MERRILL LYNCH PENNSYLVANIA
MUNICIPAL BOND FUND
Quarterly Report October 31, 1994
TO OUR SHAREHOLDERS
Concerns of increasing inflationary pressures continued to prompt
volatility in the US stock and bond markets during the October
quarter. In addition, the weakness of the US dollar in foreign
exchange markets prolonged stock and bond market declines. Early in
the period, the possibility of continued monetary policy tightening
by the Federal Reserve Board was predominant in the minds of
investors. However, a lower-than-expected rate of growth reported
for the US economy during the second calendar quarter allayed
inflationary concerns to some degree, despite the fifth increase
this year in short-term interest rates made by the central bank in
mid-August.
Inflationary expectations surfaced again with the announcement of
significant upward revisions in industrial production and capacity
utilization for the May--July period. When the central bank did not
raise short-term interest rates at the late September Federal Open
Market Committee meeting, financial markets rallied on the
expectation that the US economy was not overheating and therefore
significant further monetary policy tightening would not be
necessary. Also encouraging were reports that consumer spending is
increasing at a lower rate than has been the case in recent economic
recoveries. Nevertheless, shortly after the conclusion of the
October quarter, investor sentiment had again deteriorated. The
report of better-than-expected growth in the gross domestic product
for the three months ended September 30, combined with evidence of a
still-robust manufacturing sector and renewed US dollar weakness,
all rekindled concerns that short-term interest rates would soon
resume their upward trend.
In the weeks ahead, investors will continue to assess economic data
and inflationary trends in order to gauge whether further increases
in short-term interest rates are imminent. Continued indications of
moderate and sustainable levels of economic growth would be positive
for the US capital markets.
<PAGE>
The Municipal Market
The long-term tax-exempt market continued to erode throughout the
three months ended October 31, 1994. As measured by the Bond Buyer
Revenue Bond Index, yields on A-rated municipal revenue bonds
maturing in 30 years rose by almost 50 basis points (0.50%) to 6.95%
during the October 31, 1994 quarter. This represents the highest
level in tax-exempt bond yields in over two years. US Treasury bonds
suffered even greater declines during the quarter as Treasury bond
yields rose approximately 60 basis points to end the quarter at
8.00%.
The tax-exempt bond market reacted negatively throughout the October
quarter to indications that, despite a series of interest rate
increases by the Federal Reserve Board, the strength of the domestic
economy seen in recent quarters has not yet been significantly
reduced. While inflationary pressures have remained well contained,
additional Federal Reserve Board actions have been expected both to
ensure that domestic economic growth is eventually confined to
current levels and to assure nervous financial markets of its
anti-inflationary intentions.
Fortunately, while the demand for tax-exempt bonds has declined
somewhat in recent months, new bond issuance has remained greatly
reduced. During the quarter ended October 31, 1994, only $32 billion
in long-term tax-exempt securities were issued, a decline of over
50% versus the October 31, 1993 quarter. Similarly, for the six
months ended October 31, 1994, only $75 billion in municipal
securities were underwritten, a decline of over 50% versus the
comparable period a year earlier. This reduction in issuance in
recent quarters has allowed the municipal bond market to react to
both the decline in investor demand and the rise in fixed-income
yields in a more orderly fashion than in similar situations in the
past, particularly during 1987.
Long-term tax-exempt revenue bonds currently yield approximately 7%,
or almost 11.5% on an after-tax equivalent basis, to an investor in
the 39.6% Federal income tax bracket. As inflation has only
marginally increased in the past year, real tax-exempt interest
rates have risen dramatically. The Federal Reserve Board appears
committed to maintaining inflation at or below its current levels.
Indeed, most forecasts expect inflation to remain in its present
range of 3%--4% throughout 1995 and, potentially, for the remainder
of the 1990s. Real after-tax equivalent interest rates exceeding 7%
represent historically attractive municipal investments for
long-term investors.
<PAGE>
Federal Reserve Board actions taken thus far have yet to fully
impact US domestic growth and expected additional actions should
promote only a modest economic expansion within a benign
inflationary context beginning sometime early in 1995. Within such
an environment, it is unlikely that tax-exempt interest rates will
remain at their current attractive levels. Tax-exempt bond issuance
is unlikely to return to the historic high levels seen in 1992 and
1993, while investor demand should return as markets stabilize. As
we have discussed in earlier reports, the total number of tax-exempt
bonds outstanding is scheduled to decline dramatically in 1994 and
1995 as a result of both regular bond maturities and early
redemptions. Investors seeking tax-advantaged issues are likely to
find it very difficult to obtain currently available tax-exempt
yields as the current supply/demand balance is unlikely to be
maintained in the coming quarters.
Portfolio Strategy
The Pennsylvania sector of the tax-exempt market experienced a sharp
contraction in supply during the quarter ended October 31, 1994.
When measured against the same period of the prior year,
Pennsylvania tax-exempt issuance actually decreased by more than
75%. As a result, Pennsylvania securities became a scarce commodity
relative to national issues and were repriced to expensive levels to
reflect the strong technical dynamics.
Portfolio decisions throughout the October quarter were guided by a
decidedly conservative posture because we anticipate further
volatility in the marketplace. We have maintained cash reserves at
approximately 10% of net assets in light of this uncertain market
environment. Looking ahead, we will continue to pursue a defensive
posture, placing emphasis on those securities offering an attractive
level of tax-exempt income and significant call protection.
We appreciate your ongoing interest in Merrill Lynch Pennsylvania
Municipal Bond Fund, and we look forward to serving your investment
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
November 21, 1994
<PAGE>
PORTFOLIO COMPOSITION
For the Quarter Ended October 31, 1994
Distribution by Market Sector*
Other Revenue Bonds 61.7%
Prerefunded Bonds** 15.9
General Obligation & Tax Revenue Bonds 15.6
Utility Revenue Bonds 6.8
------
Total 100.0%
======
Net assets as of October 31, 1994 were $147,367,728.
[FN]
*Based on total market value of the portfolio as of October 31, 1994.
**Backed by an escrow fund.
++Temporary investments in short-term municipal securities.
Quality Ratings*
GRAPHIC MATERIAL APPEARS HERE.
SEE APPENDIX GRAPHIC AND IMAGE MATERIAL ITEM 1.
PERFORMANCE DATA
About Fund Performance
Since October 21, 1994, investors have been able to purchase shares
of the Fund through the Merrill Lynch Select Pricing SM System,
which offers four pricing alternatives:
* Class A Shares incur a maximum initial sales charge (front-end
load) of 4.00% and bear no ongoing distribution or account
maintenance fees. Class A Shares are available only to eligible
investors.
<PAGE>
* Class B Shares are subject to a maximum contingent deferred sales
charge of 4.00% if redeemed during the first year, decreasing 1.00%
each year thereafter to 0.00% after the fourth 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 10 years.
* Class C Shares are subject to a distribution fee of 0.35% and an
account maintenance fee of 0.25%. In addition, Class C Shares are
subject to a 1.00% contingent deferred sales charge if redeemed
within one year of purchase.
* Class D Shares incur a maximum initial sales charge of 4.00% and
an account maintenance fee of 0.10% (but no distribution fee).
The performance data for the Fund's Class A and Class B Shares are
presented in the "Average Annual Total Return" tables below. Data
for all of the Fund's shares, including Class C and Class D Shares,
are presented in the "Recent Performance Results" table. The "Recent
Performance Results" table below shows investment results before the
deduction of any sales charges for Class A and Class B Shares for
the 12-month and 3-month periods ended October 31, 1994 and for
Class C and Class D Shares for the period since inception through
October 31, 1994. All data in this table assume imposition of the
actual total expenses incurred by each class of shares during the
relevant period.
None of the past results shown should 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.
<TABLE>
Recent Performance Results
<CAPTION>
12 Month 3 Month
10/31/94 7/31/94++ 10/31/93 % Change % Change++
<S> <C> <C> <C> <C> <C>
Class A Shares* $10.53 $11.00 $11.72 -9.84%(1) -4.27%
Class B Shares* 10.53 11.00 11.72 -9.84(1) -4.27
Class C Shares* 10.53 10.68 -- -- -1.40
Class D Shares* 10.54 10.68 -- -- -1.31
Class A Shares--Total Return* -4.67(2) -2.93(3)
Class B Shares--Total Return* -5.15(4) -3.05(5)
Class C Shares--Total Return* -- -1.30(6)
Class D Shares--Total Return* -- -1.20(7)
Class A Shares--Standardized 30-day Yield 5.31%
Class B Shares--Standardized 30-day Yield 5.01%
<PAGE>
<FN>
*Investment results shown do not reflect sales charges; results shown would be lower
if a sales charge was included.
++Investment results for Class C and Class D Shares are since inception (10/21/94).
(1)Percent change includes reinvestment of $0.040 per share ordinary income dividends.
(2)Percent change includes reinvestment of $0.622 per share ordinary income dividends
and $0.040 per share capital gains distributions.
(3)Percent change includes reinvestment of $0.150 per share ordinary income dividends.
(4)Percent change includes reinvestment of $0.566 per share ordinary income dividends
and $0.040 per share capital gains distributions.
(5)Percent change includes reinvestment of $0.136 per share ordinary income dividends.
(6)Percent change includes reinvestment of $0.001 per share ordinary income dividends.
(7)Percent change includes reinvestment of $0.002 per share ordinary income dividends.
</TABLE>
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 9/30/94 -2.77% -6.66%
Inception (8/31/90)
through 9/30/94 +8.29 +7.22
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 9/30/94 -3.19% -6.84%
Inception (8/31/90)
through 9/30/94 +7.75 +7.75
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
<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.
Officers and Trustees
Arthur Zeikel, President and Trustee
Kenneth S. Axelson, Trustee
Herbert I. London, Trustee
Robert R. Martin, Trustee
Joseph L. May, Trustee
Andre F. Perold, Trustee
Terry K. Glenn, Executive Vice President
Donald C. Burke, Vice President
Vincent R. Giordano, Vice President
Kenneth A. Jacob, Vice President
Gerald M. Richard, Treasurer
Jerry Weiss, Secretary
Custodian
State Street Bank and Trust Company
P.O. Box 351
Boston, Massachusetts 02101
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
(800) 637-3863
Merrill Lynch Pennsylvania Municipal Bond Fund
Merrill Lynch Multi-State Municipal Series Trust
Box 9011
Princeton, New Jersey 08543-9011
<PAGE>
APPENDIX GRAPHIC AND IMAGE MATERIAL.
ITEM 1:
Quality Ratings*
(Based on Nationally Recognized Rating Services)
A pie chart illustrating the following percentages:
AAA/Aaa 31%
AA/Aa 8%
A/A 24%
BBB/Baa 26%
NR 3%
Other++ 8%
[FN]
*Based on total market value of the portfolio as of October 31, 1994.
++Temporary investments in short-term municipal securities.
