MERRILL LYNCH
ADJUSTABLE
RATE SECURITIES
FUND, INC.
FUND LOGO
Quarterly Report
August 31,1996
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.
<PAGE>
Merrill Lynch
Adjustable Rate
Securities Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND, INC.
Officers and
Directors
Arthur Zeikel, President and Director
Joe Grills, Director
Walter Mintz, Director
Robert S. Salomon Jr., Director
Melvin R. Seiden, Director
Stephen B. Swensrud, 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
James W. Harshaw, Secretary
<PAGE>
Custodian
The Bank of New York
90 Washington Street, 12th Floor
New York, New York 10286
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
(800) 637-3863
DEAR SHAREHOLDER
Economic Environment
The US economy grew at an extremely rapid pace in the second quarter
of 1996 as gross domestic product (GDP) was reported to have risen
at a rate of 4.8%. Much of the strength in second quarter GDP
continued to be fueled by large increases in both consumer spending
and residential construction. However, despite brisk second-quarter
growth and increased inflationary fears, the Federal Reserve Board
refrained from tightening monetary policy during the second quarter.
Recent economic data indicate the US economy is slowing to a more
moderate and sustainable rate as consumer spending and housing
growth are slowing from their pace in the first half of 1996.
High levels of debt began to constrain consumers and consumer
spending slowed. Led by declines in automobile sales, retail sales
were reported negative in three out of the last four months. In
addition, the level of consumer borrowing slowed. Consumer credit
rose at just a 7.6% annual rate in the four months ended July 31,
1996, the slowest pace since 1993. Rising interest rates in 1996
appear to have finally dampened activity in the housing sector.
Residential construction spending fell for the third consecutive
month, falling 1.5% in July. Furthermore, total single-family
housing starts fell 5.7% in July, while total single-unit permits
(an indicator of future housing activity) fell 1.4%, the third
consecutive monthly decline.
Nonetheless, strong employment reports during the August quarter
pushed interest rates higher on concerns that tight labor markets
will accelerate wage/price inflation. The unemployment rate fell to
5.1% in August, the lowest rate since 1989, and the lowest rate,
with the exception of one month, in 23 years. Although wage growth
continues to run higher in 1996 as compared to 1995 (3.2% through
August versus 2.9% in 1995), higher wages have had little impact on
inflationary pressures in 1996. Through July, the core consumer
price index remains at a 30-year low, up just 2.7% from a year ago.
More important, inflation is virtually non-existent on the wholesale
level. Through July 1996, the core producer price index rose at a
0.7% annual rate and is up just 1.5% from a year ago. As a result of
increased global competitive pressures, corporate pricing power is
reduced. Consequently, the impact of higher labor costs cannot be
passed through in terms of higher prices, but rather are being felt
in reduced corporate profit margins.
<PAGE>
In the current economic environment, the effect of wage/price
inflation remains the greatest threat for interest rates. Although
we believe competitive forces will ultimately limit price inflation,
there still remains the risk the Federal Reserve Board will tighten
monetary policy as long as the economy remains at full employment
and wages increase.
Portfolio Strategy
During the quarter ended August 31, 1996, interest rates rose once
again. The yield on the one-year US Treasury bill rose 15 basis
points (0.15%) to 5.89% while the 30-year US Treasury bond yield
rose 12 basis points to 7.12%. The yield curve continues to remain
steep, particularly at the front end, as the yield spread between
the three-month Treasury bill and three-year Treasury note stands at
125 basis points. A steep yield curve offers significant yield
advantages for adjustable rate mortgage securities (ARMS) compared
to similar duration money market instruments.
With interest rates rising during the August quarter, ARM durations
extended slightly in response to the increase in interest rate cap
costs. Despite the increase in ARM durations, we kept our overall
portfolio duration at slightly less than one year (0.95 years). As
we anticipated in our last shareholder report, ARM originations
increased during the period ended August 31, 1996. ARM issuance rose
to $4.5 billion in both June and July, the highest level since
December 1995. However, despite the increase in ARM supply, yield
spreads did not widen since investor demand remained strong.
With the threat of higher short-term interest rates amid a
tightening of monetary policy by the Federal Reserve Board still
possible, our investment strategy remains unchanged. We continue to
emphasize high-coupon, high-cap, seasoned ARMS to provide high
current income while seeking to enhance net asset value stability.
Despite high interest rate volatility during the 12 months ended
August 31, 1996, the net asset values of the Fund's Class A, Class
B, Class C and Class D Shares varied less than 1.0%. The Fund
remains 80% invested in ARMS with a weighted average coupon reset of
5.9 months. (Complete performance information, including average
annual total returns, can be found on pages 3--5 of this report to
shareholders.)
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 with you in our upcoming semi-
annual report to shareholders.
Sincerely,
<PAGE>
(Arthur Zeikel)
Arthur Zeikel
President
(Gregory Mark Maunz)
Gregory Mark Maunz
Vice President and Portfolio Manager
September 27, 1996
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:
* 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. (There is no initial sales charge for
automatic share conversions.)
<PAGE>
* 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).
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 A Shares++
<CAPTION>
Net Asset Value Capital Gains Dividends
Period Covered Beginning Ending Distributed Paid* % Change**
<S> <C> <C> <C> <C> <C>
10/21/94--12/31/94 $9.46 $9.33 -- $0.110 -0.21%
1995 9.33 9.53 -- 0.606 +8.86
1/1/96--8/31/96 9.53 9.56 -- 0.375 +4.53
------
Total $1.091
Cumulative total return as of 8/31/96: +13.54%**
</TABLE>
<TABLE>
Performance
Summary--
Class B 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 -- $0.268 +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
1995 9.33 9.54 -- 0.533 +8.13
1/1/96--8/31/96 9.54 9.54 -- 0.328 +3.66
------
Total $2.325
Cumulative total return as of 8/31/96: +21.45%***
</TABLE>
<PAGE>
<TABLE>
Performance
Summary--
Class C Shares
<CAPTION>
Net Asset Value Capital Gains Dividends
Period Covered Beginning Ending Distributed Paid* % Change***
<S> <C> <C> <C> <C> <C>
10/21/94--12/31/94 $9.46 $9.33 -- $0.095 -0.37%
1995 9.33 9.54 -- 0.528 +8.08
1/1/96--8/31/96 9.54 9.55 -- 0.326 +3.74
------
Total $0.949
Cumulative total return as of 8/31/96: +11.71%***
</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 -- 0.434 +0.25
1995 9.32 9.53 -- 0.582 +8.69
1/1/96--8/31/96 9.53 9.54 -- 0.359 +4.13
------
Total $2.573
Cumulative total return as of 8/31/96: +24.63%**
<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.
***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 were redesignated to Class D Shares.
</TABLE>
<PAGE>
<TABLE>
Recent
Performance
Results
<CAPTION>
12 Month 3 Month
8/31/96 5/31/96 8/31/95 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares* $9.56 $9.54 $9.52 +0.42% +0.21%
Class B Shares* 9.54 9.53 9.52 +0.21 +0.10
Class C Shares* 9.55 9.53 9.52 +0.32 +0.21
Class D Shares* 9.54 9.52 9.51 +0.32 +0.21
Class A Shares--Total Return* +6.88(1) +1.76(2)
Class B Shares--Total Return* +5.80(3) +1.45(4)
Class C Shares--Total Return* +5.87(5) +1.55(6)
Class D Shares--Total Return* +6.49(7) +1.69(8)
Class A Shares--Standardized 30-day Yield 5.90%
Class B Shares--Standardized 30-day Yield 5.40%
Class C Shares--Standardized 30-day Yield 5.35%
Class D Shares--Standardized 30-day Yield 5.67%
<FN>
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included.
(1)Percent change includes reinvestment of $0.598 per share ordinary
income dividends.
(2)Percent change includes reinvestment of $0.144 per share ordinary
income dividends.
(3)Percent change includes reinvestment of $0.523 per share ordinary
income dividends.
(4)Percent change includes reinvestment of $0.126 per share ordinary
income dividends.
(5)Percent change includes reinvestment of $0.519 per share ordinary
income dividends.
(6)Percent change includes reinvestment of $0.125 per share ordinary
income dividends.
(7)Percent change includes reinvestment of $0.573 per share ordinary
income dividends.
(8)Percent change includes reinvestment of $0.138 per share ordinary
income dividends.
</TABLE>
Average Annual
Total Return
% Return Without % Return With
Sales Charge Sales Charge**
<PAGE>
Class A Shares*
Year Ended 6/30/96 +6.59% +2.32%
Inception (10/21/94) through 6/30/96 +7.05 +4.50
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 6/30/96 +5.75% +1.75%
Inception (8/2/91) through 6/30/96 +3.84 +3.84
[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 % Return
Without CDSC With CDSC**
Class C Shares*
Year Ended 6/30/96 +5.81% +4.81%
Inception (10/21/94) through 6/30/96 +6.18 +6.18
[FN]
*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 6/30/96 +6.09% +1.85%
Inception (8/2/91) through 6/30/96 +4.35 +3.48
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Face Percent of
Index Amount Issue Cost Value Net Assets
<S> <S> <C> <S> <C> <C> <C>
Adjustable Certificate Federal National Mortgage Association:
Rate* of Deposit $ 544,880 #162619, 6.725% due 6/01/2022 $ 548,104 $ 552,966 0.39%
Mortgage- Indexed 4,771,147 #307622, 6.934% due 4/01/2023 4,908,997 4,926,973 3.45
Backed Obligations
Obligations**
Constant Maturity Federal Home Loan Mortgage Corporation:
Treasury Indexed 2,297,748 #645073, 7.762% due 5/01/2015 2,336,522 2,337,958 1.63
Obligations 4,492,698 #606108, 7.625% due 9/01/2019 4,583,462 4,686,467 3.28
2,960,574 #755194, 7.024% due 3/01/2020 2,968,698 3,032,753 2.12
66,148 #785173, 7.416% due 8/01/2020 67,678 66,995 0.05
3,703,669 #845139, 7.781% due 3/01/2022 3,760,213 3,818,261 2.67
6,150,912 #845535, 7.771% due 10/01/2023 6,269,719 6,293,152 4.40
8,518,429 #755170, 7.413% due 8/01/2031 8,805,925 8,710,093 6.09
Federal National Mortgage Association:
546,360 #21041, 6.73% due 10/01/2013 562,068 544,098 0.38
1,633,288 #21059, 6.96% due 11/01/2013 1,680,245 1,629,058 1.14
1,237,012 #20293, 6.17% due 9/01/2015 1,272,576 1,227,685 0.86
5,339,887 #142069, 6.816% due 12/01/2021 5,450,022 5,450,048 3.81
4,566,810 #200009, 7.563% due 2/01/2023 4,583,623 4,675,272 3.27
7,851,853 #291252, 7.772% due 8/01/2024 7,952,905 8,119,287 5.68
2,980,192 #324905, 7.244% due 9/01/2025 3,010,622 3,014,185 2.11
9,885,517 Prudential Home Mortgage Securities
Company, Inc., REMIC (a) 92-35-A1,
8.115% due 10/01/2022 10,132,655 10,002,908 7.00
Cost of Funds 4,551,641 DLJ Mortgage Acceptance Corp., REMIC (a)
Indexed Obligations 91-6-A1, 7.819% due 9/01/2021 4,629,517 4,554,486 3.18
London Interbank 6,611,702 Federal National Mortgage Association,
Offered Rate #305729, 7.63% due 2/01/2025 6,809,440 6,843,112 4.78
Indexed Resolution Trust Corporation, REMIC (a):
Obligations 6,510,813 91-M7-B, 7.44% due 1/25/2021 6,510,813 6,478,259 4.53
15,005,310 92-C1-B, 7.44% due 8/25/2023 14,452,231 15,117,850 10.57
12,000,000 Saxon Mortgage Securities Corporation,
REMIC (a) 92-3-B, 7.435% due 11/25/2022 12,270,781 12,195,000 8.53
Total Investments in Adjustable Rate
Mortgage-Backed Obligations 113,566,816 114,276,866 79.92
<PAGE>
Derivative 17,509,624 Capstead Mortgage Securities Corporation II,
Mortgage-Backed REMIC (a) 93-2I-A3, 0.50% due 9/25/2023 242,786 113,813 0.08
Obligations**-- 72,317,725 DLJ Mortgage Acceptance Corp., REMIC (a)
Interest Only (b) 92-6-A1, 0.644% due 7/25/2022 1,014,957 788,263 0.55
85,384 Federal Home Loan Mortgage Corporation,
REMIC (a)(c) 92-1363-C, 371% due 8/15/2022 1,413,274 597,685 0.42
157 Prudential Home Mortgage Securities Company,
Inc., REMIC (a) 92-1-A9, 42,989%
due 2/25/2022 69,434 28,735 0.02
18,704,779 Residential Funding Mortgage Securities I,
Inc., REMIC (a) 92-S3-A9, 0.50% due
1/25/2007 1,913,055 5,845 0.00
Sears Mortgage Securities Corp., REMIC (a):
4,607 91-K-A4, 5,774% due 9/25/2021 626,467 453,783 0.32
38,660,184 92-12-A3, 0.52% due 7/25/2022 437,021 483,252 0.34
Total Investments in Derivative
Mortgage-Backed Obligations--Interest Only 5,716,994 2,471,376 1.73
Fixed Rate 7,682,354 Kidder Peabody Acceptance Corporation,
Mortgage-Backed REMIC (a) 93-M1-A2, 7.15% due 4/25/2025 7,649,120 7,451,883 5.21
Obligations** 4,899,921 Resolution Trust Corporation, REMIC (a)
92-CHF-B, 7.15% due 12/25/2020 4,958,532 4,898,390 3.43
Total Investments in Fixed Rate
Mortgage-Backed Obligations 12,607,652 12,350,273 8.64
Total Investments in Mortgage-Backed
Obligations 131,891,462 129,098,515 90.29
US Government 10,000,000 United States Treasury Notes, 5.125% due
Obligations 2/28/1998 9,949,219 9,845,300 6.89
Total Investments in US Government
Obligations 9,949,219 9,845,300 6.89
Short-Term Repurchase 2,680,000 Nikko Securities International, Inc.,
Securities Agreements*** purchased on 8/30/96 to yield 5.26% to
9/03/1996 2,680,000 2,680,000 1.87
Total Short-Term Securities 2,680,000 2,680,000 1.87
Total Investments $144,520,681 141,623,815 99.05
============
Other Assets Less Liabilities 1,353,962 0.95
------------ ------
Net Assets $142,977,777 100.00%
============ ======
<PAGE>
Net Asset Value: Class A--Based on net assets of $266,656 and 27,899 shares
outstanding $ 9.56
============
Class B--Based on net assets of $127,862,069 and 13,397,697 shares
outstanding $ 9.54
============
Class C--Based on net assets of $2,132,297 and 223,284 shares
outstanding $ 9.55
============
Class D--Based on net assets of $12,716,755 and 1,333,342 shares
outstanding $ 9.54
============
<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
the underlying collateral and little or no principal. Interest only
securities have either a nominal or a notional amount of principal.
(c)Adjustable rate coupon that resets inversely to changes in the
London Interbank Offered Rate.
</TABLE>
