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Dear Shareholder:
As announced in our annual prospectus mailing to shareholders, Merrill
Lynch Institutional Intermediate Fund is now known as Merrill Lynch Intermediate
Government Bond Fund (effective February 18, 1997). The change in the Fund's
name also connotes a change in its investment objectives and policies. The Fund
now invests in intermediate-term debt securities issued or guaranteed by the US
Government with a maximum maturity of up to 15 years (under normal market
conditions, the Fund will maintain a dollar-weighted average maturity of six
years to eight years). In addition, the Fund offers four classes of shares, each
with a different combination of sales charges, ongoing fees and other features.
The Merrill Lynch Select Pricing(SM) 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. The Fund's shareholders as of February
18, 1997 became holders of Class D Shares.
Performance Results
For the quarter ended January 31, 1997, the Fund's total investment return
was +0.99%, based on a change in per share net asset value from $9.68 to $9.63,
and assuming reinvestment of $0.146 per share income dividends. Based on the
month-end per share net asset value of $9.63 for the same period, these
dividends represented a net annualized yield of 5.87%.
For the one-year period ended December 31, 1996, the Fund's average annual
total return was +3.54%. For the five-year and ten-year periods ended December
31, 1996, the Fund's average annual total returns were +5.30% and +6.89%,
respectively. The Fund's standardized 30-day yield as of January 31, 1997 was
5.10%.
Economic Environment & Investment Review
The Federal Reserve Board's decision in late September 1996 not to tighten
interest rates was interpreted by investors as a sign that the economy was
slowing down enough on its own in the third quarter so that inflation would not
be a problem. Interest rates began to drop as the third quarter data were
released, with gross domestic product growth measured at 2.1% for the period,
compared with 4.7% for the second quarter of 1996. The ten-year Treasury note
interest rate dropped from 6.64% at the beginning of October to 6.04% by the end
of November. This move was encouraged by continued low inflation numbers.
However, Federal Reserve Board Chairman Alan Greenspan touched a nerve on
December 5, 1996 when he suggested that there was an "irrational exuberance" in
US financial markets. This comment sent a shudder through the investment system
because of its implication that the levels of both stock and bond prices were
not consistent with the basic economic data. Within two weeks after his remarks,
the stock market dropped over 200 points, and there was a corresponding increase
of 60 basis points (0.60%) in the ten-year Treasury bond.
Prices remained weak through most of January, although there was no
additional evidence to support Chairman Greenspan's concern. The core rate of
the consumer price index rose only 0.1% in both December and January, confirming
the fact that inflation remains contained. There were no major price
<PAGE>
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increases during the quarter ended January 31, 1997, which resulted in the
interest rate on the ten-year Treasury bond improving 40 basis points since the
last week of January.
We took the opportunity to reduce the average duration of the Fund from
2.46 years to 2.14 years during the January quarter. We accomplished this
through the sale of longer-term issues and reinvesting assets in shorter-term
maturities. Cash remained at under 5% of the portfolio's net assets at January
31, 1997.
In Conclusion
We thank you for your continued investment in Merrill Lynch Intermediate
Government Bond Fund, and we look forward to discussing our outlook and strategy
in our upcoming semi-annual report to shareholders.
Sincerely,
/s/ Robert W. Crook /s/ Jay C. Harbeck
Robert W. Crook Jay C. Harbeck
President and Trustee Vice President and Portfolio Manager
March 10, 1997
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As of December 31, 1996, N. John Hewitt retired as Senior Vice President of the
Fund. His colleagues at Merrill Lynch Asset Management, L.P. join the Fund's
Board of Directors in wishing Mr. Hewitt well in his retirement.
================================================================================
<PAGE>
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Merrill Lynch Intermediate Government Bond Fund
Proxy Results
================================================================================
During the six-month period ended January 31, 1997, Merrill Lynch Institutional
Intermediate Fund shareholders voted on the following proposals. The proposals
were approved at a shareholders' meeting on January 27, 1997. The description of
each proposal and number of shares voted are as follows:
- --------------------------------------------------------------------------------
Shares Shares Voted
Voted Without
For Authority
- --------------------------------------------------------------------------------
1. To elect the Fund's A. Bruce Brackenridge 4,613,747 438,466
Board of Directors: Charles C. Cabot 4,613,747 438,466
Robert W. Crook 4,613,747 438,466
James T. Flynn 4,613,747 438,466
Terry K. Glenn 4,613,747 438,466
George W. Holbrook Jr. 4,613,747 438,466
W. Carl Kester 4,613,747 438,466
Shares Shares Shares
Voted Voted Voted
For Against Abstain
- --------------------------------------------------------------------------------
2. To consider and act upon a
proposal to approve a change
in the Fund's investment
objective and to change the
name of the Fund to "Merrill
Lynch Intermediate Government
Bond Fund". 3,342,198 1,376,977 333,039
- --------------------------------------------------------------------------------
3. To consider and act upon a
proposal to amend the
investment restrictions of
the Fund. 3,154,657 1,121,585 775,971
- --------------------------------------------------------------------------------
4. To consider and act upon a
proposal to amend the
Declaration of Trust of the
Fund in connection with the
implementation of the Merrill
Lynch Select Pricing(SM) System
(the 'Select Pricing
System'), a multiclass
distribution system for the
offer and sale of shares of
the Fund. 3,424,846 1,199,036 428,331
- --------------------------------------------------------------------------------
5. To consider and act upon a
proposal to ratify the
selection of Deloitte &
Touche LLP as the independent
auditors of the Fund to serve
for the current fiscal year. 4,260,310 461,784 330,119
- --------------------------------------------------------------------------------
<PAGE>
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Merrill Lynch Intermediate Government Bond Fund
Schedule of Investments
As of January 31, 1997
================================================================================
Face Interest Maturity
Issue Amount Rate Date Value
================================================================================
US Government & Agency Obligations--91.2%
- --------------------------------------------------------------------------------
US Treasury Notes $ 9,500,000 8.125% 2/15/98 $ 9,727,145
1,000,000 7.875 4/15/98 1,024,220
1,000,000 8.875 2/15/99 1,055,310
1,000,000 6.875 7/31/99 1,019,370
4,000,000 7.125 2/29/00 4,111,880
2,000,000 6.75 4/30/00 2,035,320
1,000,000 6.25 8/31/00 1,002,500
4,000,000 6.375 3/31/01 4,020,000
6,000,000 6.25 4/30/01 6,001,860
1,000,000 6.625 7/31/01 1,014,220
1,000,000 6.125 12/31/01 993,910
- --------------------------------------------------------------------------------
Federal National
Mortgage Association 4,000,000 7.00 8/11/99 4,019,360
- --------------------------------------------------------------------------------
Student Loan Marketing
Association 5,000,000 7.50 3/08/00 5,173,450
- --------------------------------------------------------------------------------
Total US Government &
Agency Obligations
(Cost--$41,592,318) ........................................ 41,198,545
- --------------------------------------------------------------------------------
Short-Term Securities
- --------------------------------------------------------------------------------
Face Amount US Government Agency Obligations*--6.9%
- --------------------------------------------------------------------------------
$3,095,000 Federal Home Loan Banks, 5.35% due 2/03/1997 3,095,000
- --------------------------------------------------------------------------------
Total Short-Term Securities (Cost--$3,095,000)................. 3,095,000
- --------------------------------------------------------------------------------
Total Investments (Cost--$44,687,318)--98.1% ................. 44,293,545
Other Assets Less Liabilities--1.9% 855,209
-----------
Net Assets--Equivalent to $9.63 Per Share Based
on 4,690,029 Shares of Beneficial Interest
Outstanding--100.0% .........................................$45,148,754
===========
================================================================================
*Certain US Government Agency Obligations are traded on a discount basis; the
interest rate shown is the discount rate paid at the time of purchase by the
Fund.
<PAGE>
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TRUSTEES, OFFICERS AND PORTFOLIO MANAGER
Robert W. Crook*
President & Trustee
Senior Vice President,
Merrill Lynch Asset Management, L.P.
A. Bruce Brackenridge
Trustee
Retired Group Executive,
J.P. Morgan & Co. Inc.
Charles C. Cabot, Jr.
Trustee
Partner, Sullivan & Worcester
James T. Flynn
Trustee
Retired Chief Financial Officer,
J.P. Morgan & Co., Inc.
Terry K. Glenn*
Trustee
Executive Vice President,
Merrill Lynch Asset Management, L.P.
George W. Holbrook Jr.
Trustee
Managing Partner,
Bradley Resources Company
W. Carl Kester
Trustee
MBA Class of 1958 Professor of Business
Administration,
Harvard University Graduate School of
Business Administration
* May be deemed to be an "interested person" of the Fund as such term is defined
in the Investment Company Act of 1940.
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 351
Boston, Massachusetts 02101
William E. Aldrich
Executive Vice President
Michael J. Brady
Senior Vice President
William M. Breen
Senior Vice President
James J. Fatseas
Senior Vice President
Joseph T. Monagle Jr.
Senior Vice President
William Wasel
Senior Vice President
Karen D. Barbato
Vice President
Ann Catlin
Vice President
Charles O. Daly
Vice President
Diana Frankland
Vice President
Jay C. Harbeck
Vice President and Portfolio Manager
Mark E. Maguire
Vice President
Dianne F. McDonough
Vice President
Patricia A. Schena
Vice President
Barry F. X. Smith
Vice President
Gerald M. Richard
Treasurer
Jerry Weiss
Secretary
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
(800) 637-3863
<PAGE>
[cover]
This report is not authorized for use as an offer of sale or a solicitation to
buy shares of the Fund unless accompanied or preceded by the Fund's current
prospectus. Past performance results shown in this report should not be
considered a representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Statements and other information
herein are as dated and are subject to change.
Merrill Lynch Intermediate
Government Bond Fund
Box 9011
Princeton, NJ
08543-9011 #IGB01-1/97
MERRILL LYNCH
INTERMEDIATE
GOVERNMENT
BOND FUND
[graphic of compasses]
Quarterly Report
January 31, 1997
