MERRILL LYNCH
ADJUSTABLE
RATE SECURITIES
FUND, INC.
FUND LOGO
Quarterly Report
February 28, 1995
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.
Merrill Lynch
Adjustable Rate
Securities Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND, INC.
<PAGE>
Officers and
Directors
Arthur Zeikel, President and Director
Joe Grills, Director
Walter Mintz, Director
Melvin R. Seiden, Director
Stephen B. Swensrud, Director
Harry Woolf, Director
Terry K. Glenn, Executive Vice President
N. John Hewitt, Senior Vice President
Donald C. Burke, Vice President
Jeffrey B. Hewson, Vice President
Theodore J. Magnani, Vice President
Gregory Mark Maunz, Vice President
Gerald M. Richard, Treasurer
Michael J. Hennewinkel, Secretary
Custodian
The Bank of New York
90 Washington Street
New York, New York 10286
Transfer Agent
Financial Data Services, Inc.
Transfer Agency Mutual Funds Operations
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
(800) 637-3863
DEAR SHAREHOLDER
Economic Environment
The US economy continues to show resounding strength as fourth-
quarter gross domestic product (GDP) grew at a robust 4.6% rate,
once again exceeding the Federal Reserve Board's non-inflationary
threshold target of 2.5%. As a result, the Federal Reserve Board
raised interest rates again, pushing both the Federal Funds and
discount rates up 50 basis points (0.50%) to 6.00% and 5.25%,
respectively, in February. Nonetheless, recent economic data
indicate US growth appears to be moderating from its torrid fourth-
quarter pace.
<PAGE>
Much of the surge in fourth-quarter GDP is attributable to continued
strength from both the consumer and housing sectors. Consumer
spending rose 5.0% in the fourth quarter, up from a 3.1% pace in the
third quarter, largely in response to sharp increases in consumer
durable goods purchases. In addition, after declining 6.0% in the
third quarter, residential construction rose 0.7% in the fourth
quarter, despite rising interest rates throughout the period.
However, recent data point to a slowdown in both these sectors in
the early part of 1995. In February, retail sales fell 0.5% after
advancing just 0.2% in January, down significantly from its previous
six-month pace of 0.8%. In addition, automobile sales in January
grew at their slowest rate in over five months. New residential
housing starts were reported to have fallen 9.8% in January while
existing home sales declined 4.3%, indicating the effects of higher
interest rates are appearing to take hold of the interest rate-
sensitive sectors of the economy. Meanwhile, the Mortgage Bankers
Association Purchase Index, which measures the pace of new mortgage
applications, has fallen well below its historical average.
While economic growth has remained above the Federal Reserve Board's
non-inflationary threshold over the past six quarters, inflationary
pressures have remained temperate. In January, the core rate of
inflation, as measured by the consumer price index, rose just 2.9%
over the previous year. Furthermore, wage pressures are restrained.
Despite an increase in non-farm payrolls of 3.5 million workers in
1994 and a more competitive labor market, hourly wages as measured
in January have risen only 2.7% over the prior year. More
importantly, significant gains in worker productivity in 1994 have
limited the increase in unit labor costs, which are ultimately
passed on to the consumer. Unit labor costs rose just 0.9% in 1994
after rising 1.7% in 1993, the smallest increase in 30 years.
While the US economy appears to be slowing and first-quarter GDP is
likely to be reported lower, the possibility of further Federal
Reserve Board monetary action is contingent upon the degree to which
GDP growth slows. If growth remains above the Federal Reserve
Board's non-inflationary expectations, further Federal Reserve Board
interest rate increases are likely. If GDP growth falls within the
Federal Reserve Board's non-inflationary targets, the Federal
Reserve Board will likely adopt a position of monetary neutrality
which would be highly beneficial to the adjustable rate mortgage
market.
Investment Strategy
Despite exceptionally strong economic growth in the fourth quarter,
yields on fixed-income securities fell during the period ended
February 28, 1995. The yield on the one-year Treasury bill declined
47 basis points to 6.41% while the yield on the 30-year Treasury
bond decreased 56 basis points to 7.44%. The recent decline in
interest rates is attributable to the weakness of recent economic
data and the financial market's perception of a soft-landing for the
US economy. In a soft-landing scenario, a moderating economy
combined with subdued inflation should require limited future
Federal Reserve Board monetary action. As a result, the adjustable
rate mortgage (ARM) market performed extraordinarily well. Effective
margins (an ARM's yield spread to its respective index) narrowed by
20 basis points--25 basis points, causing the prices of ARM
securities to rise.
<PAGE>
Yield spreads on ARM securities have tightened for two primary
reasons. First, despite historically high levels of origination
(ARMs in January accounted for nearly 50% of all mortgages
originated), ARM securitization has been limited as banks have
chosen to hold ARM loans in their own portfolios. This has caused
yield spreads to tighten as a result of market demand exceeding
security availability. Second, as interest rates declined, the risk
of reaching the interim and lifetime caps inherent in ARM securities
diminished. As cap risk lessened, both traditional and non-
traditional buyers of ARM securities increased their purchase of
ARMs, causing yield spreads to tighten and prices to increase.
During the three-month period ended February 28, 1995, the Fund
extended its duration to 1.6 years and increased its holdings of ARM
securities to over 75% of net assets, allowing it to benefit from
the decline in interest rates and the tightening of ARM spreads. In
addition, we continue to improve the quality and liquidity value of
the Fund's investments. As of the end of February, we increased our
holdings of US Government agency backed obligations to over 55% of
net assets. Looking ahead, we will seek to continue to maintain a
cautious and disciplined approach to the Fund's investment strategy
while looking to further improve the quality and liquidity of the
Fund. We will continue to strive to improve the Fund's yield while
limiting net asset value volatility by further increasing our
holdings of frequently adjusting interest rate-sensitive ARM
securities. Nonetheless, barring a significant decline in interest
rates, we expect the Fund's yield to continue to be attractive, as
the coupons of the underlying ARM securities, limited by their
interim caps in 1994, reset in 1995. As the coupons adjust to
current market levels, the price on the security increases thus
providing the opportunity to improve the Fund's net asset values.
In Conclusion
We thank you for your continued investment in Merrill Lynch
Adjustable Rate Securities Fund, Inc., and we look forward to
reviewing our outlook and strategy again with you in our upcoming
annual report to shareholders.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Gregory Mark Maunz)
Gregory Mark Maunz
Vice President and Portfolio Manager
<PAGE>
March 27, 1995
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% and bear no ongoing distribution or account maintenance
fees. Class A Shares are available only to eligible investors, as
detailed in the Fund's prospectus. If you were a Class A shareholder
prior to October 21, 1994, your Class A Shares were redesignated to
Class D Shares on October 21, 1994, which, in the case of certain
eligible investors, were simultaneously exchanged for Class A
Shares.
* Class B Shares are subject to a maximum contingent deferred sales
charge of 4% if redeemed during the first year, decreasing 1% each
year thereafter to 0% after the fourth year. In addition, Class B
Shares are subject to a distribution fee of 0.50% 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 0.55% 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.
* Class D Shares incur a maximum initial sales charge of 4% and an
account maintenance fee of 0.25% (but no distribution fee).
Performance data for the Fund's Class B and Class D Shares are
presented in the "Performance Summary," "Recent Performance Results"
and "Average Annual Total Return" tables on pages 4 and 5. Data for
Class A and Class C Shares are also presented in the "Recent
Performance Results" and "Aggregate Total Return" tables on pages 4
and 5.
The "Recent Performance Results" table shows investment results
before the deduction of any sales charges for Class B and Class D
Shares for the 12-month and 3-month periods ended February 28, 1995
and for Class A and Class C Shares for the since inception and 3-
month periods ended February 28, 1995. All data in this table assume
imposition of the actual total expenses incurred by each class of
shares during the relevant period.
<PAGE>
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. Dividends paid to each class
of shares will vary because of the different levels of account
maintenance, distribution and transfer agency fees applicable to
each class, which are deducted from the income available to be paid
to shareholders.
PERFORMANCE DATA (concluded)
<TABLE>
Performance
Summary--
Class B Shares
<CAPTION>
Net Asset Value Capital Gains Dividends
Period Covered Beginning Ending Distributed Paid* % Change**
<C> <C> <C> <C> <C> <C>
8/2/91--12/31/91 $10.00 $ 9.99 -- $0.268 +2.60%
1992 9.99 9.77 -- 0.497 +2.84
1993 9.77 9.73 -- 0.313 +2.83
1994 9.73 9.33 -- 0.386 -0.14
1/1/95--2/28/95 9.33 9.44 -- 0.066 +2.00
------
Total $1.530
Cumulative total return as of 2/28/95: +10.51%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the payable date, and do not
include sales charge; results would be lower if sales charge was
included.
</TABLE>
<TABLE>
Performance
Summary--
Class D Shares***
<CAPTION>
Net Asset Value Capital Gains Dividends
Period Covered Beginning Ending Distributed Paid* % Change**
<S> <C> <C> <C> <C> <C>
8/2/91--12/31/91 $10.00 $9.99 -- $0.289 +2.82%
1992 9.99 9.77 -- 0.547 +3.36
1993 9.77 9.73 -- 0.362 +3.35
1994 9.73 9.32 -- 0.435 +0.26
1/1/95--2/28/95 9.32 9.43 -- 0.072 +2.17
------
Total $1.705
Cumulative total return as of 2/28/95: +12.51%**
<PAGE>
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the payable date, and do not
reflect deduction of any sales charge; results would be lower if
sales charge was deducted.
***As a result of the implementation of the Merrill Lynch Select
Pricing SM System, Class A Shares of the Fund outstanding prior to
October 21, 1994 have been redesignated to Class D Shares.
</TABLE>
<TABLE>
Recent
Performance
Results
<CAPTION>
12 Month 3 Month
2/28/95 11/30/94 2/28/94++ % Change++ % Change
<S> <C> <C> <C> <C> <C>
Class A Shares* $9.43 $9.37 $9.46 -0.32% +0.64%
Class B Shares* 9.44 9.38 9.72 -2.88 +0.64
Class C Shares* 9.44 9.37 9.46 -0.21 +0.75
Class D Shares* 9.43 9.37 9.72 -2.98 +0.64
Class A Shares--Total Return* +1.88(1) +2.24(2)
Class B Shares--Total Return* +1.43(3) +1.93(4)
Class C Shares--Total Return* +1.72(5) +2.14(6)
Class D Shares--Total Return* +1.94(7) +2.17(8)
Class A Shares--Standardized 30-day Yield 5.14%
Class B Shares--Standardized 30-day Yield 4.58%
Class C Shares--Standardized 30-day Yield 4.53%
Class D Shares--Standardized 30-day Yield 4.90%
<FN>
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included.
++Investment results shown for Class A and Class C Shares are since
inception (10/21/94).
(1)Percent change includes reinvestment of $0.185 per share ordinary
income dividends.
(2)Percent change includes reinvestment of $0.148 per share ordinary
income dividends.
(3)Percent change includes reinvestment of $0.412 per share ordinary
income dividends.
(4)Percent change includes reinvestment of $0.130 per share ordinary
income dividends.
(5)Percent change includes reinvestment of $0.160 per share ordinary
income dividends.
(6)Percent change includes reinvestment of $0.128 per share ordinary
income dividends.
(7)Percent change includes reinvestment of $0.460 per share ordinary
income dividends.
(8)Percent change includes reinvestment of $0.142 per share ordinary
income dividends.
</TABLE>
<PAGE>
Average Annual
Total Return
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 12/31/94 -0.14% -3.98%
Inception (8/2/91) through
12/31/94 +2.37 +2.12
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Year Ended 12/31/94 +0.26% -3.75%
Inception (8/2/91) through
12/31/94 +2.86 +1.64
[FN]
*Maximum sales charge is 4%. On 10/21/94, Class A Shares were
redesignated to Class D Shares.
**Assuming maximum sales charge.
Aggregate
Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Inception (10/21/94) through
12/31/94 -0.21% -4.20%
[FN]
*Maximum sales charge is 4%. On 10/21/94, Class A Shares were
redesignated to Class D Shares.
**Assuming maximum sales charge.
<PAGE>
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Inception (10/21/94) through
12/31/94 -0.37% -1.36%
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Face Percent of
Index Amount Issue Cost Value Net Assets
<S> <S> <C> <S> <C> <C> <C>
Adjustable Rate* Constant Maturity $ 4,123,145 Bear Stearns Secured Investors,
Mortgage-Backed Treasury Indexed Inc. II, Pass-Through 91-1-A,
Obligations** Obligations 8.331% due 11/25/2021 $ 4,200,685 $ 4,080,623 1.70%
Federal Home Loan Mortgage
Corporation:
2,865,022 #645073, 7.745% due 5/01/2015 2,913,369 2,856,068 1.19
4,987,380 #606108, 6.971% due 9/01/2019 5,090,446 5,129,208 2.13
3,526,772 #755194, 6.588% due 3/01/2020 3,536,681 3,547,712 1.48
67,485 #785173, 7.568% due 8/01/2020 69,045 67,106 0.03
6,786,704 #845139, 7.074% due 3/01/2022 6,892,122 6,906,557 2.87
9,253,737 #845535, 7.143% due 10/01/2023 9,435,241 9,499,539 3.95
14,819,351 #845889, 5.463% due 9/01/2024 14,952,601 15,013,855 6.25
11,138,597 #755170, 7.136% due 8/01/2031 11,514,525 11,356,134 4.73
Federal National Mortgage
Association:
692,480 #21041, 7.61% due 10/01/2013 712,389 690,001 0.29
2,289,353 #21059, 7.60% due 11/01/2013 2,355,172 2,288,643 0.95
1,634,269 #20293, 7.62% due 9/01/2015 1,681,254 1,628,615 0.68
6,308,192 #142069, 6.808% due 12/01/2021 6,438,299 6,272,740 2.61
6,411,979 #200009, 7.56% due 2/01/2023 6,435,988 6,493,131 2.70
13,733,611 #291252, 5.745% due 8/01/2024 13,912,511 14,064,076 5.86
19,801,798 Prudential Home Mortgage
Securities Company, Inc.,
REMIC (a) 92-35-A1, 7.786%
due 10/01/2022 20,296,843 20,135,953 8.38
5,579,390 Resolution Trust Corporation,
REMIC (a) 92-6-B4, 7.409%
due 11/25/2025 5,716,865 5,570,672 2.32
<PAGE>
Cost of Funds 6,143,480 DLJ Mortgage Acceptance Corp.,
Indexed REMIC (a) 91-6-A1, 7.837%
Obligations due 9/01/2021 6,285,548 6,043,649 2.52
1,536,644 Kidder Peabody Acceptance
Corporation I, REMIC (a)
88-04-A, 6.586% due 1/01/2019 1,592,347 1,482,385 0.62
1,396,221 Resolution Trust Corporation,
REMIC (a) 91-M3-A1, 7.835%
due 2/25/2020 1,347,353 1,339,936 0.56
2,167,517 Ryland--First Nationwide Trust,
REMIC (a) 88-1-A, 5.695%
due 10/25/2018 2,237,961 2,094,363 0.87
London Interbank 4,665,077 Federal National Mortgage
Offered Rate Indexed Association, #291256,
Obligations 6.216% due 8/01/2024 4,756,332 4,796,282 2.00
328,646 Fund America Investors Corpor-
ation II, Pass-Through 93-K-F,
8.25% 1/25/2023 328,646 327,824 0.14
Resolution Trust Corporation,
REMIC (a):
6,510,700 91-M7-B, 8.00% due 1/25/2021 6,510,700 6,537,150 2.72
15,004,079 92-C1-B, 8.00% due 8/25/2023 14,451,001 15,247,895 6.35
27,000,000 Saxon Mortgage Securities
Corporation, REMIC (a) 92-3-B,
6.489% due 11/25/2022 27,620,000 26,772,201 11.15
Total Investments in
Adjustable Rate Mortgage-
Backed Obligations 181,283,924 180,242,318 75.05
Derivative 30,148,373 Capstead Mortgage Securities
Mortgage-Backed Corporation II, REMIC (a)
Obligations**-- 93-I-A3, 0.50% due 9/25/2023 408,084 241,187 0.10
Interest Only (b) 28,095 Collateralized Mortgage Secur-
ities Corp., REMIC (a)
90-5-L, 759% due 9/20/2020 650,199 431,880 0.18
90,862,503 DLJ Mortgage Acceptance Corp.,
REMIC (a) 92-6-A1, 0.65% due
7/25/2022 1,420,306 1,362,938 0.57
115,056 Federal Home Loan Mortgage
Corporation, REMIC (a)(c)
92-1363-C, 265.793% due 8/15/2022 1,450,995 333,661 0.14
Federal National Mortgage
Association, REMIC (a):
39,036 91-G-46-K, 1,009% due 12/25/2009 1,434,247 993,358 0.41
1,721 90-142-K, 1,163% due 7/25/2014 80,005 10,961 0.00
3,556,738 Federal National Mortgage
Association, Trust 32-2,
<PAGE> 8.50% due 4/01/2018 3,215,168 1,107,035 0.46
314 Prudential Home Mortgage
Securities Company, Inc.,
REMIC (a) 92-1-A9, 42,990%
due 2/25/2022 55,031 91,781 0.04
26,663,299 Residential Funding Mortgage
Securities I, Inc., REMIC (a)
92-S3-A9, 0.50% due 1/25/2007 2,092,419 124,998 0.05
Sears Mortgage Securities Corp.,
REMIC (a):
4,468 91-K-A4, 5,871% due 9/25/2021 663,534 571,941 0.24
57,604,101 92-12-A3, 0.52% due 7/25/2022 713,272 504,036 0.21
Total Investments in Derivative
Mortgage-Backed Obligations 12,183,260 5,773,776 2.40
Fixed Rate 8,445,137 Kidder Peabody Acceptance
Mortgage-Backed Corporation, REMIC (a)
Obligations** 93-M1-A2, 7.15% due 4/25/2025 8,408,604 8,088,858 3.37
7,513,044 Resolution Trust Corporation,
REMIC (a) 92-CHF-B, 7.15%
due 12/25/2020 7,604,909 7,333,436 3.05
Total Investments in Fixed Rate
Mortgage-Backed Obligations 16,013,513 15,422,294 6.42
Total Investments in Mortgage-
Backed Obligations 209,480,697 201,438,388 83.87
Short-Term Repurchase 10,600,000 Nikko Securities International,
Securities Agreements*** Inc., purchased on 2/28/1995 to
yield 6.10% to 3/01/1995 10,600,000 10,600,000 4.41
US Government 27,500,000 US Treasury Notes, 8.50% due
Obligations 5/15/1995 27,630,370 27,637,500 11.51
Total Short-Term Securities 38,230,370 38,237,500 15.92
Total Investments $247,711,067 239,675,888 99.79
============
Other Assets Less Liabilities 507,449 0.21
------------ -------
Net Assets $240,183,337 100.00%
============ =======
<PAGE>
Net Asset Value: Class A--Based on net assets of $338,848 and
35,920 shares outstanding $ 9.43
============
Class B--Based on net assets of $222,796,117 and
23,610,855 shares outstanding $ 9.44
============
Class C--Based on net assets of $304,432 and
32,262 shares outstanding $ 9.44
============
Class D--Based on net assets of $16,743,940
and 1,775,232 shares outstanding $ 9.43
============
<FN>
*Adjustable Rate Obligations have coupon rates which reset
periodically.
**Mortgage-Backed Obligations are subject to principal paydowns as a
result of prepayments or refinancings of the underlying mortgage
instruments. As a result, the average life may be substantially less
than the original maturity.
***Repurchase Agreements are fully collateralized by US Government &
Agency Obligations.
(a) Real Estate Mortgage Investment Conduits (REMIC).
(b)Securities which receive some or all of the interest portion of
their underlying collateral and little or no principal. Interest
Only securities have either a nominal or notional amount of
principal.
(c)Adjustable rate coupon that resets inversely to changes in London
Interbank Offered Rate.
</TABLE>
