MERRILL LYNCH
INTERMEDIATE
GOVERNMENT
BOND FUND
[Graphic omitted]
STRATEGIC
Performance
Quarterly Report
January 31, 1998
<PAGE>
Merrill Lynch Intermediate Government Bond Fund January 31, 1998
DEAR SHAREHOLDER
Interest rates gradually trended lower during the three months ended January 31,
1998. The yield on the ten-year Treasury note fell slightly during the early
part of the period, only to accelerate its rally in early January. The yield on
the ten-year Treasury note started the January quarter with a yield of
approximately 5.90% and ended the quarter at approximately 5.60%.
Currency and debt problems in major Southeast Asian countries, particularly
South Korea, Thailand and Indonesia, encouraged global investors to invest in
the US Treasury market as a "safe haven." Investors were attracted to the
liquidity of the US bond market, the strong currency and high real rates of
return. Further evidence of the safe haven rally was shown as the bond market
weakened slightly in late January as major lenders agreed to extend debt
maturities to South Korean borrowers. This helped investor sentiment in Asia,
but removed some of the emphasis on investing in US Treasury securities. The
Federal Open Market Committee did not change its monetary policy during the
January quarter. Strong domestic employment numbers were offset by the expected
effects of sharply slower growth in Asia. The possible effects include a rapidly
worsening US trade deficit with the region and lower goods inflation worldwide.
We held the Fund's duration relatively stable during most of the January quarter
at an average maturity of 6.7 years and an average effective duration of 4.4
years. We believed that this was a modestly bullish stance. Shareholders were
rewarded with a total return performance in the top quartile of the Fund's
intermediate US Government securities peer group, as determined by Lipper
Analytical Services, for the three months ended January 31, 1998. The Fund's
Class A Shares had a total return of +2.70% for the three months ended January
31, 1998 as compared to +2.48% for the peer group. (Fund results shown do not
reflect sales charges, and would be lower if sales charges were included.
Complete per form ance information, including average annual total returns, can
be found on pages 2 and 3 of this report to shareholders.)
The bond market rallied significantly since April 1997, and now reflects an
anticipated easing of monetary policy by the Federal Reserve Board. By the end
of the January quarter, the yield on the ten-year Treasury note fell below that
of the Federal Reserve Board's targeted Federal Funds rate of 5.50%, causing a
slight inversion of the yield curve in short-term debt. In mid-January, we
believed it was time to follow a slightly more defensive investment strategy,
until it became clearer that the Federal Reserve Board would start to move
toward a more aggressive easing in monetary policy. Therefore, we sold some of
our non-callable ten-year Treasury debt and invested in callable agency debt,
most of which has a long time to the first call date. We believed that the added
yield and call structure of these bonds provided a measure of defense in a bond
market that could move sideways in the near term. The Fund ended the January
quarter with a duration of 4.4 years.
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
with you in our upcoming semi-annual report to shareholders.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Ralph A. DeCesare
Ralph A. DeCesare
Vice President and Portfolio Manager
March 6, 1998
1
<PAGE>
Merrill Lynch Intermediate Government Bond Fund January 31, 1998
PERFORMANCE DATA
About Fund Performance
Investors are able to purchase shares of the Fund through the Merrill Lynch
Select Pricing(SM) System, which offers four pricing alternatives:
o Class A Shares incur a maximum initial sales charge (front-end load) of 1%
and bear no ongoing distribution or account maintenance fees. Class A
Shares are available only to eligible investors.
o Class B Shares are subject to a maximum contingent deferred sales charge
of 1% if redeemed during the first year, decreasing to 0% after the first
year. In addition, Class B Shares are subject to a distribution fee of
0.25% and an account maintenance fee of 0.25%. These shares automatically
convert to Class D Shares after approximately 10 years. (There is no
initial sales charge for automatic share conversions.)
o Class C Shares are subject to a distribution fee of 0.25% and an account
maintenance fee of 0.25%. In addition, Class C Shares are subject to a 1%
contingent deferred sales charge if redeemed within one year of purchase.
o Class D Shares incur a maximum initial sales charge of 1% and an account
maintenance fee of 0.10% (but no distribution fee). The Fund's
shareholders as of February 18, 1997 became holders of Class D Shares.
None of the past results shown should be considered a representation of future
performance. Figures shown in the "Aggregate Total Return" and "Average Annual
Total Return" tables as well as the total return and cumulative total return in
the "Perform-ance Summary" table assume reinvestment of all dividends and
capital gains distributions at net asset value on the payable date. Investment
return and principal value of shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost. Dividends paid to
each class of shares will vary because of the different levels of account
maintenance, distribution and transfer agency fees applicable to each class,
which are deducted from the income available to be paid to shareholders.
Performance Summary--Class D Shares
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
==============================================================================
11/6/86--12/31/86 $10.00 $ 9.98 -- $0.116 + 0.96%
- ------------------------------------------------------------------------------
1987 9.98 9.56 -- 0.757 + 3.57
- ------------------------------------------------------------------------------
1988 9.56 9.27 -- 0.809 + 5.58
- ------------------------------------------------------------------------------
1989 9.27 9.39 -- 0.827 +10.64
- ------------------------------------------------------------------------------
1990 9.39 9.45 -- 0.761 + 9.19
- ------------------------------------------------------------------------------
1991 9.45 10.00 -- 0.709 +13.91
- ------------------------------------------------------------------------------
1992 10.00 10.03 -- 0.602 + 6.54
- ------------------------------------------------------------------------------
1993 10.03 10.21 -- 0.535 + 7.23
- ------------------------------------------------------------------------------
1994 10.21 9.47 -- 0.566 - 1.71
- ------------------------------------------------------------------------------
1995 9.47 9.90 -- 0.615 +11.33
- ------------------------------------------------------------------------------
1996 9.90 9.64 -- 0.596 + 3.54
- ------------------------------------------------------------------------------
1997 9.64 9.76 -- 0.556 + 7.27
- ------------------------------------------------------------------------------
1/1/98--1/31/98 9.76 9.86 -- 0.034 + 1.54
- ------------------------------------------------------------------------------
Total $7.483
==============================================================================
Cumulative total return as of 1/31/98: +114.20%**
==============================================================================
* Figures may include short-term capital gains distributions.
** Figures do not include sales charge; results would be lower if sales charge
was included.
2
<PAGE>
Merrill Lynch Intermediate Government Bond Fund January 31, 1998
PERFORMANCE DATA (concluded)
Recent Performance Results*
<TABLE>
<CAPTION>
Standardized
12 Month 3 Month 30-Day Yield
1/31/98 10/31/97 1/31/97+% Change+ % Change As of 1/31/98
===============================================================================================
<S> <C> <C> <C> <C> <C> <C>
Class A Shares $9.85 $9.74 $9.66 +1.97% +1.13% 5.20%
- -----------------------------------------------------------------------------------------------
Class B Shares 9.86 9.74 9.66 +2.07 +1.23 4.69
- -----------------------------------------------------------------------------------------------
Class C Shares 9.85 9.73 9.66 +1.97 +1.23 4.93
- -----------------------------------------------------------------------------------------------
Class D Shares 9.86 9.74 9.63 +2.39 +1.23 5.11
- -----------------------------------------------------------------------------------------------
Class A Shares--Total Return +7.87(1) +2.70(2)
- -----------------------------------------------------------------------------------------------
Class B Shares--Total Return +7.62(3) +2.67(4)
- -----------------------------------------------------------------------------------------------
Class C Shares--Total Return +7.43(5) +2.73(6)
- -----------------------------------------------------------------------------------------------
Class D Shares--Total Return +8.49(7) +2.78(8)
===============================================================================================
</TABLE>
* Investment results shown do not reflect sales charges; results shown would
be lower if a sales charge was included.
+ Investment results and net asset values for Class A, Class B and Class C
Shares are since inception on 2/18/97.
(1) Percent change includes reinvestment of $0.527 per share ordinary income
dividends.
(2) Percent change includes reinvestment of $0.151 per share ordinary income
dividends.
(3) Percent change includes reinvestment of $0.495 per share ordinary income
dividends.
(4) Percent change includes reinvestment of $0.139 per share ordinary income
dividends.
(5) Percent change includes reinvestment of $0.488 per share ordinary income
dividends.
(6) Percent change includes reinvestment of $0.143 per share ordinary income
dividends.
(7) Percent change includes reinvestment of $0.542 per share ordinary income
dividends.
(8) Percent change includes reinvestment of $0.149 per share ordinary income
dividends.
Aggregate Total Return
% Return Without % Return With
Sales Charge Sales Charge**
==============================================================================
Class A Shares*
==============================================================================
Inception (2/18/97)
through 12/31/97 +6.23% +5.16%
- ------------------------------------------------------------------------------
* Maximum sales charge is 1%.
** Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
============================================================================
Class B Shares*
- ----------------------------------------------------------------------------
Inception (2/18/97)
through 12/31/97 +6.02% +5.02%
- ----------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 1% and is reduced to 0% after 1
year.
** Assuming payment of applicable contingent deferred sales charge.
============================================================================
% Return % Return
Without CDSC With CDSC**
============================================================================
Class C Shares*
============================================================================
Inception (2/18/97)
through 12/31/97 +5.82% +4.82%
- ----------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 1% and is reduced to 0% after 1
year.
** Assuming payment of applicable contingent deferred sales charge.
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
==============================================================================
Class D Shares*
==============================================================================
Year Ended 12/31/97 +7.27% +6.20%
- ------------------------------------------------------------------------------
Five Years Ended 12/31/97 +5.44 +5.23
- ------------------------------------------------------------------------------
Ten Years Ended 12/31/97 +7.27 +7.16
- ------------------------------------------------------------------------------
* Maximum sales charge is 1%.
** Assuming maximum sales charge.
3
<PAGE>
Merrill Lynch Intermediate Government Bond Fund January 31, 1998
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
Face Interest Maturity
Issue Amount Rate Date Value
<S> <C> <C> <C> <C>
==============================================================================================================
US Government & Agency Obligations--93.2%
==============================================================================================================
US Treasury Notes & Bonds $1,000,000 8.875% 2/15/99 $ 1,034,530
250,000 5.625 12/31/99 251,290
2,100,000 13.375 8/15/01 2,635,500
500,000 6.625 4/30/02 522,420
1,000,000 6.50 5/31/02 1,041,090
300,000 7.25 5/15/04 328,173
500,000 7.25 8/15/04 547,890
1,000,000 10.00 5/15/10 1,257,030
- --------------------------------------------------------------------------------------------------------------
Federal Farm Credit Banks 1,000,000 6.27 8/04/04 1,027,660
- --------------------------------------------------------------------------------------------------------------
Federal Home Loan Banks 2,000,000 6.67 5/10/01 2,065,940
2,000,000 6.789 2/05/07 2,130,940
- --------------------------------------------------------------------------------------------------------------
Federal National Mortgage Association 2,000,000 6.55 9/12/05 2,091,240
2,000,000 6.95 11/13/06 2,068,740
3,000,000 6.62 12/28/07 3,015,930
4,825,000 7.15 8/27/12 4,989,340
3,050,000 6.96 9/05/12 3,239,679
- --------------------------------------------------------------------------------------------------------------
Student Loan Marketing Association 2,000,000 7.50 3/08/00 2,079,060
- --------------------------------------------------------------------------------------------------------------
Total US Government & Agency Obligations (Cost--$29,729,274) 30,326,452
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
Face Amount Short-Term Securities
==============================================================================================================
US Government & Agency Obligations--5.4%
==============================================================================================================
$1,774,000 Federal Home Loan Mortgage Corp., 5.57% due 2/02/1998 1,774,000
- --------------------------------------------------------------------------------------------------------------
Total Short-Term Securities (Cost--$1,774,000) 1,774,000
- --------------------------------------------------------------------------------------------------------------
Total Investments (Cost--$31,503,274)--98.6% 32,100,452
Other Assets Less Liabilities--1.4% 443,924
-----------
Net Assets--100.0% $32,544,376
===========
- --------------------------------------------------------------------------------------------------------------
Net Asset Class A--Based on net assets of $688,566 and 69,883 shares
Value: of beneficial interest outstanding $ 9.85
===========
Class B--Based on net assets of $3,653,452 and 370,603 shares
of beneficial interest outstanding $ 9.86
===========
Class C--Based on net assets of $277,520 and 28,168 shares
of beneficial interest outstanding $ 9.85
===========
Class D--Based on net assets of $27,924,838 and 2,833,411 shares
of beneficial interest outstanding $ 9.86
===========
- --------------------------------------------------------------------------------------------------------------
</TABLE>
* 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.
4
<PAGE>
Merrill Lynch Intermediate Government Bond Fund January 31, 1998
OFFICERS AND TRUSTEES
Robert W. Crook, President and 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, Trustee
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
Donald C. Burke, Vice President
Ann Catlin, Vice President
Ralph A. DeCesare, Vice President
Diana Frankland, Vice President
Jay C. Harbeck, Vice President
Mark E. Maguire, Vice President
Dianne F. McDonough, Vice President
Patricia A. Schena, Vice President
Barry F. X. Smith, Vice President
Karen D. Young, Vice President
Gerald M. Richard, Treasurer
Ira P. Shapiro, Secretary
Custodian
State Street Bank and Trust Company
P.O. Box 351
Boston, MA 02101
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
5
<PAGE>
This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of the Fund unless accompa nied 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 #IGB01-1/98
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