MERRILL LYNCH
INTERMEDIATE
GOVERNMENT
BOND FUND
[GRAPHIC OMITTED]
STRATEGIC
Performance
Semi-Annual Report
April 30, 1999
<PAGE>
Merrill Lynch Intermediate Government Bond Fund
DEAR SHAREHOLDER
Interest rates moved sharply higher during the three months ended April 30,
1999. The yield on the Treasury's ten-year note rose from 4.75% at the beginning
of the April quarter (its lowest level of the three-month period) to 5.42% in
early March. The yield fell to just above 5.00% in early April, only to jump
back up to close the quarter at 5.35%, near its high for the year.
Strong economic growth around the world was the main reason for the increase in
Treasury yields. In the United States, gross domestic product growth grew at a
stronger-than-expected rate of 4.5%, spurred on by consumer spending, which
jumped 6.7%. Consumers benefited from low unemployment rates and the wealth
effect generated from a booming stock market. Overseas, Asian countries at the
heart of the 1998 crises showed the beginnings of recovery.
This global recovery led to concerns of a rekindling of inflation. Prices for
commodities such as copper rose. More important, the price of crude oil surged,
spurred on mainly by an agreement by the Organization of Petroleum Exporting
Countries to limit production, but also on expectations of increased demand by
recovering economies. While the reported consumer price index for March showed
only a 2.1% gain for the last 12 months (excluding food and energy), many
investors wondered how long the favorable reports would continue. Beyond the
gain in interest rates, the market environment was influenced by a flight from
quality. This is in stark reversal of the flight to quality trades we
experienced in the third quarter of last year.
In anticipation of this environment, we have been increasing our allocation to
mortgage-backed securities (MBS) throughout the year. We started 1999 with only
a 4% allocation to MBS, but increased this to 15% of net assets by the end of
January and to 23% by the end of February. At April 30, 1999, our allocation to
MBS stood just above 30% of net assets. Concurrently, we reduced our position in
Treasury holdings from 59% of net assets at the beginning of the April quarter
to 50% at the end of the quarter, with a duration of 4.4 years. Our allocation
to Government agency debentures held relatively steady. We saw investment-grade
corporate bond yield spreads relative to Treasury issues compressing and agency
spreads widening since the beginning of the year, a condition that we believed
could not last. Only recently have agency spreads begun to rally.
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 9, 1999
1
<PAGE>
Merrill Lynch Intermediate Government Bond Fund April 30, 1999
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 "Recent Performance Results" and
"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 4/30/99
===================================================================================================================
<S> <C> <C> <C> <C>
ML Intermediate Government Bond Fund Class A Shares +6.29% -1.17% + 14.82% 4.83%
- -------------------------------------------------------------------------------------------------------------------
ML Intermediate Government Bond Fund Class B Shares +5.64 -1.30 + 13.71 4.37
- -------------------------------------------------------------------------------------------------------------------
ML Intermediate Government Bond Fund Class C Shares +5.90 -1.24 + 13.87 4.63
- -------------------------------------------------------------------------------------------------------------------
ML Intermediate Government Bond Fund Class D Shares +6.18 -1.20 +100.41+ 4.73
===================================================================================================================
</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/since inception periods are
Class A, Class B & Class C Shares, from 2/18/97 to 4/30/99 and Class D
Shares, for the ten years ended 4/30/99.
+ Performance for Class D Shares for the period prior to 2/18/97 was when
the Fund operated under a different investment objective.
2
<PAGE>
Merrill Lynch Intermediate Government Bond Fund April 30, 1999
PERFORMANCE DATA (concluded)
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
================================================================================
Class A Shares*
================================================================================
Year Ended 3/31/99 +6.53% +5.46%
- --------------------------------------------------------------------------------
Inception (2/18/97)
through 3/31/99 +6.68 +6.17
- --------------------------------------------------------------------------------
* Maximum sales charge is 1%.
** Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
================================================================================
Class B Shares*
================================================================================
Year Ended 3/31/99 +5.77% +4.77%
- --------------------------------------------------------------------------------
Inception (2/18/97)
through 3/31/99 +6.16 +6.16
- --------------------------------------------------------------------------------
* 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 3/31/99 +6.14% +5.14%
- --------------------------------------------------------------------------------
Inception (2/18/97)
through 3/31/99 +6.27 +6.27
- --------------------------------------------------------------------------------
* 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 3/31/99 +6.20% +5.14%
- --------------------------------------------------------------------------------
Five Years Ended 3/31/99+ +5.84 +5.63
- --------------------------------------------------------------------------------
Ten Years Ended 3/31/99+ +7.34 +7.23
- --------------------------------------------------------------------------------
* Maximum sales charge is 1%.
** Assuming maximum sales charge.
+ Performance for Class D Shares for the period prior to 2/18/97 was when
the Fund operated under a different investment objective.
3
<PAGE>
Merrill Lynch Intermediate Government Bond Fund April 30, 1999
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
Face Interest Maturity Value
Issue Amount Rate Date(s) (Note 1a)
=============================================================================================================
US Government & Agency Obligations--98.3%
<S> <C> <C> <C> <C>
US Treasury Notes & Bonds $ 1,250,000 5.25% 8/15/03 $ 1,249,413
11,000,000 5.625 5/15/08 11,165,000
250,000 5.75 10/31/02 254,257
13,500,000 5.75 8/15/03 13,746,780
4,400,000 7.25 5/15/04 4,778,136
7,750,000 7.25 8/15/04 8,437,812
1,000,000 7.50 5/15/02 1,063,280
3,250,000 7.50 2/15/05 3,595,312
2,000,000 7.875 8/15/01 2,116,880
1,000,000 10.00 5/15/10 1,226,250
2,000,000 11.875 11/15/03 2,519,060
2,100,000 13.375 8/15/01 2,467,500
=============================================================================================================
Federal Farm Credit Banks 1,000,000 6.375 8/06/07 1,026,560
=============================================================================================================
Federal Home Loan Banks 3,000,000 5.125 2/26/02 2,970,000
=============================================================================================================
Federal Home Loan Mortgage Corporation 3,999,600 6.00 3/01/14-4/01/14 3,969,474
3,000,000 6.50 TBA*+ 3,027,180
4,000,000 7.00 TBA*+ 4,057,480
=============================================================================================================
Federal National Mortgage Association 2,000,000 5.43 3/29/01 1,996,880
3,000,000 5.81 3/02/04 2,982,660
4,000,000 5.94 12/19/08 3,865,000
5,882,984 6.00 4/01/13-12/01/13+ 5,827,802
993,116 6.105 8/01/08+ 987,159
989,434 6.40 1/01/06+ 1,001,468
5,960,900 6.50 10/25/03-3/01/14+ 6,025,853
2,000,000 6.95 11/13/06 2,036,880
3,050,000 6.96 9/05/12 3,190,575
6,879,980 7.00 6/01/06-12/01/13+ 7,028,042
2,000,000 7.15 8/27/12 2,025,940
=============================================================================================================
Government National Mortgage Association 500,000 7.00 TBA*+ 507,340
=============================================================================================================
Total US Government & Agency Obligations (Cost--$106,948,037) 105,145,973
=============================================================================================================
</TABLE>
4
<PAGE>
Merrill Lynch Intermediate Government Bond Fund April 30, 1999
SCHEDULE OF INVESTMENTS (concluded)
<TABLE>
<CAPTION>
Value
Face Amount Short-Term Securities (Note 1a)
=============================================================================================================
US Government Agency Obligations**--3.3%
<S> <C> <C>
$1,200,000 Federal Home Loan Bank, 4.66% due 5/12/1999 $ 1,198,602
$2,323,000 Federal National Mortgage Association, 4.70% due 5/06/1999 2,322,090
=============================================================================================================
Total US Government Agency Obligations (Cost--$3,520,692) 3,520,692
=============================================================================================================
<CAPTION>
Repurchase Agreements***--4.5%
<S> <C> <C>
$4,800,000 Warburg Dillon Read LLC, purchased on 4/30/1999 to yield 4.88% to 5/03/1999 4,800,000
=============================================================================================================
Total Repurchase Agreements (Cost--$4,800,000) 4,800,000
=============================================================================================================
Total Short-Term Securities (Cost--$8,320,692) 8,320,692
=============================================================================================================
Total Investments (Cost--$115,268,729)--106.1% 113,466,665
Liabilities in Excess of Other Assets--(6.1%) (6,543,654)
------------
Net Assets--100.0% $106,923,011
============
=============================================================================================================
</TABLE>
* Represents a "to-be-announced" (TBA) transaction. The Fund has committed
to purchasing securities for which all specific information is not
available at this time.
** Certain US Government Agency Obligations are traded on a discount basis;
the interest rate shown reflects the discount rate paid at the time of
purchase by the Fund.
*** Repurchase Agreements are fully collateralized by US Government & Agency
Obligations.
+ Mortgage-Backed Obligations are subject to principal paydowns as a result
of prepayments or refinancings of the underlying mortgage investments. As
a result, the average life may be substantially less than original
maturity.
See Notes to Financial Statements.
5
<PAGE>
Merrill Lynch Intermediate Government Bond Fund April 30, 1999
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of April 30, 1999
<TABLE>
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$115,268,729) (Note 1a) ... $113,466,665
Cash .............................................................. 583
Receivables:
Interest ........................................................ $ 1,698,209
Principal paydowns .............................................. 286,108
Beneficial interest sold ........................................ 235,378
Loaned securities (Note 5) ...................................... 116 2,219,811
------------
Prepaid registration fees and other assets (Note 1e) .............. 43,443
------------
Total assets ...................................................... 115,730,502
------------
=====================================================================================================================
Liabilities: Payables:
Securities purchased ............................................ 7,632,785
Beneficial interest redeemed .................................... 903,734
Dividends to shareholders (Note 1f) ............................. 156,001
Investment adviser (Note 2) ..................................... 38,211
Distributor (Note 2) ............................................ 24,573 8,755,304
------------
Accrued expenses and other liabilities ............................ 52,187
------------
Total liabilities ................................................. 8,807,491
------------
=====================================================================================================================
Net Assets: Net assets ........................................................ $106,923,011
============
=====================================================================================================================
Net Assets Class A Shares of beneficial interest, $0.10 par value, unlimited
Consist of: number of shares authorized ....................................... $ 250,854
Class B Shares of beneficial interest, $0.10 par value, unlimited
number of shares authorized ....................................... 471,789
Class C Shares of beneficial interest, $0.10 par value, unlimited
number of shares authorized ....................................... 51,037
Class D Shares of beneficial interest, $0.10 par value, unlimited
number of shares authorized ....................................... 322,840
Paid-in capital in excess of par .................................. 115,024,459
Accumulated realized capital losses on investments--net (Note 6) .. (7,395,904)
Unrealized depreciation on investments--net ....................... (1,802,064)
------------
Net assets ........................................................ $106,923,011
============
=====================================================================================================================
Net Asset Value: Class A--Based on net assets of $24,463,138 and 2,508,535 shares of
beneficial interest outstanding ................................... $ 9.75
============
Class B--Based on net assets of $46,007,004 and 4,717,893 shares of
beneficial interest outstanding ................................... $ 9.75
============
Class C--Based on net assets of $4,973,518 and 510,368 shares of
beneficial interest outstanding ................................... $ 9.74
============
Class D--Based on net assets of $31,479,351 and 3,228,398 shares of
beneficial interest outstanding ................................... $ 9.75
============
=====================================================================================================================
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
Merrill Lynch Intermediate Government Bond Fund April 30, 1999
FINANCIAL INFORMATION (continued)
Statement of Operations for the Six Months Ended April 30, 1999
<TABLE>
<S> <C> <C> <C>
Investment Income Interest and discount earned ......................................... $ 2,979,716
(Note 1d): Other ................................................................ 33,263
-----------
Total income ......................................................... 3,012,979
-----------
=====================================================================================================================
Expenses: Investment advisory fees (Note 2) .................................... $ 195,841
Account maintenance and distribution fees--Class B (Note 2) .......... 112,681
Professional fees .................................................... 34,586
Registration fees (Note 1e) .......................................... 30,853
Accounting services (Note 2) ......................................... 28,297
Printing and shareholder reports ..................................... 20,030
Trustees' fees and expenses .......................................... 17,256
Account maintenance fees--Class D (Note 2) ........................... 16,313
Transfer agent fees--Class B (Note 2) ................................ 12,807
Transfer agent fees--Class D (Note 2) ................................ 7,343
Account maintenance and distribution fees--Class C (Note 2) .......... 6,867
Custodian fees ....................................................... 5,135
Transfer agent fees--Class A (Note 2) ................................ 3,184
Transfer agent fees--Class C (Note 2) ................................ 1,650
Pricing fees ......................................................... 906
Other ................................................................ 1,702
-----------
Total expenses before reimbursement .................................. 495,451
Reimbursement of expenses (Note 2) ................................... (71,835)
-----------
Total expenses after reimbursement ................................... 423,616
-----------
Investment income--net ............................................... 2,589,363
-----------
=====================================================================================================================
Realized & Realized loss from investments--net .................................. (271,241)
Unrealized Change in unrealized appreciation/depreciation on investments--net ... (3,333,233)
Loss on -----------
Investments--Net Net Decrease in Net Assets Resulting from Operations ................. $(1,015,111)
(Notes 1d & 3): ===========
=====================================================================================================================
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
Merrill Lynch Intermediate Government Bond Fund April 30, 1999
FINANCIAL INFORMATION (continued)
Statements 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: 1999 1998
==========================================================================================================================
<S> <C> <C> <C>
Operations: Investment income--net ................................................ $ 2,589,363 $ 2,183,971
Realized gain (loss) on investments--net .............................. (271,241) 807,327
Change in unrealized appreciation/depreciation on investments--net .... (3,333,233) 805,550
------------ ------------
Net increase (decrease) in net assets resulting from operations ....... (1,015,111) 3,796,848
------------ ------------
==========================================================================================================================
Dividends to Investment income--net:
Shareholders Class A ............................................................. (400,798) (51,694)
(Note 1f): Class B ............................................................. (1,144,310) (415,382)
Class C ............................................................. (146,534) (42,950)
Class D ............................................................. (897,721) (1,673,945)
------------ ------------
Net decrease in net assets resulting from dividends to shareholders ... (2,589,363) (2,183,971)
------------ ------------
==========================================================================================================================
Beneficial Interest Net increase in net assets derived from beneficial
Transactions interest transactions ................................................. 29,565,899 49,242,919
(Note 4): ------------ ------------
==========================================================================================================================
Net Assets: Total increase in net assets .......................................... 25,961,425 50,855,796
Beginning of period ................................................... 80,961,586 30,105,790
------------ ------------
End of period ......................................................... $106,923,011 $ 80,961,586
============ ============
==========================================================================================================================
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
Merrill Lynch Intermediate Government Bond Fund April 30, 1999
FINANCIAL INFORMATION (continued)
Financial Highlights
<TABLE>
<CAPTION>
Class A
--------------------------------------
For the For the
Six For the Period
The following per share data and ratios have been derived Months Year Feb. 18,
from information provided in the financial statements. Ended Ended 1997+ to
April 30, Oct. 31, Oct. 31,
Increase (Decrease) in Net Asset Value: 1999 1998 1997
=============================================================================================================================
<S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period ......................... $ 10.11 $ 9.74 $ 9.66
Operating -------- -------- --------
Performance: Investment income--net ....................................... .32 .59 .39
Realized and unrealized gain (loss) on investments--net ...... (.36) .37 .08
-------- -------- --------
Total from investment operations ............................. (.04) .96 .47
-------- -------- --------
Less dividends from investment income--net ................... (.32) (.59) (.39)
-------- -------- --------
Net asset value, end of period ............................... $ 9.75 $ 10.11 $ 9.74
======== ======== ========
=============================================================================================================================
Total Investment Based on net asset value per share ........................... (.83%)++ 10.23% 5.04%++
Return:** ======== ======== ========
=============================================================================================================================
Ratios to Average Expenses, net of reimbursement ............................... .64%* .76% 1.12%*
Net Assets: ======== ======== ========
Expenses ..................................................... .72%* 1.09% 2.08%*
======== ======== ========
Investment income--net ....................................... 5.44%* 5.99% 5.95%*
======== ======== ========
=============================================================================================================================
Supplemental Net assets, end of period (in thousands) ..................... $ 24,463 $ 1,905 $ 425
Data: ======== ======== ========
Portfolio turnover ........................................... 67.40% 108.06% 201.55%
======== ======== ========
=============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Class B
--------------------------------------
For the For the
Six For the Period
The following per share data and ratios have been derived Months Year Feb. 18,
from information provided in the financial statements. Ended Ended 1997+ to
April 30, Oct. 31, Oct. 31,
Increase (Decrease) in Net Asset Value: 1999 1998 1997
=============================================================================================================================
<S> <C> <C> <C>
Per Share Net asset value, beginning of period ......................... $ 10.11 $ 9.74 $ 9.66
Operating -------- -------- --------
Performance: Investment income--net ....................................... .26 .54 .37
Realized and unrealized gain (loss) on investments--net ...... (.36) .37 .08
-------- -------- --------
Total from investment operations ............................. (.10) .91 .45
-------- -------- --------
Less dividends from investment income--net ................... (.26) (.54) (.37)
-------- -------- --------
Net asset value, end of period ............................... $ 9.75 $ 10.11 $ 9.74
======== ======== ========
=============================================================================================================================
Total Investment Based on net asset value per share ........................... (1.08%)++ 9.68% 4.81%++
Return:** ======== ======== ========
=============================================================================================================================
Ratios to Average Expenses, net of reimbursement ............................... 1.09%* 1.23% 1.39%*
Net Assets: ======== ======== ========
Expenses ..................................................... 1.24%* 1.54% 2.42%*
======== ======== ========
Investment income--net ....................................... 5.08%* 5.34% 5.69%*
======== ======== ========
=============================================================================================================================
Supplemental Net assets, end of period (in thousands) ..................... $ 46,007 $ 39,975 $ 829
Data: ======== ======== ========
Portfolio turnover ........................................... 67.40% 108.06% 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, 1999
FINANCIAL INFORMATION (continued)
Financial Highlights (continued)
<TABLE>
<CAPTION>
Class C
--------------------------------------
For the For the
Six For the Period
The following per share data and ratios have been derived Months Year Feb. 18,
from information provided in the financial statements. Ended Ended 1997+ to
April 30, Oct. 31, Oct. 31,
Increase (Decrease) in Net Asset Value: 1999 1998 1997
=============================================================================================================================
<S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period ......................... $ 10.11 $ 9.73 $ 9.66
Operating -------- -------- --------
Performance: Investment income--net ....................................... .30 .57 .36
Realized and unrealized gain (loss) on investments--net ...... (.37) .38 .07
-------- -------- --------
Total from investment operations ............................. (.07) .95 .43
-------- -------- --------
Less dividends from investment income--net ................... (.30) (.57) (.36)
-------- -------- --------
Net asset value, end of period ............................... $ 9.74 $ 10.11 $ 9.73
======== ======== ========
=============================================================================================================================
Total Investment Based on net asset value per share ........................... (1.06%)++ 10.05% 4.57%++
Return:** ======== ======== ========
=============================================================================================================================
Ratios to Average Expenses, net of reimbursement ............................... .83%* .95% 1.47%*
Net Assets: ======== ======== ========
Expenses ..................................................... 1.00%* 1.26% 2.64%*
======== ======== ========
Investment income--net ....................................... 5.33%* 5.54% 5.55%*
======== ======== ========
=============================================================================================================================
Supplemental Net assets, end of period (in thousands) ..................... $ 4,974 $ 4,674 $ 47
Data: ======== ======== ========
Portfolio turnover ........................................... 67.40% 108.06% 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, 1999
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: 1999 1998 1997 1996 1995
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period ........ $ 10.11 $ 9.74 $ 9.68 $ 9.82 $ 9.60
Operating -------- -------- -------- -------- --------
Performance: Investment income--net ...................... .31 .58 .55 .61 .62
Realized and unrealized gain (loss) on
investments--net ............................ (.36) .37 .06 (.14) .22
-------- -------- -------- -------- --------
Total from investment operations ............ (.05) .95 .61 .47 .84
-------- -------- -------- -------- --------
Less dividends from investment income--net .. (.31) (.58) (.55) (.61) (.62)
-------- -------- -------- -------- --------
Net asset value, end of period .............. $ 9.75 $ 10.11 $ 9.74 $ 9.68 $ 9.82
======== ======== ======== ======== ========
==================================================================================================================================
Total Investment Based on net asset value per share .......... (.88%)+ 10.12% 6.60% 4.87% 9.00%
Return:** ======== ======== ======== ======== ========
==================================================================================================================================
Ratios to Average Expenses, net of reimbursement .............. .67%* .89% 1.25% .97% .96%
Net Assets: ======== ======== ======== ======== ========
Expenses .................................... .83%* 1.22% 1.69% .97% .96%
======== ======== ======== ======== ========
Investment income--net ...................... 5.50%* 5.94% 5.71% 6.19% 6.38%
======== ======== ======== ======== ========
==================================================================================================================================
Supplemental Net assets, end of period (in thousands) .... $ 31,479 $ 34,408 $ 28,805 $ 47,281 $ 65,139
Data: ======== ======== ======== ======== ========
Portfolio turnover .......................... 67.40% 108.06% 201.55% 51.44% 47.90%
======== ======== ======== ======== ========
==================================================================================================================================
</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, 1999
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. The Fund's financial statements are prepared in accordance
with generally accepted accounting principles which may require the use of
management accruals and estimates. These unaudited financial statements reflect
all adjustments which are, in the opinion of management, necessary to a fair
statement of the results for the interim period presented. All such adjustments
are of a normal recurring nature. The Fund offers four classes of shares under
the Merrill Lynch Select Pricing(SM) System. Shares of Class A and Class D are
sold with a front-end sales charge. Shares of Class B and Class C may be subject
to a contingent deferred sales charge. All classes of shares have identical
voting, dividend, liquidation and other rights and the same terms and
conditions, except that Class B, Class C and Class D Shares bear certain
expenses related to the account maintenance of such shares, and Class B and
Class C Shares also bear certain expenses related to the distribution of such
shares. Each class has exclusive voting rights with respect to matters relating
to its account maintenance and distribution expenditures. The following is a
summary of significant accounting policies followed by the Fund.
(a) Valuation of investments--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. Under such agreements, the counterparty 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 additional 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 Plans with Merrill Lynch Funds
Distrib-utor ("MLFD" or the "Distributor"), a division of Princeton Funds
Distributor, Inc. ("PFD"), which is 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, 1999, MLAM earned fees of $195,841, of which $71,835
was waived.
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,
1999. The fees are accrued daily and
12
<PAGE>
Merrill Lynch Intermediate Government Bond Fund April 30, 1999
paid monthly at annual rates based upon the average daily net assets of the
shares as follows:
- --------------------------------------------------------------------------------
Account Distribution
Maintenance Fee Fee
- --------------------------------------------------------------------------------
Class B ..................................... 0.25% 0.25%
Class C ..................................... 0.25% 0.25%
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
Distribution Plans, MLFD has entered into an agreement with Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("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, 1999, 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 ..................................... $59 $724
- --------------------------------------------------------------------------------
For the six months ended April 30, 1999, MLPF&S received a contingent deferred
sales charge of $89,326 relating to transactions in Class B Shares.
For the six months ended April 30, 1999, the Fund paid Merrill Lynch Security
Pricing Service, an affiliate of MLPF&S, $156 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, PFD, and/ or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the six
months ended April 30, 1999 were $96,677,386 and $62,081,946, respectively.
Net realized losses for the six months ended April 30, 1999 and net unrealized
losses as of April 30, 1999 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Losses Losses
- --------------------------------------------------------------------------------
Long-term investments ....................... $ (271,241) $(1,802,064)
---------- -----------
Total ....................................... $ (271,241) $(1,802,064)
========== ===========
- --------------------------------------------------------------------------------
As of April 30, 1999, net unrealized depreciation for Federal income tax
purposes aggregated $1,802,064, of which $85,228 related to appreciated
securities and $1,887,292 related to depreciated securities. The aggregate cost
of investments at April 30, 1999 for Federal income tax purposes was
$115,268,729.
4. Transactions in Shares of Beneficial Interest:
Net increase in net assets derived from beneficial interest transactions was
$29,565,899 and $49,242,919 for the six months ended April 30, 1999 and for the
year ended October 31, 1998, respectively.
Transactions in shares of beneficial interest were as follows:
- --------------------------------------------------------------------------------
Class A Shares for the Six Months Dollar
Ended April 30, 1999 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ................................. 2,747,981 $27,356,337
Shares issued to shareholders
in reinvestment of dividends ................ 2,448 24,268
--------- -----------
Total issued ................................ 2,750,429 27,380,605
Shares redeemed ............................. (430,279) (4,244,106)
--------- -----------
Net increase ................................ 2,320,150 $23,136,499
========= ===========
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended October 31, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ................................. 544,445 $ 5,453,565
Shares issued to shareholders
in reinvestment of dividends ................ 2,124 21,048
--------- -----------
Total issued ................................ 546,569 5,474,613
Shares redeemed ............................. (401,812) (4,027,247)
--------- -----------
Net increase ................................ 144,757 $ 1,447,366
========= ===========
- --------------------------------------------------------------------------------
13
<PAGE>
Merrill Lynch Intermediate Government Bond Fund April 30, 1999
NOTES TO FINANCIAL STATEMENTS (concluded)
- --------------------------------------------------------------------------------
Class B Shares for the Six Months Dollar
Ended April 30, 1999 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ................................. 2,604,680 $25,893,525
Shares issued to shareholders
in reinvestment of dividends ................ 86,101 852,266
---------- -----------
Total issued ................................ 2,690,781 26,745,791
Automatic conversion of shares .............. (3,717) (36,813)
Shares redeemed ............................. (1,922,659) (19,043,120)
---------- -----------
Net increase ................................ 764,405 $ 7,665,858
========== ===========
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class B Shares for the Year Dollar
Ended October 31, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ................................. 4,530,074 $45,305,487
Shares issued to shareholders
in reinvestment of dividends ................ 29,013 288,719
---------- -----------
Total issued ................................ 4,559,087 45,594,206
Automatic conversion of shares .............. (5,817) (40,396)
Shares redeemed ............................. (684,891) (6,813,993)
---------- -----------
Net increase ................................ 3,868,379 $38,739,817
========== ===========
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class C Shares for the Six Months Dollar
Ended April 30, 1999 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ................................. 348,070 $ 3,459,476
Shares issued to shareholders
in reinvestment of dividends ................ 11,958 118,315
---------- -----------
Total issued ................................ 360,028 3,577,791
Shares redeemed ............................. (312,230) (3,091,119)
---------- -----------
Net increase ................................ 47,798 $ 486,672
========== ===========
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class C Shares for the Year Dollar
Ended October 31, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ................................. 506,793 $ 5,074,086
Shares issued to shareholders
in reinvestment of dividends ................ 2,869 28,676
---------- -----------
Total issued ................................ 509,662 5,102,762
Shares redeemed ............................. (51,908) (517,906)
---------- -----------
Net increase ................................ 457,754 $ 4,584,856
========== ===========
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class D Shares for the Six Months Dollar
Ended April 30, 1999 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ................................. 761,899 $ 7,568,524
Automatic conversion of shares .............. 3,717 36,813
Shares issued to shareholders
in reinvestment of dividends ................ 65,549 649,006
---------- -----------
Total issued ................................ 831,165 8,254,343
Shares redeemed ............................. (1,005,999) (9,977,473)
---------- -----------
Net decrease ................................ (174,834) $(1,723,130)
========== ===========
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class D Shares for the Year Dollar
Ended October 31, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ................................. 1,420,622 $14,078,604
Automatic conversion of shares .............. 5,819 40,396
Shares issued to shareholders
in reinvestment of dividends ................ 123,655 1,215,520
---------- -----------
Total issued ................................ 1,550,096 15,334,520
Shares redeemed ............................. (1,105,420) (10,863,640)
---------- -----------
Net increase ................................ 444,676 $4,470,880
========== ===========
- --------------------------------------------------------------------------------
5. Loaned Securities:
At April 30, 1999, the Fund held US Treasury notes and bonds having an aggregate
value of approximately $1,309,000 as collateral for portfolio securities loaned
having a market value of approximately $1,249,000.
6. Capital Loss Carryforward:
At October 31, 1998, the Fund had a net capital loss carryforward of
approximately $7,075,000, of which $3,224,000 expires in 2002, $1,996,000
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.
Expired capital loss carryforward in the amount of $3,938,679 has been
reclassified to paid-in capital in excess of par.
14
<PAGE>
Merrill Lynch Intermediate Government Bond Fund April 30, 1999
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
Todd Goodwin, Trustee
George W. Holbrook Jr., Trustee
W. Carl Kester, Trustee
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
Ann Catlin, Vice President
Ralph A. DeCesare, Vice President
Diana Frankland, 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
Donald C. Burke, Vice President and Treasurer
Phillip Gillespie, Secretary
Custodian
State Street Bank and Trust Company
P.O. Box 351
Boston, MA 02101
Transfer Agent
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--4/99
[RECYCLE LOGO] Printed on post-consumer recycled paper
