MERRILL LYNCH
INTERMEDIATE
GOVERNMENT
BOND FUND
[GRAPHIC OMITTED]
STRATIGIC
Performance
Semi-Annual Report
April 30, 1998
<PAGE>
Merrill Lynch Intermediate Government Bond Fund
DEAR SHAREHOLDER
Interest rates trended gradually higher for the three months ended April 30,
1998. The Treasury's ten-year note yield rose from 5.55% at the beginning of the
period, to close the quarter at 5.67%. The quarter would have closed
significantly lower were it not for a sharp rally on the final day of the
quarter, following a favorable first-quarter gross domestic product report and
the employment cost index report, as both indicated continued low inflation.
The quarter was highlighted by a news report suggesting that the Federal Reserve
Board was concerned about asset price inflation in the US economy, and that the
Federal Open Market Committee (FOMC) leaned from a neutral position to a
tightening bias at its March meeting. The Federal Reserve Board, along with many
bond market investors, appears to be concerned about pockets of asset
overvaluation, particularly in real estate and financial markets. This suggests
that monetary policy may be too loose and that the FOMC may need to raise
interest rates soon. It is commonly known that the Federal Reserve Board can
influence market interest rates by "talking" the market up or down. This "leak"
of information to a prominent business newspaper was believed to be one such
case, since it is politically more acceptable for the market to raise interest
rates before the FOMC does.
However, it is questionable whether the Federal Reserve Board should be worried
about asset price inflation. Price inflation of goods and services continues to
remain remarkably low this late in an economic boom. The debt and currency
troubles in Southeast Asia should also help keep worldwide inflation tamed as
their demand for goods slows and their exports become more price competitive.
However, there is little doubt that the US economy remains strong and vibrant.
Market sentiment is expected to fluctuate between headlines of a strong US
economy, offset by low reported inflation, and ever-changing sentiment toward
Asia. It is with this backdrop of mixed influences that the Federal Reserve
Board must do an unenviable balancing act.
It is our opinion that the market will continue to trade in a narrow range with
a slight short-term negative bias. This is consistent with our outlook at the
end of the January quarter, as we have kept our portfolio holdings and strategy
relatively unchanged. We invested in higher-coupon issues of both Treasury and
agency issues, and we continue to maintain a higher-than-average exposure to
callable securities. We believe that Treasury issues with higher coupons, and
agency issues with higher yields, will perform well in an environment where
interest rates remain in a narrow range. At April 30, 1998, the average
portfolio maturity and effective duration of the Fund remained near its
long-term averages of 7 years and 4.1 years, respectively, in what we believe to
be a neutral exposure to the market.
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 quarterly report to shareholders.
Sincerely,
/s/ Robert W. Crook
Robert W. Crook
President and Trustee
/s/ Ralph A. DeCesare
Ralph A. DeCesare
Vice President and Portfolio Manager
June 2, 1998
1
<PAGE>
Merrill Lynch Intermediate Government Bond Fund April 30, 1998
PERFORMANCE DATA
About Fund Performance
Investors are able to purchase shares of the Fund through the Merrill Lynch
Select PricingSM 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 "Average Annual Total Return"
tables assume reinvestment of all dividends and capital gains
distributions at net asset value on the payable date. Investment return
and principal value of shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost. Dividends
paid to each class of shares will vary because of the different levels of
account maintenance, distribution and transfer agency fees applicable to
each class, which are deducted from the income available to be paid to
shareholders.
Recent Performance Results
<TABLE>
<CAPTION>
Ten Years/ Standardized
12 Month 3 Month Since Inception 30-Day Yield
Total Return Total Return Total Return As of 4/30/98
=================================================================================================================
<S> <C> <C> <C> <C>
ML Intermediate Government Bond Fund Class A Shares +9.31% +0.15% + 8.03% 5.14%
- -----------------------------------------------------------------------------------------------------------------
ML Intermediate Government Bond Fund Class B Shares +8.98 +0.02 + 7.64 4.69
- -----------------------------------------------------------------------------------------------------------------
ML Intermediate Government Bond Fund Class C Shares +8.94 +0.08 + 7.52 4.92
- -----------------------------------------------------------------------------------------------------------------
ML Intermediate Government Bond Fund Class D Shares +9.20 +0.02 +99.69+ 5.05
=================================================================================================================
</TABLE>
* Investment results shown do not reflect sales charges; results would be
lower if a sales charge was included. Total investment returns are based
on changes in net asset values for the periods shown, and assume
reinvestment of all dividends and capital gains distributions at net asset
value on the payable date. The Fund's ten-year/inception dates are: Class
A, Class B and Class C Shares, 2/18/97; and Class D Shares, ten years
ended 4/30/98.
+ Performance for Class D Shares for the period prior to 2/18/97 was
achieved while the Fund operated under a different investment objective.
2
<PAGE>
Merrill Lynch Intermediate Government Bond Fund April 30, 1998
PERFORMANCE DATA (concluded)
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
==============================================================================
Class A Shares*
==============================================================================
Year Ended 3/31/98 +10.28% +9.18%
------------------------------------------------------------------------------
Inception (2/18/97)
through 3/31/98 + 6.81 +5.85
------------------------------------------------------------------------------
*Maximum sales charge is 1%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
==============================================================================
Class B Shares*
==============================================================================
Year Ended 3/31/98 +9.86% +8.86%
------------------------------------------------------------------------------
Inception (2/18/97)
through 3/31/98 +6.51 +6.51
------------------------------------------------------------------------------
*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*
==============================================================================
Year Ended 3/31/98 +9.88% +8.88%
------------------------------------------------------------------------------
Inception (2/18/97)
through 3/31/98 +6.38 +6.38
------------------------------------------------------------------------------
*Maximum contingent deferred sales charge is 1% and is reduced to 0% after 1
year.
**Assuming payment of applicable contingent deferred sales charge.
==============================================================================
% Return Without % Return With
Sales Charge Sales Charge**
=============================================================================
Class D Shares*
=============================================================================
Year Ended 3/31/98 +10.29% +9.18%
------------------------------------------------------------------------------
Five Years Ended 3/31/98+ + 4.97 +4.76
------------------------------------------------------------------------------
Ten Years Ended 3/31/98+ + 7.12 +7.01
------------------------------------------------------------------------------
*Maximum sales charge is 1%.
**Assuming maximum sales charge.
+Performance for Class D Shares for the period prior to 2/18/97 was achieved
while the Fund operated under a different investment objective.
3
<PAGE>
Merrill Lynch Intermediate Government Bond Fund April 30, 1998
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
Face Interest Maturity Value
Issue Amount Rate Date (Note 1a)
- -------------------------------------------------------------------------------------------------------------
US Government & Agency Obligations--93.4%
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
US Treasury Notes & Bonds $1,000,000 8.875% 2/15/99 $ 1,025,470
250,000 5.625 12/31/99 250,195
2,100,000 13.375 8/15/01 2,582,013
500,000 6.625 4/30/02 516,720
1,000,000 6.50 5/31/02 1,029,530
300,000 7.25 5/15/04 323,250
500,000 7.25 8/15/04 540,000
2,500,000 7.50 2/15/05 2,744,525
1,000,000 10.00 5/15/10 1,236,870
=============================================================================================================
Federal Farm Credit Banks 1,000,000 6.27 8/04/04 1,016,410
=============================================================================================================
Federal Home Loan Banks 2,000,000 6.67 5/10/01 2,047,500
1,000,000 6.789 2/05/07 1,050,000
=============================================================================================================
Federal National Mortgage Association 1,000,000 6.50 10/25/03 1,017,188
2,000,000 6.55 9/12/05 2,065,620
2,000,000 6.95 11/13/06 2,034,680
3,000,000 6.62 12/28/07 2,983,590
2,000,000 7.15 8/27/12 2,040,000
3,050,000 6.96 9/05/12 3,191,062
=============================================================================================================
Student Loan Marketing Association 2,000,000 7.50 3/08/00 2,061,240
=============================================================================================================
Total US Government & Agency Obligations (Cost--$29,588,631) 29,755,863
=============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Face Amount Short-Term Securities
- -------------------------------------------------------------------------------------------------------------
US Government Agency Obligations*--5.2%
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
$1,671,000 Federal Home Loan Mortgage Corp., 5.45% due 5/01/1998 1,671,000
=============================================================================================================
Total US Government Agency Obligations (Cost--$1,671,000) 1,671,000
=============================================================================================================
Total Investments (Cost--$31,259,631)--98.6% 31,426,863
Other Assets Less Liabilities--1.4% 446,760
-----------
Net Assets--100.0% $31,873,623
===========
=============================================================================================================
</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.
See Notes to Financial Statements.
4
<PAGE>
Merrill Lynch Intermediate Government Bond Fund April 30, 1998
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of April 30, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
Assets: Investments, at value (identified cost--$31,259,631) (Notes 1a & 1b) $ 31,426,863
Cash............................................................ 85
Receivables:
Interest...................................................... $ 537,559
Beneficial interest sold...................................... 2,139 539,698
------------
Prepaid registration fees and other assets (Note 1e)............ 35,686
------------
Total assets.................................................... 32,002,332
------------
=================================================================================================================
Liabilities: Payables:
Dividends to shareholders (Note 1f)........................... 71,963
Distributor (Note 2).......................................... 3,658
Investment adviser (Note 2)................................... 2,596 78,217
------------
Accrued expenses and other liabilities.......................... 50,492
------------
Total liabilities............................................... 128,709
------------
=================================================================================================================
Net Assets: Net assets...................................................... $ 31,873,623
============
=================================================================================================================
Net Assets Class A Shares of beneficial interest, $0.10 par value, unlimited
Consist of: number of shares authorized..................................... $ 7,096
Class B Shares of beneficial interest, $0.10 par value, unlimited
number of shares authorized..................................... 39,624
Class C Shares of beneficial interest, $0.10 par value, unlimited
number of shares authorized..................................... 2,774
Class D Shares of beneficial interest, $0.10 par value, unlimited
number of shares authorized..................................... 278,255
Paid-in capital in excess of par................................ 42,733,109
Accumulated realized capital losses on investments--net (Note 5) (11,354,467)
Unrealized appreciation on investments--net..................... 167,232
------------
Net assets...................................................... $ 31,873,623
============
=================================================================================================================
Net Asset Value: Class A--Based on net assets of $689,749 and 70,962 shares of
beneficial interest outstanding................................. $ 9.72
============
Class B--Based on net assets of $3,854,062 and 396,243 shares of
beneficial interest outstanding................................. $ 9.73
============
Class C--Based on net assets of $269,664 and 27,743 shares of
beneficial interest outstanding................................. $ 9.72
============
Class D--Based on net assets of $27,060,148 and 2,782,551 shares of
beneficial interest outstanding................................. $ 9.72
============
=================================================================================================================
See Notes to Financial Statements.
</TABLE>
5
<PAGE>
Merrill Lynch Intermediate Government Bond Fund April 30, 1998
FINANCIAL INFORMATION (continued)
Statement of Operations for the Six Months Ended April 30, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
Investment Income Interest and amortization of premium and discount earned........ $ 1,060,716
(Note 1d): Other income.................................................... 1,187
------------
Total income.................................................... 1,061,903
------------
=================================================================================================================
Expenses: Investment advisory fees (Note 2)............................... $ 61,007
Registration fees (Note 1e)..................................... 35,319
Professional fees............................................... 35,052
Trustees' fees and expenses..................................... 14,958
Account maintenance fees--Class D (Note 2)...................... 13,577
Accounting services (Note 2).................................... 12,877
Printing and shareholder reports................................ 8,227
Account maintenance and distribution fees--Class B (Note 2)..... 6,254
Custodian fees.................................................. 4,148
Transfer agent fees--Class D (Note 2)........................... 3,152
Pricing fees.................................................... 434
Transfer agent fees--Class B (Note 2)........................... 425
Account maintenance and distribution fees--Class C (Note 2)..... 214
Transfer agent fees--Class A (Note 2)........................... 78
Transfer agent fees--Class C (Note 2)........................... 35
Other........................................................... 1,638
------------
Total expenses before reimbursement............................. 197,395
Reimbursement of expenses (Note 2).............................. (56,226)
------------
Total expenses after reimbursement.............................. 141,169
------------
Investment income--net.......................................... 920,734
------------
=================================================================================================================
Realized & Realized gain from investments--net............................. 516,202
Unrealized Change in unrealized appreciation on investments--net........... (558,387)
Gain (Loss) on ------------
Investments--Net Net Increase in Net Assets Resulting from Operations............ $ 878,549
(Notes 1d & 3): ============
=================================================================================================================
See Notes to Financial Statements.
</TABLE>
6
<PAGE>
Merrill Lynch Intermediate Government Bond Fund April 30, 1998
FINANCIAL INFORMATION (continued)
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the Six For the
Months Ended Year Ended
April 30, October 31,
Increase (Decrease) in Net Assets: 1998 1997
========================================================================================================================
<S> <C> <C>
Operations: Investment income--net.............................................. $ 920,734 $ 2,187,672
Realized gain (loss) on investments--net............................ 516,202 (1,031,827)
Change in unrealized appreciation/depreciation on investments--net.. (558,387) 918,657
------------ ------------
Net increase in net assets resulting from operations............... 878,549 2,074,502
------------ ------------
========================================================================================================================
Dividends to Investment income--net:
Shareholders Class A.......................................................... (20,889) (14,144)
(Note 1f): Class B.......................................................... (70,516) (12,287)
Class C.......................................................... (5,033) (77)
Class D.......................................................... (824,296) (2,161,164)
------------ ------------
Net decrease in net assets resulting from dividends to shareholders (920,734) (2,187,672)
------------ ------------
========================================================================================================================
Beneficial Interest Net increase (decrease) in net assets derived from beneficial
Transactions interest transactions.............................................. 1,810,018 (17,062,260)
(Note 4): ------------ ------------
========================================================================================================================
Net Assets: Total increase (decrease) in net assets............................ 1,767,833 (17,175,430)
Beginning of period................................................ 30,105,790 47,281,220
------------ ------------
End of period...................................................... $ 31,873,623 $ 30,105,790
============ ============
========================================================================================================================
See Notes to Financial Statements.
</TABLE>
7
<PAGE>
Merrill Lynch Intermediate Government Bond Fund April 30, 1998
FINANCIAL INFORMATION (continued)
Financial Highlights
<TABLE>
<CAPTION>
Class A
----------------------
For the For the
Six Period
The following per share data and ratios have been derived Months Feb. 18,
from information provided in the financial statements. Ended 1997+ to
April 30, Oct. 31,
Increase (Decrease) in Net Asset Value: 1998 1997
================================================================================================================
<S> <C> <C>
Per Share Net asset value, beginning of period................................. $ 9.74 $ 9.66
Operating -------- --------
Performance: Investment income--net............................................... .30 .39
Realized and unrealized gain (loss) on investments--net.............. (.02) .08
-------- --------
Total from investment operations..................................... .28 .47
-------- --------
Less dividends from investment income--net........................... (.30) (.39)
-------- --------
Net asset value, end of period....................................... $ 9.72 $ 9.74
======== ========
================================================================================================================
Total Investment Based on net asset value per share................................... 2.85%++ 5.04%++
Return:** ======== ========
================================================================================================================
Ratios to Average Expenses, net of reimbursement....................................... .80%* 1.12%*
Net Assets: ======== ========
Expenses............................................................. 1.16%* 2.08%*
======== ========
Investment income--net............................................... 6.17%* 5.95%*
======== ========
================================================================================================================
Supplemental Net assets, end of period (in thousands)............................. $ 690 $ 425
Data: ======== ========
Portfolio turnover................................................... 86.81% 201.55%
======== ========
================================================================================================================
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales
loads.
+ Commencement of operations.
++ Aggregate total investment return.
See Notes to Financial Statements.
8
<PAGE>
Merrill Lynch Intermediate Government Bond Fund April 30, 1998
FINANCIAL INFORMATION (continued)
Financial Highlights (continued)
<TABLE>
<CAPTION>
Class B
---------------------
For the For the
Six Period
The following per share data and ratios have been derived Months Feb. 18,
from information provided in the financial statements. Ended 1997+ to
April 30, Oct. 31,
Increase (Decrease) in Net Asset Value: 1998 1997
================================================================================================================
<S> <C> <C>
Per Share Net asset value, beginning of period................................. $ 9.74 $ 9.66
Operating -------- --------
Performance: Investment income--net............................................... .27 .37
Realized and unrealized gain (loss) on investments--net.............. (.01) .08
-------- --------
Total from investment operations..................................... .26 .45
-------- --------
Less dividends from investment income--net........................... (.27) (.37)
-------- --------
Net asset value, end of period....................................... $ 9.73 $ 9.74
======== ========
================================================================================================================
Total Investment Based on net asset value per share................................... 2.70%++ 4.81%++
Return:** ======== ========
================================================================================================================
Ratios to Average Expenses, net of reimbursement....................................... 1.31%* 1.39%*
Net Assets: ======== ========
Expenses............................................................. 1.66%* 2.42%*
======== ========
Investment income--net............................................... 5.64%* 5.69%*
======== ========
=================================================================================================================
Supplemental Net assets, end of period (in thousands)............................. $ 3,854 $ 829
Data: ======== ========
Portfolio turnover................................................... 86.81% 201.55%
======== ========
================================================================================================================
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales
loads.
+ Commencement of operations.
++ Aggregate total investment return.
See Notes to Financial Statements.
9
<PAGE>
Merrill Lynch Intermediate Government Bond Fund April 30, 1998
FINANCIAL INFORMATION (continued)
Financial Highlights (continued)
<TABLE>
<CAPTION>
Class C
--------------------
For the For the
Six Period
The following per share data and ratios have been derived Months Feb. 18,
from information provided in the financial statements. Ended 1997+ to
April 30, Oct. 31,
Increase (Decrease) in Net Asset Value: 1998 1997
================================================================================================================
<S> <C> <C>
Per Share Net asset value, beginning of period................................. $ 9.73 $ 9.66
Operating -------- --------
Performance: Investment income--net............................................... .28 .36
Realized and unrealized gain (loss) on investments--net.............. (.01) .07
-------- --------
Total from investment operations..................................... .27 .43
-------- --------
Less dividends from investment income--net........................... (.28) (.36)
-------- --------
Net asset value, end of period....................................... $ 9.72 $ 9.73
======== ========
================================================================================================================
Total Investment Based on net asset value per share................................... 2.82%++ 4.57%++
Return:** ======== ========
================================================================================================================
Ratios to Average Expenses, net of reimbursement....................................... 1.07%* 1.47%*
Net Assets: ======== ========
Expenses............................................................. 1.42%* 2.64%*
======== ========
Investment income--net............................................... 5.88%* 5.55%*
======== ========
================================================================================================================
Supplemental Net assets, end of period (in thousands)............................ $ 270 $ 47
Data: ======== ========
Portfolio turnover.................................................. 86.81% 201.55%
======== ========
================================================================================================================
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales
loads.
+ Commencement of operations.
++ Aggregate total investment return.
See Notes to Financial Statements.
10
<PAGE>
Merrill Lynch Intermediate Government Bond Fund April 30, 1998
FINANCIAL INFORMATION (concluded)
Financial Highlights (concluded)
<TABLE>
<CAPTION>
Class D
--------------------------------------------------
For the
Six
The following per share data and ratios have been derived Months
from information provided in the financial statements. Ended For the Year Ended October 31,
April 30, --------------------------------------
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995 1994
==================================================================================================================
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period..... $ 9.74 $ 9.68 $ 9.82 $ 9.60 $ 10.31
Operating -------- -------- -------- -------- --------
Performance: Investment income--net................... .29 .55 .61 .62 .55
Realized and unrealized gain (loss) on
investments--net......................... (.02) .06 (.14) .22 (.71)
-------- -------- -------- -------- --------
Total from investment operations......... .27 .61 .47 .84 (.16)
-------- -------- -------- -------- --------
Less dividends from investment income--net (.29) (.55) (.61) (.62) (.55)
-------- -------- -------- -------- --------
Net asset value, end of period........... $ 9.72 $ 9.74 $ 9.68 $ 9.82 $ 9.60
======== ======== ======== ======== ========
==================================================================================================================
Total Investment Based on net asset value per share....... 2.80%++ 6.60% 4.87% 9.00% (1.54%)
Return:** ======== ======== ======== ======== ========
==================================================================================================================
Ratios to Average Expenses, net of reimbursement........... .89%* 1.25% .97% .96% .83%
Net Assets: ======== ======== ======== ======== ========
Expenses................................. 1.26%* 1.69% .97% .96% .83%
======== ======== ======== ======== ========
Investment income--net................... 6.07%* 5.71% 6.19% 6.38% 5.55%
======== ======== ======== ======== ========
==================================================================================================================
Supplemental Net assets, end of period (in thousands). $ 27,060 $ 28,805 $ 47,281 $ 65,139 $ 81,407
Data: ======== ======== ======== ======== ========
Portfolio turnover....................... 86.81% 201.55% 51.44% 47.90% 172.51%
======== ======== ======== ======== ========
==================================================================================================================
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales
loads.
++ Aggregate total investment return.
See Notes to Financial Statements.
11
<PAGE>
Merrill Lynch Intermediate Government Bond Fund April 30, 1998
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Intermediate Government Bond Fund (the "Fund") is registered under
the Investment Company Act of 1940 as a diversified, open-end management
investment company. These unaudited financial statements reflect all adjustments
which are, in the opinion of management, necessary to a fair statement of the
results for the interim period presented. All such adjustments are of a normal
recurring nature. The Fund offers four classes of shares under the Merrill Lynch
Select PricingSM System. Shares of Class A and Class D are sold with a front-end
sales charge. Shares of Class B and Class C may be subject to a contingent
deferred sales charge. All classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions, except that
Class B, Class C and Class D Shares bear certain expenses related to the account
maintenance of such shares, and Class B and Class C Shares also bear certain
expenses related to the distribution of such shares. Each class has exclusive
voting rights with respect to matters relating to its account maintenance and
distribution expenditures. The following is a summary of significant accounting
policies followed by the 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. For the
six months ended April 30, 1998, MLAM earned fees of $61,007, of which $55,215
was waived. MLAM also reimbursed the Fund for additional expenses of $1,011.
Pursuant to the Distribution Plans adopted by the Fund in accordance with Rule
12b-1 under the Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The Distributor voluntarily
did not collect any Class C distribution fees for the six months ended April 30,
1998. The fees are accrued daily and paid
12
<PAGE>
Merrill Lynch Intermediate Government Bond Fund April 30, 1998
monthly at annual rates based upon the average daily net assets of the shares as
follows:
- --------------------------------------------------------------------------------
Account Distribution
Maintenance Fee Fee
- --------------------------------------------------------------------------------
Class B................... 0.25% 0.25%
Class C................... 0.25% 0.25%
Class D................... 0.10% --
- --------------------------------------------------------------------------------
This fee is to compensate MLFD for the services it provides and the expenses
borne by 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 six months ended April 30, 1998, MLFD earned underwriting discounts and
MLPF&S earned dealer concessions on sales of the Fund's Class D Shares as
follows:
- --------------------------------------------------------------------------------
MLFD MLPF&S
- --------------------------------------------------------------------------------
Class D...................... $170 $2,028
- --------------------------------------------------------------------------------
For the six months ended April 30, 1998, MLPF&S received a contingent deferred
sales charge of $3,025 relating to transactions in Class B Shares.
For the six months ended April 30, 1998, the Fund paid Merrill Lynch Security
Pricing Service, an affiliate of MLPF&S, $631 for security price quotations to
compute the net asset value of the Fund.
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, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the six
months ended April 30, 1998 were $25,923,400 and $25,234,695, respectively.
Net realized gains for the six months ended April 30, 1998 and net unrealized
gains as of April 30, 1998 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains Gains
- --------------------------------------------------------------------------------
Long-term investments......... $ 516,202 $ 167,232
----------- ---------
Total......................... $ 516,202 $ 167,232
=========== =========
- --------------------------------------------------------------------------------
As of April 30, 1998, net unrealized appreciation for Federal income tax
purposes aggregated $167,232, of which $387,817 related to appreciated
securities and $220,585 related to depreciated securities. The aggregate cost of
investments at April 30, 1998 for Federal income tax purposes was $31,259,631.
4. Transactions in Shares of Beneficial Interest: Net increase (decrease) in net
assets derived from beneficial interest transactions was $1,810,018 and
$(17,062,260) for the six months ended April 30, 1998 and for the year ended
October 31, 1997.
Transactions in shares of beneficial interest were as follows:
- --------------------------------------------------------------------------------
Class A Shares for the
Six Months Ended Dollar
April 30, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold.................... 55,596 $ 542,832
Shares issued to shareholders
in reinvestment of dividends... 587 5,746
------------ ------------
Total issued................... 56,183 548,578
Shares redeemed................ (28,849) (281,210)
------------ ------------
Net increase................... 27,334 $ 267,368
============ ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class A Shares for the Period
February 18, 1997+ to Dollar
October 31, 1997 Shares Amount
- --------------------------------------------------------------------------------
Shares sold................... 49,642 $ 467,013
Shares issued to shareholders
in reinvestment of dividends.. 124 1,191
------------ ------------
Total issued.................. 49,766 468,204
Shares redeemed............... (6,138) (58,663)
------------ ------------
Net increase.................. 43,628 $ 409,541
============ ============
- --------------------------------------------------------------------------------
+Commencement of operations.
- --------------------------------------------------------------------------------
Class B Shares for the
Six Months Ended Dollar
April 30, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold................... 515,994 $ 5,056,637
Shares issued to shareholders
in reinvestment of dividends.. 5,285 51,790
------------ ------------
Total issued.................. 521,279 5,108,427
Automatic conversion
of shares..................... (449) (4,388)
Shares redeemed............... (209,696) (2,053,579)
------------ ------------
Net increase.................. 311,134 $ 3,050,460
============ ============
- --------------------------------------------------------------------------------
13
<PAGE>
Merrill Lynch Intermediate Government Bond Fund April 30, 1998
NOTES TO FINANCIAL STATEMENTS (concluded)
- --------------------------------------------------------------------------------
Class B Shares for the Period
February 18, 1997+ to Dollar
October 31, 1997 Shares Amount
- --------------------------------------------------------------------------------
Shares sold................... 100,605 $ 964,735
Shares issued to shareholders
in reinvestment of dividends.. 922 8,835
------------ ------------
Total issued.................. 101,527 973,570
Shares redeemed............... (16,418) (156,834)
------------ ------------
Net increase.................. 85,109 $ 816,736
============ ============
- --------------------------------------------------------------------------------
+Commencement of operations.
- --------------------------------------------------------------------------------
Class C Shares for the
Six Months Ended Dollar
April 30, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold.................. 32,751 $ 321,954
Shares issued to shareholders
in reinvestment of dividends. 438 4,286
------------ ------------
Total issued................. 33,189 326,240
Shares redeemed.............. (10,262) (100,442)
------------ ------------
Net increase................. 22,927 $ 225,798
============ ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class C Shares for the Period
February 18, 1997+ to Dollar
October 31, 1997 Shares Amount
- --------------------------------------------------------------------------------
Shares sold.................. 4,812 $ 46,564
Shares issued to shareholders
in reinvestment of dividends. 4 38
------------ ------------
Net increase................. 4,816 $ 46,602
============ ============
- --------------------------------------------------------------------------------
+Commencement of operations.
- --------------------------------------------------------------------------------
Class D Shares for the Six Months Dollar
Ended April 30, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold................... 314,121 $ 3,064,324
Automatic conversion
of shares..................... 449 4,388
Shares issued to shareholders
in reinvestment of dividends.. 60,025 587,253
------------ ------------
Total issued.................. 374,595 3,655,965
Shares redeemed............... (550,600) (5,389,573)
------------ ------------
Net decrease.................. (176,005) $ (1,733,608)
============ ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class D Shares for the Year Dollar
Ended October 31, 1997 Shares Amount
- --------------------------------------------------------------------------------
Shares sold................... 564,311 $ 5,452,644
Shares issued to shareholders
in reinvestment of dividends.. 192,051 1,843,504
------------ ------------
Total issued.................. 756,362 7,296,148
Shares redeemed............... (2,681,230) (25,631,287)
------------ ------------
Net decrease.................. (1,924,868) $(18,335,139)
============ ============
- --------------------------------------------------------------------------------
5. Capital Loss Carryforward:
At October 31, 1997, the Fund had a net capital loss carryforward of
approximately $11,717,000, of which $4,643,000 expires in 1998, $3,224,000
expires in 2002, $1,995,000 expires in 2003, $977,000 expires in 2004 and
$878,000 expires in 2005. This amount will be available to offset like amounts
of any future taxable gains.
14
<PAGE>
Merrill Lynch Intermediate Government Bond Fund April 30, 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
Christopher G. Ayoub, Senior 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
15
<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 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--4/98
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