MERRILL LYNCH INSTITUTIONAL INTERMEDIATE FUND, 485BPOS, 1997-02-12

MERRILL LYNCH INSTITUTIONAL INTERMEDIATE FUND
485BPOS, 1997-02-12

Previous: AMERISHOP CORP, 10-Q, 1997-02-12

Next: ADVO INC, SC 13G/A, 1997-02-12

<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 12, 1997
FILE NO. 33-8708
FILE NO. 811-4839

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

------------------------

FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. / /

POST-EFFECTIVE AMENDMENT NO. 12 /X/

AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/

AMENDMENT NO. 13 /X/

(CHECK APPROPRIATE BOX OR BOXES)

------------------------
MERRILL LYNCH INSTITUTIONAL INTERMEDIATE FUND
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)

P.O. BOX 9011 08543-9011
PRINCETON, NEW JERSEY (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ROBERT W. CROOK
MERRILL LYNCH INSTITUTIONAL INTERMEDIATE FUND
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)

------------------------

COPIES TO:

PHILIP L. KIRSTEIN, ESQ. LEONARD B. MACKEY, JR., ESQ.
FUND ASSET MANAGEMENT, L.P. ROGERS & WELLS
P.O. BOX 9011 200 PARK AVENUE
PRINCETON, NEW JERSEY 08543-9011 NEW YORK, NEW YORK 10166

IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX):

<TABLE>
<S> <C>
/ / immediately upon filing pursuant to paragraph (b)
/x/ on February 14, 1997 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)
/ / on (date) pursuant to paragraph (a)(i)
/ / 75 days after filing pursuant to paragraph (a)(ii)
/ / on (date) pursuant to paragraph (a)(ii) of rule 485
</TABLE>

IF APPROPRIATE, CHECK THE FOLLOWING BOX:

<TABLE>
<S> <C>
/ / this post-effective amendment designates a new effective date
for a previously filed post-effective amendment
</TABLE>

CALCULATION OF REGISTRATION FEE

THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF ITS SHARES UNDER THE
SECURITIES ACT OF 1933 PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT
OF 1940. THE NOTICE REQUIRED BY SUCH RULE FOR THE REGISTRANT'S MOST RECENT
FISCAL YEAR WAS FILED ON DECEMBER 21, 1995.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

<PAGE>

MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND
CROSS REFERENCE SHEET
FORM N-1A

<TABLE>
<CAPTION>
ITEM LOCATION
- ----------------------------------------------------------- ---------------------------------------------------
<S> <C> <C>
PART A
1. Cover Page...................................... Cover Page
2. Synopsis........................................ Fee Table
3. Financial Highlights............................ Financial Highlights; Performance Data
4. General Description of Registrant............... Investment Objectives and Policies; Additional
Information
5. Management of the Fund.......................... Fee Table; Investment Adviser; Trustees; Portfolio
Transactions; Additional Information
5A. Management's Discussion of Fund Performance..... *
6. Capital Stock and Other Securities.............. Cover Page; Dividends, Distributions and Taxes;
Additional Information
7. Purchase of Securities Being Offered............ Fee Table; Purchase of Shares; Merrill Lynch Select
Pricing(Service Mark) System; Additional
Information
8. Redemption or Repurchase........................ Fee Table; Redemption of Shares; Merrill Lynch
Select Pricing(Service Mark) System; Shareholder
Services
*9.... Pending Legal Proceedings....................... *

PART B
10. Cover Page...................................... Cover Page
11. Table of Contents............................... Table of Contents
12. General Information and History................. Additional Information
13. Investment Objectives and Policies.............. Investment Objectives and Policies; Investment
Restrictions; Portfolio Transactions
14. Management of the Fund.......................... Management of the Fund
*15. Control Persons and Principal Holders of
Securities.................................... *
16. Investment Advisory and Other Services.......... Management of the Fund; Purchase of Shares
17. Brokerage Allocation and Other Practices........ Portfolio Transactions
*18. Capital Stock and Other Securities.............. *
19. Purchase, Redemption and Pricing of Securities
Being Offered................................. Purchase of Shares; Determination of Net Asset
Value; Redemption of Shares; Systematic
Withdrawal Plans; Retirement Plans; Exchange
Privilege; Additional Information
20. Tax Status...................................... Dividends, Distributions and Taxes
21. Underwriters.................................... Purchase of Shares
22. Calculation of Performance Data................. Performance Data
23. Financial Statements............................ Financial Statements

PART C
Information required to be included in Part C is set forth under the appropriate Item, so numbered,
in Part C of this Registration Statement.
</TABLE>

- ------------
* Item inapplicable or answer negative.

<PAGE>

PROSPECTUS
FEBRUARY 18, 1997

MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 o PHONE NO. (609) 282-2800

------------------------

Merrill Lynch Intermediate Government Bond Fund (the 'Fund') is a
diversified mutual fund seeking the highest possible current income consistent
with the protection of capital afforded by investing in intermediate-term debt
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities with a maximum maturity not to exceed fifteen years. Under
normal circumstances, all or substantially all of the Fund's assets will be
invested in such securities. Under normal market conditions, the Fund will
maintain a dollar-weighted average maturity of six to eight years. There can be
no assurance that the Fund's investment objective will be realized. For more
information on the Fund's investment objective and policies, please see
'Investment Objectives and Policies' on page 9.

Pursuant to the Merrill Lynch Select Pricing(Service Mark) System, the Fund
offers four classes of shares, each with a different combination of sales
charges, ongoing fees and other features. Class C shares of the Fund are
available only through the Exchange Privilege. The Merrill Lynch Select
Pricing(Service Mark) System permits an investor to choose the method of
purchasing shares that the investor believes is most beneficial given the amount
of the purchase, the length of time the investor expects to hold the shares and
other relevant circumstances. See 'Merrill Lynch Select Pricing(Service Mark)
System' on page 3.

Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the 'Distributor'), P.O. Box 9081, Princeton, New Jersey 08543-9081 (609)
282-2800, or from other securities dealers which have entered into selected
dealer agreements with the Distributor. See 'Purchase of Shares' on page
12. Merrill Lynch, Pierce, Fenner & Smith Incorporated ('Merrill Lynch') may
charge its customers a processing fee (presently $4.85) for confirming
purchases and repurchases. Purchases and redemptions effected directly
through the Fund's
transfer agent are not subject to the processing fee. See 'Purchase of Shares'
and 'Redemption of Shares.'

The minimum initial purchase is $1,000 ($100 for retirement plans), and the
minimum subsequent purchase is $50 ($1 for retirement plans). A shareholder may

have his shares redeemed at the net asset value per share of the Fund.

Prior to February 18, 1997, the Fund operated as the Merrill Lynch
Institutional Intermediate Fund. At the close of business on February 14, 1997,
the Fund was reorganized as the Merrill Lynch Intermediate Government Bond Fund
and shares of the Fund outstanding on that date were reclassified as Class D
Shares.

------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

------------------------

This Prospectus sets forth in concise form the information about the Fund
that a prospective investor should know before investing in the Fund. Investors
should read and retain this Prospectus for future reference. Additional
information about the Fund has been filed with the Securities and Exchange
Commission in a Statement of Additional Information, dated February 18, 1997,
and is available upon request and without charge, by calling or writing the Fund
at the address and telephone number set forth above. The Statement of Additional
Information is hereby incorporated by reference into this Prospectus.

------------------------
MERRILL LYNCH ASSET MANAGEMENT--INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR

<PAGE>

FEE TABLE

A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows.

<TABLE>
<CAPTION>
CLASS A(a) CLASS B(b) CLASS C(c) CLASS D(d)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases (as a percentage
of offering price)....................................... 1.00%(e) None None 1.00%(e)
Sales Charge Imposed on Dividend Reinvestments.............. None None None None
Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, whichever is lower)........ None(f) 1.00%(g) 1.00%(h) None(f)
Exchange Fee................................................ None None None None
ANNUAL FUND OPERATING EXPENSES(i):
Investment Adviser Fees(j).................................. 0.40% 0.40% 0.40% 0.40%
12b-1 Fees(k):
Account Maintenance Fees................................. None 0.25% 0.25% 0.10%
Distribution Fees........................................ None 0.25% 0.25% None
Other Expenses:
Custodial Fees........................................... 0.02% 0.02% 0.02% 0.02%
Shareholder Servicing Fees(l)............................ 0.05% 0.05% 0.05% 0.05%
Other Fees............................................... 0.35% 0.35% 0.35% 0.35%
---------- ---------- ---------- ----------
Total Other Expenses................................... 0.42% 0.42% 0.42% 0.42%
---------- ---------- ---------- ----------
TOTAL FUND OPERATING EXPENSES................................. 0.82% 1.32% 1.32% 0.92%
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>

- ------------

(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and participants in
connection with certain fee-based programs. See 'Purchase of Shares--Initial
Sales Charge Alternatives--Class A and Class D Shares'--page 14 and
'Shareholder Services--Fee-Based Programs'--page 26. Prior to the date of
this Prospectus, the Fund did not offer its Class A shares to the public.

(b) Class B shares convert to Class D shares automatically approximately ten
years after initial purchase and cease being subject to distribution fees.
See 'Purchase of Shares--Deferred Sales Charge Alternatives--Class B and
Class C Shares'--page 16. Prior to the date of this Prospectus, the Fund

did not offer its Class B shares to the public.

(c) Class C shares are available only through the Exchange Privilege. See
'Shareholder Services--Exchange Privilege'--page 27. Prior to the
date of this Prospectus, the Fund did not offer its Class C shares to the
public.

(d) The shares of the Fund in existence prior to its reorganization at the close
of business on February 14, 1997 have been reclassified as Class D shares.
Prior to the date of this Prospectus, the Fund did not offer its Class D
shares to the public.

(e) Reduced for purchases of $100,000 and over. Class A or Class D purchases of
$1,000,000 or more may not be subject to an initial sales charge but instead
may be subject to a 0.20% contingent deferred sales charge ('CDSC') on
amounts redeemed within the first year after purchase. See 'Purchase of
Shares--Initial Sales Charge Alternatives--Class A and Class D Shares'--page
14.

(f) Class A and Class D shares are not subject to a CDSC, except that certain
purchases of $1,000,000 or more which are not subject to an initial sales
charge may instead be subject to a CDSC of 0.20% of amounts redeemed within
the first year after purchase. Such CDSC may be waived for redemptions made
in connection with fund participation in certain fee-based programs. See
'Shareholder Services--Fee-Based Programs'--page 26.

(g) Decreasing 1.0% thereafter to 0.0% after the first year. The CDSC may be
modified for redemptions made in connection with fund participation in
certain fee-based programs. See 'Shareholder Services--Fee-Based
Programs'--page 26.

(h) Decreasing 1.0% thereafter to 0.0% after the first year. The CDSC may be
waived for redemptions made in connection with fund participation in certain
fee-based programs. See 'Shareholder Services--Fee-Based Programs'--page 26.

(i) The Fund was reorganized at the close of business on February 14, 1997.
Information for Class A, Class B, Class C and Class D shares is estimated
for the fiscal year ending October 31, 1997.

(j) See 'Investment Adviser'--page 10.

(k) See 'Purchase of Shares--Distribution Plans'--page 19.

(l) See 'Investment Adviser--Transfer Agency Services'--page 11.

<PAGE>

<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
-------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
An investor would pay the following expenses on a $1,000 investment,
including for Class A and Class D shares the maximum $10 front-end
sales charge and assuming (i) the Total Fund Operating Expenses for
each class set forth on page 2, (ii) a 5% annual return throughout the
periods indicated and (iii) redemption at the end of the period:
Class A.............................................................. $18 $36 $55 $110
Class B.............................................................. $23 $42 $72 $159
Class C*............................................................. $23 $42 $72 $159
Class D.............................................................. $19 $39 $60 $122
An investor would pay the following expenses on the same $1,000
investment assuming no redemption at the end of the period:
Class A.............................................................. $18 $36 $55 $110
Class B.............................................................. $13 $42 $72 $159
Class C*............................................................. $13 $42 $72 $159
Class D.............................................................. $19 $39 $60 $122
</TABLE>

- ------------

* Class C shares are available only through the Exchange Privilege.

The foregoing Fee Table is intended to assist investors in understanding
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The expenses set forth under 'Other Expenses' are based on estimated
amounts through the end of the Fund's fiscal year on October 31, 1997. The
Example set forth above assumes the reinvestment of all dividends and

distributions and utilizes a five percent annual rate of return as mandated by
Securities and Exchange Commission regulations. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF
RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN
THOSE ASSUMED FOR THE PURPOSE OF THE EXAMPLE. Class B and Class C shareholders
who hold their shares for an extended period of time may pay more in Rule 12b-1
distribution fees than the economic equivalent of the maximum front-end sales
charges permitted under the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. ('NASD'). In addition, the Example does not reflect
the processing fee (presently $4.85) that Merrill Lynch may charge its customers
for confirming purchases and redemptions. Purchases and redemptions effected
directly through the Fund's transfer agent are not subject to the processing
fee. See 'Purchase of Shares' and 'Redemptions of Shares.'

MERRILL LYNCH SELECT PRICING(SERVICE MARK) SYSTEM

The Fund offers four classes of shares under the Merrill Lynch Select
Pricing(Service Mark) System. The shares of each class may be purchased at a
price equal to the next determined net asset value per share subject to the
sales charges and ongoing fee arrangements described below. Shares of Class A
and Class D are sold to investors choosing the initial sales charge
alternatives, and shares of Class B are sold to investors choosing the deferred
sales charge alternatives. Class C shares are offered only through the Exchange
Privilege and may not be purchased except through exchange of Class C shares of
certain other funds. The Merrill Lynch Select Pricing(Service Mark) System is
used by more than 50 registered investment companies advised by Merrill Lynch
Asset Management, L.P. ('MLAM' or the 'Investment Adviser') or its affiliate,
Fund Asset Management, L.P. ('FAM'). Funds

<PAGE>

advised by MLAM or FAM which utilize the Merrill Lynch Select
Pricing(Service Mark) System are referred to herein as 'MLAM-advised
mutual funds.'

Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
deferred sales charges, distribution and account maintenance fees that are
imposed on Class B and Class C shares, as well as the account maintenance fees
that are imposed on the Class D shares, will be imposed directly against those
classes and not against all assets of the Fund and, accordingly, such charges
will not affect the net asset value of any other class or have any impact on

investors choosing another sales charge option. Dividends paid by the Fund for
each class of shares will be calculated in the same manner at the same time and
will differ only to the extent that account maintenance and distribution fees
and any incremental transfer agency costs relating to a particular class are
borne exclusively by that class. Each class has different exchange privileges.
See 'Shareholder Services--Exchange Privilege.'

Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges with respect to the Class B and Class C
shares in that the sales charges applicable to each class provide for the
financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.

The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(Service Mark)
System, followed by a more detailed description of each class and a discussion
of the factors that investors should consider in determining the method of
purchasing shares under the Merrill Lynch Select Pricing(Service Mark) System
that the investor believes is most beneficial under his or her particular
circumstances. More detailed information as to each class of shares is set forth
under 'Purchase of Shares.'

<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SHARES CHARGE(1) FEE FEE FEATURE
<S> <C> <C> <C> <C>
A Maximum 1.00% initial No No No
sales charge(2)(3)

B CDSC for one year, at a rate of 1.0% 0.25% 0.25% B shares convert to D shares
during the first year, decreasing to automatically after
0.0% approximately ten years(5)
after the first year(4)

C(6) CDSC for one year, at a rate of 1.0% 0.25% 0.25% No
during the first year, decreasing to
0.0%
after the first year(7)

D Maximum 1.00% initial 0.10% No No
sales charge(3)
</TABLE>

(Footnotes on next page)
4

<PAGE>

(Footnotes from previous page)

- ------------

(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. Contingent deferred sales charges ('CDSCs') are imposed
if the redemption occurs within the applicable CDSC time period. The charge
will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed.
(2) Offered only to eligible investors. See 'Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors.'

(3) Reduced for purchases of $100,000 or more. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but if the initial sales charge is waived, may be subject to a 0.20%
CDSC for one year. A sales charge of 0.30% for 401(k) purchases over
$1,000,000 will apply. See 'Class A' and 'Class D.'

(4) The CDSC may be modified for redemptions made in connection with fund
participation in certain fee-based programs.

(5) The conversion period for dividend reinvestment shares and certain
retirement plans was modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have an
eight-year conversion period. If Class B shares of the Fund are exchanged
for Class B shares of another MLAM-advised mutual fund, the conversion
period applicable to the Class B shares acquired in the exchange will apply,
and the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.

(6) Class C shares are available only through the Exchange Privilege. See
'Shareholder Services--Exchange Privilege.'

(7) The CDSC may be waived for redemptions made in connection with fund
participation in certain fee-based programs.

<TABLE>
<S> <C>
Class A: Class A shares incur an initial sales charge when they are purchased and bear no ongoing distribution
or account maintenance fees. Class A shares will be offered to a limited group of investors and also
will be issued upon reinvestment of dividends on outstanding Class A shares. Other eligible investors
include certain retirement plans and participants in certain fee-based programs. In addition, Class A
shares will be offered at net asset value to directors and employees of Merrill Lynch & Co., Inc. ('ML
& Co.') and its subsidiaries (the term 'subsidiaries,' when used herein with respect to ML & Co.,

includes MLAM, FAM and certain other entities directly or indirectly wholly-owned and controlled by ML
& Co.) and to members of the Boards of MLAM-advised mutual funds. The maximum initial sales charge is
1.00%, and is reduced for purchases of $100,000 and over and waived for purchases of Class A shares by
certain retirement plans and participants in connection with certain fee-based programs. Purchases of
$1,000,000 or more may not be subject to an initial sales charge, but if the initial sales charge is
waived, such purchases may be subject to a contingent deferred sales charge ('CDSC') of 0.20% if the
shares are redeemed within one year after purchase. Such CDSC may be waived for redemptions made in
connection with fund participation in certain fee-based programs. Sales charges also are reduced under
a right of accumulation which takes into account the investor's holdings of all classes of all
MLAM-advised mutual funds. See 'Purchase of Shares--Initial Sales Charge Alternatives--Class A and
Class D Shares.'

Class B: Class B shares do not incur a sales charge when they are purchased, but they are subject to an ongoing
account maintenance fee of 0.25% of the Fund's average net assets attributable to the Class B shares,
an ongoing distribution fee of 0.25% of average net assets attributable to Class B shares and a CDSC
if they are redeemed within one year of purchase. Such CDSC may be modified for redemptions made in
connection with fund participation in certain fee-based programs. Approximately ten years after
issuance, Class B shares will convert automatically into Class D shares of the Fund, which are subject
to an account maintenance fee but no distribution fee; Class B shares of certain other MLAM-advised
mutual funds into which exchanges may be made convert into Class D shares automatically after
approximately eight years. If Class B shares of the Fund are exchanged for Class B shares of another
MLAM-advised mutual fund, the conversion period applicable to the Class B shares acquired in the
exchange will apply, and the holding period for the shares exchanged will be tacked onto the holding
period for the shares acquired. Automatic conversion of Class B shares into Class D shares will occur
at least once a month on the basis of the
</TABLE>

<PAGE>

<TABLE>
<S> <C>
relative net asset values of the shares of the two classes on the conversion date, without the
imposition of any sales load, fee or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of the shares for federal income tax purposes. Shares purchased
through reinvestment of dividends on Class B shares also will convert automatically to Class D shares.
The conversion period for dividend reinvestment shares and the conversion and holding periods for
certain retirement plans is modified as described under 'Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares--Conversion of Class B Shares to Class D Shares.'

Class C: Class C shares do not incur a sales charge when they are purchased, but they are subject to an ongoing
account maintenance fee of 0.25% of average net assets and an ongoing distribution fee of 0.25% of
average net assets. Class C shares are also subject to a CDSC if they are redeemed within one year of
purchase. Such CDSC may be waived for redemptions made in connection with fund participation in
certain fee-based programs. Although Class C shares are subject to a 1.0% CDSC for only one year,
Class C shares have no conversion feature and, accordingly, an investor who purchases Class C shares
will be subject to distribution fees that will be imposed on Class C shares for an indefinite period
subject to annual approval by the Fund's Board of Trustees and regulatory limitations. Class C shares
are available only through the Exchange Privilege.

Class D: The shares of the Fund in existence prior to its reorganization at the close of business on February

14, 1997 have been reclassified as Class D shares. Although purchasers of Class D shares generally
will be subject to a 1% front-end sales load, those shareholders of the Fund who have held shares of
the Fund since prior to its reorganization at the close of business on February 14, 1997 will not be
subject to any sales load with respect to either their reclassified Class D shares or any Class D
shares that they may purchase in the future. In addition, while the Fund's shares prior to its
reorganization at the close of business on February 14, 1997 were subject to a 0.15% annual
distribution fee, the Class D shares are subject to a 0.10% annual account maintenance fee. Class D
shares incur an initial sales charge when they are purchased and are subject to an ongoing account
maintenance fee 0.10% of average net assets. Class D shares are not subject to an ongoing distribution
fee or any CDSC when they are redeemed. Purchases of $1,000,000 or more may not be subject to an
initial sales charge, but if the initial sales charge is waived, such purchases may be subject to a
CDSC of 0.20% if the shares are redeemed within one year of purchase. Such CDSC may be waived for
redemptions made in connection with fund participation in certain fee-based programs. The schedule of
initial sales charges and reductions for Class D shares is the same as the schedule for Class A
shares, except that there is no waiver for purchases in connection with certain fee-based programs.
Class D shares also will be issued upon conversion of Class B shares as described above under 'Class
B.' See 'Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class D Shares.'
</TABLE>

The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing(Service Mark) System that the investor believes is most beneficial under
the investor's particular circumstances.

Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if they are eligible
investors, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because of the account maintenance fee imposed
on Class D shares. Investors qualifying for significantly reduced initial sales
charges may find the initial sales charge alternative particularly attractive
because similar sales charge reductions are not available with respect to the
deferred sales charges imposed in connection with

<PAGE>

purchases of Class B or Class C shares. Investors not qualifying for reduced
initial sales charges who expect to maintain their investment for an extended
period of time also may elect to purchase Class A or Class D shares, because
over time the accumulated ongoing account maintenance and distribution fees on
Class B or Class C shares may exceed the initial sales charge and, in the case
of Class D shares, the account maintenance fee. Although some investors who
previously purchased Class A shares may no longer be eligible to purchase Class
A shares of other MLAM-advised mutual funds, those previously purchased Class A
shares, together with Class B, Class C and Class D share holdings, will count
toward a right of accumulation which may qualify the investor for reduced
initial sales charges on new initial sales charge purchases. In addition, the
ongoing Class B and Class C account maintenance and distribution fees will cause
Class B and Class C shares to have higher expense ratios, pay lower dividends
and have lower total returns than the initial sales charge shares. The ongoing

Class D account maintenance fees will cause Class D shares to have a higher
expense ratio, pay lower dividends and have a lower total return than Class A
shares.

Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the benefit
of putting all of the investor's dollars to work from the time the investment is
made. The deferred sales charge alternatives may be particularly appealing to
investors who do not qualify for a reduction in initial sales charges. Both
Class B and Class C shares are subject to ongoing account maintenance fees and
distribution fees; however, the ongoing account maintenance and distribution
fees potentially may be offset to the extent any return is realized on the
additional funds initially invested in Class B or Class C shares. In addition,
Class B shares will be converted into Class D shares of the Fund after a
conversion period of approximately ten years, and thereafter investors will be
subject to lower ongoing fees. Class C shares are available only through the
Exchange Privilege.

Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend to
hold their shares for an extended period of time. Investors in Class B shares
should take into account whether they intend to redeem their shares within the
CDSC period and, if not, whether they intend to remain invested until the end of
the conversion period and thereby take advantage of the reduction in ongoing
fees resulting from the conversion into Class D shares. Other investors,
however, may elect to purchase Class C shares if they determine that it is
advantageous to have all their assets invested initially and they are uncertain
as to the length of time they intend to hold their assets in MLAM-advised mutual
funds. Although Class C shareholders are subject to a one year CDSC period, they
forgo the Class B conversion feature, making their investment subject to account
maintenance and distribution fees for an indefinite period of time. In addition,
while both Class B and Class C distribution fees are subject to the limitations
on asset-based sales charges imposed by the NASD, the Class B distribution fees
are further limited under a voluntary waiver of asset-based sales charges. See
'Purchase of Shares--Limitations on the Payment of Deferred Sales Charges.'

FINANCIAL HIGHLIGHTS

The financial information in the table on page 8 has been audited in
conjunction with the annual audits of the financial statements of the Fund by
Deloitte & Touche LLP, independent auditors. Financial Statements for the year
ended October 31, 1996 and the Independent Auditors' report thereon are included
in the Statement of Additional Information. Financial information is not
presented for Class A, Class B, Class C or Class D shares, because no shares of
those classes were publicly issued as of the date of this Prospectus. The shares
of the Fund in existence prior to the close of business on February 14, 1997
were reclassified as Class D shares. In connection with its reorganization at
the close of business on February 14, 1997, the Fund changed its investment
objective from investing only in assets which would permit shares of the Fund to
qualify both as 'liquid assets' under the regulations of the Office of Thrift
Supervision and as an investment permitted by the regulations of the National

<PAGE>

Credit Union Association to seeking the highest possible current income
consistent with the protection of capital afforded by investing in
intermediate-term debt securities issued or guaranteed by the U.S. Government,
its agencies or instrumentalities with a maximum maturity not to exceed fifteen
years and, under normal market conditions, a dollar-weighted average maturity of
six to eight years. For the period from the commencement of the Fund's
operations through its reorganization at the close of business on February 14,
1997, the portfolio of the Fund has consisted primarily of securities issued by
the U.S. Government and its agencies and instrumentalities. The average maturity
of the Fund's portfolio during this period (generally ranging from two to five
years) has been somewhat shorter than the average maturity of the Fund of six to
eight years following the change in its investment objective upon its
reorganization. As a result, the financial information in the table below for
operations of the Fund prior to its reorganization may not be indicative of its
performance following its reorganization.

The following per share data and ratios have been derived from information
provided in the Fund's audited financial statements:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED OCTOBER 31,
-----------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989
------- ------- ------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
period............... $ 9.82 $ 9.60 $ 10.31 $ 10.06 $ 9.76 $ 9.35 $ 9.42 $ 9.44
------- ------- ------- -------- ------- -------- -------- --------
Investment
income--net.......... .61 .62 .55 .54 .62 .72 .77 .83
Realized and
unrealized gain
(loss) on
investments--net..... (.14) .22 (.71) .25 .30 .41 (.07) (.02)
------- ------- ------- -------- ------- -------- -------- --------
Total from investment
operations........... .47 .84 (.16) .79 .92 1.13 .70 .81
------- ------- ------- -------- ------- -------- -------- --------
Less dividends from

investment
income--net.......... (.61) (.62) (.55) (.54) (.62) (.72) (.77) (.83)
------- ------- ------- -------- ------- -------- -------- --------
Net asset value, end
of period............ $ 9.68 $ 9.82 $ 9.60 $ 10.31 $ 10.06 $ 9.76 $ 9.35 $ 9.42
------- ------- ------- -------- ------- -------- -------- --------
------- ------- ------- -------- ------- -------- -------- --------
TOTAL INVESTMENT
RETURN:
Based on net asset
value per share...... 4.87% 9.00% (1.54)% 8.07% 9.66% 12.62% 7.75% 9.12%
------- ------- ------- -------- ------- -------- -------- --------
------- ------- ------- -------- ------- -------- -------- --------
RATIOS TO AVERAGE NET
ASSETS:
Expenses.............. .97% .96% .83% .80% .82% .81% .75% .70%
------- ------- ------- -------- ------- -------- -------- --------
------- ------- ------- -------- ------- -------- -------- --------
Investment
income--net.......... 6.19% 6.38% 5.55% 5.34% 6.24% 7.66% 8.24% 8.96%
------- ------- ------- -------- ------- -------- -------- --------
------- ------- ------- -------- ------- -------- -------- --------
SUPPLEMENTAL DATA:
Net assets, end of
period (in
thousands)........... $47,281 $65,139 $81,407 $122,283 $94,798 $125,888 $151,891 $211,528
------- ------- ------- -------- ------- -------- -------- --------
------- ------- ------- -------- ------- -------- -------- --------
Portfolio turnover.... 51.44% 47.90% 172.51% 204.80% 156.12% 202.11% 68.74% 306.69%
------- ------- ------- -------- ------- -------- -------- --------
------- ------- ------- -------- ------- -------- -------- --------

1988 1987+
-------- --------
<S> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
period............... $ 9.57 $ 10.00
-------- --------
Investment
income--net.......... .80 .73
Realized and
unrealized gain
(loss) on
investments--net..... (.13) (.43)
-------- --------
Total from investment
operations........... .67 .30

-------- --------
Less dividends from
investment
income--net.......... (.80) (.73)
-------- --------
Net asset value, end
of period............ $ 9.44 $ 9.57
-------- --------
-------- --------
TOTAL INVESTMENT
RETURN:
Based on net asset
value per share...... 7.29% 3.18%#
-------- --------
-------- --------
RATIOS TO AVERAGE NET
ASSETS:
Expenses.............. .65% .59%*
-------- --------
-------- --------
Investment
income--net.......... 8.36% 7.66%*
-------- --------
-------- --------
SUPPLEMENTAL DATA:
Net assets, end of
period (in
thousands)........... $303,530 $426,712
-------- --------
-------- --------
Portfolio turnover.... 262.56% 406.66%
-------- --------
-------- --------
</TABLE>

- ------------

* Annualized.

+ The Fund commenced operations on November 6, 1986.

# Aggregate total investment return.

Further information about the Fund's performance is contained in the Fund's
Annual Report, which can be obtained, without charge, upon request.

<PAGE>

INVESTMENT OBJECTIVES AND POLICIES

The Fund is a diversified, open-end management investment company. The
Fund's investment objective is to seek the highest possible current income
consistent with the protection of capital afforded by investing in
intermediate-term debt securities issued or guaranteed by the U.S. Government,
its agencies or instrumentalities with a maximum maturity not to exceed fifteen
years. Under normal circumstances, all or substantially all of the Fund's assets
will be invested in such securities. Under normal market conditions, the Fund
will maintain a dollar-weighted average maturity of six to eight years.

Certain of the securities in which the Fund invests are supported by the
full faith and credit of the U.S. Government, such as U.S. Treasury obligations.
Other of the securities in which the Fund invests are not supported by the full
faith and credit of the U.S. Government but are issued by U.S. Government
agencies, instrumentalities or government-sponsored enterprises. Such securities
are generally supported only by the credit of the agency, instrumentality or
enterprise issuing the security and are generally considered to have a low
principal risk. However, because of the longer-term maturities of the securities
in which the Fund will invest, interest rate fluctuations may adversely affect
the market value of such securities. As interest rates rise, the value of
fixed-income securities will fall, adversely affecting the net asset value of
the Fund.

INVESTMENT RESTRICTIONS

The Fund has adopted a number of restrictions and policies relating to the
investment of its assets and its activities which are fundamental policies and
may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities. Investors are referred to the Statement of
Additional Information for a complete description of such restrictions and
policies.

OTHER PORTFOLIO STRATEGIES

Indexed and Inverse Securities. The Fund may invest in securities whose
potential return is based on the change in particular measurements of value or
rate (an 'index'). As an illustration, the Fund may invest in a security that
pays interest and returns principal based on the change in an index of interest
rates or on the value of a precious or industrial metal. Interest and principal
payable on a security may also be based on relative changes among particular
indices. In addition, the Fund may invest in securities whose potential
investment return is inversely based on the change in particular indices. For
example, the Fund may invest in securities that pay a higher rate of interest
and principal when a particular index decreases and pay a lower rate of interest
and principal when the value of the index increases. To the extent that the Fund
invests in such types of securities, it will be subject to the risks associated
with changes in the particular indices, which may include reduced or eliminated

interest payments and losses of invested principal.

Certain indexed securities, including certain inverse securities, may have
the effect of providing a degree of investment leverage, because they may
increase or decrease in value at a rate that is a multiple of the changes in
applicable indices. As a result, the market value of such securities will
generally be more volatile than the market values of fixed-rate securities. The
Fund believes that indexed securities, including inverse securities, represent
flexible portfolio management instruments that may allow the Fund to seek
potential investment rewards, hedge other portfolio positions, or vary the
degree of portfolio leverage relatively efficiently under different market
conditions.

Lending of Portfolio Securities. The Fund may from time to time lend
securities from its portfolio to brokers, dealers and financial institutions and
receive collateral in cash or securities issued or guaranteed by the U.S.
Government which, while the loan is outstanding, will be maintained at all times
in an amount equal to at

<PAGE>

least 100% of the current market value of the loaned securities plus accrued
interest. Such cash collateral will be invested in short-term securities, the
income from which will increase the return to the Fund.

Forward Commitments. The Fund may purchase securities on a when-issued
basis and may purchase or sell such securities for delayed delivery. These
transactions occur when securities are purchased or sold by the Fund with
payment and delivery taking place in the future to secure what is considered an
advantageous yield and price to the Fund at the time of entering into the
transaction. The value of the security on the delivery date may be more or less
than its purchase price. The Fund will establish a segregated account in
connection with such transactions in which the Fund will deposit liquid
securities with a value at least equal to the Fund's exposure, on a
mark-to-market basis, to the transaction (as calculated pursuant to requirements
of the Securities and Exchange Commission). Such segregation will ensure that
the Fund has assets available to satisfy its obligations with respect to the
transaction, but will not limit the Fund's exposure to loss).

Repurchase Agreements. The Fund may invest in repurchase agreements.
Repurchase agreements may be entered into only with a member bank of the Federal
Reserve System or primary dealer in U.S. Government securities or an affiliate
thereof. Under such agreements, the seller agrees, upon entering into the
contract, to repurchase the security from the Fund at a mutually agreed upon
time and price, thereby determining the yield during the term of the agreement.
This results in a fixed rate of return for the Fund insulated from market
fluctuations during such period. In the event of default by the seller under a
repurchase agreement, a Fund will continue to hold the seller's securities as
collateral but may suffer time delays and incur costs or possible losses in
connection with such transactions.

INVESTMENT ADVISER

Merrill Lynch Asset Management, L.P. ('MLAM'), an indirect wholly owned
subsidiary of Merrill Lynch & Co., Inc., is the investment adviser for the Fund.
The principal address of the Investment Adviser is 800 Scudders Mill Road,
Plainsboro, New Jersey 08536 (mailing address: P.O. Box 9011, Princeton, New
Jersey 08543-9011). The Investment Adviser or its affiliate, Fund Asset
Management, L.P. ('FAM'), acts as the investment adviser for over 130 other
registered investment companies. MLAM also offers portfolio management and
portfolio analysis services to individuals and institutions. In the aggregate,
as of December 31, 1996, MLAM and FAM had a total of approximately $234.1
billion in investment company and other portfolios assets under management.

MLAM, subject to the general supervision of the Board of Trustees of the
Fund, renders investment advice and is responsible for the overall management of
the Fund's business affairs. The responsibility for making decisions to buy,
sell or hold a particular security rests with MLAM.

The Fund pays the Investment Adviser a monthly fee at the annual rate of
0.40% of the average daily net assets of the Fund. In addition, the Investment
Advisory Agreement obligates the Fund to pay certain expenses incurred in its
operations including, among other things, the investment advisory fee, legal and
audit fees, registration fees, unaffiliated trustees' fees and expenses,
custodian and transfer agency fees, accounting costs, the costs of issuing and
redeeming shares and certain of the costs of printing proxies, shareholder
reports, prospectuses and statements of additional information.

The Investment Adviser has agreed that, in the event the operating expenses
of the Fund (including the fees payable to the Investment Adviser but excluding
taxes, interest, brokerage and extraordinary expenses) for any fiscal year
exceed the expense limitations applicable to the Fund imposed by state
securities laws or any published regulations thereunder, it will reduce its fee
by the extent of such excess and, if required pursuant to any such laws or
regulations, will annually reimburse the Fund in the amount of such excess.

<PAGE>

MLAM received $231,551, or 0.40% of the Fund's average net assets, in
investment advisory fees from the Fund during the Fund's fiscal year ended
October 31, 1996. For the same period, total expenses of the Fund were $564,639,
or 0.97% of average net assets.

Jay C. Harbeck has served as the Fund's Portfolio Manager since January 1,
1992, and is primarily responsible for the Fund's day-to-day management. He has
served as Vice President of MLAM since 1986.

CODE OF ETHICS

The Board of Trustees of the Fund has adopted a Code of Ethics under Rule
17j-1 of the Investment Company Act of 1940 which incorporates the Code of
Ethics of the Investment Adviser (together, the 'Codes'). The Codes
significantly restrict the personal investing activities of all employees of the
Investment Adviser and, as described below, impose additional, more onerous,
restrictions on fund investment personnel.

The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are designed
to identify any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Investment Adviser include a ban on acquiring any securities in a 'hot' initial
public offering and a prohibition from profiting on short-term trading in
securities. In addition, no employee may purchase or sell any security which at
the time is being purchased or sold (as the case may be), or to the knowledge of
the employee is being considered for purchase or sale, by any fund advised by
the Investment Adviser. Furthermore, the Codes provide for trading 'blackout
periods' which prohibit trading by investment personnel of the Fund within
periods of trading by the Fund in the same (or equivalent) security (15 or 30
days depending upon the transaction).

TRANSFER AGENCY SERVICES

Merrill Lynch Financial Data Services, Inc. ('MLFDS' or the 'Transfer
Agent'), which is a wholly owned subsidiary of ML & Co., acts as the Fund's
Transfer Agent pursuant to a Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement (the 'Transfer Agency Agreement').
Pursuant to the Transfer Agency Agreement, MLFDS is responsible for the
issuance, transfer and redemption of shares and the opening and maintenance of
shareholder accounts. Pursuant to the Transfer Agency Agreement, MLFDS receives
an annual fee of $11.00 per shareholder account for Class A and Class D shares
of the Fund and $14.00 per shareholder account for Class B and Class C shares of
the Fund and is entitled to reimbursement for out-of-pocket expenses incurred by
it under the Transfer Agency Agreement. For the fiscal year ended October 31,
1996, the Fund incurred fees of $28,798, pursuant to its previous
transfer agency and service agreement with State Street Bank and Trust
Company.

TRUSTEES

The Trustees of the Fund consist of seven individuals, five of whom are not
'interested persons' of the Fund as defined in the Investment Company Act of
1940. The Trustees of the Fund are responsible for the overall supervision of
the operations of the Fund and perform the various duties imposed on the
directors of investment companies by the Investment Company Act of 1940. The
Board of Trustees elects officers of the Fund annually.

The Trustees of the Fund and their principal employment are as follows:

ROBERT W. CROOK*--Senior Vice President of the Investment Adviser and
of the Distributor.

A. BRUCE BRACKENRIDGE--Retired Group Executive of J.P. Morgan & Co.,
Inc. and Morgan Guaranty Trust Company.

CHARLES C. CABOT, JR.--Partner in the law firm of Sullivan &
Worcester.

<PAGE>

JAMES T. FLYNN--Retired Chief Financial Officer of J.P. Morgan & Co.,
Inc.

TERRY K. GLENN*--Executive Vice President of the Investment Adviser
and FAM and President and Director of the Distributor.

GEORGE W. HOLBROOK, JR.--Managing Partner of Bradley Resources
Company.

W. CARL KESTER--Professor, Business Administration, Harvard University
Graduate School of Business Administration.
- ------------
* Interested person, as defined in the Investment Company Act of 1940, of the
Fund.

PURCHASE OF SHARES

The Fund will continuously offer its shares in four classes at a public
offering price equal to the net asset value plus varying sales charges imposed
either at the time of purchase or on a deferred basis depending upon the class
of shares selected by the investor under the Merrill Lynch Select
Pricing(Service Mark) System. Net asset value is determined in the manner set
forth under 'Additional Information--Determination of Net Asset Value.' Merrill
Lynch Funds Distributor, Inc. (the 'Distributor'), an affiliate of both the
Investment Adviser and Merrill Lynch, acts as the distributor of the shares.
Shares may be purchased directly from the Distributor or from other securities
dealers, including Merrill Lynch, with whom the Distributor has entered into
selected dealer agreements. The minimum initial purchase is $1,000. The minimum
subsequent purchase is $50. For retirement plans, the minimum initial purchase
is $100 and the minimum subsequent purchases requirement is $1. Merrill Lynch
charges its customers a processing fee (currently $4.85) to confirm a sale of
shares to such customers.

As to purchase orders received by securities dealers prior to the close of
the New York Stock Exchange (the 'NYSE') (generally 4:00 p.m., New York City
time) on the day the order is placed with the Distributor, including orders

received after the close on the previous day, the applicable offering price will
be based on the net asset value determined as of 15 minutes after the close of
the NYSE on the day the order is placed with the Distributor, provided the order
is received by the Distributor not later than 30 minutes after the close of
business on the NYSE (generally 4:00 p.m., New York City time), on that day. If
the purchase orders are not received by the Distributor as of 30 minutes after
the close of business on the NYSE, such orders shall be deemed received on the
next business day. Any order may be rejected by the Distributor or the Fund.
Neither the Distributor nor securities dealers are permitted to withhold placing
orders to benefit themselves by a price change. The Fund reserves the right to
suspend the sale of its shares to the public in response to conditions in the
securities markets, or otherwise. Any order may be rejected by the Distributor
or the Fund.

The Fund will issue four classes of shares under the Merrill Lynch Select
Pricing(Service Mark) System, which will permit each investor to choose the
method of purchasing shares that the investor believes is most beneficial given
the amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. Class A and Class D shares will be sold
to investors choosing the initial sales charge alternative and Class B and Class
C shares are sold to investors choosing the deferred sales charge alternative.
Class C shares are available only through the Exchange Privilege and may not be
purchased except through exchange of Class C shares of another MLAM-advised
mutual fund.

The alternative sales arrangements of the Fund permit investors in the Fund
to choose the method of purchasing shares that they believe is most beneficial
given the amount of their purchase, the length of time they expect to hold their
shares and other relevant circumstances. Investors should determine whether
under their particular circumstances it is more advantageous to incur an initial
sales charge, as discussed below, or to have the entire initial purchase price
invested in the Fund with the investment thereafter being subject to ongoing
account maintenance and distribution fees. A discussion of the factors that
investors should consider in

<PAGE>

determining the method of purchasing shares under the Merrill Lynch Select
Pricing(Service Mark) System is set forth under 'Merrill Lynch Select
Pricing(Service Mark) System' on page 3.

Each Class A, Class B, Class C and Class D share of the Fund represents
identical interests in the Fund and has the same rights, except that Class B,
Class C and Class D shares bear the expenses of the ongoing account maintenance
fees, and Class B and Class C shares bear the expenses of the ongoing
distribution fees and the additional incremental transfer agency costs resulting
from the deferred sales charge arrangements. The deferred sales charges and
account maintenance fees that are imposed on Class B and Class C shares, as well
as the account maintenance fees that are imposed on Class D shares, will be
imposed directly against those classes and not against all assets of the Fund

and, accordingly, such charges will not affect the net asset value of any other
class or have any impact on investors choosing another sales charge option.
Dividends paid by the Fund for each class of shares will be calculated in the
same manner at the same time and will differ only to the extent that account
maintenance and distribution fees and any incremental transfer agency costs
relating to a particular class are borne exclusively by that class. Class B,
Class C and Class D shares of the Fund each have exclusive voting rights with
respect to the Rule 12b-1 distribution plan adopted with respect to such class
pursuant to which account maintenance and/or distribution fees are paid. See
'Distribution Plans' below. Each class has different exchange privileges. See
'Shareholder Services--Exchange Privilege.'

Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges with respect to Class B and Class C shares in that
the sales charges applicable to each class provide for the financing of the
distribution of the shares of the Fund. The distribution-related revenues paid
with respect to a class will not be used to finance the distribution
expenditures of another class. Sales personnel may receive different
compensation for selling different classes of shares. Investors are advised that
only Class A and Class D shares may be available for purchase through securities
dealers, other than Merrill Lynch, which are eligible to sell shares.

The following tables set forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(Service Mark)
System.

<TABLE>
<CAPTION>
ACCOUNT DISRIBUTION
CLASS SALES CHARGE(1) MAINTENANCE FEE FEE CONVERSION FEATURE
<S> <C> <C> <C> <C>
A Maximum 1.00% initial sales No No No
charge(2)(3)
B CDSC for one year, at a rate of 0.25% 0.25% B shares convert to D
1.0% during the first year, shares automatically after
decreasing to 0.0% after the approximately ten years(5)
first year(4)
C(6) CDSC for one year, at a rate of 0.25% 0.25% No
1.0% during the first year,
decreasing to 0.0% after the
first year(7)
D Maximum 1.00% initial sales 0.10% No No
charge(3)
</TABLE>

(Footnotes on next page)

<PAGE>

(Footnotes from previous page)
- ------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. Contingent deferred sales charges ('CDSCs') are imposed
if the redemption occurs within the applicable CDSC time period. The charge
will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed.
(2) Offered only to eligible investors. See 'Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors.'

(4) The CDSC may be modified for redemptions made in connection with fund
participation in certain fee-based programs.

(6) Class C shares are available only through the Exchange Privilege. See
'Shareholder Services--Exchange Privilege.'

(7) The CDSC may be waived for redemptions made in connection with fund
participation in certain fee-based programs.

INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES

Investors choosing the initial sales charge alternatives who are eligible
to purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
Sales charges for purchases of Class A and Class D shares of the Fund, computed
as indicated below, are reduced on larger purchases. The Distributor may reallow
as a discount all or a part of such sales charge to securities dealers with whom
it has agreements and will retain any portion of the sales charge not reallowed.
If 90% or more of the sales charge is reallowed to a dealer, such dealer may be
deemed to be an underwriter within the meaning of the Securities Act of 1933 and
subject to liability as such. The Distributor will retain the entire sales
charge on orders placed directly with it. The sales charges applicable to
purchases of Class A and Class D shares, expressed as a percentage of the gross

public offering price and the net amount invested, and expected dealer
discounts, expressed as a percentage of the gross public offering price, are as
follows:

<TABLE>
<CAPTION>
SALES LOAD AS A SALES LOAD AS A DISCOUNT TO SELECT
PERCENTAGE OF PERCENTAGE OF NET DEALERS AS A PERCENTAGE
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED* OF OFFERING PRICE
- ----------------------------------------------------- --------------- ----------------- -----------------------
<S> <C> <C> <C>
Less than $100,000................................... 1.00% 1.01% .95%
$100,000 but less than $250,000...................... .75 .76 .70
$250,000 but less than $500,000...................... .50 .50 .45
$500,000 but less than $1,000,000.................... .30 .30 .27
$1,000,000 or more**................................. .00 .00 .00
</TABLE>

- ------------
* Rounded to the nearest one-hundredth percent.

** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more, and on Class A purchases by certain fee-based plan
investors in connection with certain fee-based programs. If the sales charge
is waived in connection with a purchase of $1,000,000 or more, such purchases
may be subject to a CDSC of 0.20% if the shares are redeemed within one year
after purchase. The charge will be assessed on an amount equal to the lesser
of the proceeds of redemption or the cost of the shares being redeemed. A
sales charge of 0.30% will be imposed on purchases of $1 million or more of
Class A or Class D shares by certain 401(k) plans.

Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends from
outstanding Class A shares. Investors that currently own Class A shares in a
shareholder account, including participants in the Merrill Lynch
Blueprint(Service Mark) Program, are entitled to purchase additional Class A
shares of the Fund in that account. Certain employer sponsored retirement
or savings

<PAGE>

plans, including eligible 401(k) plans, may purchase Class A shares of the Fund
at net asset value provided such plans meet the required minimum number of
eligible employees or required amount of assets advised by MLAM or any of its
affiliates. Class A shares are available at net asset value to corporate
warranty insurance reserve fund programs provided that the program has $3
million or more initially invested in MLAM-advised mutual funds. Also eligible
to purchase Class A shares at net asset value are participants in certain
investment programs including TMA(Trademark) Managed Trusts to which Merrill
Lynch Trust Company provides discretionary trustee services, collective

investment trusts for which Merrill Lynch Trust Company serves as trustee and
purchases made in connection with certain fee-based programs. In addition, Class
A shares will be offered at net asset value to ML & Co. and its subsidiaries and
their directors and employees and to members of the Boards of MLAM-advised
investment companies, including the Fund. Certain persons who acquired shares of
certain MLAM-advised closed-end funds in their initial offerings who wish to
reinvest the net proceeds from a sale of their closed-end fund shares of common
stock in shares of the Fund also may purchase Class A or Class D shares of the
Fund if certain conditions set forth in the Statement of Additional Information
are met. For example, Class A shares of the Fund and certain other MLAM-advised
mutual funds are offered at net asset value to shareholders of Merrill Lynch
Senior Floating Rate Fund, Inc. and, if certain conditions set forth in the
Statement of Additional Information are met, to shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund,
Inc. who wish to reinvest the net proceeds from a sale of certain of their
shares of common stock pursuant to a tender offer conducted by such funds in
shares of the Fund and certain other MLAM-advised mutual funds.

Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges also
may be reduced under a Right of Accumulation and a Letter of Intention. Class A
shares are offered at net asset value to certain eligible Class A investors as
set forth above under 'Eligible Class A Investors.' See 'Shareholder
Services--Fee-Based Programs.'

The shares of the Fund in existence prior to its reorganization at the
close of business on February 14, 1997 have been reclassified as Class D shares.
Although purchasers of Class D shares generally will be subject to a 1.00%
front-end sales load, those shareholders of the Fund who have held shares of the
Fund since prior to its reorganization at the close of business on February 14,
1997 will not be subject to any sales load with respect to either their
reclassified Class D shares or any Class D shares that they may purchase in the
future.

Class A and Class D shares are offered at net asset value to certain
employer-sponsored retirement or savings plans and to Employee Access
Accounts(Service Mark) available through qualified employers which provide such
plans. Class A and Class D shares of the Fund are offered at net asset value to
shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch
High Income Municipal Bond Fund, Inc., and Class A shares are offered at net
asset value to shareholders of Senior Floating Rate Fund, Inc. who wish to
reinvest in shares of the Fund the net proceeds from a sale of certain of their
shares of common stock, pursuant to tender offers conducted by those funds.

Class D shares are offered at net asset value, without sales charge, to an

investor who has a business relationship with a Merrill Lynch Financial
Consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.

Class D shares are offered with reduced sales charges and, in certain
circumstances, at net asset value, to participants in the Merrill Lynch
Blueprint(Service Mark) Program.

Additional information concerning these reduced initial sales charges is
set forth in the Statement of Additional Information.

<PAGE>

DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES

Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds. Class C shares,
however, are available only through the Exchange Privilege.

The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net asset
value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B and Class C shares are subject to a one
year CDSC. Approximately ten years after Class B shares are issued, such Class B
shares, together with shares issued upon dividend reinvestment with respect to
those shares, are automatically converted into Class D shares and thereafter
will be subject to lower continuing fees. Class C shares are available only
through the Exchange Privilege. See 'Conversion of Class B Shares to Class D
Shares' below. Both Class B and Class C shares are subject to an account
maintenance fee of 0.25% of net assets and distribution fees of 0.25% of net
assets. See 'Distribution Plans.' The proceeds from the account maintenance fees
are used to compensate Merrill Lynch for providing continuing account
maintenance activities.

Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See 'Distribution
Plans' on page 19. Class C shares are available only through the Exchange
Privilege.

Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related

services to the Fund in connection with the sale of the Class B and Class C
shares, such as the payment of compensation to financial consultants for selling
Class B and Class C shares, from its own funds. The combination of the CDSC and
the ongoing distribution fee facilitates the ability of the Fund to sell the
Class B and Class C shares without a sales charge being deducted at the time of
purchase. Approximately ten years after issuance, Class B shares will convert
automatically into Class D shares, which are subject to an account maintenance
fee but no distribution fee; Class B shares of certain other MLAM-advised mutual
funds into which exchanges may be made convert into Class D shares automatically
after approximately eight years. If Class B shares of the Fund are exchanged for
Class B shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and the
holding period for the shares exchanged will be tacked onto the holding period
for the shares acquired.

Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See 'Limitations on
the Payment of Deferred Sales Charges' below. The proceeds from the ongoing
account maintenance fee are used to compensate Merrill Lynch for providing
continuing account maintenance activities. Class B shareholders of the Fund
exercising the exchange privilege described under 'Shareholder
Services--Exchange Privilege' will continue to be subject to the Fund's CDSC
schedule if such schedule is higher than the CDSC schedule relating to the Class
B shares acquired as a result of the exchange.

Contingent Deferred Sales Charges--Class B Shares. Class B shares which
are redeemed within one year of purchase may be subject to a CDSC at the rates
set forth below charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. Accordingly, no CDSC will
be imposed on increases in net asset value above

<PAGE>

the initial purchase price. In addition, no CDSC will be assessed on shares
derived from reinvestment of dividends or capital gains distributions.

The following table sets forth the rates of the CDSC on Class B shares:

<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
YEAR SINCE CHARGE AS A PERCENTAGE
PURCHASE OF DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
- ------------------------------------------------- -------------------------
<S> <C>
0-1.............................................. 1.0%
Thereafter....................................... None
</TABLE>

In determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
applicable rate being charged. Therefore, it will be assumed that the redemption
is of shares held for over one year or shares acquired pursuant to reinvestment
of dividends or distributions and then of shares held longest during the
one-year period. The CDSC will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of shares
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.

To provide an example, assume an investor purchased 100 Class B shares at
$10 per share (at a cost of $1,000) and in the eighth month after purchase, the
net asset value per share is $12 and, during such time, the investor has
acquired 10 additional shares upon dividend reinvestment. If at such time the
investor makes his first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to charge because of dividend reinvestment. With respect to
the remaining 40 shares, the CDSC is applied only to the original cost of $10
per share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged a CDSC at a rate of 1.0%
(the applicable rate in the first year after purchase).

The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
('IRA') or other retirement plan or following the death or disability (as
defined in the Code) of a shareholder. The Class B CDSC also is waived on
redemption of shares in connection with certain group plans through the Merrill
Lynch Blueprint(Service Mark) Program. See 'Shareholder Services--Merrill Lynch
Blueprint(Service Mark) Program.' The contingent deferred sales charge is waived
on redemption of shares by certain eligible 401(a) and eligible 401(k) plans.
The CDSC is also waived for any Class B shares which are purchased by an
eligible 401(k) or eligible 401(a) plan and are rolled over into a Merrill
Lynch, Pierce, Fenner & Smith Incorporated or Merrill Lynch Trust Company
custodied Individual Retirement Account and held in such account at the time of
redemption and for any Class B shares that were acquired and held at the time of
the redemption in an Employee Access Account available through employers
providing eligible 401(k) plans. Additional information concerning the waiver of
the Class B contingent deferred sales charge is set forth in the Statement of
Additional Information. The terms of the CDSC may be modified for redemptions
made in connection with fund participation in certain fee-based programs. See
'Shareholder Services--Fee-Based Programs.'

Contingent Deferred Sales Charges--Class C Shares. Class C shares which
are redeemed within one year of purchase may be subject to a 1.0% CDSC charged
as a percentage of the dollar amount subject thereto. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the
cost of the shares being redeemed. Accordingly, no Class C CDSC will be imposed

on increases in net asset value above the initial purchase price. In addition,
no Class C CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions. No Class C CDSC will be assessed on
redemptions made in connection with fund participation in certain fee-based
programs. See 'Shareholder Services--Fee-Based Programs.'

<PAGE>

The following table sets forth the rates of the contingent deferred sales
charge on Class C shares:

In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over one year or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the one-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of shares
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.

Conversion of Class B Shares to Class D Shares. After approximately ten
years (the 'Conversion Period'), Class B shares will be converted automatically
into Class D shares. Class D shares are subject to an ongoing account
maintenance fee of 0.10% of net assets, but are not subject to the distribution
fee that is borne by Class B shares. Automatic conversion of Class B shares into
Class D shares will occur at least once each month (on the 'Conversion Date') on
the basis of the relative net asset values of the shares of the two classes on
the Conversion Date, without the imposition of any sales load, fee or other
charge. Conversion of Class B shares to Class D shares will not be deemed a
purchase or sale of the shares for federal income tax purposes.

In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were

outstanding. If at a Conversion Date the conversion of Class B shares to Class D
shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.

Class B shareholders holding share certificates must deliver such
certificates to the Transfer Agent at least one week prior to the Conversion
Date applicable to those shares. Shares evidenced by certificates that are not
received by the Transfer Agent at least one week prior to the Conversion Date
will be converted into Class D shares on the next scheduled Conversion Date
after such certificates are delivered.

In general, Class B shares of MLAM-advised equity mutual funds will convert
approximately eight years after initial purchase, and Class B shares of
MLAM-advised taxable and tax-exempt fixed income mutual funds will convert
approximately ten years after initial purchase. If, during the Conversion
Period, a shareholder exchanges Class B shares with an eight-year Conversion
Period for Class B shares with a ten-year Conversion Period, or vice versa, the
Conversion Period applicable to the Class B shares acquired in the exchange will
apply, and the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.

The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans which qualified for a waiver of the CDSC
normally imposed on purchases of Class B shares ('Class B Retirement Plans').
When the first share of any MLAM-advised mutual fund purchased by a Class B
Retirement Plan has been held for ten years (i.e., ten years from the date the
relationship between MLAM-advised mutual funds and the Class B Retirement Plan
was established), all Class B shares of all MLAM-advised mutual funds held in
that Class B Retirement Plan will be converted into Class D shares of the
appropriate funds.

<PAGE>

Subsequent to such conversion, that Class B Retirement Plan will be sold Class D
shares of the appropriate funds at net asset value per share.

In the event that all Class B shares held in a single account are converted
to Class D shares on a Conversion Date, shares representing reinvestment of
declared but unpaid dividends on those Class B shares also will be converted to
Class D shares; otherwise, only Class B shares purchased through reinvestment of
dividends paid will convert to Class D shares on the Conversion Date.

The Conversion Period may also be modified for retirement plan investors
who participate in certain fee-based programs. See 'Shareholder Services--Fee
Based-Programs.'

DISTRIBUTION PLANS

The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
'Distribution Plan') with respect to the account maintenance and/or distribution
fees paid by the Fund to the Distributor with respect to such classes. The Class
B and Class C Distribution Plans provide for the payment of account maintenance
fees and distribution fees, and the Class D Distribution Plan provides for the
payment of account maintenance fees.

The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class of the Fund's shares, accrued daily and paid
monthly, at the annual rate of 0.25% of average daily net assets of the relevant
class for Class B and Class C shares, and 0.10% of average daily net assets
attributable to the relevant class for Class D shares in order to compensate the
Distributor and Merrill Lynch (pursuant to a sub-agreement) in connection with
account maintenance activities.

The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.25% of
average daily net assets attributable to the relevant class for Class B and
Class C shares, in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing shareholder and distribution
services, and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B and Class C
shares. The Distribution Plans relating to Class B and Class C shares are
designed to permit an investor to purchase Class B and Class C shares through
dealers without the assessment of an initial sales charge and at the same time
permit the dealer to compensate its financial consultants in connection with the
sale of the Class B and Class C shares. In this regard, the purpose and function
of the ongoing distribution fees and the CDSC are the same as those of the
initial sales charge with respect to the Class A and Class D shares of the Fund
in that the CDSC and ongoing distribution fees provide for the financing of the
distribution of the Fund's Class B and Class C shares.

Prior to reorganization of the Fund at the close of business on February
14, 1997, pursuant to the Fund's then existing distribution plan, the Fund paid
the Distributor a monthly fee at the annual rate of 0.15% of the Fund's average
daily net assets in order to compensate the Distributor for the services it
provided. During the years ended October 31, 1995 and 1996, the Fund paid to the
Distributor fees totalling $101,765 and $86,832, respectively. In connection
with the reorganization of the Fund at the close of business on February 14,

1997, the Fund's existing distribution plan was amended and became the Class D
distribution plan.

The payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the relevant shares regardless of the
amount of expenses incurred and, accordingly, distribution-related revenues from
the Distribution Plans may be more or less than distribution-related expenses.
Information with

<PAGE>

respect to the distribution-related revenues and expenses will be presented to
the Trustees for their consideration in connection with their deliberations as
to the continuance of the Class B and Class C Distribution Plans. This
information is to be presented annually as of December 31 of each year on a
'fully allocated accrual' basis and quarterly on a 'direct expense and
revenue/cash' basis. On the fully allocated accrual basis, revenues consist of
the account maintenance fees, distribution fees, the contingent deferred sales
charges and certain other related revenues, and expenses consist of financial
consultant compensation, branch office and regional operation center selling and
transaction processing expenses, advertising, sales promotion and marketing
expenses, corporate overhead and interest expense. On the direct expense and
revenue/cash basis, revenues consist of the account maintenance fees,
distribution fees and the contingent deferred sales charges and the expenses
consist of financial consultation compensation. As of December 31, 1995, the
last date for which full allocated accrual data is available, the fully
allocated accrual expenses incurred by the Distributor and Merrill Lynch under
the Fund's prior distribution plan since the Fund commenced operations on
November 6, 1986 exceeded revenues for such period by $1,546,000 (2.43%) of net
assets at that date). As of December 31, 1996, direct cash revenues for the
period since the commencement of operations exceeded direct expenses by $651,173
(1.41% of net assets at that date).

The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with the Class B, Class C and Class D shares, and there is no
assurance that the Board of Trustees of the Fund will approve the continuance of
the Distribution Plans from year to year. However, the Distributor intends to
seek annual continuation of the Distribution Plans. In their review of the
Distribution Plans, the Trustees will be asked to take into consideration
expenses incurred in connection with the account maintenance and/or distribution
of each class of shares separately. The initial sales charges, the account
maintenance fee, the distribution fee and/or the CDSCs received with respect to
one class will not be used to subsidize the sale of shares of another class.
Payments of the distribution fee on Class B shares will terminate upon
conversion of those Class B shares into Class D shares as set forth under
'Deferred Sales Charge Alternatives--Class B and Class C Shares--Conversion of
Class B Shares to Class D Shares.'

LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES

The maximum sales charge rule in the Rules of Fair Practice of the NASD
imposes a limitation on certain asset-based sales charges, such as the Fund's
distribution fee and the CDSC borne by the Class B and Class C shares but not
the account maintenance fees. The maximum sales charge rule is applied
separately by each class. As applicable to the Fund, the maximum sales charge
rule limits the aggregate of distribution fee payments and CDSCs payable to the
sum of (1) 6.25% of eligible gross sales of Class B shares and Class C shares,
computed separately (defined to exclude shares issued pursuant to dividend
reinvestment and exchanges) and (2) interest on the unpaid balance for the
respective class computed separately at the prime rate plus 1% (the unpaid
balance being the maximum amount payable minus amounts received from the payment
of the distribution fee and the CDSC). In connection with the Class B shares,
the Distributor has voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the maximum
amount payable to the Distributor (referred to as the 'voluntary maximum') in
connection with Class B shares is 6.75% of eligible gross sales. The Distributor
retains the right to stop waiving the interest charge at any time. To the extent
payments would exceed the voluntary maximum, the Fund will not make further
payments of the distribution fee with respect to Class B shares, and any CDSCs
will be paid to the Fund rather than to the Distributor; however, the Fund will
continue to make payments of the account maintenance fees. In certain
circumstances the amount payable pursuant to the voluntary maximum may exceed
the amount payable under the NASD formula. In such circumstances, payment in
excess of the amount payable under the NASD formula will not be made.

<PAGE>

REDEMPTION OF SHARES

The Fund is required to redeem for cash all shares upon receipt of a
written request in proper form. The redemption price is the net asset value per
share next determined after the initial receipt of proper notice of redemption
in the case of Class A or Class D shares, and is the net asset value per share
next determined after the initial receipt of proper notice of redemption, less
the applicable CDSC, if any, in the case of Class B or Class C Shares. Except
for any contingent deferred sales load which may be applicable to Class B or
Class C Shares, there will be no charge for redemption if the redemption request
is sent directly to the Transfer Agent. Shareholders liquidating their total
holdings also will receive upon redemption all dividends declared on the shares
redeemed. If a shareholder redeems all of the shares in his account, he will
receive, in addition to the net asset value of the shares redeemed, a separate
check representing all dividends declared but unpaid. If a shareholder redeems a
portion of the shares in his account, the dividends declared but unpaid on the
shares redeemed will be distributed on the next dividend payment date.

The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending on the market value of the securities held at such
time.

REDEMPTION

A shareholder wishing to redeem shares may do so by tendering the shares
directly to the Transfer Agent, Merrill Lynch Financial Data Services, Inc.,
P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption requests delivered
other than by mail should be delivered to Merrill Lynch Financial Data Services,
Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484. Proper notice
of redemption in case of shares deposited with the Transfer Agent may be
accomplished by a written letter requesting redemption. Proper notice of
redemption in the case of shares for which certificates have been issued may be
accomplished by a written letter as noted above accompanied by certificates for
the shares to be redeemed. The notice in either event requires the signature(s)
of all persons in whose name(s) the shares are registered, signed exactly as
their name(s) appears on the Transfer Agent's register or on the certificate, as
the case may be. The signature(s) on the redemption request must be guaranteed
by an 'eligible guarantor institution' as such is defined in Rule 17Ad-15 under
the Securities Exchange Act of 1934, the existence and validity of which may be
verified by the Transfer Agent through the use of industry publications.
Notarized signatures are not sufficient. Examples of 'eligible guarantor
institutions' include most commercial banks and broker dealers (including, for
example, Merrill Lynch branch offices). Information regarding other financial
institutions which qualify as 'eligible guarantor institutions' may be obtained
from the Transfer Agent. In certain instances, the Transfer Agent may require
additional documents such as, but not limited to, trust instruments, death
certificates, appointments as executor or administrator, or certificates of
corporate authority. For shareholders redeeming directly with the Transfer
Agent, payment will be mailed within seven days after receipt of a proper notice
of redemption.

At various times the Fund may be requested to redeem shares for which it
has not yet received good payment. The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as it has assured itself that good
payment (e.g., cash or certified check drawn on a United States bank) has been
collected for the purchase of such shares. Normally, this delay will not exceed
10 days.

REPURCHASE

The Fund will also repurchase shares through a shareholder's listed
securities dealer. As described in the Statement of Additional Information, the
repurchase arrangements are for the convenience of shareholders and do not
involve a charge by the Fund (other than any applicable CDSC). Securities
dealers may impose a charge on the shareholder for transmitting the notice of
repurchase to the Fund. The Fund reserves the right to reject any

<PAGE>

order for repurchase, which right of rejection might adversely affect
shareholders seeking redemption through the repurchase procedure. Merrill Lynch
may charge its customers a processing fee (currently $4.85) to confirm a
repurchase of shares to such customers. Redemptions directly through the Fund's
Transfer Agent are not subject to the processing fee.

The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any applicable
CDSC). Securities firms which do not have selected dealer agreements with the
Distributor, however, may impose a transaction charge on the shareholder for
transmitting the notice of repurchase to the Fund. Merrill Lynch may charge its
customers a processing fee (presently $4.85) to confirm a repurchase of shares
to such customers. Repurchases directly through the Transfer Agent are not
subject to the processing fee. The Fund reserves the right to reject any order
for repurchase, which right of rejection might adversely affect shareholders
seeking redemption through the repurchase procedure. However, a shareholder
whose order for repurchase is rejected by the Fund may redeem shares as set
forth above.

Redemption payments will be made within seven days of the proper tender of
the certificates, if any, and stock power or letter requesting redemption, in
each instance with signatures guaranteed as noted above.

REINSTATEMENT PRIVILEGE--CLASS A AND CLASS D SHARES

As described in further detail in the Statement of Additional Information,
holders of Class A or Class D shares who have redeemed their shares will have a
one-time privilege to reinstate their accounts by purchasing shares of the same
class at net asset value without a sales charge up to the dollar amount
redeemed. The reinstatement privilege may be exercised by sending a notice of
exercise along with a check for the amount to be reinstated to the Transfer
Agent within 30 days after the date the request for redemption was accepted by
the Transfer Agent or the Distributor. Alternatively, the reinstatement
privilege may be exercised through the investor's Merrill Lynch Financial
Consultant within 30 days after the date the request for redemption was accepted
by the Transfer Agent or Distributor. The reinstatement will be made at the net
asset value per share next determined after the notice of reinstatement is
received and cannot exceed the amount of the redemption proceeds.

DIVIDENDS, DISTRIBUTIONS AND TAXES

DIVIDENDS AND DISTRIBUTIONS

It is the Fund's intention to distribute substantially all of the net
investment income of the Fund, if any. The net investment income of the Fund is
declared as dividends daily immediately prior to the determination of the net
asset value of the Fund on that day and reinvested monthly in additional full
and fractional shares of the Fund at net asset value unless the shareholder
elects to receive such dividends in cash. The net investment income of the Fund
for dividend purposes consists of interest and dividends earned on portfolio
securities, less expenses, in each case computed since the most recent
determination of net asset value. Expenses of the Fund, including the advisory
fee and any account maintenance and/or distribution fees (if applicable), are
accrued daily. Shares will accrue dividends as long as they are issued and

outstanding. The per share dividends and distributions on Class B and Class C
shares will be lower than the per share dividends and distributions on Class A
and Class D shares as a result of the account maintenance, distribution and
higher transfer agency fees applicable to the Class B and Class C shares.
Similarly, the per share dividends and distributions on Class D shares will be
lower than the per share dividends and distributions on Class A shares as a
result of the account maintenance fees applicable with respect to the Class D
shares. See 'Additional Information--Determination of Net Asset Value.' Shares
are issued and outstanding as of the settlement date of a purchase order to the
settlement date of a redemption order.

<PAGE>

In order to avoid a four percent nondeductible excise tax, a regulated
investment company must distribute to its shareholders during the calendar year
an amount equal to 98 percent of the Fund's investment company income, with
certain adjustments, for such calendar year, plus 98 percent of the Fund's
capital gain net income for the one-year period ending on October 31 of such
calendar year. All net realized long- or short-term capital gains of the Fund,
if any, are declared and distributed to the shareholders of the Fund annually
after the close of the Fund's fiscal year.

See 'Shareholder Services--Automatic Reinvestment of Dividends and Capital
Gain Distributions' for information concerning the manner in which dividends and
distributions may be automatically reinvested in shares of the Fund.
Shareholders may elect in writing to receive any such dividends or
distributions, or both, in cash. Dividends and distributions are taxable to
shareholders as discussed below whether they are reinvested in shares or
received in cash.

FEDERAL INCOME TAXES

The Fund has in the past elected the special tax treatment afforded
regulated investment companies under the Internal Revenue Code of 1986 (the
'Code'). The Fund believes that it has qualified for such treatment and intends
to continue to qualify therefor. If it so qualifies, the Fund (but not its
shareholders) will be relieved of federal income tax on the amount it
distributes to Class A, Class B, Class C and Class D shareholders (together, the
'shareholders'). If in any taxable year the Fund does not qualify as a regulated
investment company, all of its taxable income will be taxed at corporate rates.

The Fund contemplates declaring as dividends substantially all of its net
investment income. See 'Dividends and Distributions.' Dividends paid by the Fund
from its investment income and distributions of its net realized short-term
capital gains are taxable to shareholders as ordinary income. Distributions made
from net realized long-term capital gains are taxable to shareholders as
long-term capital gains. Dividends and distributions will be taxable to
shareholders as ordinary income or capital gains, whether received in cash or
reinvested in additional shares of the Fund. The maximum tax rate imposed on

capital gains for individual taxpayers is 28 percent. Merrill Lynch Financial
Data Services, Inc., the Fund's transfer agent, will send each shareholder a
quarterly dividend statement which will include the amount of dividends paid and
identify whether such dividends represent ordinary income or capital gains.

Upon sale or exchange of shares of the Fund, a shareholder will realize
short- or long-term capital gain or loss, depending upon the shareholder's
holding period in the shares. However, if a shareholder's holding period in his
shares is six months or less, any capital loss realized from a sale or exchange
of such shares must be treated as long-term capital loss to the extent of
capital gains dividends received with respect to such shares.

The Fund may recognize interest attributable to it from holding zero coupon
securities. Current federal law requires that, for most zero coupon securities,
the Fund must accrue a portion of the discount at which the security was
purchased as income each year even though the Fund receives no interest payment
in cash on the security during the year. The Fund must pay out substantially all
of its net investment income each year. Accordingly, the Fund may be required to
pay out as an income distribution each year an amount which is greater than the
total amount of cash interest it actually received. Such distributions will be
made from the cash assets of the Fund or by sales of portfolio securities, if
necessary. The Fund may realize a gain or loss from such sales.

Some shareholders may be subject to a 31% withholding tax on ordinary
income dividends, capital gains distributions and redemption payments ('backup
withholding'). Generally, shareholders subject to backup withholding will be
those for whom no certified taxpayer identification number is on file with the
Fund or who, to the Fund's knowledge, have furnished an incorrect number. An
investor when establishing an account must

<PAGE>

certify under penalty of perjury that such number is correct and that he is not
otherwise subject to backup withholding.

No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.

Dividends to shareholders who are nonresident aliens, trusts, estates,
partnerships or corporations may be subject to a 30% United States withholding
tax unless a reduced rate of withholding is provided under an applicable treaty.
Shareholders who are nonresident aliens or foreign entities are urged to consult
their own tax advisers concerning the applicability of the United States
withholding tax.

If a shareholder exercises his exchange privilege with respect to shares of
the Fund within 90 days after the date such shares were acquired to acquire
shares in or a second Fund ('New Fund'), then the loss, if any, recognized on

the exchange will be reduced (or the gain, if any, increased) to the extent the
load charge paid to the Fund reduces any load charge such shareholder would have
been required to pay on the acquisition of the New Fund shares in the absence of
the exchange privilege. Instead, such load charge will be treated as an amount
paid for the New Fund shares and will be included in the shareholder's basis for
such shares.

Under another provision of the Code, any dividend declared by the Fund to
shareholders of record in October, November, or December of any year and made
payable to shareholders of record in such a month will be deemed to have been
received on December 31 of such year if actually paid during the following
January.

A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.

The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Regulations promulgated thereunder. The Code and Regulations are subject to
change by legislative or administrative action either prospectively or
retroactively.

The Statement of Additional Information describes the effect of other
provisions of the Code on the Fund's shareholders.

Ordinary income and capital gains dividends may also be subject to state
and local taxes.

Investors are urged to consult their attorneys or tax advisers regarding
specific questions as to federal, foreign, state or local taxes.

PORTFOLIO TRANSACTIONS

Subject to policies established by the Board of Directors of the Fund, the
Investment Adviser is responsible for the Fund's portfolio decisions and the
placing of the Fund's portfolio transactions. With respect to such transactions,
the Investment Adviser seeks to obtain the best net results for the Fund, taking
into account such factors as price (including the applicable brokerage
commission or dealer spread), size of order, difficulty of execution and
operational facilities of the firm involved and the firm's risk in positioning a
block of securities. While the Investment Adviser generally seeks reasonably
competitive commission rates, the Fund will not necessarily be paying the lowest
commission or spread available.

<PAGE>

The Fund has no obligation to deal with any dealer or group of dealers in
the execution of transactions in portfolio securities. Subject to the policy
established by the Board of Trustees, the Investment Adviser is primarily
responsible for the portfolio decisions of the Fund and the placing of its
portfolio transactions. In placing orders, it is the policy of the Fund to
obtain the best price and execution for its transactions. Affiliated persons of
the Fund, including Merrill Lynch, may serve as its broker in over-the-counter
transactions conducted on an agency basis.

SHAREHOLDER SERVICES

The Fund offers a number of shareholder services described below which are
designed to facilitate investment in its shares. Full details as to each of such
services and copies of the various plans described below can be obtained from
the Fund, the Distributor or Merrill Lynch. Certain of these services are
available only to U.S. investors.

INVESTMENT ACCOUNT

Each shareholder whose account is maintained with the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchase and the reinvestment of ordinary income dividends
and long-term capital gain distributions. These statements will also show any
other activity in the account since the previous statement. Shareholders will
receive separate transaction confirmations for each purchase or sale transaction
other than automatic investment purchases and the reinvestments of ordinary
income dividends and long-term capital gain distributions. A shareholder may
make additions to his Investment Account at any time by purchasing shares at the
applicable public offering price either through a securities dealer that has
entered into a selected dealers agreement with the Distributor or by mail
directly to the Transfer Agent, acting as agent for the Distributor.

Shareholders also may maintain their accounts through Merrill Lynch. Upon
the transfer of shares out of a Merrill Lynch brokerage account, an Investment
Account in the transferring shareholder's name will be opened automatically,
without charge, at the Transfer Agent. Shareholders considering transferring
their Class A or Class D shares from Merrill Lynch to another brokerage firm or
financial institution should be aware that, if the firm to which the Class A or
Class D shares are to be transferred will not take delivery of shares of the
Fund, a shareholder either must redeem the Class A or Class D shares (paying any
applicable CDSC) so that the cash proceeds can be transferred to the account at
the new firm or such shareholder must continue to maintain an Investment Account
at the Transfer Agent for those Class A or Class D shares. Shareholders
interested in transferring their Class B or Class C shares from Merrill Lynch
and who do not wish to have an Investment Account maintained for such shares at
the Transfer Agent may request their new brokerage firm to maintain such shares
in an account registered in the name of the brokerage firm for the benefit of
the shareholder. Shareholders considering transferring a tax-deferred retirement

account such as an individual retirement account from Merrill Lynch to another
brokerage firm or financial institution should be aware that, if the firm to
which the retirement account is to be transferred will not take delivery of
shares of the Fund, a shareholder must either redeem the shares (paying any
applicable CDSC) so that the cash proceeds can be transferred to the account at
the new firm, or such shareholder must continue to maintain a retirement account
at Merrill Lynch for those shares.

Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing all
or only part of the full shares in an Investment Account may be requested by a
shareholder directly from the Transfer Agent.

<PAGE>

AUTOMATIC INVESTMENT PLANS

Regular additions of Class A, Class B and Class D shares may be made to an
investor's Investment Account by prearranged charges of $50 or more to his
regular bank account. Investors who maintain CMA(Registered)or CBA(Registered)
accounts may arrange to have periodic investments made in the Fund in their
CMA(Registered) or CBA(Registered) accounts or in certain related accounts in
amounts of $100 or more through the CMA(Registered)/CBA(Registered) Automated
Investment Program.

FEE-BASED PROGRAMS

Certain Merrill Lynch fee-based programs, including pricing alternatives
for securities transactions (each referred to in this paragraph as a 'Program'),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of shares
held therein or the automatic exchange thereof to another class of shares at net
asset value, which may be shares of a money market fund. In addition, upon
termination of participation in a Program, shares that have been held for less
than specified periods within such Program may be subject to a fee based upon
the current value of such shares. These Programs also generally prohibit such
shares from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance fees)
in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from Merrill Lynch Investor

Services at (800) MER-FUND (637-3863).

AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS

All dividends and capital gains distributions are reinvested automatically
in full and fractional shares of the Fund at the net asset value per share of
the Fund as of the close of business on the monthly payment date for such
dividends and distributions. A shareholder may at any time, by written
notification to Merrill Lynch if the shareholder's account is maintained with
Merrill Lynch or by written notification or by telephone (1-800-MER-FUND) to the
Transfer Agent if the shareholder's account is maintained with the Transfer
Agent, elect to have subsequent dividends or capital gains distributions, or
both, paid in cash, rather than reinvested, in which event payment will be
mailed on or about the payment date. Cash payments can also be directly
deposited to the shareholder's bank account. No CDSC will be imposed upon
redemption of shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions.

SYSTEMATIC WITHDRAWAL PLANS

A Class A or Class D shareholder may elect to receive systematic withdrawal
payments from his or her Investment Account in the form of payments by check or
through automatic payment by direct deposit to his or her bank account on either
a monthly or quarterly basis. A Class A or Class D shareholder whose shares are
held within a CMA(Registered), CBA(Registered) or Retirement Account may elect
to have shares redeemed on a monthly, bimonthly, quarterly, semiannual or annual
basis through the Systematic Redemption Program, subject to certain conditions.

<PAGE>

RETIREMENT PLANS

As described in further detail in the Statement of Additional Information,
eligible shareholders of the Fund may participate in a variety of qualified
employee benefit plans which are available from Merrill Lynch.

EXCHANGE PRIVILEGE

U.S. shareholders of each class of shares have an exchange privilege with
certain other MLAM-advised mutual funds. There is currently no limitation on the
number of times a shareholder may exercise the exchange privilege. The exchange
privilege may be modified or terminated in accordance with the rules of the
Securities and Exchange Commission (the 'Commission').

Under the Merrill Lynch Select Pricing(Service Mark) System, Class A
shareholders may exchange Class A shares for Class A shares of a second
MLAM-advised mutual fund if the shareholder holds any Class A shares of the

second fund in his account in which the exchange is made at the time of the
exchange or is otherwise eligible to purchase Class A shares of the second fund.
If the Class A shareholder wants to exchange Class A shares for shares of a
second MLAM-advised mutual fund, and the shareholder does not hold Class A
shares of the second fund in his account at the time of the exchange and is not
otherwise eligible to acquire Class A shares of the second fund, the shareholder
will receive Class D shares of the second fund as a result of the exchange.
Class D shares also may be exchanged for Class A shares of a second MLAM-advised
mutual fund at any time as long as, at the time of the exchange, the shareholder
holds Class A shares of the second fund in the account in which the exchange is
made or is otherwise eligible to purchase Class A shares of the second fund.

Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.

Class B, Class C and Class D shares will be exchangeable with shares of the
same class of other MLAM-advised mutual funds. Class C shares are available only
through the Exchange Privilege.

Shares which are subject to a CDSC will be exchangeable on the basis of
relative net asset value per share without the payment of any CDSC that might
otherwise be due upon redemption of the shares. For purposes of computing the
CDSC that may be payable upon a disposition of the shares acquired in the
exchange, the holding period for the previously owned shares is 'tacked' to the
holding period of the newly acquired shares of the other fund.

Class A, Class B, Class C and Class D shares also will be exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares are
held in a money market fund, however, will not count toward satisfaction of the
holding period requirement for reduction of any CDSC imposed on such shares, if
any, and, with respect to Class B shares, toward satisfaction of the Conversion
Period.

Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the CDSC schedule applicable to the Fund if such
schedule is higher than the CDSC schedule relating to the new Class B shares. In
addition, Class B shares of the Fund acquired through use of the exchange
privilege will be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the Class B shares of the MLAM-advised mutual
fund from which the exchange has been made.

<PAGE>

Exercise of the exchange privilege is treated as a sale of the exchanged
shares and a purchase of the acquired shares for federal income tax purposes.
For further information, see 'Shareholder Services--Exchange Privilege' in the

Statement of Additional Information.

MERRILL LYNCH BLUEPRINT(SERVICE MARK) PROGRAM

Class D shares of the Fund are offered to participants in the Merrill Lynch
Blueprint(Service Mark) Program ('Blueprint'). In addition, participants in
Blueprint who own Class A shares of the Fund may purchase additional Class A
shares of the Fund through Blueprint. Blueprint is directed to small investors,
group or corporate IRAs and participants in certain affinity groups such as
benefit plans, credit unions and trade associations. Investors placing orders to
purchase Class A or Class D shares of the Fund through a Blueprint account will
acquire such Class A or Class D shares at a reduced sales charge calculated in
accordance with the standard Blueprint sales charge schedules. Class B shares of
the Fund are offered through Blueprint only to members of certain affinity
groups. The contingent deferred sales load will be waived in connection with
orders to purchase Class B shares of the Fund through Blueprint provided that
the shareholder is a participant in a qualified group plan at the time of
purchase. However, services available to Fund shareholders through Blueprint may
differ from those available to other Fund shareholders. Orders for purchase and
redemption of shares of the Fund may be grouped for execution purposes which, in
some circumstances, may involve the execution of such orders two business days
following the day such orders are placed. There will be no minimum initial or
subsequent purchase requirement for participants who are part of an automatic
investment plan. Additional information concerning placing orders to purchase
through Blueprint, including any annual fees and transaction charges, is
available from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The
Blueprint(Service Mark) Program, P.O. Box 30441, New Brunswick, New Jersey
08989-0441.

PERFORMANCE DATA

From time to time the Fund may include the average annual total return and
yield of the Fund for various specified time periods in advertisements or
information furnished to present or prospective shareholders. Average annual
total return and yield are computed separately for the Class A, Class B, Class C
and Class D shares of the Fund in accordance with formulas specified by the
Commission.

Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return will be computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including any contingent deferred sales charge that
would be applicable to a complete redemption of the investment at the end of the
specified period such as in the case of Class B and Class C shares and the
maximum sales charge in the case of Class A and Class D shares.

Dividends paid by the Fund with respect to all shares, to the extent any
dividends are paid, will be calculated in the same manner at the same time on
the same day and will be in the same amount, except that account maintenance

fees and distribution charges and any incremental transfer agency costs relating
to each class of shares will be borne exclusively by that class. The Fund will
include performance data for all classes of shares in any advertisement or
information including performance data of the Fund.

The Fund also may quote its total return and aggregate total return
performance data for various specified time periods. Such data will be
calculated substantially as described above, except that (1) the rates of return

<PAGE>

calculated will not be average annual rates, but rather, actual annual,
annualized or aggregate rates of return and (2) the maximum applicable sales
charge will not be included with respect to annual or annualized rate of return
calculations. Aside from the impact on the performance data calculations of
including or excluding the maximum applicable sales charge, actual annual or
annualized total return data generally will be lower than average annual total
return data since the average annual rates of return reflect compounding;
aggregate total return generally will be higher than average annual total return
data since the aggregate rates of return reflect compounding over a longer
period of time. In advertisements distributed to investors whose purchases are
subject to waiver of the CDSC in the case of Class B and Class C shares (such as
investors in certain retirement plans) or to reduced sales charges in the case
of Class A and Class D shares, performance data may take into account the
reduced, and not the maximum, sales charge or may not take into account the
contingent deferred sales charges and therefore may reflect greater total return
since, due to the reduced sales charges or waiver of the contingent deferred
sales charge, a lower amount of expenses is deducted. See 'Purchase of Shares.'
The Fund's total return may be expressed either as a percentage or as a dollar
amount in order to illustrate such total return on a hypothetical investment in
the Fund at the beginning of each specified period.

Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield to maturity of each security earned during the
period by (b) the average daily number of shares outstanding during the period
that were entitled to receive dividends multiplied by the maximum offering price
per share on the last day of the period. The yield for the 30-day period ended
October 31, 1996 was 5.50%. In connection with its reorganization at the close
of business on February 14, 1997, the Fund changed its investment objective from
investing only in assets which would permit shares of the Fund to qualify both
as 'liquid assets' under the regulations of the Office of Thrift Supervision and
as an investment permitted by the regulations of the National Credit Union
Association to seeking the highest possible current income consistent with the
protection of capital afforded by investing in intermediate-term debt securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
with a maximum maturity not to exceed fifteen years and, under normal market
conditions, a dollar-weighted average maturity of six to eight years. For the
period from the commencement of the Fund's operations through its reorganization
at the close of business on February 14, 1997, the portfolio of the Fund has
consisted primarily of securities issued by the U.S. government and its agencies
and instrumentalities. The average maturity of the Fund's portfolio during this

period (generally ranging from two to five years) has been somewhat shorter than
the average maturity of the Fund of six to eight years following the change in
its investment objective upon its reorganization. As a result, financial
information for operations of the Fund prior to its reorganization may not be
indicative of its performance following its reorganization.

Total return and yield figures are based on the Fund's historical
performance and are not intended to indicate future performance. The Fund's
total return and yield will vary depending on market conditions, the securities
held by the Fund, the Fund's operating expenses and the amount of realized and
unrealized net capital gains or losses during the period. The value of an
investment in the Fund will fluctuate and an investor's shares, when redeemed,
may be worth more or less than their original cost.

On occasion, the Fund may compare the performance of the Fund to that of
the Standard & Poor's 500 Composite Stock Price Index, the Value Line Composite
Index, the Dow Jones Industrial Average, or performance data contained in
publications such as Lipper Analytical Services, Inc., Morningstar Publications,
Inc., Money Magazine, U.S. News & World Report, Business Week, CDA Investment
Technology, Inc., Forbes Magazine or Fortune Magazine. In addition, from time to
time the Fund may include the Fund's risk-adjusted performance ratings assigned
by Morningstar Publications, Inc. in advertising or supplemental sales
literature. As with other performance data, performance comparisons should not
be considered indicative of the Fund's relative performance for any future
period.

<PAGE>

ADDITIONAL INFORMATION

DETERMINATION OF NET ASSET VALUE

The net asset value of all classes of shares of the Fund is determined once
daily by MLAM immediately after the declaration of dividends as of 15 minutes
after the close of business on the NYSE (generally 4:00 p.m., New York City
time) on each day during which the NYSE is open for trading and on any other day
on which there is sufficient trading in the Fund's portfolio securities that net
asset value might be materially affected but only if on any such day the Fund is
required to sell or redeem shares. The Fund's net asset value per share is
computed by dividing the sum of the value of the portfolio securities held by
the Fund plus any cash or other assets minus all liabilities by the total number
of shares outstanding at such time, rounded to the nearest cent. Expenses,
including the investment advisory fee payable to MLAM and any account
maintenance and/or distribution fees payable to the Distributor, are accrued
daily. The Fund employs Merrill Lynch Securities Pricing Service ('MLSPS'), an
affiliate of the Investment Adviser, to provide certain securities prices for
the Fund.

The per share net asset value of Class A shares generally will be higher
than the per share net asset value of Class B, Class C and Class D shares,
reflecting the daily expense accruals of the account maintenance, distribution

and higher transfer agency fees applicable with respect to Class B and Class C
shares and the daily expense accruals of the account maintenance fee applicable
with respect to Class D shares. Moreover, the per share net asset value of Class
D shares generally will be higher than the per share net asset value of the
Class B and Class C shares, reflecting the daily expense accruals of the
distribution and higher transfer agency fees applicable with respect to Class B
and Class C shares. It is expected, however, that the per share net asset value
of the four classes of shares eventually will tend to converge (although not
necessarily meet) immediately after the payment of dividends, which will differ
by approximately the amount of the expense accrual differentials between the
classes.

ORGANIZATION OF THE FUND

The Fund was organized as an unincorporated business trust under the laws
of Massachusetts under the name 'Merrill Lynch Institutional Intermediate Fund'
on September 10, 1986. At the close of business on February 14, 1997, the Fund
was reorganized and changed its name to 'Merrill Lynch Intermediate Government
Bond Fund.' Its executive offices are located at One Financial Center, Boston,
Massachusetts 02111-2646 (telephone toll free 800-225-1576). Under the
Declaration of Trust, the Trustees are authorized to issue an indefinite number
of shares of $0.10 par value of one or more classes, and the Trustees have
designated four classes: 'Class A Common Stock,' 'Class B Common Stock,' 'Class
C Common Stock' and 'Class D Common Stock.' Each Class A, Class B, Class C and
Class D share of Common Stock has equal voting rights, and each such issued and
outstanding share is entitled to one vote and to participate equally in
dividends and distributions declared by the Fund and in net assets of the Fund
upon liquidation or dissolution remaining after satisfaction of outstanding
liabilities. The shares of the Fund, when issued, will be fully paid and
non-assessable, be freely transferable and have no preference, preemptive,
conversion or similar rights, except that the Class B, Class C and Class D
shares bear certain expenses related to the account maintenance fees associated
with such shares, and Class B and Class C shares bear certain expenses related
to the distribution of such shares. Each class has exclusive voting rights with
respect to matters relating to such account maintenance and distribution
expenditures, as applicable. See 'Purchase of Shares.' The Trustees are
authorized to divide or combine such shares into a greater or lesser number of
shares and to classify and reclassify the shares of the Fund into additional
classes of Common Stock at a future date. Shares of the Fund outstanding on the
date the Fund was reorganized were reclassified as Class D shares.

<PAGE>

shareholders holding in the aggregate not less than 10% of the outstanding
shares having voting rights. Except as set forth above, the Trustees will
continue to hold office and appoint successor trustees. Shares do not have
cumulative voting rights and the holders of more than 50% of the shares of the
Fund voting for the election of Trustees can elect all of the Trustees of the
Fund if they choose to do so and in such event the holders of the remaining
shares would not be able to elect any Trustees. Holders of shares of the Fund
are entitled to redeem their shares as set forth under 'Redemption of Shares.'
No amendment may be made to the Declaration of Trust without the affirmative
vote of a majority of the outstanding shares of the Fund.

The Declaration of Trust establishing the Fund, dated September 10, 1986, a
copy of which, together with all amendments thereto (the 'Declaration'), is on
file in the office of the Secretary of the Commonwealth of Massachusetts,
provides that the name of the Fund refers to the trustees under the Declaration
collectively as trustees, but not as individuals or personally, and no trustee,
shareholder, officer, employee or agent of the Fund may be held to any personal
liability, nor may resort be had to their private property for the satisfaction
of any obligation or claim otherwise in connection with the affairs of the Fund
but the Fund's property only shall be liable.

For further information concerning the organization of the Fund, see the
Statement of Additional Information.

INDEPENDENT AUDITORS

Deloitte & Touche LLP, independent auditors, has been selected as the
independent auditors of the Fund.

CUSTODIAN

State Street Bank and Trust Company, Boston, Massachusetts, acts as
Custodian of the Fund's assets.

LEGAL COUNSEL

Rogers & Wells, New York, New York, is counsel for the Fund and passes upon
legal matters for the Fund in connection with the shares offered by this
Prospectus.

SHAREHOLDER INQUIRIES

Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth in the cover page of this prospectus.

REPORTS TO SHAREHOLDERS

Only one copy of each shareholder report and certain shareholder

communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts the shareholder should notify in writing:

MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
P.O. BOX 45289
JACKSONVILLE, FLORIDA 32232-5289

<PAGE>

The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. If you have any questions regarding this
please call your Merrill Lynch Financial Consultant or Merrill Lynch Financial
Data Services, Inc. at 800-637-3863.

ADDITIONAL INFORMATION

This Prospectus does not contain all the information included in the
Registration Statement filed with the Commission under the Securities Act of
1933 and the Investment Company Act of 1940, with respect to the securities
offered hereby, certain portions of which have been omitted pursuant to the
rules and regulations of the Commission.

To the knowledge of the Fund as of February 6, 1997, no entities owned
beneficially more than 5% of the Fund's outstanding shares other than: American
Cancer Society, Illinois Division Inc., 77 East Monroe, Chicago, Illinois
60603-5700, which owned 342,699 shares, representing 7% of such outstanding
shares.

The Statement of Additional Information, dated February 18, 1997, which
forms a part of the Registration Statement, is incorporated by reference into
this Prospectus. The Statement of Additional Information may be obtained without
charge as provided on the cover page of this Prospectus. The Registration
Statement, including the exhibits filed therewith, may be examined at the office
of the Securities and Exchange Commission in Washington, D.C.

<PAGE>

MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND--AUTHORIZATION FORM (PART 1)
- --------------------------------------------------------------------------------

1. SHARE PURCHASE APPLICATION

I, being of legal age, wish to purchase: (choose one)
/ / Class A shares / / Class B shares / / Class D shares

of Merrill Lynch Intermediate Government Bond Fund and establish an Investment
Account as described in the Prospectus. In the event that I am not eligible to
purchase Class A shares, I understand that Class D shares will be purchased.

Basis for establishing an Investment Account:

A. I enclose a check for $ ..... payable to Merrill Lynch Financial Data
Services, Inc., as an initial investment (minimum
$1,000). I understand that this purchase will be executed at the applicable
offering price next to be determined after this Application is received
by you.

B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of
paper if necessary.)

<TABLE>
<S> <C>
1. ...................................................... 4. ......................................................
2. ...................................................... 5. ......................................................
3. ...................................................... 6. ......................................................

Name..................................................................................................................
First Name Initial Last Name
Name of Co-Owner (if any).............................................................................................
First Name Initial Last Name
Address...................................................

.......................................................... Name and Address of Employer..............................
(Zip Code)

Occupation................................................ ..........................................................

.......................................................... ..........................................................
Signature of Owner Signature of Co-Owner (if any)

(In the case of co-owners, a joint tenancy with right of survivorship will be presumed unless otherwise specified.)
</TABLE>

- --------------------------------------------------------------------------------

2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS

Ordinary Income Dividends Long-Term Capital Gains

SELECT / / Reinvest SELECT / / Reinvest
ONE: / / Cash ONE: / / Cash

If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.

IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: / / Check
or / / Direct Deposit to bank account

IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:

I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch Intermediate Government Bond Fund Authorization
Form.

SPECIFY TYPE OF ACCOUNT (CHECK ONE): / / checking / / savings

Name on your account ...........................................................

Bank Name ......................................................................

Bank Number ......................... Account Number .........................

Bank Address ...................................................................

I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE WRITTEN
NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.

Signature of Depositor .........................................................

Signature of Depositor ......................... Date ........................

(if joint account, both must sign)

NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED 'VOID' OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS
APPLICATION.

<PAGE>

MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND--AUTHORIZATION FORM
(PART 1)--(CONTINUED)

- --------------------------------------------------------------------------------
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER

Social Security Number or Taxpayer Identification Number

--------------------------------------------------------

Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security Number or Taxpayer Identification Number and (2) that
I am not subject to backup withholding (as discussed in the Prospectus under
'Distributions and Taxes--Taxes') either because I have not been notified that I
am subject thereto as a result of a failure to report all interest or dividends,
or the Internal Revenue Service ('IRS') has notified me that I am no longer
subject thereto.

INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDER-REPORTING AND
IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO
OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.

...................................... .......................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>

- --------------------------------------------------------------------------------
4. LETTER OF INTENTION--CLASS A AND CLASS D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)

................ , 19 ......
Date of Initial Purchase

Dear Sir/Madam:

Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Intermediate Government Bond Fund or any other investment company with an
initial sales charge or deferred sales charge for which Merrill Lynch Funds
Distributor, Inc. acts as distributor over the next 13-month period which will
equal or exceed:

/ / $100,000 / / $250,000 / / $500,000 / / $1,000,000

Each purchase will be made at the then reduced offering price applicable to

the amount checked above, as described in the Merrill Lynch Intermediate
Government Bond Fund Prospectus.

I agree to the terms and conditions of the Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc. my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Intermediate Government Bond Fund held as security.

<TABLE>
<S> <C>
By: ................................... .......................................
Signature of Owner Signature of Co-Owner
(If registered in joint names, both
must sign)
</TABLE>

In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:

<TABLE>
<S> <C>
(1) Name .............................. (2) Name ..............................

Account Number ........................ Account Number ........................
</TABLE>

- --------------------------------------------------------------------------------
5. FOR DEALER ONLY

Branch Office, Address, Stamp

__ __
| |

| |
__ __

This form, when completed, should be mailed to:

Merrill Lynch Intermediate Government Bond Fund
c/o Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289

We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our agent in
connection with transactions under this authorization form and agree to notify
the Distributor of any purchases or sales made under a Letter of Intention,
Automatic Investment Plan or Systematic Withdrawal Plan. We guarantee the
Shareholder's signature.

..............................................................................
Dealer Name and Address

By:............................................................................
Authorized Signature of Dealer

/ / / / / / / .......................................
Branch Code F/C No. F/C Last Name

/ / / / / / / /
Dealer's Customer Account No.

<PAGE>

MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND--AUTHORIZATION FORM (PART 2)
- --------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OR AUTOMATIC
INVESTMENT PLANS ONLY.
- --------------------------------------------------------------------------------

1. ACCOUNT REGISTRATION __________________________________
SOCIAL SECURITY NUMBER
OR TAXPAYER IDENTIFICATION NUMBER

Name of Owner .................................................................

Name of Co-Owner (if any) .....................................................

Account Number .................................................................
(if existing account)

Address ........................................................................

- --------------------------------------------------------------------------------

2. SYSTEMATIC WITHDRAWAL PLAN--CLASS A AND D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)

MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for quarterly,
of / / Class A or / / Class D shares in Merrill Lynch Intermediate Government
Bond Fund at cost or current offering price. Withdrawals to be made either
(check one) / / Monthly on the 24th day of each month, or / / Quarterly on the
24th day of March, June, September and December. If the 24th falls on a weekend
or holiday, the next succeeding business day will be utilized. Begin systematic
withdrawal on _______________ (month) or as soon as possible thereafter.

SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU
(CHECK ONE): / / $_______________ or / / __________% of the current
value of / / Class A or / / Class D shares in the account.

SPECIFY WITHDRAWAL METHOD: / / check or / / direct deposit to bank account
(check one and complete part (a) or (b) below):

DRAW CHECKS PAYABLE (CHECK ONE)

(a) I hereby authorize payment by check

/ / as indicated in Item 1. / / to the order of ...............................

Mail to (check one)

/ / the address indicated in Item 1.

/ / Name (please print) ....................................................

Address .......................................................................

........................................................................

Signature of Owner ........................... Date ..........................

(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO MY BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.

Specify type of account (check one): / / checking / / savings

Name on your account ...........................................................

Bank Name ......................................................................

Bank Number ......................... Account Number .........................

Bank Address ...................................................................

.......................................................................

Signature of Depositor ......................... Date ........................

Signature of Depositor .........................................................
(If joint account, both must sign)

NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED 'VOID' OR
A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS APPLICATION.

<PAGE>

MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND--AUTHORIZATION FORM
(PART 2)--(CONTINUED)

- --------------------------------------------------------------------------------

1. APPLICATION FOR AUTOMATIC INVESTMENT PLAN

I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ('ACH') debit on my checking account as described below
each month to purchase: (choose one)

/ / Class A shares / / Class B shares / / Class D shares

of Merrill Lynch Intermediate Government Bond Fund subject to the terms set
forth below. In the event that I am not eligible to purchase Class A shares, I
understand that Class D shares will be purchased.

MERRILL LYNCH FINANCIAL DATA SERVICES, INC.

You are hereby authorized to draw an ACH debit each month on my bank account for
investment in Merrill Lynch Intermediate Government Bond Fund, as indicated
below:

Amount of each ACH debit $ ................................................

Account Number ............................................................

Please date and invest ACH debits on the 20th of each month

beginning .................................. or as soon thereafter as possible.
(month)

I agree that you are drawing these ACH debits voluntarily at my request and
that you shall not be liable for any loss arising from any delay in preparing or
failure to prepare any such debit. If I change banks or desire to terminate or
suspend this program, I agree to notify you promptly in writing. I hereby
authorize you to take any action to correct erroneous ACH debits of my bank
account or purchases of fund shares including liquidating shares of the Fund and
credit my bank account. I further agree that if a check or debit is not honored
upon presentation, Merrill Lynch Financial Data Services, Inc. is authorized to
discontinue immediately the Automatic Investment Plan and to liquidate
sufficient shares held in my account to offset the purchase made with the
dishonored debit.

...................................... .......................................
Date Signature of Depositor

.......................................
Signature of Depositor
(If joint account, both must sign)

AUTHORIZATION TO HONOR ACH DEBITS
DRAWN BY MERRILL LYNCH FINANCIAL DATA
SERVICES, INC.

To ....................................................................... Bank
(Investor's Bank)

Bank Address ..................................................................

City ............ State ............ Zip Code ...............................

As a convenience to me, I hereby request and authorize you to pay and charge to
my account ACH debits drawn on my account by and payable to Merrill Lynch
Financial Data Services, Inc. I agree that your rights in respect to each such
debit shall be the same as if it were a check drawn on you and signed personally
by me. This authority is to remain in effect until revoked personally by me in
writing. Until you receive such notice, you shall be fully protected in honoring
any such debit. I further agree that if any such debit be dishonored, whether
with or without cause and whether intentionally or inadvertently, you shall be
under no liability.

...................................... .......................................
Date Signature of Depositor

...................................... .......................................
Bank Account Number Signature of Depositor
(If joint account, both must sign)

NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED
'VOID' SHOULD ACCOMPANY THIS APPLICATION.

<PAGE>

INVESTMENT ADVISER
Merrill Lynch Asset Management, L.P.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536

Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011

DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536

Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081

TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484

Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289

CUSTODIAN
State Street Bank and Trust Company
P.O. Box 351
Boston, Massachusetts 02101

INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540

COUNSEL
Rogers & Wells
200 Park Avenue
New York, New York 10166

<PAGE>

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND, THE INVESTMENT ADVISER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table................................... 2
Merrill Lynch Select Pricing(Service Mark)
System.................................... 3
Financial Highlights........................ 7
Investment Objectives and Policies.......... 9
Investment Restrictions................... 9
Other Portfolio Strategies................ 9
Investment Adviser.......................... 10
Code of Ethics............................ 11
Transfer Agency Services.................. 11
Trustees.................................... 11
Purchase of Shares.......................... 12
Initial Sales Charge Alternatives--
Class A and Class D Shares.............. 14
Deferred Sales Charge Alternatives--
Class B and Class C Shares.............. 16
Distribution Plans........................ 19
Limitations on the Payment of
Deferred Sales Charges.................. 20
Redemption of Shares........................ 21
Redemption................................ 21
Repurchase................................ 21
Reinstatement Privilege--
Class A and Class D Shares.............. 22
Dividends, Distributions and Taxes.......... 22
Dividends and Distributions............... 22
Federal Income Taxes...................... 23
Portfolio Transactions...................... 24
Shareholder Services........................ 25
Investment Account........................ 25
Automatic Investment Plans................ 26
Fee-Based Programs........................ 26
Automatic Reinvestment of Dividends and
Capital Gains Distributions............. 26
Systematic Withdrawal Plans............... 26
Retirement Plans.......................... 27

Exchange Privilege........................ 27
Merrill Lynch Blueprint(Service Mark)
Program................................. 28
Performance Data............................ 28
Additional Information...................... 30
Determination of Net Asset Value.......... 30
Organization of the Fund.................. 30
Independent Auditors...................... 31
Custodian................................. 31
Legal Counsel............................. 31
Shareholder Inquiries..................... 31
Reports to Shareholders................... 31
Additional Information.................... 32
Authorization Form.......................... 33

Code 10431-0297
</TABLE>

<PAGE>

[LOGO]

MERRILL LYNCH
INTERMEDIATE GOVERNMENT BOND FUND
[ART]
PROSPECTUS

February 18, 1997

Distributor:
Merrill Lynch
Funds Distributor, Inc.

This prospectus should be
retained for future reference.

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 18, 1997

MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011--PHONE NO. (609) 282-2800

------------------------

Merrill Lynch Intermediate Government Bond Fund, Inc. (the 'Fund') is a
diversified mutual fund. Pursuant to the Merrill Lynch Select Pricing(Service
Mark) System, the Fund offers four classes of shares of Common Stock, each with
a different combination of sales charges, ongoing fees and other features,
except that Class C shares of the Fund are available only through the Exchange
Privilege. The Merrill Lynch Select Pricing(Service Mark) System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances.

------------------------

This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the Prospectus of the Fund (the
'Prospectus') dated February 18, 1997, which has been filed with the Securities
and Exchange Commission (the 'Commission') and is available upon oral or written
request without charge. Copies of the Prospectus can be obtained by calling or
by writing the Fund at the above telephone number or address. This Statement of
Additional Information has been incorporated by reference into the Prospectus.

------------------------

MERRILL LYNCH ASSET MANAGEMENT--INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR

<PAGE>

INVESTMENT OBJECTIVES AND POLICIES

The investment objective of the Fund is to seek the highest possible
current income consistent with the protection of capital afforded by investing
in intermediate-term debt securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities with a maximum maturity not to
exceed fifteen years. Under normal circumstances, all or substantially all of
the Fund's assets will be invested in such securities. Under normal market
conditions, the Fund will maintain a dollar-weighted average maturity of six to
eight years.

Reference is made to 'Investment Objectives and Policies' on page 9 of the
Prospectus for a discussion of the investment objectives and policies of the
Fund.

INVESTMENT RESTRICTIONS

The Fund has adopted the following fundamental and non-fundamental
restrictions and policies relating to the investment of its assets and its
activities. The fundamental policies set forth below may not be changed without
the approval of the holders of a majority of the Fund's outstanding voting
securities (which for this purpose and under the Investment Company Act of 1940
means the lesser of (i) 67% of the shares represented at a meeting at which more
than 50% of the outstanding shares are represented or (ii) more than 50% of the
outstanding shares).

Under the fundamental investment restrictions, the Fund may not:

1. Make any investment inconsistent with the Fund's classification as
a diversified company under the Investment Company Act.

2. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).

3. Make investments for the purpose of exercising control or
management.

4. Purchase or sell real estate, except that, to the extent permitted
by applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.

5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers' acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except

further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Fund's Prospectus and
Statement of Additional Information, as they may be amended from time to
time.

6. Issue senior securities to the extent such issuance would violate
applicable law.

7. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may, to the
extent permitted by applicable law, borrow up to an additional 5% of its
total assets for temporary purposes, (iii) the Fund may obtain such
short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities and (iv) the Fund may purchase securities on
margin to the extent permitted by applicable law. The Fund may not pledge
its assets other than to secure such borrowings or, to the extent permitted
by the Fund's investment policies as set forth in its Prospectus and
Statement of

<PAGE>

Additional Information, as they may be amended from time to time, in
connection with hedging transactions, short sales, when-issued and forward
commitment transactions and similar investment strategies.

8. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the 'Securities Act') in selling portfolio securities.

9. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.

Under the non-fundamental investment restrictions, the Fund may not:

a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law.

b. Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law. The Fund currently does not
intend to engage in short sales, except short sales 'against the box.'

c. Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of

acquisition more than 15% of its total assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Trustees of the Fund has
otherwise determined to be liquid pursuant to applicable law.

d. Notwithstanding fundamental investment restriction (7) above, the
Fund will not borrow amounts in excess of 5% of the total assets of the
Fund, taken at market value, and then only from banks as a temporary
measure for extraordinary or emergency purposes such as the redemption of
Fund shares. In addition, the Fund will not purchase securities while
borrowings are outstanding.

Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ('Merrill Lynch') with the Fund, the Fund is prohibited from
engaging in certain transactions involving Merrill Lynch except pursuant to an
exemptive order or otherwise in compliance with the provisions of the Investment
Company Act of 1940 and the rules and regulations thereunder. Included among
such restricted transactions are (i) purchases from or sales to Merrill Lynch of
securities in transactions in which Merrill Lynch acts as principal, and (ii)
purchases of securities from underwriting syndicates of which Merrill Lynch is a
member.

Lending of Portfolio Securities. Subject to investment restriction (5)
above, the Fund from time to time may lend securities from its portfolio to
brokers, dealers and financial institutions and receive as collateral cash or
United States Treasury securities which at all times while the loan is
outstanding will be maintained in amounts equal to at least 100% of the current
market value of the loaned securities. Any cash collateral will be invested in
short-term securities, which will increase the current income of the Fund. Such
loans, which will not have terms longer than 30 days, will be terminable at any
time. The Fund will have the right to regain record ownership of loaned
securities to exercise beneficial rights such as voting rights, subscription
rights and rights of dividends, interest or other distributions. The Fund may
pay reasonable fees to persons unaffiliated with the Fund for services in
arranging such loans. In the event of a default by the borrower, the Fund may
suffer time delays and incur costs or possible losses in connection with the
disposition of the collateral.

<PAGE>

Forward Commitments. U.S. Government securities and corporate debt
obligations may be purchased on a forward commitment basis at fixed purchase
terms with periods of up to 45 days between the commitment and settlement dates.
The purchase will be recorded on the date the Fund enters into the commitment
and the value of the security will thereafter be reflected in the calculation of
the Fund's net asset value. The value of the security on the delivery date may
be more or less than its purchase price. A separate account of the Fund will be

established with the Custodian consisting of cash or liquid high grade debt
obligations having a market value at all times until the delivery date at least
equal to the amount of the forward commitment. Although the Fund will generally
enter into forward commitments with the intention of acquiring securities for
its portfolio, the Fund may dispose of a commitment prior to settlement if the
Investment Adviser deems it appropriate to do so. There can, of course, be no
assurance that the judgments upon which these techniques are based will be
accurate or that such techniques when applied will be effective. The Fund will
enter into forward commitment arrangements only with respect to securities in
which it may otherwise invest as described under 'Investment Objectives and
Policies.'

Repurchase Agreements. As described in the Prospectus, the Fund may invest
in securities pursuant to repurchase agreements. Under such agreements, the
seller agrees, upon entering into the contract, to repurchase the security at a
mutually agreed-upon time and price, thereby determining the yield during the
term of the agreement. This results in a fixed rate of return insulated from
market fluctuations during such period. Such agreements usually cover short
periods, such as under one week. Repurchase agreements may be construed to be
collateralized loans by the purchaser to the seller secured by the securities
transferred to the purchaser. The Fund will require the seller to provide
additional collateral if the market value of the securities falls below the
repurchase price at any time during the term of the repurchase agreement. In the
event of default by the seller under a repurchase agreement construed to be a
collateralized loan, the underlying securities are not owned by the Fund but
only constitute collateral for the seller's obligation to pay the repurchase
price. Therefore, the Fund may suffer time delays and incur costs or possible
losses in connection with the disposition of the collateral. Instead of the
contractual fixed rate of return, the rate of return to the Fund will be
dependent upon intervening fluctuations of the market value of such security and
the accrued interest on the security. In such event, the Fund would have rights
against the seller for breach of contract with respect to any losses arising
from market fluctuations following the failure of the seller to perform. From
time to time, the Fund also may invest in securities pursuant to purchase and
sale contracts. While the substance of purchase and sale contracts is similar to
repurchase agreements, because of the different treatment with respect to
accrued interest and additional collateral, management believes that purchase
and sale contracts are not repurchase agreements as such term is understood in
the banking and brokerage community. As a matter of operating policy, the Fund
will not enter into repurchase agreements or purchase and sale contracts with
greater than seven days to maturity if, at the time of such investment, more
than 10% of the total assets of the Fund would be so invested.

MANAGEMENT OF THE FUND

TRUSTEES AND OFFICERS

The Trustees and officers of the Fund, their ages, principal occupations
for at least the last five years and the public companies for which they serve
as directors are set forth below. Unless otherwise stated, the address of each
Trustee and officer is One Financial Center, Boston, Massachusetts 02111-2646.

ROBERT W. CROOK (60)--President and Trustee(1)(2)--Senior Vice President of
Merrill Lynch Asset Management, L.P. ('MLAM') and of Merrill Lynch Funds
Distributor, Inc. ('MLFD') since 1990 and Vice President of MLAM and MLFD prior
thereto.

<PAGE>

A. BRUCE BRACKENRIDGE (66)--Trustee(2)--9 Elm Lane, Bronxville, New York
10708. Group Executive of J.P. Morgan & Co., Inc. (banking) and Morgan Guaranty
Trust Company from 1979 to 1991 and an employee of J.P. Morgan in various
capacities from 1952 to 1991.

CHARLES C. CABOT, JR. (66)--Trustee(2)--One Post Office Square, Boston,
Massachusetts 02119. Partner of the law firm Sullivan & Worcester and associated
with that firm since 1966.

JAMES T. FLYNN (56)--Trustee(2)--340 East 72nd Street, New York, New York
10021. Chief Financial Officer of J.P. Morgan & Co., Inc. from 1990 to 1995 and
an employee of J.P. Morgan in various capacities from 1967 to 1995.

TERRY K. GLENN (56)--Trustee(1)(2)--P.O. Box 9011, Princeton, New Jersey
08543-9011. Executive Vice President of MLAM and FAM since 1983; Executive Vice
President and Director of Princeton Services, Inc. since 1993; President of MLFD
since 1986 and Director thereof since 1991; President of Princeton
Administrators, L.P. since 1988.

GEORGE W. HOLBROOK, JR. (65)--Trustee(2)--107 John Street, Southport,
Connecticut 06490. Managing Partner of Bradley Resources Company (private
investment company) and associated with that firm and its predecessors since
1953; Director of Canyon Resources Corporation (mineral exploration
company); Director of Thoratec Laboratories Corporation (medical device
manufacturer).

W. CARL KESTER (44)--Trustee(2)--Harvard Business School, Morgan Hall 393,
Soldiers Field, Boston, Massachusetts 02163. MBA Class of 1958 Professor of
Business Administration of Harvard University Graduate School of Business
Administration since 1981; Independent Consultant since 1978.

WILLIAM E. ALDRICH (63)--Executive Vice President(2)--Vice President of
MLAM since 1993; Senior Vice President of MLFD since 1990; Vice President of
MLFD prior thereto and a Vice President of FAM since 1981.

MICHAEL J. BRADY (37)--Senior Vice President(2)--Vice President of MLAM
since 1993; Vice President of MLFD since 1990 and an employee of MLFD prior
thereto.

WILLIAM M. BREEN (42)--Senior Vice President and Assistant
Treasurer(2)--Vice President of MLAM since 1993 and Vice President of MLFD since
1990 and Assistant Vice President of MLFD prior thereto.

JAMES J. FATSEAS (40)--Senior Vice President(2)--Vice President of MLAM
since 1993; Vice President of MLFD since 1990 and Assistant Vice President of
MLFD prior thereto.

JOSEPH T. MONAGLE, JR. (48)--Senior Vice President(2)--Senior Vice
President of MLAM and FAM since 1990 and Vice President of MLAM and FAM prior
thereto.

WILLIAM WASEL (38)--Senior Vice President(2)--Vice President of MLAM since
1993; Vice President of MLFD since 1990 and Assistant Vice President of MLFD
prior thereto.

DONALD C. BURKE (36)--Vice President(2)--P.O. Box 9011, Princeton, New
Jersey 08543-9011. Vice President and Director of Taxation of MLAM since 1990;
employee of Deloitte & Touche LLP from 1982 to 1990.

ANN CATLIN (35)--Vice President(2)--Employee of MLFD since 1986.

CHARLES O. DALY (61)--Vice President(2)--Employee of MLFD since 1981.

DIANA FRANKLAND (61)--Vice President(2)--Employee of MLFD since 1979.

JAY C. HARBECK (62)--Vice President(2)--P.O. Box 9011, Princeton, New
Jersey 08543-9011. Vice President of MLAM since 1986.

<PAGE>

MARK E. MAGUIRE (37)--Vice President(2)--Assistant Vice President of MLFD
since 1990 and an employee of MLFD since 1986.

PATRICIA A. SCHENA (39)--VicePresident(2)--Assistant Vice President of MLFD
since 1990 and an employee of MLFD since 1980.

BARRY F. X. SMITH (31)--Vice President(2)--Employee of MLFD since 1987.

KAREN D. YOUNG (32)--Vice President(2)--Employee of MLFD since 1982.

DIANNE F. MCDONOUGH (35)--Vice President(2)--Employee of MLFD since 1983.

GERALD M. RICHARD (47)--Treasurer(2)--P.O. Box 9011, Princeton, New Jersey
08543-9011. Senior Vice President and Treasurer of MLAM and FAM since 1984; Vice
President and Treasurer of MLFD since 1981; Senior Vice President and Treasurer
of Princeton Administrators, Inc. since 1988; Senior Vice President and
Treasurer of Princeton Services, Inc. since 1993.

JERRY WEISS (38)--Secretary(1)--P.O. Box 9011, Princeton, New Jersey
08543-9011. Vice President of MLAM since 1990 and an attorney in private
practice prior thereto.

- ------------
(1) These Trustees may be deemed to be 'interested persons' of the Fund as that
term is defined in the Investment Company Act of 1940. Mr. Crook and Mr.
Glenn are officers of MLFD and MLAM.
(2) Director/trustee or officer of certain other investment companies for which
FAM or MLAM acts as investment adviser.

Set forth below is a chart showing, for the fiscal year ended October 31,
1996, compensation paid by the Fund to the non-interested Trustees and, for the
calendar year ending December 31, 1996, the aggregate compensation paid by all
investment companies advised by MLAM and its affiliate, FAM (collectively, the
'Fund Complex'), to the non-interested Trustees. In addition, during the fiscal
year ended October 31, 1996, two Trustees who are no longer Trustees of the Fund
received $1,500 and $3,000, respectively, in compensation from the Fund and
$7,500 and $15,000, respectively, in compensation from the Fund Complex.

<TABLE>
<CAPTION>
PENSION OR AGGREGATE COMPENSATION
RETIREMENT BENEFITS FROM FUND AND
COMPENSATION ACCRUED AS PART FAM/MLAM ADVISED
NAME OF TRUSTEE FROM FUND OF FUND EXPENSES FUNDS PAID TO TRUSTEES
- --------------- ------------ ------------------- ----------------------
<S> <C> <C> <C>
A. Bruce Brackenridge(1).............................. $6,000 None $ 30,000
Charles C. Cabot, Jr.(1).............................. 6,000 None 30,000

James T. Flynn(1)(2).................................. 1,500 None 15,000
George W. Holbrook(1)................................. 6,000 None 30,000
W. Carl Kester(1)(3).................................. 6,000 None 30,000
</TABLE>

- ------------

(1) The Trustees served on the boards of other MLAM-advised Funds as follows: A.
Bruce Brackenridge (2 funds and 6 portfolios), Charles C. Cabot, Jr. (2
funds and 6 portfolios), James T. Flynn (2 funds and 6 portfolios), George
W. Holbrook (2 funds and 6 portfolios) and W. Carl Kester (2 funds and 6
portfolios).

(2) Mr. Flynn became a Trustee in June 1996.

(3) Mr. Kester became a Trustee in December 1995.

<PAGE>

At February 6, 1997, the officers and trustees of the Fund as a group
(twenty-five persons) owned an aggregate of less than 1/4 of 1% of the
outstanding shares of common stock of Merrill Lynch & Co., Inc. ('ML & Co.') and
owned less than 1% of the outstanding shares of the Fund.

The trustees have an Audit and Nominating Committee, the members of which
are Messrs. Brackenridge, Cabot, Flynn, Holbrook and Kester.

Each Trustee who is not an officer or employee of ML & Co. or its
subsidiaries will be paid $6,000 annually in his capacity as Trustee. All
Trustees will be reimbursed for any expenses incurred in attending meetings of
the Board of Trustees of the Fund or of any committee thereof. No officer or
employee of ML & Co. or its subsidiaries will receive any compensation from the
Fund for acting as a Trustee or officer of the Fund.

MANAGEMENT AND INVESTMENT ADVISORY ARRANGEMENTS

The Investment Adviser (MLAM) acts as the investment adviser for the Fund
and provides the Fund with management services. The Investment Adviser (the
general partner of which is Princeton Services Inc., a wholly owned subsidiary

of Merrill Lynch & Co., Inc.) is itself a wholly owned affiliate of Merrill
Lynch & Co., Inc. and has its principal place of business at 800 Scudders Mill
Road, Plainsboro, New Jersey 08536. Merrill Lynch & Co., Inc. has its principal
place of business at 250 Vesey Street, New York, New York 10281.

The Investment Adviser is a limited partnership, the partners of which are
ML & Co. and Princeton Services. ML & Co. and Princeton Services are
'controlling persons' of the Investment Adviser as defined under the Investment
Company Act because of their ownership of its voting securities or their power
to exercise a controlling influence over its management or policies.

Pursuant to the terms of the Investment Advisory Agreement, the Investment
Adviser, subject to the general supervision of the Trustees of the Fund and in
conformance with the stated policies of the Fund, renders investment supervisory
and administrative services to the Fund. In this regard, it is the
responsibility of the Investment Adviser to make investment decisions for the
Fund and to place the purchase and sale orders for the portfolio transactions of
the Fund. In addition the Investment Adviser performs, or supervises the
performance of, administrative services in connection with the Fund, including
(i) supervision of all aspects of the Fund's administration and operations,
including processing services related to the purchase and redemption of Fund
shares, the general handling of shareholder relations, and portfolio management;
(ii) providing the Fund, at the Investment Adviser's expense, with the services
of persons competent to perform such administrative and clerical functions as
are necessary in order to provide effective administration of the Fund; and
(iii) providing the Fund, at the Investment Adviser's expense, with adequate
office space and related services. The Investment Adviser may arrange for the
provision of these administrative services and functions by MLFD or another
affiliate of ML & Co.

The Investment Advisory Agreement obligates the Investment Adviser to pay
all compensation of and furnish office space for officers and employees of the
Fund connected with investment and economic research, trading and investment
management of the Fund, as well as compensation of all Trustees of the Fund who
are affiliated persons of ML & Co. or any of its subsidiaries. The Fund pays all
other expenses incurred in the operation of the Fund including, among other
things, taxes, expenses for legal and auditing services, costs of printing
proxies, stock certificates, shareholder reports, prospectuses and statements of
additional information (except to the extent paid by the Distributor), charges
of the custodian and the transfer agent, expenses of redemption of shares,
Securities and Exchange Commission fees, expenses of registering the shares
under Federal and state securities laws, fees and expenses of unaffiliated
trustees, accounting and pricing costs (including the daily calculation of net
asset value), insurance, interest, brokerage costs, litigation and other
extraordinary or non-recurring expenses, and other expenses properly payable by
the Fund. Accounting services

<PAGE>

are provided for the Fund by the Investment Adviser, and the Fund reimburses the
Investment Adviser for its costs in connection with those services. MLFD pays
certain of the expenses of the Fund in connection with the continuous offering
of Fund shares. See 'Purchase of Shares' in the Prospectus. Certain distribution
expenses will be financed by the Fund pursuant to the Distribution Plans in
compliance with Rule 12b-1 under the Investment Company Act of 1940. See
'Distributor.'

As compensation for the services rendered under the Investment Advisory
Agreement, the Fund pays the Investment Adviser a fee, payable monthly, at an
annual rate of 0.40% of the Fund's average daily net assets. For the fiscal
years ended October 31, 1995 and 1996, the Fund paid investment advisory fees of
$271,378 and $231,551, respectively.

DURATION AND TERMINATION

The Investment Advisory Agreement is effective as of October 31, 1986 and,
unless earlier terminated as described below, will continue in effect from year
to year if approved annually (a) by the Board of Trustees of the Fund or by a
majority of the outstanding shares of the Fund, and (b) by a majority of the
trustees who are not parties to that contract or interested persons (as defined
in the Investment Company Act of 1940) of any such party. The Investment
Advisory Agreement will terminate automatically upon its assignment and is
terminable at any time without penalty by the trustees of the Fund or by a vote
of a majority of the Fund's outstanding shares (as defined under 'Investment
Restrictions' herein) or by the Investment Adviser on 60 days' written notice to
the other party. The Investment Advisory Agreement was last renewed by the
Fund's Board of Trustees on September 9, 1996.

The investment advisory services of the Investment Adviser to the Fund are
not exclusive under the terms of the Investment Advisory Agreement and the
Investment Adviser is also free to, and does, render such services to others.

TRANSFER AGENCY SERVICES ARRANGEMENTS

Merrill Lynch Financial Data Services, Inc. ('MLFDS'), which is a wholly
owned subsidiary of ML & Co., serves as transfer agent to the Fund pursuant to a
Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement (the 'Transfer Agency Agreement'). MLFDS receives a fee of $11.00 per
shareholder account for Class A or Class D shares of the Fund and a fee of
$14.00 per shareholder account for Class B or Class C shares of the Fund. For
the fiscal year ended October 31, 1996, the Fund incurred fees of $28,798
pursuant to its previous transfer agency and service agreement with
State Street Bank and Trust Company.

DETERMINATION OF NET ASSET VALUE

Reference is made to 'Additional Information--Determination of Net Asset
Value' on page 28 of the Prospectus. The net asset value of the shares of the
Fund is determined once daily by MLAM immediately after the declaration of
dividends as of 15 minutes after the close of business on the New York Stock
Exchange (the 'NYSE') (generally 4:00 p.m., New York City time) on days that the
NYSE is open for business and on any other day on which there is sufficient
trading in the Fund's portfolio securities that net asset value might be
materially affected but only if on any such day the Fund is required to sell or
redeem shares. The NYSE is not open for business on the following holidays: New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day. The net asset value per share of the
Fund is computed by dividing the sum of the value of the securities held by the
Fund plus any cash or other assets minus all liabilities by the total number of
shares of the Fund outstanding at such time, rounded to the nearest cent.
Expenses, including the investment advisory fee payable to MLAM and any account
maintenance and/or distribution fees payable to the Distributor, are accrued
daily.

<PAGE>

The per share net asset value of Class A shares generally will be higher
than the per share net asset value of shares of the other classes, reflecting
the daily expense accruals of the account maintenance, distribution and higher
transfer agency fees applicable with respect to Class B and Class C shares and
the daily expense accruals of the account maintenance fees applicable with
respect to Class D shares; moreover, the per share net asset value of Class D
shares generally will be higher than the per share net asset value of Class B
and Class C shares, reflecting the daily expense accruals of the distribution
and higher transfer agency fees applicable with respect to Class B and Class C
shares. It is expected, however, that the per share net asset value of the
classes will tend to converge (although not necessarily meet) immediately after
the payment of dividends or distributions which will differ by approximately the
amount of the expense accrual differentials between the classes.

Portfolio securities that are traded in the over-the-counter market are
valued at the last available bid price as obtained from dealers who make a
market in the securities. Securities 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 Fund.

PORTFOLIO TRANSACTIONS

Reference is made to 'Portfolio Transactions' in the Prospectus.

The obligations in which the Fund invests are traded primarily in the
over-the-counter market but may be traded on an exchange. Where possible, the
Fund will deal directly with the dealers who make a market in the securities
involved except in those circumstances where better prices and execution are
available elsewhere. Such dealers usually are acting as principal for their own
account. On occasion, securities may be purchased directly from the issuer. The
cost of executing portfolio transactions of the Fund will primarily consist of
dealer spreads and underwriting commissions.

Under the Investment Company Act of 1940, persons affiliated with the Fund
are prohibited from dealing with the Fund as a principal in the purchase and
sale of securities unless a permissive order allowing such transactions is
obtained from the Securities and Exchange Commission. Affiliated persons of the
Fund may serve as its broker in over-the-counter transactions conducted on an
agency basis. The Fund may not generally purchase securities from any
underwriting syndicate of which Merrill Lynch is a member.

The Trustees of the Fund have considered the possibility of recapturing for
the benefit of the Fund brokerage commissions, dealer spreads and other expenses
of possible portfolio transactions, such as underwriting commissions, by
conducting such portfolio transactions through affiliated entities, including
Merrill Lynch. For example, brokerage commissions received by Merrill Lynch
could be offset against the management fee paid by the Fund to the Investment
Adviser. After considering all factors deemed relevant, the Trustees made a
determination not to seek such recapture. The Trustees will consider this matter
from time to time.

In placing orders, it is the policy of the Fund to obtain the best net
results taking into account such factors as price (including the applicable
dealer spread), the size, type and difficulty of the transaction involved, the
firm's general execution and operational facilities, the firm's risk in
positioning the securities involved and the firm's provision of supplemental
investment research (such as economic data and market forecasts). Information so
received will be in addition to and not in lieu of the services required to be
performed by the Investment Adviser under its Investment Advisory Agreement, and
the expenses of the Investment Adviser will not necessarily be reduced as a
result of the receipt of such supplemental information. In some cases, the
Investment Adviser may use such supplemental research in providing investment
advice to its other investment advisory accounts. While the Investment Adviser
generally seeks reasonably competitive spreads or commissions, the Fund will not
necessarily be paying the lowest spread or commission available.

<PAGE>

Securities held by the Fund may also be held by or be appropriate
investments for other funds for which the Investment Adviser or its affiliates
act as an adviser or by investment advisory clients of the Investment Adviser.
Because of different objectives or other factors, a particular security may be
bought for one or more clients when one or more clients are selling the same

security. If purchases or sales of securities for the Fund or other funds for
which they act as investment adviser or for their advisory clients arise for
consideration at or about the same time, transactions in such securities will be
made, insofar as feasible, for the respective funds and clients in a manner
deemed equitable to all. To the extent that transactions on behalf of more than
one client of the Investment Adviser or its affiliates during the same period
may increase the demand for securities being purchased or the supply of
securities being sold, there may be an adverse effect on price.

PORTFOLIO TURNOVER

The Investment Adviser effects portfolio transactions without regard to
holding period if, in its judgment, such transactions are advisable in light of
a change in circumstances in general market, economic or financial conditions.
As a result of its investment policies, the Fund may engage in a substantial
number of portfolio transactions. The portfolio turnover rate is calculated by
dividing the lesser of the Fund's annual sales or purchases of portfolio
securities (exclusive of purchases or sales of securities whose maturities at
the time of acquisition were one year or less) by the monthly average value of
the securities in the portfolio during the year. High portfolio turnover
involves correspondingly greater transaction costs in the form of dealer spread
and brokerage commissions, which are borne directly by the Fund, and may
increase the percentage of the Fund's distributions which are taxable to
shareholders as ordinary income. For the fiscal years ended October 31, 1995 and
October 31, 1996, the Fund's portfolio turnover rates were 47.90% and 51.44%,
respectively.

PURCHASE OF SHARES

The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(Service Mark) System: Class A and Class D shares are sold to investors
choosing the initial sales charge alternatives and Class B and Class C shares
are sold to investors choosing the deferred sales charge alternatives. Each
Class A, Class B, Class C and Class D share represents an identical interest in
the same portfolio of investments of the Fund and has the same rights except
that Class B, Class C and Class D shares bear the expenses of the Class B, Class
C and Class D exclusive voting rights with respect to the Rule 12b-1
distribution plan adopted with respect to such class pursuant to which the
distribution and/or account maintenance fees are paid. Each has different
exchange privileges. See 'Shareholder Services--Exchange Privilege.' Class C
shares are available only through the Exchange Privilege.

ALTERNATIVE SALES ARRANGEMENTS

The alternative sales arrangements available for the Fund's shares permit
each investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of time
the investor expects to hold his shares and other relevant circumstances.
Investors should determine whether under their particular circumstances it is
more advantageous to incur an initial sales charge and not be subject to ongoing
charges, as discussed below, or to have the entire initial purchase price
invested in the Fund with the investment thereafter being subject to ongoing

charges.

The Merrill Lynch Select Pricing(Service Mark) System is used by more than
50 registered investment companies advised by MLAM or its affiliate, the
Investment Adviser. Funds advised by MLAM or the Investment Adviser which
utilize the Merrill Lynch Select Pricing(Service Mark) System are referred to
herein as 'MLAM-advised mutual funds.'

The Fund has entered into separate distribution agreements (the
'Distribution Agreements') with the Distributor in connection with the
continuous offering of each class of shares. The Distribution Agreements

<PAGE>

obligate the Distributor to pay certain expenses in connection with the offering
of each class of shares of the Fund. After the prospectuses, statements of
additional information and periodic reports have been prepared, set in type and
mailed to shareholders, the Distributor pays for the printing and distribution
of copies thereof used in connection with the offering to dealers and investors.
The Distributor also pays for other supplementary sales literature and
advertising costs. The Distribution Agreements are subject to the same renewal
requirements and termination provisions as the Investment Advisory Agreement
described above.

INITIAL SALES CHARGE ALTERNATIVE--CLASS A AND CLASS D SHARES

Reduced Sales Charges. As described generally in the Prospectus, a reduced
sales charge is available for any purchase of Class A or Class D shares of the
Fund in excess of $100,000. The term 'purchase,' as used in the Prospectus and
this Statement of Additional Information in connection with an investment in
Class A and Class D shares of the Fund, refers to a single purchase by an
individual, or to concurrent purchases, which in the aggregate are at least
equal to the prescribed amounts, by an individual, his spouse and their children
under the age of 21 years purchasing shares for his or their own account and to
single purchases by a trustee or other fiduciary purchasing shares for a single
trust estate or single fiduciary account (including a pension, profit-sharing or
other employee benefit trust created pursuant to a plan qualified under Section
401 of the Code) although more than one beneficiary is involved. The term
'purchase' also includes purchases by any 'company,' as that term is defined in
the Investment Company Act, but does not include purchases by any such company
that has not been in existence for at least six months or that has no purpose
other than the purchase of shares of the Fund or shares of other registered
investment companies at a discount; provided, however that it shall not include
purchases by any group of individuals whose sole organizational nexus is that
the participants therein are credit cardholders of a company, policyholders of
an insurance company, customers of either a bank or broker-dealer or clients of
an investment adviser. The term 'purchase' also includes purchases by employee
benefit plans not qualified under Section 401 of the Code, including purchases
by employees or by employers on behalf of employees, by means of a payroll

deduction plan or otherwise, of shares of the Fund. Purchases by such a company
or non-qualified employee benefit plan will qualify for the quantity discounts
discussed above only if the Fund and the Distributor are able to realize
economies of scale in sales effort and sales related expense by means of the
company, employer or plan making the Fund's Prospectus available to individual
investors or employees and forwarding investments by such persons to the Fund
and by any such employer or plan bearing the expense of any payroll deduction
plan.

Right of Accumulation. Reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to purchase
Class A or Class D shares of the Fund subject to initial sales charge at the
offering price applicable to the total of (a) the public offering price of the
shares then being purchased plus (b) an amount equal to the then current net
asset value or cost, whichever is higher, of the purchaser's combined holdings
of all classes of shares of the Fund and of any other MLAM-advised mutual fund.
For any such right of accumulation to be made available the Distributor must be
provided at the time of purchase, by the purchaser or the purchaser's securities
dealer, with sufficient information to permit confirmation of qualification, and
acceptance of the purchase order is subject to such confirmation. The right of
accumulation may be amended or terminated at any time. Shares held in the name
of a nominee or custodian under pension, profit-sharing or other employee
benefit plans may not be combined with other shares to qualify for the right of
accumulation.

Letter of Intention. Reduced sales charges are applicable to purchases
through any dealer aggregating $100,000 or more of Class A shares of the Fund or
any other MLAM-advised mutual funds made within a 13-month period starting with
the first purchase pursuant to a Letter of Intention in the form provided by the
Distributor. The Letter of Intention is available only to investors whose
accounts are maintained at the Fund's Transfer Agent. The Letter of Intention is
not a binding obligation to purchase any amount of Class A or Class D

<PAGE>

shares, but its execution will result in the purchaser's paying a lower sales
charge at the appropriate quantity purchase level. A purchase not originally
made pursuant to a Letter of Intention may be included under a subsequent Letter
executed within 90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. The value of Class A and Class
D shares of the Fund or of other MLAM-advised mutual funds presently held, at
cost or maximum offering price (whichever is higher), on the date of the first
purchase under the Letter of Intention, may be included as a credit toward the
completion of such Letter. The reduced sales charge applicable to the amount
covered by the Letter of Intention will be applied only to new purchases. If the
total amount of shares purchased does not equal the amount stated in the Letter
of Intention, the investor will be notified and must pay, within 20 days of the
expiration of such Letter, the difference between the sales charge on Class A or
Class D shares of the Fund purchased at the reduced rate and the sales charge
applicable to the shares actually purchased through the Letter. Class A or Class
D shares equal to five percent of the intended amount will be held in escrow

during the 13-month period (while remaining registered in the name of the
purchaser). The first purchase under the Letter of Intention must be five
percent of the dollar amount of such Letter. If during the term of such Letter,
a purchase brings the total amount invested to an amount equal to or in excess
of the amount indicated in the Letter, the purchaser will be entitled on that
purchase and subsequent purchases to the reduced percentage sales charge which
would be applicable to a single purchase equal to the total dollar value of the
Class A or Class D shares of the Fund then being purchased under such Letter,
but there will be no retroactive reduction of the sales charges on any previous
purchase. The value of any shares redeemed or otherwise disposed of by the
purchaser prior to termination or completion of the Letter of Intention will be
deducted from the total purchases made under such Letter. An exchange from a
MLAM-advised money market fund into the Fund that creates a sales charge will
count toward completing a new or existing Letter of Intention in the Fund.

Employee Access Accounts(Service Mark). Class A or Class D shares are
offered at net asset value to Employee Access Accounts available through
qualified employers that provide employer-sponsored retirement or savings plans
that are eligible to purchase such shares at net asset value. The initial
minimum for such accounts is $500, except that the initial minimum for shares
purchased for such accounts pursuant to the Automatic Investment Program is $50.

TMA(Service Mark) Managed Trusts. Class A shares are offered to
TMA(Service Mark) Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services at net asset value.

Merrill Lynch Blueprint(Service Mark) Program. Class D shares of the Fund
are offered to participants in the Merrill Lynch Blueprint(Service Mark) Program
('Blueprint'). In addition, participants in Blueprint who own Class A shares of
the Fund may purchase additional Class A shares of the Fund through Blueprint.
Blueprint is directed to small investors, Group IRAs and participants in certain
affinity groups such as benefit plans, credit unions and trade associations.
Investors placing orders to purchase Class A or Class D shares of the Fund
through Blueprint will acquire such Class A or Class D shares at net asset value
plus a sales charge calculated in accordance with the Blueprint sales charge
schedule (i.e., up to $5,000 at .80%. Purchases of greater than $5,000 will be
at the standard sales charge rate disclosed in the Prospectus). In addition,
Class D shares of the Fund are being offered at net asset value plus a sales
charge of .50% for participants in corporate or group IRA programs placing
orders to purchase their shares through Blueprint. However, services (including
the exchange privilege) available to Class A and Class D shareholders through
Blueprint may differ from those available to other investors in Class A or Class
D shares. Class A and Class D shares are offered at net asset value to
participants in the Merrill Lynch Blueprint(Service Mark) Program through the
Merrill Lynch Directed IRA Rollover Program ('IRA Rollover Program') available
from Merrill Lynch Business Financial Services, a business unit of Merrill
Lynch. The IRA Rollover Program is available to custodian rollover assets from
Employer Sponsored Retirement and Savings Plans (see definition below) whose
Trustee and/or Plan Sponsor offers the Merrill Lynch Directed IRA Rollover
Program.

<PAGE>

Orders for purchases and redemptions of Class A or Class D shares of the Fund
may be grouped for execution purposes which, in some circumstances, may involve
the execution of such orders two business days following the day such orders are
placed. The minimum initial purchase price is $100 with a $50 minimum for
subsequent purchases through Blueprint. Minimum initial or subsequent purchase
requirements are waived in connection with automatic investment plans for
Blueprint participants. Additional information concerning purchases through
Blueprint, including any annual fees and transaction charges, is available from
Merrill Lynch, Pierce, Fenner & Smith Incorporated, The Blueprint(Service Mark)
Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.

Purchase Privileges of Certain Persons. Trustees of the Fund, directors
and trustees of other MLAM-advised mutual funds, ML & Co. and its subsidiaries
(the term 'subsidiaries,' when used herein with respect to ML & Co., includes
MLAM, FAM and certain other entities directly or indirectly wholly-owned and
controlled by ML & Co.), and their directors or employees, and any trust,
pension, profit-sharing or other benefit plan for such persons, may purchase
Class A shares of the Fund at net asset value.

The shares of the Fund in existence prior to its reorganization at the
close of business on February 14, 1997 have been reclassified as Class D shares.
Although purchasers of Class D shares generally will be subject to a 1% initial
sales charge, those shareholders of the Fund who have held shares of the Fund
since prior to its reorganization at the close of business on February 14, 1997,
will not be subject to any sales charge with respect to either their
reclassified Class D shares or any Class D shares that they may purchase in the
future.

Closed-End Fund Investment Option. Class A shares of the Fund and other
MLAM-advised mutual funds ('Eligible Class A Shares') are offered at net asset
value to shareholders of certain closed-end funds advised by the Investment
Adviser or MLAM who purchased such closed-end fund shares prior to October 21,
1994 (the date the Merrill Lynch Select Pricing(Service Mark) System commenced
operations) and wish to reinvest the net proceeds from a sale of their
closed-end fund shares of common stock in Eligible Class A Shares of the Fund.
Alternatively, closed-end fund shareholders who purchased such shares on or
after October 21, 1994 and wish to reinvest the net proceeds from a sale of
their closed-end fund shares are offered Class A shares (if eligible to buy

Class A shares) or Class D shares of the Fund and other MLAM-advised mutual
funds ('Eligible Class D Shares'). In order to exercise this investment option,
closed-end fund shareholders must (i) sell their closed-end fund shares through
Merrill Lynch and reinvest the proceeds immediately in the Eligible Class A or
Class D Shares of the Fund, (ii) either have acquired the shares in the
closed-end fund's initial public offering or through reinvestment of dividends
earned on shares purchased in such offering, (iii) have maintained their
closed-end fund shares continuously in a Merrill Lynch account, and (iv)
purchase a minimum of $250 worth of Fund shares. Shareholders of certain
MLAM-advised continuously offered closed-end funds may reinvest at net asset
value the net proceeds from a sale of certain shares of common stock of such
funds in shares of the Fund. Upon exercise of this investment option,
shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. will receive Class
A shares of the Fund and shareholders of Merrill Lynch Municipal Strategy Fund,
Inc. and Merrill Lynch High Income Municipal Bond Fund, Inc. will receive Class
D shares of the Fund, except that shareholders already owning Class A shares of
the Fund will be eligible to purchase additional Class A shares pursuant to this
option, if such additional Class A shares will be held in the same account as
the existing Class A shares and the other requirements pertaining to the
reinvestment privilege are met. In order to exercise this investment option,
a shareholder of one of the above-referenced continuously offered closed-end
funds (an 'eligible fund') must sell his or her shares of common stock of
the eligible fund (the 'eligible shares') back to the fund in connection with

<PAGE>

a tender offer conducted by the eligible fund and reinvest the proceeds
immediately in the designated class of shares of the Fund. This
investment option is available only with respect to eligible shares as to
which no Early Withdrawal Charge or CDSC (each as defined in the eligible fund's
prospectus) is applicable. Purchase orders from eligible fund shareholders
wishing to exercise this investment option will be accepted only on the day that
the related tender offer terminates and will be effected at the net asset value
of the designated class of the Fund on such day.

Class D shares of the Fund are offered at the net asset value, without
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund for which
Merrill Lynch has not served as a selected dealer if the following conditions
are satisfied: First, the investor must advise Merrill Lynch that he or she will
purchase Class D shares of the Fund with proceeds from a redemption of such
shares of other mutual funds and that such shares have been outstanding for a
period of no less than six months. Second, such purchase of Class D shares must
be made within 60 days after the redemption and the proceeds from the redemption
must have been maintained in the interim in cash or a money market fund.

Class D shares of the Fund are also offered at net asset value, without
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund sponsored by a

non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ('notice'), if the following conditions are
satisfied: First, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and such fund was
subject to a sales charge either at the time of purchase or on a deferred basis.
Second, such purchase of Class D shares must be made within 90 days after such
notice.

Class D shares of the Fund are offered at net asset value, without sales
charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied. First, the investor must advise Merrill Lynch that it
will purchase Class D shares with proceeds from a redemption of shares of a
mutual fund that was sponsored by the financial consultant's previous firm and
imposed a sales charge either at the time of purchase or on a deferred basis.
Second, the investor also must establish that such redemption had been made
within 60 days prior to the investment in the Fund, and the proceeds from the
redemption had been maintained in the interim in cash or a money market fund.

Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
in obtaining such investors.

Acquisition of Certain Investment Companies. The public offering price of
Class D shares of the Fund may be reduced to the net asset value per Class D
share in connection with the acquisition of the assets of or merger or
consolidation with a personal holding company or a public or private investment
company. The value of the assets or company acquired in a tax-free transaction
may in appropriate cases be adjusted to reduce possible adverse tax consequences
to the Fund which might result from an acquisition of assets having net
unrealized appreciation which is disproportionately higher at the time of
acquisition than the realized or unrealized appreciation of the Fund.

The issuance of Class D shares for consideration other than cash is limited
to bona fide reorganizations, statutory mergers or other acquisitions of
portfolio securities which (i) meet the investment objectives and policies of
the Fund; (ii) are acquired for investment and not for resale (subject to the
understanding that the disposition of the Fund's portfolio securities shall
at all times remain within its control); and (iii) are liquid securities,
the value of which is readily ascertainable, which are not restricted as
to transfer either by law or liquidity of market (except that the Fund
may acquire through such transactions restricted or illiquid securities to

<PAGE>

the extent the Fund does not exceed the applicable limits on acquisition

of such securities set forth under 'Investment Objective and Policies' herein).

Reductions in or exemptions from the imposition of a sales charge are due
to the nature of the investors and/or the reduced sales efforts that will be
needed in obtaining such investments.

EMPLOYER-SPONSORED RETIREMENT OR SAVINGS PLANS AND CERTAIN OTHER ARRANGEMENTS

Certain employer-sponsored retirement or savings plans and certain other
arrangements may purchase Class A or Class D shares at net asset value, based on
the number of employees or number of employees eligible to participate in the
plan, the aggregate amount invested by the plan in specified investments and/or
the services provided by Merrill Lynch to the plan. Certain other plans may
purchase Class B shares with a waiver of the CDSC upon redemption, based on
similar criteria. Such Class B shares will convert into Class D shares
approximately ten years after the plan purchases the first share of any
MLAM-advised mutual fund. Minimum purchase requirements may be waived or varied
for such plans. Additional information regarding purchases by employer-sponsored
retirement or savings plans and certain other arrangements is available
toll-free from Merrill Lynch Business Financial Services at (800) 237-7777.

DISTRIBUTION PLAN

Reference is made to 'Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares--Distribution Plan' in the Prospectus
for certain information with respect to the separate distribution plans of the
Fund for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a 'Distribution Plan') with respect to the account
maintenance and/or distribution fees paid or payable by the Fund to the
Distributor with respect to such classes. During the years ended October 31,
1995 and 1996, pursuant to the Fund's then existing distribution plan, the Fund
paid to the Distributor fees totalling $101,765 and $86,832, respectively.

Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act of
1940. Among other things, each Distribution Plan provides that the Distributor
shall provide and the Trustees shall review quarterly reports of the
disbursement of the account maintenance fees and/or distribution fees paid to
the Distributor. In their consideration of each Distribution Plan, the Trustees
must consider all factors they deem relevant, including information as to the
benefits of the Distribution Plan to the Fund and its related class of
shareholders. Each Distribution Plan further provides that, so long as the
Distribution Plan remains in effect, the selection and nomination of Trustees
who are not 'interested persons' of the Fund, as defined in the Investment
Company Act of 1940 (the 'Independent Trustees'), shall be committed to the
discretion of the Independent Trustees then in office. In approving each

Distribution Plan in accordance with Rule 12b-1, the Independent Trustees
concluded that there is reasonable likelihood that such Distribution Plan will
benefit the Fund and its related class of shareholders. Each Distribution Plan
can be terminated at any time, without penalty, by the vote of a majority of the
Independent Trustees or by the vote of the holders of a majority of the
outstanding related class of voting securities. A Distribution Plan cannot be
amended to increase materially the amount to be spent without the approval of
the related class of shareholders, and all material amendments are required to
be approved by the vote of Trustees, including a majority of the Independent
Trustees who have no direct or indirect financial interest in such Distribution
Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further
requires that the Fund preserve copies of each Distribution Plan and any
report made pursuant to such plan for a period of not less than six years
from the date of such Distribution Plan or such report, the first two
years in an easily accessible place.

<PAGE>

REDEMPTION OF SHARES

The right to redeem shares or to receive payment with respect to any
redemption may only be suspended for any period during which trading on the NYSE
is restricted as determined by the Securities and Exchange Commission (the
'SEC') or such Exchange is closed (other than customary weekend and holiday
closings), for any period during which an emergency exists as defined by the SEC
as a result of which disposal of portfolio securities or determination of the
net asset value of the Fund is not reasonably practicable, and for such other
periods as the SEC may by order permit for the protection of shareholders of the
Fund. Reference is made to 'Redemption of Shares' in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.

The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending on the market value of the securities held by the
Fund at such time.

REPURCHASE

The Fund will normally accept orders to repurchase shares by wire or
telephone from dealers for their customers at the net asset value next computed
after receipt of the order by the dealer, provided that the request for
repurchase is received by the dealer prior to the close of business on the NYSE
on the day received and is received by the Fund from such dealer not later than
30 minutes after the close of business on the NYSE (generally 4:00 p.m., New
York City time), on the same day. Dealers have the responsibility of submitting
such repurchase requests to the Fund not later than 30 minutes after the close
of business on the NYSE (generally 4:00 p.m., New York City time), in order to
obtain that day's closing price.

For shareholders submitting their shares for repurchase through listed
securities dealers, payment for fractional shares will be made by the Transfer
Agent directly to the shareholder and payment for full shares will be made by
the securities dealer within seven days of the proper tender of the
certificates, if any, and stock power or letter requesting redemption, in each
instance with signatures guaranteed as noted in the Prospectus.

REINSTATEMENT PRIVILEGE

Shareholders who have redeemed Class A or Class D shares, including
redemption through repurchase by the Fund, have a one-time privilege to
reinstate their accounts by purchasing Class A or Class D shares, as the case
may be, at the net asset value of such shares without a sales charge up to the
dollar amount redeemed. The reinstatement privilege may be exercised as follows.
A notice to exercise this privilege along with a check for the amount to be
reinstated must be received by the Transfer Agent within 30 days after the date
the request for redemption was accepted by the Transfer Agent or the
Distributor. Alternatively, the reinstatement privilege may be exercised through
the investor's Merrill Lynch Financial Consultant within 30 days after the date
the request for redemption was accepted by the Transfer Agent or Distributor.
The reinstatement will be made at the net asset value per share next determined
after the notice of reinstatement is received and cannot exceed the amount of
the redemption proceeds.

If a shareholder disposes of shares within 90 days of their acquisition and
subsequently reacquires shares of the Fund pursuant to the reinstatement
privilege, then the shareholder's tax basis in those shares disposed of will be
reduced to the extent the load charge paid to the Fund upon the shareholder's
initial purchase reduces any load charge such shareholder would have been
required to pay on the subsequent acquisition in absence of the
reinstatement privilege. Instead, such load charge will be treated as an amount
paid for the subsequently acquired shares and will be included in the
shareholder's tax basis for such shares.

<PAGE>

DEFERRED SALES CHARGE--CLASS B AND CLASS C SHARES

As discussed in the Prospectus under 'Purchase of Shares--Alternative Sale
Arrangements--Deferred Sales Charge Alternative--Class B and Class C Shares,'
while Class B shares redeemed within one year of purchase are subject to a
contingent deferred sales charge under most circumstances, the charge is waived
on redemptions of Class B shares in connection with certain post-retirement
withdrawals from an Individual Retirement Account ('IRA') or other retirement
plan or following the death or disability of a Class B shareholder. Redemptions
for which the waiver applies are: (a) any partial or complete redemption in
connection with a distribution following retirement under a tax-deferred
retirement plan or attaining age 59 1/2 in the case of an IRA or other
retirement plan, or part of a series of equal periodic payments (not less
frequently than annually) made for the life (or life expectancy) or any

redemption resulting from the tax-free return of an excess contribution to an
IRA; or (b) any partial or complete redemption following the death or disability
(as defined in the Internal Revenue Code) of a Class B shareholder (including
one who owns the Class B shares as joint tenant with his or her spouse),
provided the redemption is requested within one year of the death or initial
determination of disability. The CDSC is also waived for any Class B shares that
were acquired and held at the time of redemption by Employee Access Accounts
available through employers that provide Eligible 401(k) Plans. The initial
minimum for such accounts is $500, except that the initial minimum for shares
purchased for such accounts pursuant to the Automatic Investment Program is $50.

Merrill Lynch Blueprint(Service Mark)Program. Class B shares are offered
to certain participants in the Merrill Lynch Blueprint(Service Mark) Program
('Blueprint'). Blueprint is directed to small investors and participants in
certain affinity groups such as trade associations and credit unions. Class B
shares are offered through Blueprint only to members of certain affinity groups.
The contingent deferred sales charge is waived for shareholders who are members
of certain affinity groups at the time orders to purchase Class B shares are
placed through Blueprint. However, services (including the exchange privilege)
available to Class B shareholders through Blueprint may differ from those
available to other Class B investors. Orders for purchases and redemptions of
Class B shares may be grouped for execution purposes which, in some
circumstances, may involve the execution of such orders two business days
following the day such orders are placed. The minimum initial purchase price is
$100 with a $50 minimum for subsequent purchases through Blueprint. Minimum
investment amounts are waived in connection with automatic investment plans for
Blueprint participants. Additional information concerning these Blueprint
programs, including any annual fees or transaction charges, is available from
Merrill Lynch, Pierce, Fenner & Smith Incorporated, The Blueprint(Service Mark)
Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.

DIVIDENDS, DISTRIBUTIONS AND TAXES

DIVIDENDS AND DISTRIBUTIONS

Reference is made to 'Dividends, Distributions and Taxes' on page 22 of the
Prospectus.

FEDERAL INCOME TAXES

The Fund intends to qualify as a regulated investment company under certain
provisions of the Internal Revenue Code of 1986, as amended (the 'Code'). Under
such provisions, the Fund will not be subject to federal income tax on such part
of its ordinary income and net realized capital gains which it distributes to
Class A, Class B, Class C and Class D shareholders. To qualify for treatment as
a regulated investment company, the Fund must, among other things, derive in
each taxable year at least 90% of its gross income from dividends, interest and
gains from the sale or other disposition of securities and derive less than 30%
of its gross income each taxable year from gains (without deduction for losses)
from the sale or other disposition of stocks, securities and

<PAGE>

certain options, futures or forward contracts held for less than three months.
If in any taxable year the Fund does not qualify as a regulated investment
company, all its taxable income will be taxed to the Fund at corporate rates.

Dividends will be taxable to shareholders as ordinary income, except for
(a) such portion as may exceed a shareholder's ratable share of the Fund's
earnings and profits as determined for tax purposes (which may differ from net
income for book purposes), which excess will be applied against and reduce the
shareholder's cost or other tax basis for his shares and (b) amounts
representing distributions of realized net long-term capital gains, if any. If
the amount described in (a) above were to exceed the shareholder's tax basis for
his shares, the excess over basis would be treated as gain from the sale or
exchange of such shares. The excess of any net long-term capital gains over net
short-term capital losses realized by the Fund will, to the extent distributed
by the Fund, be taxable to shareholders as long-term capital gains regardless of
the length of time a particular shareholder may have held his shares in the
Fund. The maximum tax rate imposed on capital gains for individual taxpayers is
28 percent. Dividends and distributions are taxable as described, whether
received in cash or reinvested in additional shares of the Fund.

Some shareholders may be subject to a 31% withholding tax on reportable
dividends, capital gains distributions and redemption payments ('backup
withholding'). Generally, shareholders subject to backup withholding will be
those for whom a certified taxpayer identification number is not on file with
the Fund or who, to the Fund's knowledge, have furnished an incorrect number.
When establishing an account, an investor must certify under penalties of
perjury that such number is correct and that he is not otherwise subject to
backup withholding.

No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares for Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period of the converted Class B shares.

The Code imposes a 4% nondeductible excise tax on a regulated investment
company, such as the Fund, if it does not distribute to its shareholders during
the calendar year an amount equal to 98 percent of the Fund's investment company
income, with certain adjustments, for such calendar year, plus 98 percent of the
Fund's capital gain net income for the one-year period ending on October 31, of
such calendar year. In addition, an amount equal to any undistributed investment
company taxable income or capital gain net income from the previous calendar
year must also be distributed to avoid the excise tax. While the Fund intends to
distribute its income and capital gains in the manner necessary to avoid

imposition of the 4% excise tax, there can be no assurance that sufficient
amounts of the Fund's taxable income and capital gains will be distributed to
avoid entirely the imposition of the tax. The excise tax is imposed on the
amount by which the regulated investment company does not meet the foregoing
distribution requirements.

Only dividends paid by the Fund which are attributable to dividends
received by the Fund will qualify for the 70% dividends-received deduction for
corporations. In addition, corporate shareholders must have held their shares in
the Fund for more than 45 days to qualify for the deduction on dividends paid by
the Fund. Because most of the Fund's income will be interest income, rather than
dividends on common or preferred stock, it is unlikely that any substantial
proportion of its distributions will be eligible for the dividends-received
deduction available for corporations under the Code.

<PAGE>

At October 31, 1996, the Fund had a net capital loss carry-forward of
approximately $16,669,000 ($5,830,000 expires in 1997, $4,643,000 expires in
1998, $3,224,000 expires in 2002, $1,995,000 expires in 2003, and $977,000
expires in 2004), which will be available to offset like amounts of any future
taxable gains.

Dividends to shareholders who are nonresident aliens, trusts, estates,
partnerships or corporations may be subject to a 30% United States withholding
tax unless a reduced rate of withholding is provided under an applicable tax
treaty. Shareholders who are nonresident aliens or foreign entities are urged to
consult their own tax advisers concerning the applicability of the United States
withholding tax.

The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent sections of the
Code and the Treasury Regulations promulgated thereunder. The Code and
Regulations are subject to change by legislative or administrative action.

SHAREHOLDER SERVICES

INVESTMENT ACCOUNT

Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for

automatic investment purchases and the reinvestment of ordinary income dividends
and long-term capital gains distributions. The statements will also show any
other activity in the account since the preceding statement. Shareholders will
receive separate transaction confirmations for each purchase or sale transaction
other than automatic investment purchases and the reinvestment of ordinary
income dividends and long-term capital gains distributions. A shareholder may
make additions to his Investment Account at any time by mailing a check directly
to the Fund's Transfer Agent.

Shareholders considering transferring their Class A shares from Merrill
Lynch to another brokerage firm or financial institution should be aware that,
if the firm to which the Class A or Class D shares are to be transferred will
not take delivery of shares of the Fund, a shareholder either must redeem the
Class A or Class D shares (paying any applicable CDSC) so that the cash proceeds
can be transferred to the account at the new firm or such shareholder must
continue to maintain an Investment Account at the Transfer Agent for those Class
A or Class D shares. Shareholders interested in transferring their Class B or
Class C shares from Merrill Lynch and who do not wish to have an Investment
Account maintained for such shares at the transfer agent may request their new
brokerage firm to maintain such shares in an account registered in the name of
the brokerage firm for the benefit of the shareholder at the transfer agent. If
the new brokerage firm is willing to accommodate the shareholder in this manner,
the shareholder must request that he or she be issued certificates for his
shares, and then must turn the certificates over to the new firm for
re-registration as described in the preceding sentence. Shareholders considering
transferring a tax-deferred retirement account such as an individual retirement
account from Merrill Lynch to another brokerage firm or financial institution
should be aware that, if the firm to which the retirement

<PAGE>

account is to be transferred will not take delivery of shares of the Fund, a
shareholder must either redeem the shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to the account at the new firm, or such
shareholder must continue to maintain a retirement account with Merrill Lynch
for those shares.

AUTOMATIC INVESTMENT PLANS

A shareholder may make additions to an Investment Account (as described in
the Prospectus under 'Shareholder Services--Investment Account' on p. 25) at any

time by purchasing Class A shares (if he or she is an eligible Class A investor
as described in the Prospectus) or Class B or Class D shares at the applicable
public offering price either through the shareholder's securities dealer or by
mail directly to the Fund's Transfer Agent, acting as agent for such securities
dealer. Voluntary accumulation also can be made through a service known as the
Fund's Automatic Investment Plan whereby the Fund is authorized through
pre-authorized checks or automated clearing house debits of $50 or more to
charge the regular bank account of the shareholder on a regular basis to provide
systematic additions to the Investment Account of such shareholder. For
investors who buy shares of the Fund through Blueprint no minimum charge to the
investors' bank accounts is required. An investor whose shares of the Fund are
held within a CMA(Registered) or CBA(Registered) account may arrange to have
periodic investments made in the Fund in amounts of $100 or more ($1 for
retirement accounts) through the CMA(Registered)/CBA(Registered) Automated
Investment Program.

FEE-BASED PROGRAMS

Certain Merrill Lynch fee-based programs, including pricing alternatives
for securities transactions (each referred to in this paragraph as a 'Program'),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of shares
held therein or the automatic exchange thereof to another class at net asset
value, which may be shares of a money market fund. In addition, upon termination
of participation in a Program, shares that have been held for less than
specified periods within such Program may be subject to a fee based upon the
current value of such shares. These Programs also generally prohibit such shares
from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance fees)
in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from Merrill Lynch Investor
Services at (800) MER-FUND (637-3863).

AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS

Unless specific instructions to the contrary are given as to the method of
payment of dividends and capital gains distributions, dividends and
distributions will be reinvested automatically in additional shares of the Fund.
Such reinvestment will be at the net asset value of shares of the Fund as of the

close of business on the monthly payment date of the dividend or distribution.
Shareholders may elect in writing to receive either their dividends or capital
gains distributions, or both, in cash, in which event payment will be mailed or
direct deposited on or about the payment date.

<PAGE>

Shareholders may, at any time, notify the transfer agent in writing or by
telephone (1-800-MER-FUND) that they no longer wish to have their dividends
and/or distributions reinvested in shares of the Fund or vice versa, and
commencing ten days after receipt by the transfer agent of such notice, those
instructions will be effected.

SYSTEMATIC WITHDRAWAL PLANS

A Class A or Class D shareholder of the Fund may elect to receive
systematic withdrawal payments from an Investment Account in the form of
payments by check or through automatic payment by direct deposit to his bank
account on either a monthly or quarterly basis as provided below. Quarterly
withdrawals are available for shareholders who have acquired Class A or Class D
shares having a value, based upon the current net asset value, of $5,000 or
more, and monthly withdrawals are available for shareholders with Class A or
Class D shares having a value of $10,000 or more.

At the time of each withdrawal payment, sufficient Class A or Class D
shares are redeemed from those on deposit in the shareholder's account to
provide the withdrawal payment specified by the shareholder. The shareholder may
specify either a dollar amount or a percentage of the value of his Class A or
Class D shares. Redemptions will be made at net asset value as determined once
by MLAM immediately after the declaration of dividends as of 15 minutes after
the close of business on the NYSE (generally 4:00 p.m., New York City time) on
the 24th day of each month or the 24th day of the last month of each quarter,
whichever is applicable. If the NYSE is not open for business on such date, the
Class A or Class D shares will be redeemed at the close of business on the
following business day. The check for the withdrawal payment will be mailed, or
the direct deposit for the withdrawal payment will be made, on the next business
day following redemption. When a shareholder is making systematic withdrawals,
dividends and distributions on all Class A or Class D shares in the Investment
Account are automatically reinvested in Class A or Class D shares of the Fund. A
shareholder's Systematic Withdrawal Plan may be terminated at any time, without
charge or penalty, by the shareholder, the Fund, the Fund's Transfer Agent or
the Distributor.

Withdrawal payments should not be considered as dividends, yields or
income. Each withdrawal is a taxable event. If periodic withdrawals continuously
exceed reinvested dividends, the shareholder's original investment may be
correspondingly reduced. Purchases of additional Class A or Class D shares
concurrent with withdrawals are ordinarily disadvantageous to the shareholder
because of sales charges and tax liabilities. The Fund will not knowingly accept

additions to an Investment Account in which an election has been made to receive
systematic withdrawals unless such addition is equal to at least one year's
scheduled withdrawals or $1,200, whichever is greater. Periodic investments may
not be made into an Investment Account from which the shareholder has elected to
make systematic withdrawals.

A Class A or Class D shareholder whose shares are held within a
CMA(Registered), CBA(Registered) or Retirement Account may elect to have shares
redeemed on a monthly, bimonthly, quarterly, semiannual or annual basis through
the Systematic Redemption Program. The minimum fixed dollar amount redeemable is
$25. The proceeds of systematic redemptions will be posted to the shareholder's
account five business days after the date the shares are redeemed. Monthly
systematic redemptions will be made at net asset value on the first Monday of
each month, bimonthly systematic redemptions will be made at net asset value on
the first Monday of every other month, and quarterly, semiannual or annual
redemptions are made at net asset value on the first Monday of months selected
at the shareholder's option. If the first Monday of the month is a holiday, the
redemption will be processed at net asset value on the next business day. The
Systematic Redemption Program is not available if Fund shares are being
purchased within the account pursuant to the Automatic Investment Program. For
more information on the Systematic Redemption Program, eligible shareholders
should contact their Financial Consultant.

<PAGE>

RETIREMENT PLANS

Self-directed individual retirement accounts and other retirement plans are
available from Merrill Lynch. Under these plans, investments may be made in the
Fund and certain of the other mutual funds sponsored by Merrill Lynch as well as
in other securities. Merrill Lynch charges an initial establishment fee and an
annual custodial fee for each account. Information with respect to these plans
is available upon request from Merrill Lynch. The minimum initial purchase to
establish any such plan is $100 and the minimum subsequent purchase is $1.

Retirement Plan

Any Retirement Plan which does not meet the qualifications to purchase
Class A or Class D shares at net asset value may purchase Class B shares with a
waiver of the CDSC upon redemption if the following qualifications are met. The
CDSC is waived for any Eligible 401(k) Plan redeeming Class B shares and is also
waived for Class B redemptions from a 401(a) plan qualified under the Code,
provided that each such plan has the same or an affiliated sponsoring employer
as an Eligible 401(k) Plan purchasing Class B shares ('Eligible 401(a) Plan').
Other tax qualified retirement plans within the meaning of Section 401(a) and
403(b) of the Code which are provided specialized services (e.g., plans whose
participants may direct on a daily basis their plan allocations among a menu of
investments) by independent administration firms contracted through Merrill
Lynch may also purchase Class B shares with a waiver of the CDSC. The CDSC is
also waived for any Class B shares which are purchased by an Eligible 401(k)
Plan or Eligible 401(a) Plan and are rolled over into a Merrill Lynch or Merrill
Lynch Trust Company custodied IRA and held in such account at the time of

redemption. The Class B CDSC is also waived for shares purchased by a Merrill
Lynch rollover IRA that was funded by a rollover from a terminated 401(k) plan
managed by the MLAM Private Portfolio Group and held in such account at the time
of redemption. The minimum initial and subsequent purchase requirements are
waived in connection with all the above-referenced Retirement Plans.

EXCHANGE PRIVILEGE

Shareholders of each class of shares of the Fund have an exchange privilege
with certain other MLAM-advised mutual funds listed below. Under the Merrill
Lynch Select Pricing(Service Mark) System, Class A shareholders may exchange
Class A shares of the Fund for Class A shares of a second MLAM-advised mutual
fund if the shareholder holds any Class A shares of the second fund in his
account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second MLAM-advised
mutual fund, and the shareholder does not hold Class A shares of the second fund
in his account at the time of the exchange and is not otherwise eligible to
acquire Class A shares of the second fund, the shareholder will receive Class D
shares of the second fund as a result of the exchange. Class D shares also may
be exchanged for Class A shares of a second MLAM-advised mutual fund at any time
as long as, at the time of the exchange, the shareholder holds Class A shares of
the second fund in the account in which the exchange is made or is otherwise
eligible to purchase Class A shares of the second fund. Class B, Class C and
Class D shares will be exchangeable with shares of the same class of other
MLAM-advised mutual funds. For purposes of computing the CDSC that may be
payable upon a disposition of the shares acquired in the exchange, the holding
period for the previously owned shares of the Fund is 'tacked' to the holding
period of the newly acquired shares of the other Fund as more fully described
below. Class A, Class B, Class C and Class D shares also will be exchangeable
for shares of certain MLAM-advised money market funds as follows: Class A shares
may be exchanged for shares of Merrill Lynch Ready Assets Trust, Merrill Lynch
Retirement Reserves Money Fund (available only for exchange within certain
retirement plans),

<PAGE>

Merrill Lynch USA Government Reserves and Merrill Lynch U.S. Treasury
Money Fund. Class B, Class C and Class D shares may be exchanged for
shares of Merrill Lynch Government Fund, Merrill Lynch Institutional Fund,
Merrill Lynch Institutional Tax-Exempt Fund and Merrill Lynch Treasury Fund.
Shares with a net asset value of at least $100 are required to qualify for the
exchange privilege, and any shares utilized in an exchange must have been held
by the shareholder for at least 15 days. It is contemplated that the exchange
privilege may be applicable to other new mutual funds whose shares may be
distributed by the Distributor.

Exchanges of Class A or Class D shares outstanding ('outstanding Class A or
Class D shares') for Class A or Class D shares of another MLAM-advised mutual
fund ('new Class A or Class D shares') are transacted on the basis of relative

net asset value per Class A or Class D share, respectively, plus an amount equal
to the difference, if any, between the sales charge previously paid on the
outstanding Class A or Class D shares and the sales charge payable at the time
of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have taken
place, the 'sales charge previously paid' shall include the aggregate of the
sales charge paid with respect to such Class A or Class D shares in the initial
purchase and any subsequent exchange. Class A or Class D shares issued pursuant
to dividend reinvestment are sold on a no-load basis in each of the funds
offering Class A or Class D shares. For purposes of the exchange privilege,
Class A and Class D shares acquired through dividend reinvestment shall be
deemed to have been sold with a sales charge equal to the sales charge
previously paid on the Class A or Class D shares on which the dividend was paid.
Based on this formula, Class A and Class D shares of the Fund generally may be
exchanged into the Class A or Class D shares of the other funds or into shares
of the Class A and Class D money market funds with or without a reduced sales
charge.

In addition, each of the funds with Class B and Class C shares outstanding
('outstanding Class B or Class C shares') offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively ('new Class B or
Class C shares'), of another MLAM-advised mutual fund on the basis of relative
net asset value per Class B or Class C share, without the payment of any CDSC
that might otherwise be due on redemption of the outstanding shares. Class B
shareholders of the fund exercising the exchange privilege will continue to be
subject to the fund's CDSC schedule if such schedule is higher than the CDSC
relating to the new Class B shares acquired through use of the exchange
privilege. In addition, Class B shares of the fund acquired through use of the
exchange privilege will be subject to the higher of the fund's CDSC schedule or
the CDSC relating to the Class B shares of the fund from which the exchange has
been made. For purposes of computing the sales load that may be payable on a
disposition of the new Class B or Class C shares, the holding period for the
outstanding Class B or Class C shares is 'tacked' to the holding period of the
new Class B or Class C shares. For example, an investor may exchange Class B
shares of the Fund for those of Merrill Lynch Special Value Fund, Inc. ('Special
Value Fund') after having held the Fund's Class B shares for two and a half
years. The 2% sales load that generally would apply to a redemption would not
apply to the exchange. Two years later the investor may decide to redeem the
Class B shares of Merrill Lynch Special Value Fund and receive cash. There will
be no CDSC due on this redemption, since by 'tacking' the two and a half year
holding period of the Fund's Class B shares to the two year holding period for
the Merrill Lynch Special Value Fund Class B shares, the investor will be deemed
to have held the new Class B shares for more than four years.

Shareholders also may exchange shares of the Fund into shares of a money
market fund advised by the Investment Adviser or its affiliates, but the period
of time that Class B or Class C shares are held in a Class B money market fund
will not count towards satisfaction of the holding period requirement for
purposes of reducing the CDSC or with respect to Class B shares, towards
satisfaction of the conversion period. However, shares of a money market fund
which were acquired as a result of an exchange for Class B or Class C shares of

a fund may, in turn, be exchanged back into Class B or Class C shares of any
fund offering such shares, in which event the holding period for Class B or
Class C shares of that fund will be aggregated with previous holding

<PAGE>

periods for purposes of reducing the CDSC. Thus, for example, an investor may
exchange Class B shares of the Fund for shares of Merrill Lynch Institutional
Fund ('Institutional Fund') after having held the Fund's Class B shares for two
and a half years and two years later decide to redeem the shares of
Institutional Fund for cash. At the time of this redemption, the 2% CDSC that
would have been due had the Class B shares of the Fund been redeemed for cash
rather than exchanged for shares of Institutional Fund will be payable. If,
instead of such redemption the shareholder exchanged such shares for Class B
shares of a fund which the shareholder continues to hold for an additional one
and a half years, any subsequent redemption will not incur a CDSC.

To exercise the exchange privilege, shareholders should contact their
Merrill Lynch Financial Consultant who will advise the Fund of the exchange.
Before effecting an exchange, shareholders should obtain a currently effective
prospectus of the fund into which the exchange is to be made. Shareholders of
the Fund, and shareholders of the other funds described above with shares for
which certificates have not been issued, may exercise the exchange privilege by
wire through their securities dealers. The Fund reserves the right to require a
properly completed Exchange Application. This exchange privilege may be modified
or terminated in accordance with the rules of the SEC. The Fund reserves the
right to limit the number of times an investor may exercise the exchange
privilege. Certain funds may suspend the continuous offering of their shares to
the general public at any time and may thereafter resume such offering from time
to time. The exchange privilege is available only to U.S. shareholders in states
where the exchange legally may be made.

PERFORMANCE DATA

From time to time the Fund may include its average annual total return and
other total return data, as well as yield, in advertisements or information
furnished to present or prospective shareholders. Total return and yield figures
are based on the Fund's historical performance and are not intended to indicate
future performance. Average annual total return and yield are determined
separately for Class A, Class B, Class C and Class D shares in accordance with
formulas specified by the SEC and take into account the maximum applicable sales
charge.

Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount

invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A and Class D
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period in the case of Class B and Class C
shares.

The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (1) the rates of return calculated will not be average annual rates,
but rather, actual annual, annualized or aggregate rate of return and (2) the
maximum applicable sales charge will not be included with respect to annual or
annualized rates of return calculations. Aside from the impact on the
performance data calculations of including or excluding the maximum applicable
sales charge, actual annual or annualized total return data generally will be
lower than average annual total return data since the average rates of return
reflect compounding of return; aggregate total return data generally will be
higher than average annual total return data since the aggregate rates of return
reflect compounding over a longer period of time.

<PAGE>

Set forth below is total return information relating to the periods prior
to reorganization of the Fund. In connection with its reorganization at the
close of business on February 14, 1997, the Fund changed its investment
objective from investing only in assets which would permit shares of the Fund to
qualify both as 'liquid assets' under the regulations of the Office of Thrift
Supervision and as an investment permitted by the regulations of the National
Credit Union Association to seeking the highest possible current income
consistent with the protection of capital afforded by investing in
intermediate-term debt securities issued or guaranteed by the U.S. Government,
its agencies or instrumentalities with a maximum maturity not to exceed fifteen
years and, under normal market conditions, a dollar-weighted average maturity of
six to eight years. For the period from the commencement of the Fund's
operations through its reorganization at the close of business on February 14,
1997, the portfolio of the Fund has consisted primarily of securities issued by
the U.S. government and its agencies and instrumentalities. The average maturity
of the Fund's portfolio during this period (generally ranging from two to five
years) has been somewhat shorter than the average maturity of the Fund of six to
eight years following the change in its investment objective upon its
reorganization. As a result, the financial information in the table below for
operations of the Fund prior to its reorganization may not be indicative of its
performance following its reorganization. Since Class A, Class B, Class C and
Class D shares have not been issued prior to the date of this Statement of
Additional Information, total return information concerning Class A, Class B,
Class C and Class D shares is not yet provided.

<TABLE>
<CAPTION>
REDEEMABLE VALUE OF
EXPRESSED AS A A HYPOTHETICAL
PERCENTAGE BASED ON A $1,000 INVESTMENT
HYPOTHETICAL $1,000 AT THE END OF
PERIOD INVESTMENT THE PERIOD
- ----------------------------------- --------------------- -------------------
AVERAGE ANNUAL TOTAL RETURN
<S> <C> <C>
One Year Ended October 31, 1996.... 4.87% $1,048.70
Five Years Ended October 31,
1996............................. 5.93% $1,333.70
Inception (November 6, 1986) to
October 31, 1996................. 6.94% $1,955.10
</TABLE>

PERIOD ANNUAL TOTAL RETURN
- -----------------------------------
<S> <C> <C>
One Year Ended October 31, 1996.... 4.87% $1,048.70
One Year Ended October 31, 1995.... 9.00% $1,090.00
One Year Ended October 31, 1994.... (1.54)% $ 984.60
One Year Ended October 31, 1993.... 8.07% $1,080.70
One Year Ended October 31, 1992.... 9.66% $1,096.60
One Year Ended October 31, 1991.... 12.62% $1,126.20
One Year Ended October 31, 1990.... 7.75% $1,077.50
One Year Ended October 31, 1989.... 9.12% $1,091.20
One Year Ended October 31, 1988.... 7.29% $1,072.90
Inception (November 6, 1986)
through October 31, 1987......... 3.18% $1,031.80
</TABLE>

AGGREGATE TOTAL RETURN
<S> <C> <C>
Inception (November 6, 1986) to
October 31, 1996................. 95.51% $1,955.10
</TABLE>

In order to reflect the reduced sales charges applicable to certain
investors, as described under 'Purchase of Shares,' the total return data quoted
by the Fund in advertisements directed to such investors whose purchases are

subject to reduced sales load, in the case of Class A and Class D shares, or
waiver of the contingent deferred sales charge in the case of Class B and Class
C shares, may take into account the reduced, and not the maximum,

<PAGE>

sales charge or may not take into account the contingent deferred sales charge
and therefore may reflect greater total return since, due to the reduced sales
charge, a lower amount of expenses is deducted.

On occasion, the Fund may compare its performance to that of the Standard &
Poor's 500 Composite Stock Price Index, the Value Line Composite Index, the Dow
Jones Industrial Average, or performance data contained in publications such as
Lipper Analytical Services, Inc., Morningstar Publications, Inc., Money
Magazine, U.S. News & World Report, Business Week, CDA Investment Technology,
Inc., Forbes Magazine or Fortune Magazine. As with other performance data,
performance comparisons should not be considered indicative of the Fund's
relative performance for any future period.

ADDITIONAL INFORMATION

ORGANIZATION OF THE FUND

There will normally be no meetings of shareholders for the purpose of
electing Trustees unless and until such time as less than a majority of the
Trustees holding office have been elected by shareholders, at which time the
Trustees then in office will call a shareholders' meeting for the election of
trustees. Shareholders may, in accordance with the Declaration of Trust, cause a
meeting of shareholders to be held for the purpose of voting on the removal of
Trustees. Meetings of the shareholders will be called upon written request of
shareholders holding in the aggregate not less than 10% of the outstanding
shares having voting rights. Except as set forth above, the Trustees will
continue to hold office and appoint successor trustees. Shares do not have
cumulative voting rights and the holders of more than 50% of the shares of the
Fund voting for the election of Trustees can elect all of the Trustees of the
Fund if they choose to do so and in such event the holders of the remaining
shares would not be able to elect any Trustees. Holders of shares of the Fund
are entitled to redeem their shares as set forth under 'Redemption of Shares.'
No amendment may be made to the Declaration of Trust without the affirmative
vote of a majority of the outstanding shares of the Fund.

<PAGE>

Under a separate agreement Merrill Lynch has granted the Fund the right to
use the 'Merrill Lynch' name and has reserved the right to withdraw its consent
to the use of such name by the Fund at any time, or to grant the use of such
name to any other company, and the Fund has granted Merrill Lynch, under certain
conditions, the use of any other name it might assume in the future, with
respect to any corporation organized by Merrill Lynch.

COMPUTATION OF OFFERING PRICE PER SHARE

The shares of the Fund in existence prior to its reorganization at the
close of business on February 14, 1997 have been reclassified as Class D shares.
The offering price for Class D shares of the Fund, treating the shares of the
Fund in existence prior to their reclassification as Class D shares and based on
the value of the Fund's net assets and number of shares outstanding as of
October 31, 1996, is calculated as set forth below. Information is not provided
for Class A, Class B or Class C shares since no Class A, Class B or Class C
shares were publicly offered prior to the date of this Statement of Additional
Information.

<TABLE>
<CAPTION>
CLASS D
-----------
<S> <C>
Net assets..................................................................... $47,281,220
-----------
-----------
Number of Shares Outstanding................................................... 4,883,424
-----------
-----------
Net Asset Value Per Share (net assets divided by number of shares
outstanding)................................................................. $ 9.68
-----------
-----------
Sales Charge* (for Class A and Class D shares:
1.00% of offering price (1.01% of net asset value per share))................ .10
-----------
Offering Price................................................................. $ 9.78
-----------
-----------
</TABLE>

- ------------
* Rounded to the nearest one-hundredth percent, assumes maximum sales charge is
applicable.

<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Trustees and Shareholders,
Merrill Lynch Institutional Intermediate Fund:

We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Institutional Intermediate Fund as
of October 31, 1996, the related statements of operations for the year then
ended and changes in net assets for each of the years in the two-year period
then ended, and the financial highlights for each of the years in the five-year
period then ended. These financial statements and the financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at October
31, 1996 by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Institutional Intermediate Fund as of October 31, 1996, the results of its
operations, the changes in its net assets, and the financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.

Deloitte & Touche LLP
Princeton, New Jersey
December 6, 1996

<PAGE>

- -------------------------------------------------------------------------------
MERRILL LYNCH INSTITUTIONAL INTERMEDIATE FUND
SCHEDULE OF INVESTMENTS
AS OF OCTOBER 31, 1996
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Interest Maturity Value
Issue Face Amount Rate Date (Note 1a)
- --------------------------------------------------------------------------------------------
US GOVERNMENT & AGENCY OBLIGATIONS--99.5%
<S> <C> <C> <C> <C>
============================================================================================
US Treasury Notes $ 9,500,000 8.125% 2/15/98 $ 9,786,520
1,000,000 8.875 2/15/99 1,064,370
2,000,000 6.875 7/31/99 2,048,740
3,000,000 7.75 1/31/00 3,156,090
4,000,000 7.125 2/29/00 4,137,480
2,000,000 6.75 4/30/00 2,047,500
1,000,000 6.25 8/31/00 1,007,660
4,000,000 6.375 3/31/01 4,046,240
6,000,000 6.25 4/30/01 6,040,320
2,000,000 6.625 7/31/01 2,042,180
- ---------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corporation 2,422,000 5.55 11/01/96 2,422,000
- ---------------------------------------------------------------------------------------------
Federal National Mortgage Association 4,000,000 7.00 8/11/99 4,031,880
- ---------------------------------------------------------------------------------------------
Student Loan Marketing Association 5,000,000 7.50 3/08/00 5,207,800
- ---------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT & AGENCY OBLIGATIONS (COST--$47,231,818) 47,038,780
- ---------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST--$47,231,818)--99.5% 47,038,780
OTHER ASSETS LESS LIABILITIES--0.5% 242,440
-----------
NET ASSETS--100.0% $47,281,220
===========
- -------------------------------------------------------------------------------------------
</TABLE>

See Notes to Financial Statements.

F-1

<PAGE>

- -------------------------------------------------------------------------------
MERRILL LYNCH INSTITUTIONAL INTERMEDIATE FUND
STATEMENT OF ASSETS AND LIABILITIES
AS OF OCTOBER 31, 1996
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$47,231,818) (Notes 1a & 1b) $ 47,038,780
Cash 1,186
Interest receivable 511,079
Prepaid registration fees and other assets (Note 1e) 87,053
------------
Total assets 47,638,098
------------
LIABILITIES:
Payables:
Dividends to shareholders (Note 1f) $239,539
Beneficial interest redeemed 30,000
Investment adviser (Note 2) 16,719
Distributor (Note 2) 6,270 292,528
--------
Accrued expenses and other liabilities 64,350
------------
Total liabilities 356,878
------------
NET ASSETS $ 47,281,220
============
NET ASSETS CONSIST OF:
Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized $ 488,342
Paid-in capital in excess of par 63,654,950
Accumulated realized capital losses on investments -- net (Note 5) (16,669,034)
Unrealized depreciation on investments -- net (193,038)
------------
NET ASSETS--Equivalent to $9.68 per share based on 4,883,424
shares of beneficial interest outstanding $ 47,281,220
============
</TABLE>

See Notes to Financial Statements.

F-2

<PAGE>

- -------------------------------------------------------------------------------
MERRILL LYNCH INSTITUTIONAL INTERMEDIATE FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1996
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME (NOTE 1D):
Interest and amortization of premium and discount earned $4,155,917
EXPENSES:
Investment advisory fees (Note 2) $231,551
Distribution fees (Note 2) 86,832
Professional fees 67,343
Registration fees (Note 1e) 41,891
Accounting services (Note 2) 32,660
Trustees' fees and expenses 30,000
Transfer agent fees (Note 2) 28,798
Printing and shareholder reports 27,362
Custodian fees 13,429
Insurance 3,303
Pricing fees 631
Other 839
--------
Total expenses 564,639
----------
Investment income--net 3,591,278
REALIZED & UNREALIZED LOSS ON INVESTMENTS--NET (NOTES 1D & 3):
Realized loss on investments--net (976,648)
Change in unrealized depreciation on investments--net (2,927)
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $2,611,703
==========
</TABLE>

See Notes to Financial Statements.

F-3

<PAGE>

- -------------------------------------------------------------------------------
MERRILL LYNCH INSTITUTIONAL INTERMEDIATE FUND
STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
For the Year Ended
October 31,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Investment income--net $ 3,591,278 $ 4,325,960
Realized loss on investments--net (976,648) (1,995,513)
Change in unrealized appreciation/depreciation on
investments--net (2,927) 3,394,399
------------ ------------
Net increase in net assets resulting from operations 2,611,703 5,724,846
------------ ------------
DIVIDENDS TO SHAREHOLDERS (NOTE 1F):
Investment income--net (3,591,278) (4,325,960)
------------ ------------
Net decrease in net assets resulting from dividends
to shareholders (3,591,278) (4,325,960)
------------ ------------
BENEFICIAL INTEREST TRANSACTIONS (NOTE 4):
Net decrease in net assets derived from beneficial interest
transactions (16,877,924) (17,667,570)
------------ ------------
NET ASSETS:
Total decrease in net assets (17,857,499) (16,268,684)
Beginning of year 65,138,719 81,407,403
------------ ------------
End of year $ 47,281,220 $ 65,138,719
============ ============
</TABLE>

See Notes to Financial Statements.

F-4

<PAGE>

- -------------------------------------------------------------------------------
MERRILL LYNCH INSTITUTIONAL INTERMEDIATE FUND
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE
BEEN DERIVED FROM INFORMATION PROVIDED IN
THE FINANCIAL STATEMENTS.

<TABLE>
<CAPTION>
INCREASE (DECREASE) IN NET ASSET VALUE: FOR THE YEAR ENDED OCTOBER 31,
----------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $9.82 $9.60 $10.31 $10.06 $ 9.76
------- ------- ------- ------- -------
Investment income--net .61 .62 .55 .54 .62
Realized and unrealized gain (loss) on
investments--net (.14) .22 (.71) .25 .30
------- ------- ------- ------- -------
Total from investment operations .47 .84 (.16) .79 .92
------- ------- ------- ------- -------
Less dividends from investment
income--net (.61) (.62) (.55) (.54) (.62)
------- ------- ------- ------- -------
Net asset value, end of year $9.68 $9.82 $ 9.60 $10.31 $10.06
======= ======= ======= ======== =======
TOTAL INVESTMENT RETURN:
Based on net asset value per share 4.87% 9.00% (1.54%) 8.07% 9.66%
======= ======= ======= ======== =======
RATIOS TO AVERAGE NET ASSETS:
Expenses .97% .96% .83% .80% .82%
======= ======= ======= ======== =======
Investment income--net 6.19% 6.38% 5.55% 5.34% 6.24%
======= ======= ======= ======== =======
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands) $47,281 $65,139 $81,407 $122,283 $94,798
======= ======= ======= ======== =======
Portfolio turnover 51.44% 47.90% 172.51% 204.80% 156.12%
======= ======= ======= ======== =======
</TABLE>

See Notes to Financial Statements.

F-5

<PAGE>

- -------------------------------------------------------------------------------
MERRILL LYNCH INSTITUTIONAL INTERMEDIATE FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996
- -------------------------------------------------------------------------------

1. SIGNIFICANT ACCOUNTING POLICIES:

Merrill Lynch Institutional Intermediate Fund (the "Fund") is registered under
the Investment Company Act of 1940 as a diversified, open-end management
investment company. The following is a summary of significant accounting
policies followed by the Fund.

(a) Valuation of investments--Portfolio securities traded in the
over-the-counter markets are valued at the last available bid price or yield
equivalent as obtained from dealers who make a market in the securities. US
Government securities and securities issued by Federal agencies are traded in
the over-the-counter market. Securities with remaining maturities of sixty days
or less are valued at amortized cost, which approximates market value.

(b) Repurchase agreements--The Fund invests in US Government securities pursuant
to repurchase agreements with a member bank of the Federal Reserve System or a
primary dealer in US Government securities. Under such agreements, the bank or
primary dealer agrees to repurchase the security at a mutually agreed upon time
and price. The Fund takes possession of the underlying securities, marks to
market such securities and, if necessary, receives additions to such securities
daily to ensure that the contract is fully collateralized.

(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 (including amortization of discount and premium) is recognized
on the accrual basis. 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 Merrill Lynch
Asset Management, L.P. ("MLAM"). The general partner of MLAM 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 Plan with Merrill
Lynch Funds Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.

MLAM 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 at
the annual rate of 0.40% of the average daily net assets of the Fund.

The Fund has adopted a Distribution Plan (the "Plan") in accordance with Rule
12b-1 under the Investment Company Act of 1940 pursuant to which MLFD receives a
fee from the Fund at the end of each month at the annual rate of 0.15% of the
average daily net assets of the Fund.

This fee is to compensate MLFD for the services it provides and the expenses
borne by

F-6

<PAGE>

- -------------------------------------------------------------------------------
MERRILL LYNCH INSTITUTIONAL INTERMEDIATE FUND
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
OCTOBER 31, 1996
- -------------------------------------------------------------------------------

MLFD under the Distribution Agreement. As authorized by the Plan, MLFD has
entered into an agreement with Merrill Lynch, Pierce, Fenner & Smith Inc.
("MLPF&S"), which provides for the compensation of MLPF&S for providing
distribution-related services to the Fund. Such services relate to the sale,
promotion, and marketing of the shares of the Fund. For the year ended October
31, 1996, MLFD earned $86,832 under the Plan, all of which was paid to MLPF&S
pursuant to the agreement.

Accounting services are provided to the Fund by MLAM at cost.

Certain officers and/or trustees of the Fund are officers and/or directors of
MLAM, PSI, MLFD, MLPF&S, and/or ML & Co.

3. INVESTMENTS:

Purchases and sales of investments, excluding short-term securities, for the
year ended October 31, 1996 were $28,097,734 and $44,532,305, respectively.

Net realized and unrealized losses as of October 31, 1996 were as follows:

- ---------------------------------------------------
REALIZED UNREALIZED
LOSSES LOSSES
- ---------------------------------------------------

Long-term investments $(976,648) $(193,038)
--------- ---------
Total $(976,648) $(193,038)
========= =========
- ---------------------------------------------------

As of October 31, 1996, net unrealized depreciation for Federal income tax
purposes aggregated $193,038, of which $547,831 related to appreciated
securities and $740,869 related to depreciated securities. The aggregate cost of
investments at October 31, 1996 for Federal income tax purposes was $47,231,818.

4. TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST:

Transactions in shares of beneficial interest were as follows:

- -------------------------------------------------
FOR THE YEAR ENDED DOLLAR
OCTOBER 31, 1996 SHARES AMOUNT
- -------------------------------------------------

Shares sold 3,906,826 $ 37,917,545
Shares issued to
shareholders in
reinvestment of
dividends 310,652 3,023,342
---------- ------------
Total issued 4,217,478 40,940,887
Shares redeemed (5,964,956) (57,818,811)
---------- ------------
Net decrease (1,747,478) $(16,877,924)
========== ============
- -------------------------------------------------

- -------------------------------------------------
FOR THE YEAR ENDED DOLLAR
OCTOBER 31, 1995 SHARES AMOUNT
- -------------------------------------------------

Shares sold 2,117,377 $ 20,392,534
Shares issued to
shareholders in
reinvestment of
dividends 344,636 3,329,426
---------- ------------

Total issued 2,462,013 23,721,960
Shares redeemed (4,312,941) (41,389,530)
---------- ------------
Net decrease (1,850,928) $(17,667,570)
========== ============
- -------------------------------------------------

5. CAPITAL LOSS CARRYFORWARD:

At October 31, 1996, the Fund had a net capital loss carryforward of
approximately $16,669,000, of which $5,830,000 expires in 1997, $4,643,000
expires in 1998, $3,224,000 expires in 2002, $1,995,000 expires in 2003, and
$977,000 expires in 2004. This amount will be available to offset like amounts
of any future taxable gains. Expired capital loss carryforward in the amount of
$8,336,446 has been reclassified to paid-in capital in excess of par.

6. SHAREHOLDER MEETING:

A shareholder meeting is scheduled to take place on December 23, 1996. At this
meeting, shareholders will vote on proposals to amend the investment objective
and fundamental investment restrictions of the Fund, change the Fund's name and
enable the Fund to issue four classes of shares under the Merrill Lynch Select
Pricing(Service Mark) System.

F-7

<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objectives and Policies............. 2
Investment Restrictions........................ 2
Management of the Fund......................... 4
Trustees and Officers........................ 4
Management and Investment Advisory
Arrangements.............................. 7
Duration and Termination..................... 8
Transfer Agency Services
Arrangements.............................. 8
Determination of Net Asset Value............... 8
Portfolio Transactions......................... 9
Portfolio Turnover........................... 10
Purchase of Shares............................. 10
Alternative Sales Arrangements............... 10
Initial Sales Charge Alternative-- Class A
and Class D Shares........................ 11
Employer-Sponsored Retirement or Savings
Plans and Certain Other Arrangements...... 15
Distribution Plan............................ 15
Redemption of Shares........................... 16
Repurchase................................... 16
Reinstatement Privilege...................... 16
Deferred Sales Charge--Class B and Class C
Shares.................................... 17
Dividends, Distributions and Taxes............. 17
Dividends and Distributions.................. 17
Federal Income Taxes......................... 17
Shareholder Services........................... 19
Investment Account........................... 19
Automatic Investment Plans................... 20
Fee-Based Programs........................... 20
Automatic Reinvestment of Dividends and
Capital Gains Distributions............... 20
Systematic Withdrawal Plans.................. 21
Retirement Plans............................... 22
Exchange Privilege............................. 22
Performance Data............................... 24
Additional Information......................... 26
Organization of the Fund..................... 26
Computation of Offering Price Per Share...... 27
Independent Auditors' Report................... 28
Audited Financial Statements................... F-1
</TABLE>

Code #10432-0297
[LOGO]

[ART]

STATEMENT OF
ADDITIONAL
INFORMATION

February 18, 1997

Distributor:
Merrill Lynch
Funds Distributor, Inc.

<PAGE>

PART C. OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.

(A) FINANCIAL STATEMENTS

Contained in Part A:

Financial Highlights for each of the years in the nine-year period ended
October 31, 1996 and for the period November 6, 1986 (commencement of
operations) to October 31, 1987.

Contained in Part B:

Schedule of Investments, as of October 31, 1996

Statement of Assets and Liabilities, as of October 31, 1996

Statement of Operations for the year ended October 31, 1996

Statements of Changes in Net Assets for each of the years in the two-year
period ended October 31, 1996

Financial Highlights for each of the years in the five-year period ended
October 31, 1996.

(B) EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------
<S> <C>
1 (a) -- Declaration of Trust (incorporated by reference to Exhibit 1 to
Registrant's Registration Statement on Form N-1A (File No.
33-8708)).

1 (b) -- Form of Amendment to Declaration of Trust

2 -- By-Laws of Registrant (incorporated by reference to Exhibit 2 to
Registrant's Registration Statement on Form N-1A (File No.
33-8708)).

3 -- None.

4 -- Specimen certificates for Class A, Class B, Class C and Class D
shares of beneficial interest of Fund.*

5 -- Form of Investment Advisory Agreement (incorporated by reference
to Exhibit 5 to Post-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-1A (File No. 33-8708)).

6 (a) -- Form of Class A Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (including form of Selected
Dealer Agreement) (incorporated by reference to Exhibit 6(a) to
Post-Effective Amendment No. 10 to Registrant's Registration
Statement on Form N-1A (File No. 33-8708)).

6 (b) -- Form of Class B Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (including form of Selected
Dealer Agreement) (incorporated by reference to Exhibit 6(b) to
Post-Effective Amendment No. 10 to Registrant's Registration
Statement on Form N-1A (File No. 33-8708)).

6 (c) -- Form of Class C Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (including form of Selected
Dealer Agreement) (incorporated by reference to Exhibit 6(c) to
Post-Effective Amendment No. 10 to Registrant's Registration
Statement on Form N-1A (File No. 33-8708)).

6 (d) -- Form of Class D Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (including form of Selected
Dealer Agreement) (incorporated by reference to Exhibit 6(d) to
Post-Effective Amendment No. 10 to Registrant's Registration
Statement on Form N-1A (File No. 33-8708)).
7 -- None.
</TABLE>

C-1

<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------
<S> <C>
8 -- Form of Custodian Agreement (incorporated by reference to Exhibit
8 to Pre-Effective Amendment No. 1 to Registrant's Registration

Statement on Form N-1A (File No. 33-8708)).

9 (a) -- Form of Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement between Registrant and
Merrill Lynch Financial Data Services, Inc.*

9 (b) -- Form of Agreement relating to the use of the 'Merrill Lynch' name
(incorporated by reference to Exhibit 9(b) to Pre-Effective
Amendment No. 1 to Registrant's Registration Statement on Form
N-1A (File No. 33-8708)).

10 -- Opinion of Counsel.+

11 -- Consent of Deloitte & Touche LLP, independent accountants for the
Registrant.*

12 -- None.

13 (a) -- None.

14 -- None.

15 (a) -- Form of Class B Distribution Plan of Registrant (incorporated by
reference to Exhibit 15(a) to Post-Effective Amendment No. 10 to
Registrant's Registration Statement on Form N-1A (File No.
33-8708)).

15 (b) -- Form of Class C Distribution Plan of Registrant (incorporated by
reference to Exhibit 15(b) to Post-Effective Amendment No. 10 to
Registrant's Registration Statement on Form N-1A (File No.
33-8708)).

15 (c) -- Form of Class D Distribution Plan of Registrant (incorporated by
reference to Exhibit 15(c) to Post-Effective Amendment No. 10 to
Registrant's Registration Statement on Form N-1A (File No.
33-8708)).

16 -- Schedule for computation of each performance quotation provided
in the Registration Statement in response to Item 22
(incorporated by reference to Exhibit 16 to Post-Effective
Amendment No. 2 to Registrant's Registration Statement on Form
N-1A (File No. 33-8708)).

17 -- None.

18 -- Form of plan under Rule 18f-3 (incorporated by reference to
Exhibit 18 to Post-Effective Amendment No. 10 to Registrant's
Registration Statement on Form N-1A (File No. 33-8708)).

27 (a) -- Financial Data Schedule--Class A shares.*

27 (b) -- Financial Data Schedule--Class B shares.*

27 (c) -- Financial Data Schedule--Class C shares.*

27 (d) -- Financial Data Schedule--Class D shares.*
</TABLE>

- ---------------
* Filed herewith.
+ To be filed by amendment.

ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.

None.

ITEM 26. NUMBER OF HOLDERS OF SECURITIES.

<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
TITLE OF CLASS DECEMBER 31, 1996
- ------------------------------------------------------------ -----------------
<S> <C>
Class A common stock, par value $0.10 per share............. None
Class B common stock, par value $0.10 per share............. None
Class C common stock, par value $0.10 per share............. None
Class D common stock, par value $0.10 per share............. 314*
</TABLE>

(Footnotes on next page)

C-2

<PAGE>

(Footnotes from previous page)

- ------------------

Note: The number of holders shown in the table above includes holders of record
plus beneficial owners, whose shares are held of record by Merrill Lynch,
Pierce, Fenner & Smith Incorporated.

* Represents number of holders of existing shares of the Fund, which
shares will be reclassified as Class D shares at the close of business on
February 14, 1997.

ITEM 27. INDEMNIFICATION.

Reference is made to Section 5.3 of Registrant's Declaration of Trust.

Insofar as the conditional advancing of indemnification monies for actions
based upon the Investment Company Act of 1940 may be concerned, such payments
will be made only on the following conditions: (i) the advances must be limited
to amounts used, or to be used, for the preparation or presentation of a defense
to the action, including costs connected with the preparation of a settlement;
(ii) advances may be made only upon receipt of a written promise by, or on
behalf of, the recipient to repay that amount of the advance which exceeds that
amount to which it is ultimately determined that he is entitled to receive from
the Registrant by reason of indemnification; and (iii) (a) such promise must be
secured by a surety bond, other suitable insurance of an equivalent form of
security which assures that any repayments may be obtained by the Registrant
without delay or litigation, which bond, insurance or other form of security
must be provided by the recipient of the advance, or (b) a majority of a quorum
of the Registrant's disinterested, non-party trustees, or an independent legal
counsel in a written opinion, shall determine, based upon a review of readily
available facts, that the recipient of the advance ultimately will be found
entitled to indemnification.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a trustee, officer, or controlling person of the Registrant in
connection with the successful defense of any action, suit or proceeding) is
asserted by such trustee, officer or controlling person in connection with
shares being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.

Merrill Lynch Asset Management, L.P. ('MLAM' or the 'Investment Adviser'),
an affiliate of FAM, acts as the investment adviser for the following open-end
investment companies: Merrill Lynch Adjustable Rate Securities Fund, Inc.,
Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset Builder Program,
Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund,
Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Developing Capital Markets
Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill
Lynch Fundamental Growth Fund, Inc., Merrill Lynch Fund for Tomorrow, Inc.,
Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for
Investment and Retirement, Merrill Lynch Global Convertible Fund, Inc., Merrill
Lynch Global Holdings, Merrill Lynch Global Resources Trust, Merrill Lynch

Global SmallCap Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill
Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch
Healthcare Fund, Inc., Merrill Lynch International Equity Fund, Merrill Lynch
Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill
Lynch Municipal Series Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch
Ready Assets Trust, Merrill Lynch Retirement Series Trust, Merrill Lynch Series
Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch
Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch
U.S.A. Government Reserves, Merrill Lynch U.S. Treasury Money Fund, Merrill
Lynch Utility Income Fund, Inc., and Merrill Lynch Variable Series Funds, Inc.,
and the following closed-end investment companies: Convertible Holdings, Inc.,
Merrill Lynch High Income Municipal Bond Fund, Inc., Merrill Lynch Senior
Floating Rate Fund, Inc. and Merrill Lynch Municipal Strategy Fund, Inc. The
address of each of these investment companies

C-3

<PAGE>

is P.O. Box 9011, Princeton, New Jersey 08543-9011, except that the address of
Merrill Lynch Funds for Institutions Series and Merrill Lynch Institutional
Intermediate Fund is One Financial Center, 23rd Floor, Boston, Massachusetts
02111-2646. The address of the Investment Adviser and of Merrill Lynch Funds
Distributor, Inc. ('MLFD'), and MLAM is also P.O. Box 9011, Princeton, New
Jersey 08543-9011. The address of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ('Merrill Lynch') and Merrill Lynch & Co., Inc. ('ML & Co.') is
World Financial Center, North Tower, 250 Vesey Street, New York, New York
10281-1213. Fund Asset Management, L.P. ('FAM') acts as the investment adviser
for the following other open-end investment companies: CBA Money Fund, CMA
Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series
Trust, CMA Treasury Fund, The Corporate Fund Accumulation Program, Inc.,
Financial Institutions Series Trust, Merrill Lynch Basic Value Fund, Inc.,
Merrill Lynch California Municipal Series Trust, Merrill Lynch Corporate Bond
Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch Federal
Securities Trust, Merrill Lynch Funds for Institutions Series, Merrill Lynch
Multi-State Limited Maturity Municipal Series Trust, Merrill Lynch Multi-State
Municipal Series Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch
Phoenix Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch World
Income Fund, Inc. and The Municipal Fund Accumulation Program, Inc., and the
following closed-end investment companies: Apex Municipal Fund, Inc., Corporate
High Yield Fund, Inc., Corporate High Yield Fund II, Inc., Income Opportunities
Fund 1999, Inc., Income Opportunities Fund 2000, Inc., MuniAssets Fund, Inc.,
MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest
Fund II, Inc., MuniVest Florida Fund, MuniVest Michigan Fund, Inc., MunVest New
Jersey Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniYield Arizona Fund,
Inc., MuniYield California Fund, Inc., MuniYield California Insured Fund, Inc.,
MuniYield California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield
Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc.,
MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc.,
MuniYield New Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc.,
MuniYield New York Insured Fund II, Inc., MuniYield Pennsylvania Fund, MuniYield
Quality Fund, Inc., MuniYield Quality Fund II, Inc., Senior High Income

Portfolio, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNew York
Holdings, Inc. and Worldwide DollarVest Fund, Inc.

Set forth below is a list of each officer and director of the Investment
Adviser indicating each business, profession, vocation or employment of a
substantial nature in which each such person has been engaged since October 31,
1987 for his or her or its own account or in the capacity of director, officer,
partner or trustee. In addition, Messrs. Zeikel, Glenn and Richard hold the same
positions with substantially all of the investment companies described in the
preceding paragraph and Messrs. Giordano, Harvey and Monagle are directors or
officers of one or more of such companies. Messrs. Zeikel and Richard also hold
the same positions with all or substantially all of the investment companies
advised by FAM as they do with the Investment Adviser. Messrs. Harvey and
Monagle are directors or officers of one or more of such companies.

<TABLE>
<CAPTION>
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
- ---------------------- ---------------------- ---------------------------------------------------
<S> <C> <C>
ML & Co. ............. Limited Partner Financial Services Holding Company; Limited Partner
of MLAM
Fund Asset Management, Limited Partner Investment Advisory Services
Inc.................

Princeton Services,
Inc.
('Princeton
Services').......... General Partner General Partner of MLAM

Arthur Zeikel......... President and Director President of MLAM; President and Director of
Princeton Services; Executive Vice President of
ML & Co. and Merrill Lynch; Director of MLFD

Terry K. Glenn........ Executive Vice Executive Vice President of MLAM and FAM; Executive
President Vice President and Director of Princeton Services
since 1993; President of MLFD and Director
thereof since 1991; President of Princeton
Administrators, L.P.

Robert W. Crook....... Senior Vice President Senior Vice President of MLFD since 1990;
Vice President of MLFD from 1978 to 1990 and Vice
President of FAM from 1981 to 1990

Vincent R. Giordano... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
</TABLE>

C-4

<PAGE>

<TABLE>
<CAPTION>
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
- ---------------------- ---------------------- ---------------------------------------------------
<S> <C> <C>
Elizabeth Griffin..... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services

Norman R. Harvey...... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services

Michael J. Senior Vice President Senior Vice President of MLAM; Senior Vice
Hennewinkel......... President of Princeton Services

Philip L. Kirstein.... Senior Vice President Senior Vice President, General Counsel and
General Counsel, and Secretary of MLAM; Senior Vice President, General
Secretary Counsel, Director and Secretary of Princeton
Services; Director of MLFD

Ronald M. Kloss....... Senior Vice President Senior Vice President and Controller of MLAM;
and Controller Senior Vice President and Controller of Princeton
Services

Stephen M. M. Senior Vice President Executive Vice President of Princeton
Miller.............. Administrator, L.P.; Senior Vice President of
Princeton Services

Joseph T. Monagle, Senior Vice President Senior Vice President of MLAM; Senior Vice
Jr. ................ President of Princeton Services

Michael L. Quinn...... Senior Vice President Senior Vice President of FAM; Senior Vice President
of Princeton Services; Managing Director and
First Vice President of Merrill Lynch from 1989
to 1995

Richard L. Reller..... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services

Gerald M. Richard..... Senior Vice President Senior Vice President and Treasurer of MLAM; Senior
and Treasurer Vice President and Treasurer of Princeton
Services; Vice President and Treasurer of MLFD

Ronald L. Welburn..... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services

Anthony Wiseman....... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
</TABLE>

ITEM 29. PRINCIPAL UNDERWRITERS.

(a) Merrill Lynch Funds Distributor, Inc. ('MLFD') acts as the principal
underwriter for the Registrant. MLFD acts as the principal underwriter for each
of the investment companies referred to in Item 28 except Apex Municipal Fund,
Inc., CBA Money Fund, CMA Government Securities Fund, CMA Treasury Fund, CMA
Money Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, Merrill
Lynch Corporate High Yield Fund, Inc., Merrill Lynch Corporate High Yield Fund
II, Inc., MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund,
Inc., MuniVest Fund, Inc., MuniVest Florida Fund, MuniVest Fund II, Inc.,
MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest
Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc., MuniYield California
Fund, Inc., MuniYield California Insured Fund, Inc., MuniYield California
Insured Fund II, Inc., MuniYield Florida Fund, MuniYield Florida Insured Fund,
MuniYield Insured Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan
Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey
Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New York
Insured Fund II, Inc., MuniYield Pennsylvania Fund, Inc., MuniYield Fund, Inc.,
MuniYield Quality Fund, Inc., MuniYield Quality Fund II, Inc., Senior High
Income Portfolio, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNew
York Holdings, The Corporate Fund Accumulation Program, Inc., The Municipal Fund
Accumulation Program, Inc., World Wide Dollar Vest, Inc.

(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9081,
Princeton, New Jersey 08543-9081, except that the address of

C-5

<PAGE>

Messrs. Crook, Aldrich, Brady, Breen, Fatseas, Maguire and Wasel and Ms. Schena
is One Financial Center, Boston, Massachusetts 02111.

<TABLE>
<CAPTION>
POSITIONS AND OFFICES
WITH POSITIONS AND OFFICES WITH
NAME UNDERWRITER REGISTRANT
- ------------------------- ----------------------- --------------------------
<S> <C> <C>
Terry K. Glenn........... President Trustee
Arthur Zeikel............ Director None
Philip Kirstein.......... Director None
William E. Aldrich....... Senior Vice President Executive Vice President
Robert W. Crook.......... Senior Vice President President and Trustee
Gerald M. Richard........ Vice President and Vice President, Treasurer
Treasurer
Mark A. DeSario.......... Vice President None
Michelle T. Lau.......... Vice President None

Salvatore Venezia........ Vice President None
Kevin P. Boman........... Vice President None
Michael J. Brady......... Vice President Senior Vice President
William M. Breen......... Vice President Senior Vice President and
Assistant Treasurer
James T. Fatseas......... Vice President Senior Vice President
William Wasel............ Vice President Senior Vice President
Debra W. Vice President None
Landsman-Yaros.........
Mark E. Maguire.......... Vice President Senior Vice President
Patricia A. Schena....... Vice President Vice President and
Assistant Secretary
Robert Harris............ Secretary None
</TABLE>

ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.

All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules thereunder
will be maintained at the offices of the Registrant, Merrill Lynch Institutional
Intermediate Fund, 800 Scudders Mill Road, Plainsboro, New Jersey 08536; its
Investment Adviser, Merrill Lynch Asset Management, 800 Scudders Mill Road,
Plainsboro, New Jersey 08536; its Transfer Agent, Merrill Lynch Financial Data
Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289; and its
Custodian, State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110.

ITEM 31. MANAGEMENT SERVICES.

Other than as set forth under the caption 'Management of the Fund' in the
Prospectus constituting Part A of the Registration Statement and under the
caption 'Management and Advisory Arrangements' in the Statement of Additional
Information constituting Part B of the Registration Statement, the Registrant is
not a party to any management-related service contract.

ITEM 32. UNDERTAKINGS.

The Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders,
upon request, and without charge.

C-6

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to its Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
County of Suffolk, and Commonwealth of Massachusetts, on the 10th day of
February, 1997.

MERRILL LYNCH INSTITUTIONAL
INTERMEDIATE FUND

By: /s/ ROBERT W. CROOK
----------------------------------
Robert W. Crook

Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registrant's Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------- ------------------------------------- -------------------

<S> <C> <C>
/s/ ROBERT W. CROOK President and Trustee February 10, 1997
- ------------------------ (Principal Executive Officer)
Robert W. Crook

* Treasurer (Principal Financial and
----------------------- Accounting Officer)
Gerald M. Richard

* Trustee
-----------------------
A. Bruce Brackenridge

* Trustee
-----------------------
Charles C. Cabot, Jr.

* Trustee
-----------------------
James T. Flynn

* Trustee
-----------------------
Terry K. Glenn

* Trustee
-----------------------
George W. Holbrook, Jr.

* Trustee
-----------------------
W. Carl Kester

*By:/s/ROBERT W. CROOK February 10, 1997
-----------------------
(Robert W. Crook,
Attorney-in-Fact)
</TABLE>

C-7

<PAGE>

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER NUMBER
- ------- ------------
<S> <C> <C>
4* -- Specimen certificates for Class A, Class B, Class C and Class D shares of beneficial
interest of Fund............................................................................
9(a)* -- Form of Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement between Registrant and Merrill Lynch Financial Data
Services, Inc...............................................................................
11* -- Consent of Deloitte & Touche LLP, independent accountants for the Registrant...............
27(a)* -- Financial Data Schedule--Class A shares....................................................
27(b)* -- Financial Data Schedule--Class B shares....................................................
27(c)* -- Financial Data Schedule--Class C shares....................................................
27(d)* -- Financial Data Schedule--Class D shares....................................................
</TABLE>

- ---------------

* Filed herewith.

<PAGE>

EXHIBIT 4

NUMBER SHARES

MERRIL LYNCH INTERMEDIATE GOVERNMENT BOND FUND

ORGANIZED AS A BUSINESS TRUST
UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS

CLASS A SHARES OF BENEFICIAL INTEREST

THIS CERTIFIES THAT CUSIP 59019P 20 8
SEE REVERSE FOR CERTAIN DEFINITIONS

is the owner of

FULLY PAID AND NON-ASSESSABLE SHARES, PAR VALUE TEN CENTS ($0.10)
PER SHARE, OF BENEFICIAL INTEREST, CLASS A, OF

MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND

in accordance with, and subject to all the provisions of, a Declaration of Trust
dated September 10, 1986, as amended, a copy of which has been filed with the
Secretary of The Commonwealth of Massachusetts.

The Declaration of Trust provides that the name "Merrill Lynch Intermediate
Government Bond Fund" refers to the Trustees under the Declaration collectively
as Trustees, but not as individuals or personally; and no Trustee, shareholder,
officer, employee or agent of the Trust may be held to any personal liability,
nor may resort be had to their private property for the satisfaction of
any obligation or claim or otherwise in connection with the affairs of the Trust
but the Trust Property only shall be liable.

This certificate is not valid until countersigned by the Transfer Agent.

IN WITNESS WHEREOF, the Trustees under said Declaration of Trust, acting not
individually, but as such Trustees, have caused to be affixed to this
certificate the facsimile seal of the Trust and the facsimile signatures of duly
authorized officers of the Trust, acting not individually but as such officers.

Dated: Countersigned:

MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
By Transfer Agent

[Seal]

/s/ Robert W. Crook /s/ Jerry Weiss
President Secretary Authorized Signature

<PAGE>

MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND

A full statement of the designations and any preferences, conversion
and other rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of redemption of the
shares of each series and class thereof which the Trust is authorized to
issue and the differences in the relative rights and preferences between
the shares of each series and class thereof to the extent that they have
been set, and the authority of the Board of Trustees to set the relative rights
and preferences of subsequent series and classes thereof, will be furnished by
the Trust to any shareholder, without charge, upon request to the Secretary of
the Trust at its principal office.

The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:

TEN COM-as tenants in common UNIF GIFT MIN ACT- __________Custodian _________
(Cust) (Minor)

TEN ENT-as tenants by the entireties under Uniform Gifts to Minors Act

JT TEN -as joint tenants with right ______________________
of survivorship and not as (State)
tenants in common

Additional abbreviations may also be used though not in the above list.

For value received ___________________ hereby sell, assign and transfer unto

PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE

/ / / /-/ / /-/ / / / /

_____________________________________________________________________________
Please Print or Typewrite Name and Address including Postal Zip Code
of Assignee

________________________________________________________________________________

_________________________________________________________________________ Shares
represented by the within Certificate, and do hereby irrevocably constitute and
appoint ________________________________________________________________________

________________________________________________________________________________
Attorney to transfer the said shares on the books of the within-named Trust with
full power of substitution in the premises.

Dated, _____________________________

-----------------------------------

---------------------------------------------------------------------------
Signatures must be guaranteed by an "eligible guarantor institution" as such
term is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934.
-----------------------------------------------------------------------------

NOTICE: The signature to this assignment must correspond with the name as
written upon the face of the Certificate, in every particular, without
alteration or enlargement, or any change whatever.

<PAGE>

NUMBER SHARES

MERRIL LYNCH INTERMEDIATE GOVERNMENT BOND FUND

ORGANIZED AS A BUSINESS TRUST
UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS

CLASS B SHARES OF BENEFICIAL INTEREST

THIS CERTIFIES THAT CUSIP 59019P 20 7
SEE REVERSE FOR CERTAIN DEFINITIONS

is the owner of

FULLY PAID AND NON-ASSESSABLE SHARES, PAR VALUE TEN CENTS ($0.10)
PER SHARE, OF BENEFICIAL INTEREST, CLASS B, OF

MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND

This certificate is not valid until countersigned by the Transfer Agent.

Dated: Countersigned:
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.

By Transfer Agent

[Seal]

/s/ Robert W. Crook /s/ Jerry Weiss
President Secretary Authorized Signature

<PAGE>

MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND

The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:

TEN COM-as tenants in common UNIF GIFT MIN ACT- __________Custodian _________
(Cust) (Minor)

TEN ENT-as tenants by the entireties under Uniform Gifts to Minors Act

JT TEN -as joint tenants with right ______________________
of survivorship and not as (State)
tenants in common

Additional abbreviations may also be used though not in the above list.

For value received,___________________ hereby sell, assign and transfer unto

PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE

/ / / /-/ / /-/ / / / /

_____________________________________________________________________________
Please Print or Typewrite Name and Address including Postal Zip Code
of Assignee

________________________________________________________________________________

Dated, _____________________________

-----------------------------------

NOTICE: The signature to this assignment must correspond with the name as
written upon the face of the Certificate, in every particular, without
alteration or enlargement, or any change whatever.

<PAGE>

NUMBER SHARES

MERRIL LYNCH INTERMEDIATE GOVERNMENT BOND FUND

ORGANIZED AS A BUSINESS TRUST
UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS

CLASS C SHARES OF BENEFICIAL INTEREST

THIS CERTIFIES THAT CUSIP 59019P 40 6
SEE REVERSE FOR CERTAIN DEFINITIONS

is the owner of

FULLY PAID AND NON-ASSESSABLE SHARES, PAR VALUE TEN CENTS ($0.10)
PER SHARE, OF BENEFICIAL INTEREST, CLASS C, OF

MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND

This certificate is not valid until countersigned by the Transfer Agent.

Dated: Countersigned:
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.

By Transfer Agent

[Seal]

/s/ Robert W. Crook /s/ Jerry Weiss
President Secretary Authorized Signature

<PAGE>

MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND

The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:

TEN COM-as tenants in common UNIF GIFT MIN ACT- __________Custodian _________
(Cust) (Minor)

TEN ENT-as tenants by the entireties under Uniform Gifts to Minors Act

JT TEN -as joint tenants with right ______________________
of survivorship and not as (State)
tenants in common

Additional abbreviations may also be used though not in the above list.

For value received,___________________ hereby sell, assign and transfer unto

PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE

/ / / /-/ / /-/ / / / /

_____________________________________________________________________________
Please Print or Typewrite Name and Address including Postal Zip Code
of Assignee

________________________________________________________________________________

Dated, _____________________________

-----------------------------------

NOTICE: The signature to this assignment must correspond with the name as
written upon the face of the Certificate, in every particular, without
alteration or enlargement, or any change whatever.

<PAGE>

NUMBER SHARES

MERRIL LYNCH INTERMEDIATE GOVERNMENT BOND FUND

ORGANIZED AS A BUSINESS TRUST
UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS

CLASS D SHARES OF BENEFICIAL INTEREST

THIS CERTIFIES THAT CUSIP 59019P 10 9
SEE REVERSE FOR CERTAIN DEFINITIONS

is the owner of

FULLY PAID AND NON-ASSESSABLE SHARES, PAR VALUE TEN CENTS ($0.10)
PER SHARE, OF BENEFICIAL INTEREST, CLASS D, OF

MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND

This certificate is not valid until countersigned by the Transfer Agent.

Dated: Countersigned:
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.

By Transfer Agent

[Seal]

/s/ Robert W. Crook /s/ Jerry Weiss
President Secretary Authorized Signature

<PAGE>

MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND

The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:

TEN COM-as tenants in common UNIF GIFT MIN ACT- __________Custodian _________
(Cust) (Minor)

TEN ENT-as tenants by the entireties under Uniform Gifts to Minors Act

JT TEN -as joint tenants with right ______________________
of survivorship and not as (State)
tenants in common

Additional abbreviations may also be used though not in the above list.

For value received,___________________ hereby sell, assign and transfer unto

PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE

/ / / /-/ / /-/ / / / /

_____________________________________________________________________________
Please Print or Typewrite Name and Address including Postal Zip Code
of Assignee

________________________________________________________________________________

Dated, _____________________________

-----------------------------------

NOTICE: The signature to this assignment must correspond with the name as
written upon the face of the Certificate, in every particular, without
alteration or enlargement, or any change whatever.

EXHIBIT 9(A)

TRANSFER AGENCY, DIVIDEND DISBURSING AGENCY

AND SHAREHOLDER SERVICING AGENCY AGREEMENT

THIS AGREEMENT made as of the ___ day of ________, 1997 by and
between MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND, a Massachusetts
business trust (the "Fund"), and MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
("MLFDS"), a New Jersey corporation.

WITNESSETH:

WHEREAS, the Fund wishes to appoint MLFDS to be the Transfer
Agent, Dividend Disbursing Agent and Shareholder Servicing Agent upon, and
subject to, the terms and provisions of this Agreement, and MLFDS is desirous of
accepting such appointment upon, and subject to, such terms and provisions:

NOW THEREFORE, in consideration of mutual covenants contained
in this Agreement, the Fund and MLFDS agree as follows:

1. Appointment of MLFDS as Transfer Agent, Dividend
Disbursing Agent and Shareholder Servicing Agent.

a. The Fund hereby appoints MLFDS to act as Transfer
Agent, Dividend Disbursing Agent and Shareholder Servicing Agent
for the Fund upon, and subject to, the terms and provisions of this
Agreement.

b. MLFDS hereby accepts the appointment as Transfer
Agent, Dividend Disbursing Agent and Shareholder Servicing Agent
for the Fund, and agrees to act as such upon, and subject to, the
terms and provisions of this Agreement.

2. Definitions.

a. In this Agreement:

(i) The term "Act" means the Investment Company Act
of 1940 as amended from time to time and any rule or regulation thereunder;

(ii) The term "Account" means any account of a
Shareholder, or, if the shares are held in an account in the name of Merrill
Lynch, Pierce, Fenner & Smith Incorporated for benefit of an identified
customer, such account, including a Plan Account, any account under a plan (by
whatever name referred to in the Prospectus) pursuant to the Self-Employed
Individuals Retirement Act of 1962 ("Keogh Act Plan") and any plan (by whatever
name referred to in the Prospectus) in conjunction with Section 401 of the
Internal Revenue Code ("Corporation Master Plan");

<PAGE>

(iii) The term "application" means an application
made by a Shareholder or prospective Shareholder respecting the opening of an
Account;

(iv) The term "MLFD" means Merrill Lynch Funds
Distributor, Inc., a Delaware corporation;

(v) The term "MLPF&S" means Merrill Lynch, Pierce,
Fenner & Smith Incorporated, a Delaware corporation;

(vi) The term "Officer's Instruction" means an
instruction in writing given on behalf of the Fund to MLFDS, and signed on
behalf of the Fund by the President, any Vice President, the Secretary or the
Treasurer of the Fund;

(vii) The term "Prospectus" means the Prospectus and
the Statement of Additional Information of the Fund as from time to time in
effect;

(viii) The term "Shares" means shares of beneficial
interest of the Fund, irrespective of class or series;

(ix) The term "Shareholder" means the holder of
record of Shares; and

(x) The term "Plan Account" means an account opened
by a Shareholder or prospective Shareholder in respect to an open account,
monthly payment or withdrawal plan (in each case by whatever name referred to in
the Prospectus), and may also include an account relating to any other plan if
and when provision is made for such plan in the Prospectus.

3. Duties of MLFDS as Transfer Agent, Dividend Disbursing
Agent and Shareholder Servicing Agent.

a. Subject to the succeeding provisions of the Agreement,
MLFDS hereby agrees to perform the following functions as Transfer Agent,
Dividend Disbursing Agent and Shareholder Servicing Agent for the Fund;

(i) Issuing, transferring and redeeming Shares;

(ii) Opening, maintaining, servicing and closing
Accounts;

(iii) Acting as agent for the Fund Shareholders
and/or customers of MLPF&S in connection with Plan Accounts, upon the terms and
subject to the conditions contained in the Prospectus and application relating
to the specific Plan Account;

(iv) Acting as agent of the Fund and/or MLPF&S,
maintaining such records as may permit the imposition of such contingent
deferred sales charges as may be described in the Prospectus, including such
reports as may be reasonably requested

<PAGE>

by the Fund with respect to such Shares as may be subject to a contingent
deferred sales charge;

(v) Upon the redemption of Shares subject to such a
contingent deferred sales charge, calculating and deducting from the redemption
proceeds thereof the amount of such charge in the manner set forth in the
Prospectus. MLFDS shall pay, on behalf of MLFD, to MLPF&S such deducted
contingent deferred sales charges imposed upon all Shares maintained in the name
of MLPF&S, or maintained in the name of an account identified as a customer
account of MLPF&S. Sales charges imposed upon any other Shares shall be paid by
MLFDS to MLFD;

(vi) Exchanging the investment of an investor into,
or from the shares of other open-end investment companies or other series
portfolios of the Fund, if any, if and to the extent permitted by the Prospectus
at the direction of such investor;

(vii) Processing redemptions;

(viii) Examining and approving legal transfers;

(ix) Replacing lost, stolen or destroyed certificates
representing Shares, in accordance with, and subject to, procedures and
conditions adopted by the Fund;

(x) Furnishing such confirmations of transactions
relating to their Shares as required by applicable law;

(xi) Acting as agent for the Fund and/or MLPF&S,
furnishing such appropriate periodic statements relating to Accounts, together
with additional enclosures, including appropriate income tax information and
income tax forms duly completed, as required by applicable law;

(xii) Acting as agent for the Fund and/or MLPF&S,
mailing annual, semi-annual and quarterly reports prepared by or on behalf of
the Fund, and mailing new Prospectuses upon their issue to Shareholders as
required by applicable law;

(xiii) Furnishing such periodic statements of
transactions effected by MLFDS, reconciliations, balances and summaries as the
Fund may reasonably request;

(xiv) Maintaining such books and records relating to
transactions effected by MLFDS as are required by the Act, or by any other
applicable provision of law, rule or regulation, to be maintained by the Fund or
its transfer agent with respect to such transactions, and preserving, or causing
to be preserved any such books and records for such periods as may be required
by any such law, rule or regulation and as may be agreed upon from time to time
between MLFDS and the Fund. In addition, MLFDS agrees to maintain and preserve

master files and historical computer tapes on a daily basis in multiple separate
locations a

<PAGE>

sufficient distance apart to insure preservation of at least one
copy of such information;

(xv) Withholding taxes on non-resident alien
Accounts, preparing and filing U.S. Treasury Department Form 1099 and other
appropriate forms as required by applicable law with respect to dividends and
distributions; and

(xvi) Reinvesting dividends for full and fractional
shares and disbursing cash dividends, as applicable.

b. MLFDS agrees to act as proxy agent in connection with the
holding of annual, if any, and special meetings of Shareholders, mailing such
notices, proxies and proxy statements in connection with the holding of such
meetings as may be required by applicable law, receiving and tabulating votes
cast by proxy and communicating to the Fund the results of such tabulation
accompanied by appropriate certifications, and preparing and furnishing to the
Fund certified lists of Shareholders as of such date, in such form and
containing such information as may be required by the Fund.

c. MLFDS agrees to deal with, and answer in a timely manner,
all correspondence and inquiries relating to the functions of MLFDS under this
Agreement with respect to Accounts.

d. MLFDS agrees to furnish to the Fund such information and at
such intervals as is necessary for the Fund to comply with the registration
and/or the reporting requirements (including applicable escheat laws) of the
Securities and Exchange Commission, Blue Sky authorities or other governmental
authorities.

e. MLFDS agrees to provide to the Fund such information as may
reasonably be required to enable the Fund to reconcile the number of outstanding
Shares between MLFDS's records and the account books of the Fund.

f. Notwithstanding anything in the foregoing provisions of
this paragraph, MLFDS agrees to perform its functions thereunder subject to such
modification (whether in respect of particular cases or in any particular class
of cases) as may from time to time be contained in an Officer's Instruction.

4. Compensation.

The charges for services described in this Agreement,
including "out-of-pocket" expenses, will be set forth in the Schedule of Fees
attached hereto.

5. Right of Inspection.

MLFDS agrees that it will in a timely manner make available
to, and permit, any officer, accountant, attorney or

<PAGE>

authorized agent of the Fund to examine and make transcripts and copies
(including photocopies and computer or other electronical information storage
media and print-outs) of any and all of its books and records which relate to
any transaction or function performed by MLFDS under or pursuant to this
Agreement.

6. Confidential Relationship.

MLFDS agrees that it will, on behalf of itself and its
officers and employees, treat all transactions contemplated by this Agreement,
and all information germane thereto, as confidential and not to be disclosed to
any person (other than the Shareholder concerned, or the Fund, or as may be
disclosed in the examination of any books or records by any person lawfully
entitled to examine the same) except as may be authorized by the Fund by way of
an Officer's Instruction.

7. Indemnification.

The Fund shall indemnify and hold MLFDS harmless from any
loss, costs, damage and reasonable expenses, including reasonable attorney's
fees (provided that such attorney is appointed with the Fund's consent, which
consent shall not be unreasonably withheld), incurred by it resulting from any
claim, demand, action, or suit in connection with the performance of its duties
hereunder, provided that this indemnification shall not apply to actions or
omissions of MLFDS in cases of willful misconduct, failure to act in good faith
or negligence by MLFDS, its officers, employees or agents, and further provided,
that prior to confessing any claim against it which may be subject to this
indemnification, MLFDS shall give the Fund reasonable opportunity to defend
against said claim in its own name or in the name of MLFDS. An action taken by
MLFDS upon any Officer's Instruction reasonably believed by it to have been
properly executed shall not constitute willful misconduct, failure to act in
good faith or negligence under this Agreement.

8. Regarding MLFDS.

a. MLFDS hereby agrees to hire, purchase, develop and maintain
such dedicated personnel, facilities, equipment, software, resources and
capabilities as may be reasonably determined by the Fund to be necessary for the
satisfactory performance of the duties and responsibilities of MLFDS. MLFDS
warrants and represents that its officers and supervisory personnel charged with
carrying out its functions as Transfer Agent, Dividend Disbursing Agent and
Shareholder Servicing Agent for the Fund possess the special skill and technical
knowledge appropriate for that purpose. MLFDS shall at all times exercise due
care and diligence in the performance of its functions as Transfer Agent,
Dividend Disbursing Agent and Shareholder Servicing Agent for the Fund. MLFDS

agrees that, in determining whether it has exercised due care and diligence, its
conduct shall be measured by the standard applicable to persons possessing such
special skill and technical knowledge.

<PAGE>

b. MLFDS warrants and represents that it is duly authorized
and permitted to act as Transfer Agent, Dividend Disbursing Agent and
Shareholder Servicing Agent under all applicable laws and that it will
immediately notify the Fund of any revocation of such authority or permission or
of the commencement of any proceeding or other action which may lead to such
revocation.

9. Termination.

a. This Agreement shall become effective as of the date first
above written and shall thereafter continue from year to year. This Agreement
may be terminated by the Fund or MLFDS (without penalty to the Fund or MLFDS)
provided that the terminating party gives the other party written notice of such
termination at least sixty (60) days in advance, except that the Fund may
terminate this Agreement immediately upon written notice to MLFDS if the
authority or permission of MLFDS to act as Transfer Agent, Dividend Disbursing
Agent and Shareholder Servicing Agent has been revoked or if any proceeding or
other action which the Fund reasonably believes will lead to such revocation has
been commenced.

b. Upon termination of this Agreement, MLFDS shall deliver all
unissued and cancelled share certificates representing Shares remaining in its
possession, and all Shareholder records, books, share ledgers, instruments and
other documents (including computerized or other electronically stored
information) made or accumulated in the performance of its duties as Transfer
Agent, Dividend Disbursing Agent and Shareholder Servicing Agent for the Fund
along with a certified locator document clearly indicating the complete contents
therein, to such successor as may be specified in a notice of termination or
Officer's Instruction; and the Fund assumes all responsibility for failure
thereafter to produce any paper, record or documents so delivered and identified
in the locator document, if and when required to be produced.

10. Amendment.

Except to the extent that the performance by MLFDS or its
functions under this Agreement may from time to time be modified by an Officer's
Instruction, this Agreement may be amended or modified only by further written
Agreement between the parties.

11. Governing Law.

This Agreement shall be governed by the laws of the State of
New Jersey.

IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be signed by their respective duly authorized officers and their

respective corporate seals hereunto duly affixed and attested, as of the day and
year above written.

<PAGE>

MERRILL LYNCH INTERMEDIATE
GOVERNMENT BOND FUND

By:_____________________________
Title:

MERRILL LYNCH FINANCIAL DATA
SERVICES, INC.

By:_____________________________
Title:

<PAGE>

INDEPENDENT AUDITORS' CONSENT

Merill Lynch Institutional Intermediate Fund:

We consent to the use in Post-Effective Amendment No. 12 to Registration
Statement No. 33-8708 of our report dated December 6, 1996 appearing in
the Statement of Additional Information, which is a part of such
Registration Statement, and to the reference to us under the caption
"Financial Highlights" appearing in the Prospectus, which also is a part
of such Registration Statement.

/s/ Deloitte & Touche LLP

Deloitte & Touche LLP
Princeton, New Jersey
February 11, 1997

<ARTICLE> 6
<LEGEND>
Information is not provided for Class A shares of Merrill
Lynch Institutional Intermediate Fund (the "Fund") since no Class A shares of
the Fund were publicly offered prior to the date of this Post-Effective
Amendment to the Registration Statement of the Fund on Form N-1A, under the
Securities Act of 1933 and the Investment Company Act of 1940, each as amended.
</LEGEND>
<CIK> 0000801421
<NAME> Merrill Lynch Institutional Intermediate Fund
<SERIES>
<NUMBER> 001
<NAME> Class A

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0

<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0.000
<PER-SHARE-NII> 0.000
<PER-SHARE-GAIN-APPREC> 0.000
<PER-SHARE-DIVIDEND> 0.000
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 0.000
<EXPENSE-RATIO> 0.000
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000

</TABLE>

<ARTICLE> 6
<LEGEND>
Information is not provided for Class B shares of Merrill
Lynch Institutional Intermediate Fund (the "Fund") since no Class B shares of
the Fund were publicly offered prior to the date of this Post-Effective
Amendment to the Registration Statement of the Fund on Form N-1A, under the
Securities Act of 1933 and the Investment Company Act of 1940, each as amended.
</LEGEND>
<CIK> 0000801421
<NAME> Merrill Lynch Institutional Intermediate Fund
<SERIES>
<NUMBER> 002
<NAME> Class B

</TABLE>

<ARTICLE> 6
<LEGEND>
Information is not provided for Class C shares of Merrill
Lynch Institutional Intermediate Fund (the "Fund") since no Class C shares of
the Fund were publicly offered prior to the date of this Post-Effective
Amendment to the Registration Statement of the Fund on Form N-1A, under the
Securities Act of 1933 and the Investment Company Act of 1940, each as amended.
</LEGEND>
<CIK> 0000801421
<NAME> Merrill Lynch Institutional Intermediate Fund
<SERIES>
<NUMBER> 003
<NAME> Class C

</TABLE>

<ARTICLE> 6
<LEGEND>
Note: Prior to the date of this Post-Effective Amendment to the Registration
Statement of Merrill Lynch Institutional Intermediate Fund (the "Fund") on Form
N-1A, under the Securities Act of 1933 and the Investment Company Act of 1940,
each as amended, the Fund did not offer its Class D shares to the public. The
financial data schedule for Class D shares of the Fund included in this Exhibit
27(d) treats as Class D shares the shares of the Fund in existence prior to
their reclassification at the close of business on February 14, 1997.
</LEGEND>
<CIK> 0000801421
<NAME> Merrill Lynch Institutional Intermediate Fund
<SERIES>
<NUMBER> 004
<NAME> Class D

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Oct-31-1996
<PERIOD-START> Nov-01-1995
<PERIOD-END> Oct-31-1996
<INVESTMENTS-AT-COST> 47,231,818
<INVESTMENTS-AT-VALUE> 47,038,780
<RECEIVABLES> 511,079
<ASSETS-OTHER> 88,239
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 47,638,098
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 356,878
<TOTAL-LIABILITIES> 356,878
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 64,143,292
<SHARES-COMMON-STOCK> 4,883,424
<SHARES-COMMON-PRIOR> 6,630,902
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (16,669,034)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (193,038)
<NET-ASSETS> 47,281,220
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4,155,917
<OTHER-INCOME> 0
<EXPENSES-NET> (564,639)
<NET-INVESTMENT-INCOME> 3,591,278
<REALIZED-GAINS-CURRENT> (976,648)
<APPREC-INCREASE-CURRENT> (2,927)
<NET-CHANGE-FROM-OPS> 2,611,703
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3,591,278
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,906,826

<NUMBER-OF-SHARES-REDEEMED> (5,964,956)
<SHARES-REINVESTED> 310,652
<NET-CHANGE-IN-ASSETS> (17,857,499)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (24,028,833)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 231,551
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 564,639
<AVERAGE-NET-ASSETS> 57,887,782
<PER-SHARE-NAV-BEGIN> 9.82
<PER-SHARE-NII> .61
<PER-SHARE-GAIN-APPREC> (.14)
<PER-SHARE-DIVIDEND> (.61)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.68
<EXPENSE-RATIO> .97
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>