MuniInsured Fund, Inc.
Semi-Annual
Report
March 31, 1994
Officers and Directors
Arthur Zeikel, President and Director
Walter Mintz, Director
Melvin R. Seiden, Director
Stephen B. Swensrud, Director
Harry Woolf, Director
Terry K. Glenn, Executive Vice President
Donald C. Burke, Vice President
Vincent R. Giordano, Vice President
Gerald M. Richard, Treasurer
Mark B. Goldfus, Secretary
Custodian
National Westminster Bank NJ
10 Exchange Place
Jersey City, New Jersey 07302
Transfer Agent
State Street Bank & Trust Company
225 Franklin Street
Boston, Massachusetts 02101
(617) 328-5000
ASE Symbol
MIF
This report, including the financial
information herein, is transmitted to
the shareholders of MuniInsured Fund,
Inc. for their information. It is not
a prospectus, circular or representation
intended for use in the purchase of
shares of the Fund or any securities
mentioned in the report. Past performance
results shown in this report should not
be considered a representation of
future performance.
<PAGE>
MuniInsured Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
MuniInsured Fund, Inc.
DEAR SHAREHOLDER
During the six-month period ended March 31, 1994, MuniInsured
Fund, Inc. earned $0.293 per share income dividends, representing
a net annualized yield of 6.05%, based on a month-end net asset
value of $9.72 per share. Over the same period, the Fund's total
investment return was -4.70%, based on a change in per share net
asset value from $10.72 to $9.72, and assuming reinvestment of
$0.295 per share income dividends, and $0.224 per share capital
gains distributions.
The Environment
Inflationary expectations changed sharply during the March
quarter. Following better-than-expected economic results, Federal
Reserve Board Chairman Alan Greenspan indicated in Congressional
testimony in January that continued strong expansion of the
economy would lead the central bank to tighten monetary policy in
an effort to control inflation. On February 4, 1994, the central
bank broke with tradition and publicly announced a modest 25
basis point (0.25%) increase in short-term interest rates. At the
March 22 meeting of the Federal Open Market Committee, the
Federal Reserve Board again raised the Federal Funds rate by 25
basis points, and also announced the increase.
Rather than view the Federal Reserve Board's first tightening
move as a preemptive strike against inflation, fixed-income
investors focused on Chairman Greenspan's implicit promise of
further tightening should the rate of inflation accelerate, and
bond prices declined sharply. The setback in the bond market was
also reflected in greater stock market volatility. While the
second increase in the Federal Funds rate was less of a surprise,
investors remained concerned that interest rates would trend
upward sharply. As a result, stock and bond prices continued to
decline through the end of March. The volatility in the US
capital markets was mirrored in international markets. Political
and economic developments, along with concerns of heightened
global inflationary pressures, led to a sell-off in most capital
markets, especially the emerging markets that had appreciated
strongly in 1993.
<PAGE>
In the weeks ahead, investors will continue to gauge the pace of
the economic expansion and watch for signs of an overheating
economy. At this time, there is little evidence that the rate of
inflation will increase rapidly. Therefore, although the secular
long-term trend toward lower interest rates may be over, it is
not yet certain whether the pace of economic activity will
accelerate to the point where significant Federal Reserve Board
tightening will be necessary to contain inflation.
The Municipal Market
During the three months ended March 31, 1994, yields on long-term
tax-exempt bonds rose to their highest levels in more than three
years. As measured by the Bond Buyer Revenue Bond Index, the
yield on newly issued municipal bonds maturing in 30 years
increased by over 90 basis points (0.90%) to 6.39%. Yields on
seasoned municipal revenue bonds rose by over 100 basis points in
conjunction with the equally dramatic increase in US Treasury
bond yields. During the March quarter, the yield on long-term US
Treasury securities rose by over 90 basis points to approximately
7.25%.
Municipal bond yields were essentially unchanged in January.
However, following the initial interest rate increase by the
Federal Reserve Board in early February, municipal bond prices
began to slowly erode in concert with taxable bond prices as
investors sold securities in anticipation of further interest
rate increases. This concern also led investors to withdraw from
the tax-exempt market. As a result, total assets of all tax-exempt
bond funds declined by $14 billion to $247 billion between early
February and the end of March. This decline in investor demand,
coupled with concerns that the robust economic recovery seen in
the fourth quarter of 1993 would continue into much of 1994,
helped push municipal bond yields higher in February and March.
A rise in tax-exempt bond yields the magnitude of that experienced
this past quarter has not been seen since 1987 when municipal
bond rates rose 250 basis points between March and October. It is
very important to note that the municipal bond price declines of
the March quarter, while certainly damaging, were essentially
much different than those in 1987. Recent price declines largely
have been the result of persistent selling pressures over the
last two months. In 1987, the tax-exempt bond market was much more
volatile and, at times, chaotic as investors sought to liquidate
positions without concern to fundamental value. For the most
part, the recent price deterioration has been orderly, and the
municipal bond market's liquidity and integrity have not been
challenged or jeopardized.
<PAGE>
To a large extent the municipal bond market has continued to be
supported by a strong technical position. New issue volume during
the March 1994 quarter declined by over 25% compared to the first
three months of 1993. Less than $50 billion in long term municipal
bonds have been issued thus far in 1994. This decline was
expected and has been discussed in previous shareholder reports.
This reduced issuance has minimized potential selling pressure in
recent months since institutional investors have been wary of
selling appreciable amounts of securities that they may be unable
to replace later in the year at any price level. We expect this
decline in issuance to continue since we expect recent yield
increases to significantly curtail future municipal bond
issuance. Just as higher mortgage rates slow home mortgage
refinancings, the recent rise in bond yields will prevent bond
refinancings from becoming the driving force in bond issuance in
1994 as they were in 1993.
Despite recent price declines, tax-exempt securities remain among
the most attractive investment alternatives available. After the
yield increases experienced in the March quarter, longer-term
municipal securities yield approximately 90% of comparable US
Treasury yields. Purchasers of these municipal bonds also accrue
substantial after-tax yield advantages. To investors in the 39%
marginal Federal income tax bracket, the purchase of a municipal
bond yielding 6.50% represents an after-tax equivalent of 10.65%.
With prevailing estimates of 1994 inflation at no more than 3%--
4%, real after-tax rates in excess of 6.50% easily compensate
longer-term investors for much of the price volatility recently
experienced.
We continue to look for municipal bond yields to decline later
this year and into 1995 as inflationary pressures remain low and
as the domestic economy is further slowed by the impact of higher
interest rates. As this scenario unfolds, we expect currently
available tax-exempt products to generate significant returns for
long-term investors.
Portfolio Strategy
During the three months ended March 31, 1994, the Fund continued
to follow a strategy of structuring the portfolio to seek to
maintain an attractive level of tax-exempt income. In this
context, the Fund engaged in the sale of prerefunded bonds with
approaching call dates and particular issues we viewed to be
fully valued in relation to the market. Consequently, the Fund
had the opportunity to make some additions to the portfolio,
notably in the insured sector of the municipal market. We
emphasized the acquisition of current coupon income-oriented
issues in specific high-tax states.
<PAGE>
Our positive view for long-term municipal interest rates remains
essentially unchanged, despite recent market performance.
Compared to alternative investment choices, municipal securities
have been offering very attractive yields. We maintained the
Fund's cash reserves at a minimum to take advantage of the steep
yield spread between short-term and long-term interest rates.
We appreciate your ongoing interest in MuniInsured Fund, Inc.,
and we look forward to assisting you with your financial needs in
the months and years to come.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Vincent R. Giordano)
Vincent R. Giordano
Vice President and Portfolio Manager
May 4, 1994
PORTFOLIO ABBREVIATIONS
To simplify the listings of MuniInsured Fund, Inc.'s portfolio
holdings in the Schedule of Investments, we have abbreviated
the names of many of the securities according to the list at right.
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
EDA Economic Development Authority
GO General Obligation Bonds
INFLOS Inverse Floating Rate Municipal Bonds
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
UT Unlimited Tax
VRDN Variable Rate Demand Notes
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
<C> <C> <C> <S> <C>
State
Alaska--1.3%
AAA Aaa $ 1,000 Ketchikan, Alaska, Municipal Utility Revenue Bonds, Series R, 6.65% due 12/01/2012 (f) $ 1,040
California--9.2%
AAA Aaa 1,000 Cucamonga, California, County Water District, COP (Water Facility Projects),
5.45% due 9/01/2023 (d) 881
Culver City, California, Redevelopment Financing Authority
Revenue Bonds (Senior Lien Project), Series A (a):
AAA Aaa 10 6.75% due 11/01/1999 (c) 11
AAA Aaa 115 6.75% due 11/01/2015 119
AA Aa 1,400 Los Angeles, California, Department of Water and Power, Electric
Plant Revenue Bonds, 5.30% due 2/15/2021 1,221
AAA Aaa 2,000 Los Angeles, California, Wastewater Systems, Revenue Refunding
Bonds, Series A, 5.80% due 6/01/2021 (b) 1,858
AAA Aaa 1,000 Moulton-Niguel, California, Water District Revenue Bonds, COP,
4.80% due 9/01/2017 (a) 809
AAA Aaa 1,000 San Bernardino County, California, COP (West Valley Detention
Center), 6.50% due 11/01/2012 (b) 1,026
AAA Aaa 1,000 San Francisco, California, GO, UT (City and County Variable
Purpose Projects), Series A, 10% due 12/15/2000 (b) 1,271
Florida--7.5%
AAA Aaa 1,000 Dade County, Florida, Water and Sewer System Revenue
Refunding Bonds, 5% due 10/01/2013 (d) 867
AAA Aaa 1,250 Florida State Turnpike Authority Revenue Bonds, Series A, 9.50% due 7/01/2000 (a) 1,547
AAA Aaa 3,000 Reedy Creek, Florida, Improvement District, Florida Utility
Revenue Bonds, AMT, Series 1, 9% due 10/01/2007 (b) 3,425
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
<C> <C> <C> <S> <C>
State
Illinois--6.6%
AAA Aaa $ 1,000 Chicago, Illinois, Central Public Library, GO, Series C, 6.85% due 7/01/2002 (a)(c) $ 1,109
AAA Aaa 1,400 Chicago, Illinois, Public Building Commerce, Building Revenue
Refunding Bonds, Series A, 5.25% due 12/01/2011 (b) 1,271
AAA Aaa 1,000 Decatur, Illinois, Hospital Revenue Refunding Bonds (Decatur
Memorial Hospital), Series A, 7.75% due 10/01/2021 (b) 1,128
AAA Aaa 1,500 Illinois Regional Transportation Authority Revenue Bonds,
Series A, 7.20% due 11/01/2020 (a) 1,677
Indiana--5.1%
AAA Aaa 4,100 Indiana Municipal Power Agency, Power Supply System, Revenue
Refunding Bonds, Series B, 6% due 1/01/2012 (b) 4,025
Iowa--7.7%
AAA Aaa 4,500 Cedar Rapids, Iowa, PCR, Refunding (Iowa Electric Light &
Power Company Project), 5.50% due 11/01/2023 (b) 4,020
A-1+ NR 2,000 Iowa Finance Authority, Solid Waste Disposal Revenue Bonds (Cedar River Paper
Company Project), Series A, VRDN, 3% due 7/01/2023 (g) 2,000
Kentucky--7.1%
AAA Aaa 5,000 Louisville and Jefferson County, Kentucky, Regional Airport Authority, Airport
System Revenue Bonds, AMT, Series A, 8.50% due 7/01/2017 (b) 5,587
Louisiana--4.8%
AAA Aaa 2,300 Louisiana Stadium and Expo District Revenue Bonds (Hotel and
Stadium Occupancy Tax), Series A, 6% due 7/01/2024 (d) 2,210
AAA Aaa 1,465 New Orleans, Louisiana, Public Improvement, GO, UT, 6.60% due 9/01/2011 (d) 1,514
Maryland--3.1%
AAA Aaa 2,330 Baltimore, Maryland, Revenue Refunding Bonds (Wastewater
Projects), Series A, 6% due 7/01/2015 (d) 2,294
NR VMIG1 100 Maryland State Health and Higher Educational Facilities
Authority Revenue Bonds (Pooled Loan Program), Series A,
VRDN, 2.20% due 4/01/2035 (g) 100
Massachusetts--1.2%
BBB Baa1 1,000 Massachusetts State Health and Educational Facilities Authority
Revenue Bonds (Sisters of Providence Health Systems), Series A,
6.50% due 11/15/2008 960
Missouri--0.4%
NR VMIG1 300 Missouri Higher Education Loan Authority, Student Loan
Revenue Bonds, VRDN, AMT, Series A, 2.35% due 6/01/2017 (g) 300
<PAGE>
New Jersey--5.5%
AAA Aaa 1,000 New Jersey EDA, Water Facilities Revenue Refunding Bonds (Hackensack Water Company
Project), Series A, 5.80% due 3/01/2024 (b) 942
AAA Aaa 3,000 New Jersey Health Care Facilities and Financing Authority Revenue Bonds (Saint
Peter's Medical Center), Series C, 8.60% due 7/01/2017 (b) 3,386
New York--2.8%
A- Baa1 2,000 New York City, New York, GO, UT, Refunding, Series F, 7.625% due 2/01/2015 2,202
Oregon--3.6%
AAA Aaa 3,000 Western Lane Hospital District, Oregon, Hospital Facility
Authority, Revenue Refunding Bonds (Sisters of St. Joseph's
Peace), 5.75% due 8/01/2019 (b) 2,839
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
<C> <C> <C> <S> <C>
State
Pennsylvania--3.7%
AAA Aaa $ 1,000 Pennsbury, Pennsylvania, School District, GO, 6.50% due 1/15/2012 (a) $ 1,027
BBB+ Baa1 2,000 Philadelphia, Pennsylvania, Hospital and Higher Education
Facilities Authority, Hospital Revenue Refunding Bonds (Temple
University Hospital), Series A, 6.625% due 11/15/2023 1,867
Rhode Island--2.7%
AAA Aaa 2,000 Rhode Island Depositors, Economic Protection Corporation,
Special Obligation Bonds, Series A, 6.50% due 8/01/2007 (f) 2,106
South Carolina--1.3%
AAA Aaa l,000 South Carolina State Port Authority Revenue Bonds, AMT, 6.75% due 7/01/2021 (a) 1,031
Texas--7.6%
AAA Aaa 1,150 Brazos River Authority, Texas, Revenue Refunding Bonds
(Houston Light and Power), Series A, 6.70% due 3/01/2017 (a) 1,188
AAA Aaa 1,500 Harris County, Texas, Toll Road Revenue Refunding Bonds
(Senior Lien), Series A, 6.50% due 8/15/2017 (a) 1,612
AAA Aaa 1,000 Houston, Texas, Airport System Revenue Bonds (Sub-Lien),
AMT, Series A, 6.75% due 7/01/2021 (d) 1,028
AA- A2 1,000 Port Corpus Christi Authority, Texas, Nueces County, PCR (Hoechst Celanese
Corporation Project), AMT, 6.875% due 4/01/2017 1,032
AA Aa 1,000 Texas State Public Financing Authority, GO, RIB, UT, Series B-l
and B-2, 9.176% due 9/30/2011 (e) 1,049
Utah--4.0%
AAA Aaa 3,000 Salt Lake City, Utah, Hospital Revenue Refunding Bonds (IHC
Hospitals, Inc.), INFLOS, 10.861% due 5/15/2020 (a)(e) 3,158
<PAGE>
Virginia--1.4%
AAA Aaa 1,000 Prince William County, Virginia, Service Authority, Water and
Sewer System Revenue Bonds, 6.50% due 7/01/2001 (c)(d) 1,092
Washington--8.1%
AAA Aaa 2,000 Snohomish County, Washington, School District #006, Revenue Refunding Bonds
(Mukilteo), UT, 5.70% due 12/01/2012 (d) 1,906
Washington State Public Power Supply System, Revenue Refunding Bonds:
AAA Aaa 1,000 (Nuclear Project No. 1), Series A, 6.25% due 7/01/2017 (b) 991
AA Aa 3,000 (Nuclear Project No. 2), Series C, 7.625% due 1/01/2001 (c) 3,439
Wisconsin--1.9%
AAA Aaa 1,300 Wisconsin Municipal Insurance Commission Revenue Bonds,
8.70% due 4/01/2007 (a) 1,451
Total Investments (Cost--$73,677)--96.6% 75,616
Other Assets Less Liabilities--3.4% 2,627
-------
Net Assets--100.0% $78,243
=======
<FN>
(a AMBAC Insured.
(b)MBIA Insured.
(c)Prerefunded.
(d)FGIC Insured.
(e)The interest rate is subject to change periodically and inversely to the prevailing market rate.
The interest rates shown are the rates in effect at March 31, 1994.
(f)FSA Insured.
(g)The interest rate is subject to change periodically based upon the prevailing market rate.
The interest rates shown are the rates in effect at March 31, 1994.
See Notes to Financial Statements.
</TABLE>
<PAGE>
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Statement of Assets, Liabilities and Capital as of March 31, 1994
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$73,676,820) (Note 1a) $ 75,615,817
Cash 14,809
Receivables:
Securities sold $ 7,665,830
Interest 1,298,270 8,964,100
------------
Prepaid expenses fees and other assets 40,773
------------
Total assets 84,635,499
------------
Liabilities: Payables:
Securities purchased 6,190,584
Dividends to shareholders (Note 1e) 82,329
Investment adviser (Note 2) 34,126 6,307,039
------------
Accrued expenses and other liabilities 85,308
------------
Total liabilities 6,392,347
------------
Net Assets: Net assets $ 78,243,152
============
Capital: Common Stock, par value $.10 per share; 150,000,000 shares authorized;
8,053,709 shares issued and outstanding (Note 4) $ 805,371
Paid-in capital in excess of par 74,273,333 $ 75,078,704
------------
Undistributed investment income--net 374,347
Undistributed realized capital gains--net 851,104
Unrealized appreciation on investments--net 1,938,997
------------
Total capital--Equivalent to $9.72 net asset value per share of Common
Stock (market price--$9.25) (Note 4) $ 78,243,152
============
See Notes to Financial Statements.
</TABLE>
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statement of Operations for the Six Months Ended March 31, 1994
<S> <S> <C> <C>
Investment Income Interest and amortization of premium and discount $ 2,610,075
(Note 1d):
Expenses: Investment advisory fees (Note 2) $ 208,763
Professional fees 29,036
Directors' fees and expenses 19,173
Transfer agent fees 17,195
Accounting services (Note 2) 15,969
Printing and shareholder reports 12,153
Listing fees 4,972
Custodian fees 4,857
Pricing fees 3,469
Other 8,812
------------
Total expenses 324,399
------------
Investment income--net 2,285,676
------------
Realized & Realized gain on investments--net 1,679,275
Unrealized Gain Change in unrealized appreciation on investments--net (7,911,171)
(Loss) on ------------
Investments--Net Net Decrease in Net Assets Resulting from Operations $ (3,946,220)
(Notes 1d & 3): ============
</TABLE>
<PAGE>
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Six For the
Months Ended Year Ended
March 31, September 30,
Increase (Decrease) in Net Assets: 1994 1993
<S> <S> <C> <C>
Operations: Investment income--net $ 2,285,676 $ 4,751,040
Realized gain on investments--net 1,679,275 1,305,529
Change in unrealized appreciation on investments--net (7,911,171) 4,088,797
------------ ------------
Net increase (decrease) in net assets resulting from operations (3,946,220) 10,145,366
------------ ------------
Dividends & Investment income--net (2,296,177) (4,773,030)
Distributions Realized gain on investments--net (1,857,617) (1,714,912)
To Shareholders ------------ ------------
(Note 1f): Net decrease in net assets resulting from dividends and distributions
to shareholders (4,153,794) (6,487,942)
------------ ------------
Common Stock Net increase in net assets derived from shares issued to shareholders
Transactions in reinvestment of dividends 807,877 1,140,297
(Note 4): ------------ ------------
Net Assets: Total increase (decrease) in net assets (7,292,137) 4,797,721
Beginning of period 85,535,289 80,737,568
------------ ------------
End of period* $ 78,243,152 $ 85,535,289
============ ============
<FN>
*Undistributed investment income--net $ 374,347 $ 384,848
============ ============
See Notes to Financial Statements.
</TABLE>
<PAGE>
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights
<CAPTION>
For the
Six Months
The following per share data and ratios have been derived Ended
from information provided in the financial statements. March 31, For the Year Ended September 30,
Increase (Decrease) in Net Asset Value: 1994 1993 1992 1991 1990
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.72 $ 10.26 $ 10.21 $ 9.68 $ 10.00
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .29 .60 .62 .64 .65
Realized and unrealized gain (loss) on
investments--net (.77) .68 .45 .60 (.11)
-------- -------- -------- -------- --------
Total from investment operations (.48) 1.28 1.07 1.24 .54
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.29) (.60) (.62) (.63) (.64)
Realized gain on investments--net (.23) (.22) (.40) (.08) (.22)
-------- -------- -------- -------- --------
Total dividends and distributions (.52) (.82) (1.02) (.71) (.86)
-------- -------- -------- -------- --------
Net asset value, end of period $ 9.72 $ 10.72 $ 10.26 $ 10.21 $ 9.68
======== ======== ======== ======== ========
Market price per share, end of period $ 9.25 $ 10.875 $ 10.875 $ 10.00 $ 9.00
======== ======== ======== ======== ========
Total Investment Based on market price per share (10.60%)++ 8.27% 20.15% 19.40% (1.29%)
Return:** ======== ======== ======== ======== ========
Based on net asset value per share (4.70%)++ 13.12% 11.03% 13.35% 5.61%
======== ======== ======== ======== ========
Ratios to Average Expenses .78%* .80% .85% .89% .91%
Net Assets: ======== ======== ======== ======== ========
Investment income--net 5.46%* 5.81% 6.17% 6.47% 6.57%
======== ======== ======== ======== ========
Supplemental Data: Net assets, end of period (in thousands) $ 78,243 $ 85,535 $ 80,737 $ 79,033 $ 74,293
======== ======== ======== ======== ========
Portfolio turnover 23.86% 27.89% 84.01% 92.07% 132.60%
======== ======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns based on market value, which can be significantly
greater or lesser than the net asset value, result in substantially different
returns. Total investment returns exclude the effects of sales loads.
++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniInsured Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a non-diversified, closed-end
management investment company. The Fund determines and makes
available for publication the net asset value of its Common Stock
on a weekly basis. The Fund's Common Stock is listed on the
American Stock Exchange under the symbol MIF. The following is a
summary of significant accounting policies followed by the Fund.
(a) Valuation of investments--Municipal bonds are traded
primarily in the over-the-counter markets and are valued at the
most recent bid price or yield equivalent as obtained by the
Fund's pricing service from dealers that make markets in such
securities. Municipal bonds for which quotations are not readily
available are valued at fair value on a consistent basis as
determined by the pricing service using a matrix system to
determine valuations. The procedures of the pricing service and
its valuations are reviewed by the officers of the Fund under the
general supervision of the Board of Directors. The Board of
Directors has determined in good faith that the use of a pricing
service is a fair method of determining the valuation of
portfolio securities. Obligations with remaining maturities of
sixty days or less are valued at amortized cost which
approximates market. Financial futures contracts, which are
traded on exchanges, are valued at their closing prices as of the
close of such exchanges. Options, which are traded on exchanges,
are valued at their last sale price as of the close of such
exchanges or, lacking any sales, at the last available bid price.
Securities for which market quotations are not readily available
are valued at their fair value as determined in good faith by or
under the direction of the Board of Directors of the Fund.
(b) Financial futures contracts--The Fund may purchase or sell
interest rate futures contracts and options on such futures
contracts for the purpose of hedging the market risk on existing
securities or the intended purchase of securities. Futures
contracts are contracts for delayed delivery of securities at a
specific future date and at a specific price or yield. Upon
entering into a contract, the Fund deposits and maintains as
collateral such initial margin as required by the exchange on
which the transaction is effected. Pursuant to the contract, the
Fund agrees to receive from or pay to the broker an amount of
cash equal to the daily fluctuation in value of the contract.
Such receipts or payments are known as variation margin and are
recorded by the Fund as unrealized gains or losses. When the
contract is closed, the Fund records a realized gain or loss
equal to the difference between the value of the contract at the
time it was opened and the value at the time it was closed.
<PAGE>
(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 is recognized on
the accrual basis. Discounts and market premiums are amortized
into interest income. Realized gains and losses on security
transactions are determined on the identified cost basis.
(e) Dividends and distributions--Dividends from net investment
income are declared 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
Fund Asset Management, L.P. ("FAM"). Effective January 1, 1994,
the investment advisory business of FAM was reorganized from a
corporation to a limited partnership. Both prior to and after the
reorganization, ultimate control of FAM was vested with Merrill
Lynch & Co., Inc. ("ML & Co."). The general partner of FAM is
Princeton Services, Inc., an indirect wholly-owned subsidiary of
ML & Co. The limited partners are ML & Co. and Merrill Lynch
Investment Management, Inc. ("MLIM"), which is also an indirect
wholly-owned subsidiary of ML & Co.
FAM 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 an annual rate
of .50% of the Fund's average weekly net assets.
NOTES TO FINANCIAL STATEMENTS (concluded)
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, MLIM, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, and/or ML & Co.
<PAGE>
3. Investments:
Purchases and sales of investments, excluding short-term
securities, for the six months ended March 31, 1994 were
$19,188,040 and $22,755,340, respectively.
Net realized and unrealized gains as of March 31, 1994 were as
follows:
Realized Unrealized
Gains Gains
Long-term investments $1,679,275 $1,938,997
---------- ----------
Total $1,679,275 $1,938,997
========== ==========
As of March 31, 1994, net unrealized appreciation for Federal
income tax purposes aggregated $1,938,997, of which $3,616,645
related to appreciated securities and $1,677,648 related to
depreciated securities. The aggregate cost of investments at
March 31, 1994 for Federal income tax purposes was $73,676,820.
4. Capital Stock Transactions:
At March 31, 1994, the Fund had one class of shares of Common
Stock, par value $.10 per share, of which 150,000,000 shares were
authorized. For the six months ended March 31, 1994, shares
issued and outstanding increased by 77,093 to 8,053,709 as a
result of dividend reinvestment. At March 31, 1994, total paid-in
capital amounted to $75,078,704.
5. Subsequent Event:
On April 8, 1994, the Fund's Board of Directors declared an
ordinary income dividend to Common Stock shareholders in the
amount of $.0465 per share, payable on April 28, 1994 to
shareholders of record as of April 18, 1994.
<PAGE>
PER SHARE INFORMATION
<TABLE>
Per Share Selected Quarterly Financial Data*
<CAPTION>
Dividends/Distributions
Net Realized Unrealized
Investment Gains Gains Net Investment Capital
For the Quarter Income (Losses) (Losses) Income Gains
<S> <C> <C> <C> <C> <C>
April 1, 1992 to June 30, 1992 $0.15 $0.06 $ 0.22 $(0.15) --
July 1, 1992 to September 30, 1992 0.16 0.10 0.00 (0.16) --
October 1, 1992 to December 31, 1992 0.15 -- 0.02 (0.15) $(0.22)
January 1, 1993 to March 31, 1993 0.15 0.03 0.19 (0.15) --
April 1, 1993 to June 30, 1993 0.15 0.13 0.07 (0.15) --
July 1, 1993 to September 30, 1993 0.15 -- 0.24 (0.15) --
October 1, 1993 to December 31, 1993 0.15 0.10 (0.12) (0.15) (0.23)
January 1, 1994 to March 31, 1994 0.14 0.11 (0.86) (0.14) --
<CAPTION>
Net Asset Value Market Price**
For the Quarter High Low High Low Volume***
<S> <C> <C> <C> <C> <C>
April 1, 1992 to June 30, 1992 $10.16 $ 9.90 $10.25 $ 9.875 515
July 1, 1992 to September 30, 1992 10.54 10.17 11.125 10.125 847
October 1, 1992 to December 31, 1992 10.29 9.98 10.875 10.00 409
January 1, 1993 to March 31, 1993 10.57 10.01 10.875 10.125 384
April 1, 1993 to June 30, 1993 10.49 10.25 10.75 10.00 492
July 1, 1993 to September 30, 1993 10.78 10.37 11.00 10.125 475
October 1, 1993 to December 31, 1993 10.82 10.39 11.125 10.25 431
January 1, 1994 to March 31, 1994 10.59 9.72 10.875 8.875 464
<FN>
*Calculations are based upon Common Shares outstanding at the end of each quarter.
**As reported in the consolidated transaction reporting system.
***In thousands.
</TABLE>
