, tax-exempt
bond yields declined 40 basis points while US Treasury bond yields
fell approximately 20 basis points.
The municipal bond market's recent outperformance was largely the
result of two principal factors. First, and perhaps more
importantly, much of the earlier concern regarding proposed changes
in Federal income tax codes and their effect on the tax treatment of
tax-exempt bond income dissipated. As the negative revenue impact of
the various proposals such as the flat-tax became apparent, the
likelihood of immediate tax reform quickly diminished. When the Kemp
Commission dealing with Federal income tax reform released its
findings early in 1996, the obvious need for reform was highlighted.
However, no specific recommendations of a flat-tax, value-added tax
or any other specific reforms were made. Consequently, fears of
losing the favored tax treatment of municipal bond income declined
even further. As a percentage of Treasury bond yields, tax-exempt
bond yield ratios quickly declined from 95% to approximately 90%.
This allowed the municipal bond market to preserve much of the gains
it made in recent months.
<PAGE>
The second major factor leading to the municipal bond market's
recent improvement was the return of a more favorable technical
environment. Over the past six months approximately $86 billion in
municipal securities were underwritten, an increase of nearly 40%
versus the comparable period a year earlier. However, much of this
increase was biased by recent underwritings over the last three
months. Municipal issuers sought to refinance their existing higher-
couponed debt as tax-exempt bond yields have approached their recent
historic lows. Over the past three months such refundings have
contributed to total bond issuance of over $40 billion. However, at
the same time, investors continue to receive significant amounts of
assets derived from coupon income, bond maturities and proceeds from
early redemptions. During January and February 1996, investors
received approximately $35 billion in such assets, nearly equal to
the total amount of bonds issued during the previous three months.
These cash flows helped maintain individual retail investor demand
during recent months. Additionally, major institutional investors,
including certain insurance companies whose underwriting profits
were cyclically high, demonstrated significant ongoing interest in
the tax-exempt bond market, particularly on higher-quality
securities. Individual and institutional investor demand was strong
enough during the six-month period ended February 29, 1996 to absorb
the relative increase in bond issuance and still allow tax-exempt
bond yields to decline further.
Looking ahead, the municipal bond market is likely to continue to
outperform the US Treasury bond market. Investor demand should
remain adequate enough to absorb new bond issuance. It is unlikely
that the rapid pace of issuance seen thus far in 1996 will be
maintained. The recent rise in yields has made further bond
refinancings economically unfeasible. Since these refinancings were
the driving force of recent bond issuance, as the amount of these
refundings decline, overall issuance should decline. This should
allow the current demand/supply balance to be easily maintained.
Additionally, as a percentage of US Treasury bond yields, long-term
municipal bond yields remain historically attractive. With long-
term, tax-exempt revenue bonds yielding approximately 90% of their
taxable counterparts, should taxable interest rates resume their
decline, municipal bond yields are poised to decline further.
Portfolio Strategy
Throughout the six-month period ended February 29, 1996, we
maintained the Fund's essentially neutral to defensive posture which
we adopted last August. Our strategy largely is to maintain that
stance and to continue to seek to enhance coupon income. However,
should interest rates continue to rise in the coming months, we may
increase the Fund's holdings of more interest rate-sensitive issues
in anticipation of the next decline in interest rates. We believe
that, given the absence of inflationary pressures, any significant
increase in interest rates will place material pressures on the
current economic recovery. Such pressures could cause the quick
resumption of the economic slowdown seen in early 1995. Any material
increase in interest rates in 1996 will also be viewed as an
opportunity to add higher-quality issues to the Fund at yield levels
not seen since 1994.
<PAGE>
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Vincent R. Giordano)
Vincent R. Giordano
Senior Vice President
(Walter C. O'Connor)
Walter C. O'Connor
Portfolio Manager
March 29, 1996
We are pleased to announce that Walter C. O'Connor is responsible
for the day-to-day management of Merrill Lynch California Municipal
Bond Fund. Mr. O'Connor has been employed by Merrill Lynch Asset
Management, L.P. (an affiliate of the Fund's investment adviser)
since 1993 as Vice President, and was Assistant Vice President from
1991 to 1993. Prior thereto, he was Assistant Vice President with
Prudential Securities from 1984 to 1991.
PERFORMANCE DATA
About Fund Performance
Investors are able to purchase shares of the Fund through the
Merrill Lynch Select Pricing SM System, which offers four pricing
alternatives:
<PAGE>
* 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.
* 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 0.25% and an account
maintenance fee of 0.25%. These shares automatically convert to
Class D Shares after approximately 10 years.
* Class C Shares are subject to a distribution fee of 0.35% 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 0.10% (but no distribution fee).
None of the past results shown should be considered a representation
of future performance. Investment return and principal value of
shares will fluctuate so that shares, when redeemed, may be worth
more or less than their original cost. Dividends paid to each class
of shares will vary because of the different levels of account
maintenance, distribution and transfer agency fees applicable to
each class, which are deducted from the income available to be paid
to shareholders.
<TABLE>
Recent Performance Results
<CAPTION>
12 Month 3 Month
2/29/96 11/30/95 2/28/95 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares* $11.73 $11.73 $11.23 + 4.45% 0.00%
Class B Shares* 11.74 11.73 11.24 + 4.45 + 0.09
Class C Shares* 11.74 11.73 11.24 + 4.45 + 0.09
Class D Shares* 11.74 11.73 11.24 + 4.45 + 0.09
Class A Shares--Total Return* +10.45(1) + 1.37(2)
Class B Shares--Total Return* + 9.80(3) + 1.24(4)
Class C Shares--Total Return* + 9.68(5) + 1.21(6)
Class D Shares--Total Return* +10.23(7) + 1.34(8)
Class A Shares--Standardized 30-day Yield 4.51%
Class B Shares--Standardized 30-day Yield 4.19%
Class C Shares--Standardized 30-day Yield 4.08%
Class D Shares--Standardized 30-day Yield 4.41%
<PAGE>
<FN>
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included.
(1)Percent change includes reinvestment of $0.634 per share ordinary
income dividends.
(2)Percent change includes reinvestment of $0.161 per share ordinary
income dividends.
(3)Percent change includes reinvestment of $0.576 per share ordinary
income dividends.
(4)Percent change includes reinvestment of $0.146 per share ordinary
income dividends.
(5)Percent change includes reinvestment of $0.564 per share ordinary
income dividends.
(6)Percent change includes reinvestment of $0.143 per share ordinary
income dividends.
(7)Percent change includes reinvestment of $0.622 per share ordinary
income dividends.
(8)Percent change includes reinvestment of $0.158 per share ordinary
income dividends.
</TABLE>
PERFORMANCE DATA (continued)
<TABLE>
Performance Summary--Class A Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
10/25/88--12/31/88 $11.02 $10.99 -- $0.148 + 1.08%
1989 10.99 11.31 -- 0.761 +10.14
1990 11.31 11.22 -- 0.755 + 6.14
1991 11.22 11.61 $0.031 0.751 +10.79
1992 11.61 11.64 0.125 0.807 + 8.58
1993 11.64 12.13 0.158 0.808 +12.78
1994 12.13 10.62 -- 0.662 - 7.08
1995 10.62 11.83 -- 0.636 +17.77
1/1/96--2/29/96 11.83 11.73 -- 0.087 + 0.06
------ ------
Total $0.314 Total $5.415
Cumulative total return as of 2/29/96: +75.55%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the payable date, and do not
include sales charge; results would be lower if sales charge was
included.
</TABLE>
<PAGE>
<TABLE>
Performance Summary--Class B Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
9/30/85--12/31/85 $10.00 $10.60 -- $0.175 + 8.00%
1986 10.60 11.63 $0.046 0.763 +17.80
1987 11.63 10.73 -- 0.745 - 1.45
1988 10.73 10.99 -- 0.707 + 9.28
1989 10.99 11.32 -- 0.705 + 9.69
1990 11.32 11.22 -- 0.698 + 5.51
1991 11.22 11.62 0.031 0.694 +10.33
1992 11.62 11.64 0.125 0.748 + 7.94
1993 11.64 12.13 0.158 0.747 +12.22
1994 12.13 10.63 -- 0.606 - 7.50
1995 10.63 11.83 -- 0.578 +17.07
1/1/96--2/29/96 11.83 11.74 -- 0.079 - 0.01
------ ------
Total $0.360 Total $7.245
Cumulative total return as of 2/29/96: +129.49%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the payable date, and do not
reflect deduction of any sales charge; results would be lower if
sales charge was deducted.
</TABLE>
PERFORMANCE DATA (concluded)
<TABLE>
Performance Summary--Class C Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
10/21/94--12/31/94 $10.94 $10.63 -- $0.116 - 1.76%
1995 10.63 11.83 -- 0.566 +16.95
1/1/96--2/29/96 11.83 11.74 -- 0.078 - 0.02
------
Total $0.760
Cumulative total return as of 2/29/96: +14.87%**
<PAGE>
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the payable date, and do not
reflect deduction of any sales charge; results would be lower if
sales charge was deducted.
</TABLE>
<TABLE>
Performance Summary--Class D Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
10/21/94--12/31/94 $10.94 $10.63 -- $0.127 - 1.65%
1995 10.63 11.83 -- 0.623 +17.53
1/1/96--2/29/96 11.83 11.74 -- 0.086 + 0.05
------
Total $0.836
Cumulative total return as of 2/29/96: +15.65%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the payable date, and do not
include sales charge; results would be lower if sales charge was
included.
</TABLE>
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 12/31/95 +17.77% +13.06%
Five Years Ended 12/31/95 + 8.23 + 7.35
Inception (10/25/88)
through 12/31/95 + 8.14 + 7.52
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
<PAGE>
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 12/31/95 +17.07% +13.07%
Five Years Ended 12/31/95 + 7.67 + 7.67
Ten Years Ended 12/31/95 + 7.83 + 7.83
[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 12/31/95 +16.95% +15.95%
Inception (10/21/94)
through 12/31/95 +12.32 +12.32
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Year Ended 12/31/95 +17.53% +12.83%
Inception (10/21/94)
through 12/31/95 +12.90 + 9.10
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
<PAGE>
PORTFOLIO ABBREVIATIONS
To simplify the listings of Merrill Lynch California Municipal Bond
Fund's portfolio holdings in the Schedule of Investments, we have
abbreviated the names of many of the securities according to the
list below and at right.
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
CP Commercial Paper
GO General Obligation Bonds
HFA Housing Finance Agency
INFLOS Inverse Floating Rate Municipal Bonds
M/F Multi-Family
PCR Pollution Control Revenue Bonds
RAW Revenue Anticipation Warrants
RIB Residual Interest Bonds
RITE Residual Interest Tax-Exempt Securities
RITR Residual Interest Trust Receipts
S/F Single Family
UT Unlimited Tax
VRDN Variable Rate Demand Notes
<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
California--96.7%
<S> <S> <C> <S> <C>
AAA Aaa $ 3,000 Anaheim, California, Public Financing Authority, Tax Allocation
Revenue Bonds, RITES, 8.87% due 12/28/2018 (c)(j) $ 3,555
Antioch, California, Improvement Bonds (1915 Assessment District No.
27-Lone Tree):
NR* NR* 625 Series D, 6.20% due 9/02/2002 642
NR* NR* 665 Series D, 6.40% due 9/02/2003 683
NR* NR* 4,965 Series D, 7.30% due 9/02/2013 5,137
NR* NR* 4,000 Series E, 7.125% due 9/02/2016 4,124
AAA Aaa 3,140 Brea, California, Public Financing Authority, Tax Allocation Revenue Bonds
(Redevelopment Project AB), Series A, 6.75% due 8/01/2022 (c) 3,489
AAA Aaa 2,025 Brentwood, California, Unified School District Revenue Bonds, 6.85% due
8/01/2016 (d) 2,192
<PAGE>
California HFA, Home Mortgage Revenue Bonds:
AA- Aa 5,080 AMT, Series A, 7.70% due 8/01/2030 5,363
AA- Aa 535 AMT, Series B, 8% due 8/01/2029 568
AA- Aa 10,200 AMT, Series F-1, 7% due 8/01/2026 10,724
AA- Aa 815 AMT, Series G, 8.15% due 8/01/2019 855
AA- Aa 2,125 Series A, 8.125% due 8/01/2019 2,263
AA- Aa 2,975 Series D, 7.25% due 8/01/2017 3,157
California HFA, Revenue Bonds, AMT:
AA- Aa 4,150 RIB, 9.237% due 8/01/2023 (j) 4,394
AAA Aaa 980 Series A, 7.20% due 2/01/2026 (c) 1,038
AAA Aaa 5,000 California Health Facilities Financing Authority Revenue Bonds, 5%
due 7/01/2014 4,658
California Health Facilities Financing Authority Revenue Bonds, Series A:
AA Aa3 15,770 (Kaiser Permanente), 7% due 10/01/2018 17,172
AAA Aaa 4,350 (Kaiser Permanente), 7% due 10/01/2018 (c) 4,773
BB Ba 5,150 Refunding (Good Samaritan Health System), 7.50% due 5/01/2000 (a) 5,902
A1+ VMIG1++ 1,580 Refunding (Saint Joseph Health System), VRDN, 3% due 7/01/2013 (b) 1,580
AAA Aaa 4,000 (Scripps Memorial Hospital), 6.25% due 10/01/2013 (c) 4,224
A1+ VMIG1++ 1,100 (Scripps Memorial Hospital), VRDN, 3.05% due 12/01/2005 (b)(c) 1,100
NR* A 5,780 (Scripps Research Institute), 6.625% due 7/01/2014 6,254
A1+ VMIG1++ 2,100 (Sutter Health), VRDN, 3.05% due 3/01/2020 (b) 2,100
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
California (continued)
<S> <S> <C> <S> <C>
California Pollution Control Financing Authority, PCR, Refunding (b):
A1+ P1 $ 2,500 (Exxon Project), VRDN, 2.95% due 12/01/2012 $ 2,500
A1+ NR* 1,500 (Pacific Gas & Electric), CP, Series E, 3.10% due 3/01/1996 1,500
A1+ VMIG1++ 400 (Shell Oil Company Project), VRDN, Series C, 3% due 11/01/2000 400
California Pollution Control Financing Authority, PCR (Southern
California Edison), VRDN (b):
A1 VMIG1++ 2,400 Series A, 3.15% due 2/28/2008 2,400
A1 VMIG1++ 1,700 Series B, 3.15% due 2/28/2008 1,700
A1 P1 300 Series C, 3.15% due 2/28/2008 300
A1 P1 2,000 Series D, 3.15% due 2/28/2008 2,000
California Pollution Control Financing Authority, Resource Recovery
Revenue Bonds, VRDN, AMT (b):
NR* P1 2,500 (Delano Project), Series 1991, 3.25% due 8/01/2019 2,500
NR* P1 3,300 Refunding (Ultra Power Malaga Project), Series A, 3.20% due 4/01/2017 3,300
<PAGE>
California Pollution Control Financing Authority, Solid Waste Disposal
Revenue Bonds(Shell Oil Co.--Martinez Project), VRDN, AMT (b):
A1+ VMIG1++ 6,200 Series A, 3.15% due 10/01/2024 6,200
A1+ VMIG1++ 300 Series B, 3.30% due 12/01/2024 300
California State Department of Water Resources, Central Valley Project
Revenue Bonds(Water Systems):
AA Aa 10,000 Series M, 5% due 12/01/2019 9,155
AAA Aaa 15,000 Series O, 4.75% due 12/01/2029 (c) 13,219
A A1 16,300 California State, GO, Veterans' Revenue Bonds, AMT, UT, Series AW, 7.70%
due 4/01/2009 17,639
California State Public Works Board, Lease Revenue Bonds:
A- A 10,675 (Department of Corrections--Monterey County), Series A, 7% due 11/01/2019 12,034
A- A 3,555 High Technology Facilities (San Jose Facilities), Series A, 7.75%
due 8/01/2006 4,107
A- A 7,000 (Various Community College Projects), 7% due 3/01/2019 7,846
AAA Aaa 10,625 (Various University of California Projects), Series A, 6.40% due
12/01/2016 (d)(l) 11,467
A- A1 1,475 (Various University of California Projects), Series B, 6.625% due
12/01/2019 1,615
AAA Aaa 3,900 California State, RAW, Series C, 5.75% due 4/25/1996 (e) 3,912
California Statewide Community Development Authority Revenue Bonds, COP:
AAA Aaa 4,000 (Good Samaritan Health System), 6.50% due 5/01/2004 (a)(k) 4,597
AA Aa 4,750 (Saint Joseph Health System Group), 6.625% due 7/01/2021 5,200
A1 VMIG1++ 1,300 (Sutter Health Obligation Group), VRDN, 3.05% due 7/01/2015 (b)(d) 1,300
NR* Aa2 800 California Statewide Community Development Authority, Solid Waste Facility
Revenue Bonds (Chevron USA, Inc. Project), VRDN, AMT, 3.15% due 12/15/2024 (b) 800
AAA Aaa 5,000 Central Coast, California, Water Authority Revenue Bonds (State Water
Project Regional Facilities), 6.60% due 10/01/2022 (d) 5,552
BBB NR* 1,000 Contra Costa County, California, Public Financing Authority, Tax
Allocation Revenue Refunding Bonds, Series A, 7.10% due 8/01/2022 1,077
Corona, California, COP, Corona Community:
AAA Aaa 1,915 8% due 3/01/2009 (a) 2,466
AAA Aaa 2,065 8% due 3/01/2010 (a) 2,664
AAA Aaa 2,230 8% due 3/01/2011 (a) 2,891
AAA Aaa 2,410 8% due 3/01/2012 (a) 3,143
AAA Aaa 2,605 8% due 3/01/2013( a) 3,411
AAA Aaa 2,810 8% due 3/01/2014 (a) 3,691
AAA Aaa 3,035 8% due 3/01/2015 (i) 4,005
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
California (continued)
<S> <S> <C> <S> <C>
NR* Aaa $ 4,635 Cypress, California, S/F Residential Mortgage Revenue Refunding
Bonds, Series A, 7.10% due 1/01/2011 (i) $ 5,509
AA- A1 5,900 East Bay, California, Municipal Utilities District, Water System Revenue
Refunding Bonds, 6% due 6/01/2020 6,065
AAA Aaa 5,000 El Cajon, California, Redevelopment Agency, Tax Allocation Bonds (El
Cajon Redevelopment Project), 6.60% due 10/01/2022 (d) 5,505
BBB+ NR* 4,600 Fontana, California, Redevelopment Agency, Tax Allocation Refunding Bonds
(Jurupa Hills Redevelopment Project), Series A, 7.20% due 10/01/2024 5,041
AAA Aaa 2,230 Irvine, California, Unified School District, Special Tax Community
Facilities Bonds(District No. 86-1), Series A, 8.10% due 11/15/2013 (c) 2,484
Long Beach, California, Improvement Bonds (1915 Assessment District 90-2):
NR* NR* 465 7% due 9/02/2001 481
NR* NR* 495 7.05% due 9/02/2002 512
NR* NR* 530 7.10% due 9/02/2003 549
NR* NR* 570 7.15% due 9/02/2004 589
NR* NR* 610 7.20% due 9/02/2005 629
NR* NR* 655 7.25% due 9/02/2006 676
NR* NR* 4,065 7.50% due 9/02/2011 4,221
NR* NR* 5,695 Long Beach, California, M/F Redevelopment Agency Revenue Bonds
(Housing-Pacific Court Apartments), Issue B, AMT, 6.95% due 9/01/2023 4,519
NR* NR* 4,545 Long Beach, California, Special Tax Community Facilities, District No.
3-Pine Avenue, 6.375% due 9/01/2023 4,350
AAA Aaa 5,225 Los Angeles, California, Community Redevelopment Agency, Housing Revenue
Refunding Bonds, Series A, 6.45% due 7/01/2017 (d) 5,482
AAA Aaa 5,150 Los Angeles, California, Community Redevelopment Agency, Tax Allocation
Refunding Bonds (Bunker Hill), Series H, 6.50% due 12/01/2016 (f) 5,614
AAA Aaa 17,050 Los Angeles, California, Convention and Exhibition Center Authority, COP,
9% due 12/01/2005 (a) 22,940
AA- Aa 10,000 Los Angeles, California, Department of Water and Power, Electric Plant
Revenue Bonds, Registered RITR, 8.67% due 2/01/2020 (j) 11,263
AAA Aaa 5,000 Los Angeles, California, Department of Water and Power, Waterworks
Revenue Bonds, 6.30% due 7/01/2024 (c) 5,324
<PAGE>
AAA NR* 12,000 Los Angeles, California, Harbor Department Revenue Bonds, 7.60% due
10/01/2018 (i) 13,410
Los Angeles, California, Wastewater System Revenue Refunding Bonds, Series D:
AAA Aaa 7,890 6.625% due 12/01/2012 (c) 8,678
AAA Aaa 2,890 Refunding, 5.20% due 11/01/2021 (e) 2,707
AAA Aaa 13,500 Los Angeles County, California, COP (Correctional Facilities Project),
6.50% due 9/01/2013 (c) 14,638
NR* NR* 5,000 Los Angeles County, California, COP (Marina Del Rey), Series A, 6.50%
due 7/01/2008 5,119
AAA Aaa 5,000 Los Angeles County, California, Metropolitan Transportation Authority,
Sales Tax Revenue Bonds (Proposition C--Second Senior), Series A, 5.50%
due 7/01/2017 (d) 4,938
AAA Aaa 6,250 Marysville, California, Hospital Revenue Bonds (Fremont-Rideout
Health Group), Series A, 6.30% due 1/01/2022 (d) 6,672
Metropolitan Water District, Southern California, Waterworks Revenue Bonds:
AA Aa 3,000 6.625% due 7/01/2001 (a) 3,383
AA Aa 6,150 RIB, 8.075% due 8/05/2022 (j) 6,450
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
California (continued)
<S> <S> <C> <S> <C>
AAA Aaa $ 2,000 Modesto, California, Health Facilities Revenue Bonds (Memorial
Hospital Association), Series A, 6.875% due 6/01/2021 (c) $ 2,219
AAA Aaa 10,000 Northern California Power Agency, Public Power Revenue Refunding Bonds
(Hydroelectric Project Number 1), Series A, 5.50% due 7/01/2016 (c) 9,879
AAA Aaa 5,635 Ontario, California, Redevelopment Financing Authority Revenue Bonds
(Cimarron Project No. 1--Center City), 6.375% due 8/01/2020 (c) 5,992
AAA Aaa 20,300 Orange County, California, Local Transportation Authority, Sales Tax
Revenue Bonds, Second Series, 6.10% due 2/14/2011 (e) 21,451
A NR* 4,250 Palmdale, California, Civic Authority, Revenue Refunding Bonds (Merged
Redevelopment Project), Series A, 6.60% due 9/01/2034 4,553
<PAGE>
AAA Aaa 11,620 Pittsburg, California, Redevelopment Agency, Residential Mortgage Revenue
Bonds, 9.60% due 6/01/2016 (i) 18,136
NR* NR* 4,850 Pleasanton, California, Joint Powers Financing Authority, Revenue
Reassessment Bonds, Sub-Series B, 6.75% due 9/02/2017 4,949
AAA Aaa 1,000 Port Oakland, California, Port Revenue Bonds, AMT, Series E, 6.50% due
11/01/2016 (c) 1,076
AAA Aaa 3,450 Rancho, California, Water District Financing Authority Revenue Bonds,
RITES, 9.124% due 9/11/2001 (a)(d)(j) 4,261
Redwood City, California, Public Financing Authority, Local Agency Revenue
AAA Aaa 1,500 Bonds:Refunding, Series A, 6.50% due 7/15/2011 (d) 1,647
A- NR* 2,500 Series B, 7.25% due 7/15/2011 2,751
BBB NR* 2,430 Riverside County, California, Redevelopment Agency Bonds (Tax Allocation
Redevelopment Project No. 4), Series A, 7.50% due 10/01/2026 2,645
AAA Aaa 3,000 Rohnert Park, California, Community Development Agency, Tax Allocation
Refunding Bonds (Rohnert Park Redevelopment Project), 6.50% due 8/01/2020 (d) 3,257
Sacramento, California, Municipal Utilities District, Electric Revenue Bonds:
AAA Aaa 7,000 INFLOS, 8.818% due 8/15/2018 (e)(j) 7,752
AAA Aaa 5,000 Series B, 6.375% due 8/15/2022 (c) 5,341
AA Aa 2,500 San Bernardino, California, Health Care System Revenue Bonds (Sisters
of Charity), Series A, 7% due 7/01/2021 2,777
AAA Aaa 5,000 San Francisco, California, Bay Area Rapid Transit District, Sales Tax
Revenue Bonds, 5.50% due 7/01/2020 (e) 4,934
San Francisco, California, City and County Airport Commission, International
Airport Revenue Bonds, Second Series (d):
AAA Aaa 3,240 AMT, Issue 6, 6.50% due 5/01/2018 3,512
AAA Aaa 8,000 AMT, Issue 6, 6.60% due 5/01/2020 8,697
AAA Aaa 8,500 Refunding, Issue 1, 6.30% due 5/01/2011 9,121
NR* NR* 1,280 San Francisco, California, City and County Redevelopment Agency, Community
Facilities District, Special Tax No. 1 Revenue Bonds (South Beach), 8.20%
due 8/01/2013 1,393
AAA Aaa 2,700 San Jose, California, Redevelopment Agency, Tax Allocation Refunding Bonds
(Merged Area Redevelopment Project), 5% due 8/01/2020 (c) 2,499
AAA Aaa 4,150 Santa Clara County, California, Electric Revenue Bonds, Series A, 6.50% due
7/01/2021 (c) 4,537
AAA Aaa 10,000 Santa Clara County, California, Financing Authority, Lease Revenue Bonds
(VMC Facility Replacement Project), Series A, 6.75% due 11/15/2020 (d) 11,262
AA A1 1,000 Santa Clara County, California, Transportation District, Sales Tax Revenue
Bonds, Series A,6.75% due 6/01/2011 1,093
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
California (concluded)
<S> <S> <C> <S> <C>
AAA Aaa $ 2,000 Santa Fe Springs, California, Redevelopment Agency, Tax Allocation
Bonds (Consolidated Redevelopment Project), Series A, 6.40% due
9/01/2022 (c) $ 2,148
Southern California Home Financing Authority, S/F Mortgage Revenue Bonds,
AMT (h):
AAA NR* 4,015 Series A, 7.625% due 10/01/2023 4,248
AAA NR* 2,450 Series A, 7.35% due 9/01/2024 (g) 2,573
AAA NR* 1,040 Series B, 7.75% due 3/01/2024 (g) 1,104
BBB+ NR* 20,590 Stanislaus, California, Waste-to-Energy Financing Agency, Solid Waste
Facility, Revenue Refunding Bonds (Ogden Martin System Inc. Project),
7.625% due 1/01/2010 22,433
AAA Aaa 9,000 Stockton, California, Revenue Bonds (Wastewater Treatment Plant
Expansion), COP, Series A, 6.80% due 9/01/2024 (e) 10,123
AAA Aaa 4,000 Tri-City, California, Hospital District Revenue Bonds (Tri-City Hospital),
7.50% due 2/01/2017 (c) 4,593
University of California Revenue Bonds (Multiple Purpose Projects):
A- NR* 14,700 Refunding, Series A, 6.875% due 9/01/2002(a) 16,997
AAA Aaa 8,000 Series D, 6.25% due 9/01/2012 (c) 8,554
AAA Aaa 6,000 Series D, 6.375% due 9/01/2019 (c) 6,416
AAA Aaa 11,845 Series D, 6.375% due 9/01/2024 (c) 12,666
A A 6,000 West Covina, California, COP (Queen of the Valley Hospital), 6.95% due
8/15/2023 6,568
AAA Aaa 6,000 West Sacramento, California, Redevelopment Agency, Tax Allocation Bonds
(West Sacramento Redevelopment Project), 6.25% due 9/01/2010 (c) 6,401
<PAGE>
Puerto Rico--2.7%
A Baa1 5,000 Puerto Rico Commonwealth, GO, UT, 6.45% due 7/01/2017 5,403
A1+ VMIG1++ 1,000 Puerto Rico Commonwealth, Government Development Bank, Revenue
Refunding Bonds, VRDN, 2.80% due 12/01/2015 (b) 1,000
A Baa1 10,465 Puerto Rico Commonwealth, Highway and Transportation Authority, Highway
Revenue Bonds, Series T, 6.625% due 7/01/2018 11,493
Total Investments (Cost--$616,123)--99.4% 667,040
Variation Margin on Financial Futures Contracts**--(0.0%) (13)
Other Assets Less Liabilities--0.6% 4,083
--------
Net Assets--100.0% $671,110
========
<FN>
(a)Prerefunded.
(b)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at February 29, 1996.
(c)MBIA Insured.
(d)AMBAC Insured.
(e)FGIC Insured.
(f)FSA Insured.
(g)FNMA Collateralized.
(h)GNMA Collateralized.
(i)Escrowed to Maturity.
(j)The interest rate is subject to change periodically and inversely
based upon prevailing market rates. The interest rate shown is the
rate in effect at February 29, 1996.
(k)CAPMAC Insured.
(l)Securities held as collateral in connection with open financial
futures contracts.
*Not Rated.
**Financial futures contracts purchased as of February 29, 1996 were
as follows:
Number of Expiration Value
Contracts Issue Date (Notes 1a & 1b)
200 Municipal Bond Index June 1996 $23,212,500
Total Contract Price--$23,395,000 $23,212,500
===========
<FN>
++Highest short-term rating by Moody's Investors Service, Inc.
See Notes to Financial Statements.
</TABLE>
<PAGE>
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of February 29, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$616,122,616)(Note 1a) $667,040,057
Cash 1,110,625
Receivables:
Interest $ 11,485,371
Securities sold 1,195,111
Beneficial interest sold 460,764 13,141,246
------------
Prepaid registration fees and other assets (Note 1e) 127,695
------------
Total assets 681,419,623
------------
Liabilities: Variation margin on financial futures contracts (Note 1b) 12,500
Payables:
Securities purchased 8,045,435
Dividends to shareholders (Note 1f) 822,749
Beneficial interest redeemed 669,273
Investment adviser (Note 2) 291,746
Distributor (Note 2) 229,267 10,058,470
------------
Accrued expenses and other liabilities 238,317
------------
Total liabilities 10,309,287
------------
Net Assets: Net assets $671,110,336
============
Net Assets Class A Shares of beneficial interest, $.10 par value, unlimited
Consist of: number of shares authorized $ 384,184
Class B Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized 4,663,624
Class C Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized 52,704
Class D Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized 616,957
Paid-in capital in excess of par 634,500,528
Accumulated realized capital losses on investments--net (Note 5) (13,270,751)
Accumulated distributions in excess of realized capital gains--net (6,571,851)
Unrealized appreciation on investments--net 50,734,941
------------
Net assets $671,110,336
============
<PAGE>
Net Asset Value: Class A--Based on net assets of $45,082,917 and 3,841,837 shares
of beneficial interest outstanding $ 11.73
============
Class B--Based on net assets of $547,431,829 and 46,636,241 shares
of beneficial interest outstanding $ 11.74
============
Class C--Based on net assets of $6,185,075 and 527,045 shares
of beneficial interest outstanding $ 11.74
============
Class D--Based on net assets of $72,410,515 and 6,169,568 shares
of beneficial interest outstanding $ 11.74
============
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations
<CAPTION>
For the Six Months Ended
February 29, 1996
<S> <S> <C>
Investment Income Interest and amortization of premium and discount earned $ 20,542,717
(Note 1d): -------------
Expenses: Investment advisory fees (Note 2) 1,819,077
Account maintenance and distribution fees--Class B (Note 2) 1,444,809
Transfer agent fees--Class B (Note 2) 117,057
Printing and shareholder reports 57,669
Accounting services (Note 2) 45,385
Registration fees (Note 1e) 40,525
Custodian fees 34,058
Professional fees 33,484
Account maintenance fees--Class D (Note 2) 21,155
Trustees' fees and expenses 20,014
Account maintenance and distribution fees--Class C (Note 2) 13,746
Pricing fees 9,223
Transfer agent fees--Class A (Note 2) 7,518
Transfer agent fees--Class D (Note 2) 7,180
Transfer agent fees--Class C (Note 2) 1,034
Other 9,529
-------------
Total expenses 3,681,463
-------------
Investment income--net 16,861,254
-------------
<PAGE>
Realized & Realized gain on investments--net 3,702,405
Unrealized Change in unrealized appreciation on investments--net 15,946,449
Gain on -------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 36,510,108
(Notes 1b, 1d & 3): =============
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Six For the
Months Ended Year Ended
February 29, August 31,
Increase (Decrease) in Net Assets: 1996 1995
<S> <S> <C> <C>
Operations: Investment income--net $ 16,861,254 $ 37,800,235
Realized gain (loss) on investments--net 3,702,405 (16,973,155)
Change in unrealized appreciation on investments--net 15,946,449 17,518,587
------------ ------------
Net increase in net assets resulting from operations 36,510,108 38,345,667
------------ ------------
Dividends to Investment income--net:
Shareholders Class A (1,220,334) (3,035,857)
(Note 1f): Class B (14,398,019) (34,575,842)
Class C (111,365) (69,364)
Class D (1,131,536) (119,172)
------------ ------------
Net decrease in net assets resulting from dividends to shareholders (16,861,254) (37,800,235)
------------ ------------
Beneficial Interest Net decrease in net assets derived from beneficial interest (15,942,701) (120,046,349)
Transactions transactions ------------ ------------
(Note 4):
Net Assets: Total increase (decrease) in net assets 3,706,153 (119,500,917)
Beginning of period 667,404,183 786,905,100
------------ ------------
End of period $671,110,336 $667,404,183
============ ============
See Notes to Financial Statements.
</TABLE>
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights
<CAPTION>
Class A
For the Six
The following per share data and ratios have been derived Months
from information provided in the financial statements. Ended
Feb. 29, For the Year Ended August 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 11.40 $ 11.32 $ 12.38 $ 11.80 $ 11.44
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .32 .64 .68 .70 .72
Realized and unrealized gain (loss) on
investments--net .33 .08 (.78) .78 .41
-------- -------- -------- -------- --------
Total from investment operations .65 .72 (.10) 1.48 1.13
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.32) (.64) (.68) (.70) (.72)
Realized gain on investments--net -- -- (.19) (.20) (.05)
In excess of realized gain on
investments--net -- -- (.09) -- --
-------- -------- -------- -------- --------
Total dividends and distributions (.32) (.64) (.96) (.90) (.77)
-------- -------- -------- -------- --------
Net asset value, end of period $ 11.73 $ 11.40 $ 11.32 $ 12.38 $ 11.80
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 5.75%+++ 6.77% (.92%) 13.19% 10.23%
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses .65%* .65% .62% .63% .63%
Net Assets: ======== ======== ======== ======== ========
Investment income--net 5.47%* 5.83% 5.65% 5.87% 6.26%
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 45,083 $ 44,228 $ 60,017 $ 64,526 $ 46,556
Data: ======== ======== ======== ======== ========
Portfolio turnover 21.20% 53.40% 75.66% 61.24% 52.31%
======== ======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effect of sales loads.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
<PAGE>
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights (concluded)
<CAPTION>
Class B
For the Six
The following per share data and ratios have been derived Months
from information provided in the financial statements. Ended
Feb. 29, For the Year Ended August 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 11.40 $ 11.32 $ 12.38 $ 11.80 $ 11.44
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .29 .59 .61 .64 .67
Realized and unrealized gain (loss) on
investments--net .34 .08 (.78) .78 .41
-------- -------- -------- -------- --------
Total from investment operations .63 .67 (.17) 1.42 1.08
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.29) (.59) (.61) (.64) (.67)
Realized gain on investments--net -- -- (.19) (.20) (.05)
In excess of realized gain on
investments--net -- -- (.09) -- --
-------- -------- -------- -------- --------
Total dividends and distributions (.29) (.59) (.89) (.84) (.72)
-------- -------- -------- -------- --------
Net asset value, end of period $ 11.74 $ 11.40 $ 11.32 $ 12.38 $ 11.80
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 5.48%+++ 6.28% (1.50%) 12.62% 9.68%
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses 1.16%* 1.16% 1.13% 1.13% 1.13%
Net Assets: ======== ======== ======== ======== ========
Investment income--net 4.97%* 5.32% 5.15% 5.38% 5.76%
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $547,432 $616,199 $726,888 $821,220 $729,569
Data: ======== ======== ======== ======== ========
Portfolio turnover 21.20% 53.40% 75.66% 61.24% 52.31%
======== ======== ======== ======== ========
<PAGE>
<CAPTION>
Class C Class D
For the For the For the For the
Six Period Six Period
The following per share data and ratios have been derived Months Oct. 21, Months Oct. 21,
from information provided in the financial statements. Ended 1994++ to Ended 1994++ to
Feb. 29, Aug. 31, Feb. 29, Aug. 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1996 1995
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 11.40 $ 10.94 $ 11.40 $ 10.94
Operating -------- -------- -------- --------
Performance: Investment income--net .28 .49 .31 .54
Realized and unrealized gain on investments--net .34 .46 .34 .46
-------- -------- -------- --------
Total from investment operations .62 .95 .65 1.00
-------- -------- -------- --------
Less dividends from investment income--net (.28) (.49) (.31) (.54)
-------- -------- -------- --------
Net asset value, end of period $ 11.74 $ 11.40 $ 11.74 $ 11.40
======== ======== ======== ========
Total Investment Based on net asset value per share 5.43%+++ 8.96%+++ 5.70%+++ 9.42%+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses 1.26%* 1.27%* .75%* .76%*
Net Assets: ======== ======== ======== ========
Investment income--net 4.85%* 5.04%* 5.33%* 5.59%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 6,185 $ 3,131 $ 72,410 $ 3,846
Data: ======== ======== ======== ========
Portfolio turnover 21.20% 53.40% 21.20% 53.40%
======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effect of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
<PAGE>
1. Significant Accounting Policies:
Merrill Lynch California Municipal Bond Fund (the "Fund") is part of
Merrill Lynch California Municipal Series Trust (the "Trust"). The
Fund is registered under the Investment Company Act of 1940 as a
diversified, open-end management investment company. These unaudited
financial statements reflect all adjustments which are, in the
opinion of management, necessary to a fair statement of the results
for the interim period presented. All such adjustments are of a
normal recurring nature. The Fund 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 Fund.
(a) Valuation of investments--Municipal bonds and other portfolio
securities in which the Fund invests are traded primarily in the
over-the-counter municipal bond and money markets and 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. Financial futures contracts and
options thereon, which are traded on exchanges, are valued at their
settlement prices as of the close of such exchanges. Short-term
investments with remaining maturities of sixty days or less are
valued at amortized cost, 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 Board of Trustees of the Trust, including
valuations furnished by a pricing service retained by the Trust,
which may utilize a matrix system for valuations. The procedures of
the pricing service and its valuations are reviewed by the officers
of the Trust under the general supervision of the Trustees.
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses may
arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
<PAGE>
* Financial futures contracts--The Fund may purchase or sell interest
rate futures contracts and options on such futures contracts for the
purpose of hedging the market risk on existing securities or the
intended purchase of securities. Futures contracts are contracts for
delayed delivery of securities at a specific future date and at a
specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required
by the exchange on which the transaction is effected. Pursuant to
the contract, the Fund 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 Fund as unrealized gains or losses. When the
contract is closed, the Fund 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.
(c) Income taxes--It is the Fund'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.
(d) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income is recognized on the accrual
basis. Discounts and market premiums are amortized into interest
income. Realized gains and losses on security transactions are
determined on the identified cost basis.
(e) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.
(f) 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.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("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 Fund has also entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee based upon the average daily
value of the Fund's net assets at the following annual rates: 0.55%
of the Fund's average daily net assets not exceeding $500 million;
0.525% of average daily net assets in excess of $500 million but not
exceeding $1 billion; and 0.50% of average daily net assets in
<PAGE>
excess of $1 billion. The Investment Advisory Agreement obligates
FAM to reimburse the Fund to the extent the Fund's expenses
(excluding interest, taxes, distribution fees, brokerage fees and
commissions, and extraordinary items) exceed 2.5% of the Fund's
first $30 million of average daily net assets, 2.0% of the next $70
million of average daily net assets, and 1.5% of the remaining
average net assets. FAM's obligation to reimburse the Fund is
limited to the amount of the management fee. No fee payment will be
made during any fiscal year which will cause such expenses to exceed
expense limitations at the time of such payment.
Pursuant to the distribution plans (the "Distribution Plans")
adopted by the Fund in accordance with Rule 12b-1 under the
Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are
accrued daily and paid monthly at annual rates based upon the
average daily net assets of the shares as follows:
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.25%
Class C 0.25% 0.35%
Class D 0.10% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to the
Fund. 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, 1996, MLFD earned underwriting
discounts and MLPF&S earned dealer concessions on sales of the
Fund's Class A and Class D Shares as follows:
MLFD MLPF&S
Class A $1,402 $10,890
Class D $ 579 $ 5,215
For the six months ended February 29, 1996, MLPF&S received
contingent deferred sales charges of $255,965 and $1,910 relating to
transactions in Class B and Class C Shares, respectively.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
<PAGE>
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or trustees of the Fund are officers and/or
directors of FAM, PSI, MLPF&S, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the six months ended February 29, 1996 were $136,875,909 and
$195,620,046, respectively.
Net realized and unrealized gains (losses) as of February 29, 1996
were as follows:
Realized Unrealized
Gains (Losses) Gains (Losses)
Long-term investments $ 4,335,467 $ 50,919,796
Short-term investments (750) (2,355)
Financial futures
contracts (632,312) (182,500)
----------- -------------
Total $ 3,702,405 $ 50,734,941
=========== =============
NOTES TO FINANCIAL STATEMENTS (concluded)
As of February 29, 1996, net unrealized appreciation for Federal
income tax purposes aggregated $50,917,441 of which $52,900,144
related to appreciated securities and $1,982,703 related to
depreciated securities. The aggregate cost of investments at
February 29, 1996 for Federal income tax purposes was $616,122,616.
4. Beneficial Interest Transactions:
Net decrease in net assets derived from beneficial interest
transactions was $15,942,701 and $120,046,349 for the six months
ended February 29, 1996 and for the year ended August 31, 1995,
respectively.
Transactions in shares of beneficial interest for each class were as
follows:
Class A Shares for the
Six Months Ended Dollar
February 29, 1996 Shares Amount
<PAGE>
Shares sold 213,956 $ 2,504,870
Shares issued to share-
holders in reinvestment
of dividends 44,233 515,626
------------ ------------
Total issued 258,189 3,020,496
Shares redeemed (297,351) (3,464,845)
------------ ------------
Net decrease (39,162) $ (444,349)
============ ============
Class A Shares
For the Year Ended Dollar
August 31, 1995 Shares Amount
Shares sold 356,036 $ 3,948,528
Shares issued to share-
holders in reinvestment
of dividends 110,995 1,224,562
------------ ------------
Total issued 467,031 5,173,090
Shares redeemed (1,889,907) (20,801,528)
------------ ------------
Net decrease (1,422,876) $(15,628,438)
============ ============
Class B Shares for the
Six Months Ended Dollar
February 29, 1996 Shares Amount
Shares sold 1,929,001 $ 22,521,783
Shares issued to share-
holders in reinvestment
of dividends 546,271 6,367,224
------------ ------------
Total issued 2,475,272 28,889,007
Shares redeemed (4,086,147) (47,599,367)
Automatic conversion
of shares (5,808,438) (67,581,755)
------------ ------------
Net decrease (7,419,313) $(86,292,115)
============ ============
<PAGE>
Class B Shares
For the Year Ended Dollar
August 31, 1995 Shares Amount
Shares sold 4,055,625 $ 44,759,130
Shares issued to share-
holders in reinvestment
of dividends 1,364,078 15,067,056
------------- -------------
Total issued 5,419,703 59,826,186
Shares redeemed (15,559,912) (170,703,755)
Automatic conversion
of shares (22,131) (248,360)
------------ -------------
Net decrease (10,162,340) $(111,125,929)
============ =============
Class C Shares for the
Six Months Ended Dollar
February 29, 1996 Shares Amount
Shares sold 300,449 $ 3,508,101
Shares issued to share-
holders in reinvestment
of dividends 4,024 47,075
------------ ------------
Total issued 304,473 3,555,176
Shares redeemed (52,137) (611,871)
------------ ------------
Net increase 252,336 $ 2,943,305
============ ============
Class C Shares for the Period Dollar
Oct. 21, 1994++ to Aug. 31, 1995 Shares Amount
Shares sold 343,686 $ 3,830,307
Shares issued to share-
holders in reinvestment
of dividends 3,078 34,747
------------ ------------
Total issued 346,764 3,865,054
Shares redeemed (72,055) (813,364)
------------ ------------
Net increase 274,709 $ 3,051,690
============ ============
[FN]
++Commencement of Operations.
<PAGE>
Class D Shares for the Six Months Dollar
Ended February 29, 1996 Shares Amount
Shares sold 267,692 $ 3,131,277
Automatic conversion
of shares 5,808,438 67,581,755
Shares issued to share-
holders in reinvestment
of dividends 40,698 477,820
------------ ------------
Total issued 6,116,828 71,190,852
Shares redeemed (284,729) (3,340,394)
------------ ------------
Net increase 5,832,099 $ 67,850,458
============ ============
Class D Shares for the Period Dollar
Oct. 21, 1994++ to Aug. 31, 1995 Shares Amount
Shares sold 383,812 $ 4,170,592
Automatic conversion
of shares 22,131 248,360
Shares issued to share-
holders in reinvestment
of dividends 7,710 86,300
------------ ------------
Total issued 413,653 4,505,252
Shares redeemed (76,184) (848,924)
------------ ------------
Net increase 337,469 $ 3,656,328
============ ============
[FN]
++Commencement of Operations.
5. Capital Loss Carryforward:
At August 31, 1995, the Fund had a net capital loss carryforward of
approximately $9,806,000, all of which expires in 2003. This amount
will be available to offset like amounts of any future taxable
gains.
<PAGE>
OFFICERS AND TRUSTEES
Arthur Zeikel, President and Trustee
James H. Bodurtha, Trustee
Herbert I. London, Trustee
Robert R. Martin, Trustee
Joseph L. May, Trustee
Andre F. Perold, Trustee
Terry K. Glenn, Executive Vice President
Donald C. Burke, Vice President
Vincent R. Giordano, Senior Vice President
Kenneth A. Jacob, Vice President
Walter C. O'Connor, Portfolio Manager
Gerald M. Richard, Treasurer
Jerry Weiss, Secretary
Custodian
The Bank of New York
90 Washington Street, 12th Floor
New York, New York 10286
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
(800) 637-3863
