MERRILL LYNCH
ADJUSTABLE
RATE SECURITIES
FUND, INC.
FUND LOGO
Quarterly Report
August 31, 1997
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
Joseph T. Monagle Jr., 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
Ira P. Shapiro, Secretary
<PAGE>
Custodian
The Bank of New York
90 Washington Street, 12th Floor
New York, NY 10286
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
DEAR SHAREHOLDER
Economic Environment
US economic activity remained vibrant during the quarter ended
August 31, 1997. Gross domestic product rose 3.6% in the second
quarter of 1997 and has exceeded the Federal Reserve Board's (FRB)
noninflationary target of 2.5% in four of the past five quarters. A
lower trade deficit resulting from unexpectedly high net exports and
a continued buildup of inventories were the primary contributors to
second-quarter growth. Although virtually all sectors of the US
economy are exhibiting resounding strength, inflationary pressures
remain nonexistent.
Despite rising just 0.5% for the entire second quarter, consumer
spending rebounded sharply in July rising 0.8%, the biggest gain in
six months. Consequently, the Consumer Confidence Index is at its
highest level since 1969. The housing market, buoyed by relatively
stable interest rates, remains strong. Both new and existing home
sales reached the 5.1 million unit pace in July, matching their
highest level over the past 20 years. In the manufacturing sector,
both factory and durable goods orders remained robust. Factory
orders rose 0.2% in July and have risen at an 11.6% rate in 1997.
Inventory levels again rose sharply for the second consecutive
quarter. Inventory building surged to a $77.7 billion rate in the
second quarter, the second-fastest pace in history. In addition, the
National Purchasing Managers Index, an indicator of overall business
conditions, reached a three-year high in July. The US labor market
still remains tight. In August, the unemployment rate rose just 0.1%
from its 24-year low, to 4.9%. However, despite taut labor
conditions, labor cost pressures remained absent. The Employment
Cost Index rose just 2.8% from a year ago, while average hourly
earnings are rising at a slower pace than in 1996.
<PAGE>
In spite of the risk of higher inflation amid continued strong
economic growth, deflation is occurring on the wholesale level. The
Producer Price Index (PPI) fell 0.1% in July, an unprecedented
seventh consecutive monthly decline, and is down 0.2% from a year
ago. The core PPI, which excludes the more volatile food and energy
components, was also down 0.1% and has declined at a 0.5% rate since
the beginning of the year. Retail inflation continues to ease. The
Consumer Price Index (CPI) edged up 0.2% in July and is up just 2.2%
from a year ago. The core CPI also rose 0.2% and is up 2.4% over the
past year, a 32-year low.
As we enter the final months of 1997, we believe the US economy will
continue on its course of strong-to-moderate growth coupled with low
inflation. Although the FRB has kept monetary policy unchanged since
March, we believe the persistent underlying strength of the US
economy has skewed the risks toward additional monetary policy
tightening. Nevertheless, while it is possible the FRB could raise
interest rates once again, we believe overall interest rate risk
should continue to be limited, as long as inflation remains
restrained.
Portfolio Strategy
The US bond market staged a modest rally during the quarter ended
August 31, 1997. Amid continued reports of low inflation and no
change in monetary policy by the FRB, investors pushed interest
rates lower. The one-year US Treasury bill declined 20 basis points
(0.20%) to 5.66% while the 30-year US Treasury bond fell 30 basis
points to 6.61%. Despite a rise in prepayment fears and an increase
in price volatility, net asset values of the Fund's shares began and
ended the August period unchanged.
Our continued strategy of holding primarily "seasoned" adjustable
rate mortgage securities (ARMS) proved beneficial to the Fund during
the quarter. Seasoned ARMS, those originated over five years ago,
delivered a greater degree of cashflow certainty to the Fund because
of their lower and more stable prepayments. On the other hand, the
newly issued and moderately seasoned ARMS sectors experienced a
tremendous pickup in prepayments, and as a result, a larger degree
of cashflow and price volatility. We do not expect this scenario to
abate in the near term. As such, we believe the seasoned ARMS sector
will continue to exhibit greater price and yield stability than
newly issued and moderately seasoned ARMS.
During the quarter ended August 31, 1997, we reduced our holdings of
US Treasury securities from 10% to 4% and added seasoned ARMS to the
Fund, increasing our total investment in ARMS to nearly 90% of total
net assets. As a result, we lowered the Fund's effective duration
from 0.9 years to 0.7 years. We believe this shift should provide
the Fund additional price and yield stability should interest rate
volatility increase.
<PAGE>
Looking ahead, we will continue to emphasize our current investment
strategy of holding primarily high coupon, high interest rate capped
seasoned ARMS. We believe the cashflow characteristics of these
securities provide the best opportunity to enable the Fund to
maintain our strategy of achieving a yield advantage over money
market instruments while limiting the fluctuation of its 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 with you in our upcoming semi-
annual report to shareholders.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Gregory Mark Maunz)
Gregory Mark Maunz
Vice President and Portfolio Manager
September 26, 1997
PERFORMANCE DATA
About Fund
Performance
<PAGE>
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. However, in the case of certain
eligible investors, the shares 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 approximately 10 years. (There is no initial
sales charge for automatic share conversions.)
* 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. Figures shown in the "Average Annual Total
Return" tables as well as the total returns and cumulative total
returns in the "Performance Summary" 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.
<PAGE>
<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
1996 9.53 9.63 -- 0.587 +7.42
1/1/97--8/31/97 9.63 9.65 -- 0.374 +4.34
------
Total $1.677
Cumulative total return as of 8/31/97: +21.76%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures do not include sales charge; results would be lower if
sales charge was included.
</TABLE>
PERFORMANCE DATA (concluded)
<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
1996 9.54 9.60 -- 0.512 +6.16
1/1/97--8/31/97 9.60 9.62 -- 0.326 +3.81
------
Total $2.835
Cumulative total return as of 8/31/97: +29.11%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures do not reflect deduction of any sales charge; results
would be lower if sales charge was deducted.
</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
1996 9.54 9.61 -- 0.509 +6.23
1/1/97--8/31/97 9.61 9.63 -- 0.324 +3.79
------
Total $1.456
Cumulative total return as of 8/31/97: +18.71%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures do not reflect deduction of any sales charge; results
would be lower if sales charge was deducted.
</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
1995 9.32 9.53 -- 0.582 +8.69
1996 9.53 9.60 -- 0.562 +6.82
1/1/97--8/31/97 9.60 9.62 -- 0.357 +4.17
------
Total $3.134
Cumulative total return as of 8/31/97: +33.19%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures do not include sales charge; results would be lower if
sales charge was included.
</TABLE>
<PAGE>
<TABLE>
Recent
Performance
Results
<CAPTION>
12 Month 3 Month
8/31/97 5/31/97 8/31/96 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares* $9.65 $9.65 $9.56 +0.94% 0.00%
Class B Shares* 9.62 9.62 9.54 +0.84 0.00
Class C Shares* 9.63 9.63 9.55 +0.84 0.00
Class D Shares* 9.62 9.62 9.54 +0.84 0.00
Class A Shares--Total Return* +7.24(1) +1.52(2)
Class B Shares--Total Return* +6.31(3) +1.32(4)
Class C Shares--Total Return* +6.27(5) +1.31(6)
Class D Shares--Total Return* +6.86(7) +1.46(8)
Class A Shares--Standardized 30-day Yield 4.97%
Class B Shares--Standardized 30-day Yield 4.44%
Class C Shares--Standardized 30-day Yield 4.41%
Class D Shares--Standardized 30-day Yield 4.75%
<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 $0.585 per share ordinary
income dividends.
(2)Percent change includes reinvestment of $0.145 per share ordinary
income dividends.
(3)Percent change includes reinvestment of $0.510 per share ordinary
income dividends.
(4)Percent change includes reinvestment of $0.126 per share ordinary
income dividends.
(5)Percent change includes reinvestment of $0.507 per share ordinary
income dividends.
(6)Percent change includes reinvestment of $0.125 per share ordinary
income dividends.
(7)Percent change includes reinvestment of $0.560 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 6/30/97 +7.30% +3.00%
Inception (10/21/94) through 6/30/97 +7.15 +5.53
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 6/30/97 +6.37% +2.37%
Five Years Ended 6/30/97 +4.01 +4.01
Inception (8/2/91) through 6/30/97 +4.26 +4.26
[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 6/30/97 +6.21% +5.21%
Inception (10/21/94) through 6/30/97 +6.20 +6.20
[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 6/30/97 +6.92% +2.64%
Five Years Ended 6/30/97 +4.52 +3.67
Inception (8/2/91) through 6/30/97 +4.78 +4.06
[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 Rate* Certificate of Federal National Mortgage
Mortgage-Backed Deposit Indexed Association:
Obligations** Obligations $ 2,140,255 #131221, 6.95% due 9/01/2021 $ 2,205,952 $ 2,203,794 1.76%
2,144,926 #138541, 7.204% due 12/01/2021 2,211,110 2,208,603 1.76
4,197,860 #307622, 7.394% due 4/01/2023 4,317,716 4,344,785 3.47
Constant Federal Home Loan Mortgage
Maturity Corporation:
Treasury 2,049,299 #645073, 7.755% due 5/01/2015 2,083,881 2,133,118 1.70
Indexed 3,986,443 #840032, 7.483% due 1/01/2019 4,155,639 4,140,917 3.31
Obligations 3,706,901 #606108, 7.896% due 9/01/2019 3,780,645 3,909,038 3.12
2,432,782 #775194, 7.24% due 3/01/2020 2,439,351 2,515,278 2.01
65,093 #785173, 7.64% due 8/01/2020 66,599 66,762 0.05
2,726,324 #845139, 8.035% due 3/01/2022 2,767,460 2,851,572 2.28
4,906,408 #845535, 7.985% due 10/01/2023 5,000,187 5,176,260 4.14
7,493,478 #755170, 7.765% due 8/01/2031 7,746,383 7,774,484 6.21
Federal National Mortgage
Association:
527,108 #21041, 7.31% due 10/01/2013 542,262 524,583 0.42
1,403,861 #21059, 7.44% due 11/01/2013 1,444,221 1,400,042 1.12
1,089,218 #20293, 6.78% due 9/01/2015 1,120,533 1,080,341 0.86
7,011,597 #70169, 7.395% due 12/01/2018 7,313,888 7,313,972 5.85
3,756,698 #142069, 7.637% due 12/01/2021 3,834,180 3,863,538 3.09
2,442,979 #139312, 7.846% due 12/01/2021 2,548,274 2,564,737 2.05
1,770,488 #181278, 7.57% due 9/01/2022 1,814,968 1,808,554 1.45
4,217,482 #200009, 7.581% due 2/01/2023 4,232,818 4,393,436 3.51
5,621,192 #291252, 8.122% due 8/01/2024 5,692,903 5,848,681 4.67
921,158 #309653, 7.22% due 5/01/2025 942,862 949,225 0.76
2,156,139 #324905, 7.813% due 9/01/2025 2,177,967 2,251,592 1.80
6,706,164 Prudential Home Mortgage
Securities Company, Inc., REMIC
(a) 92-35-A1, 8.301% due
11/25/2022 6,873,819 6,841,335 5.47
Cost of Funds 3,436,851 DLJ Mortgage Acceptance Corp.,
Indexed REMIC (a) 91-6-A1, 7.829% due
Obligations 9/25/2021 3,495,653 3,426,110 2.74
<PAGE>
London Interbank 5,046,719 Federal National Mortgage
Offered Rate Association, #305729, 7.97% due
Indexed 2/01/2025 5,196,251 5,250,152 4.20
Obligations 15,005,538 Resolution Trust Corporation,
REMIC (a), 92-C1-B, 7.75% due
8/25/2023 14,452,461 15,033,673 12.01
12,000,000 Saxon Mortgage Securities
Corporation, REMIC (a) 92-3-B,
7.687% due 11/25/2022 12,248,880 12,120,000 9.69
Total Investments in Adjustable
Rate Mortgage-Backed Obligations 110,706,863 111,994,582 89.50
Derivative 13,180,962 Capstead Mortgage Securities
Mortgage-Backed Corporation II, REMIC (a) 93-2I-A3,
Obligations**-- 0.50% due 9/25/2023 204,184 52,724 0.04
Interest Only (b) 56,678,611 DLJ Mortgage Acceptance Corp.,
REMIC (a) 92-6-A1, 0.66% due
7/25/2022 783,610 498,772 0.40
73,027 Federal Home Loan Mortgage
Corporation, REMIC (a)(c) 92-1363-C,
333% due 8/15/2022 1,167,487 586,424 0.47
75 Prudential Home Mortgage
Securities Company, Inc., REMIC
(a) 92-1-A9, 42,989% due 2/25/2022 18,085 8,543 0.01
Sears Mortgage Securities Corp.,
REMIC (a):
3,692 91-K-A4, 5,855% due 9/25/2021 490,032 339,678 0.27
28,927,976 92-12-A3, 0.49% due 7/25/2022 332,770 289,280 0.23
Total Investments in Derivative
Mortgage-Backed Obligations--
Interest Only 2,996,168 1,775,421 1.42
Fixed Rate 3,480,142 Resolution Trust Corporation,
Mortgage-Backed REMIC (a) 92-CHF-B, 7.15% due
Obligations** 12/25/2020 3,521,102 3,473,617 2.77
Total Investments in Fixed Rate
Mortgage-Backed Obligations 3,521,102 3,473,617 2.77
Total Investments in
Mortgage-Backed Obligations 117,224,133 117,243,620 93.69
US Government 5,000,000 United States Treasury Notes,
Obligations 6.125% due 8/31/1998 4,978,516 5,017,200 4.01
<PAGE>
Total Investments in US
Government Obligations 4,978,516 5,017,200 4.01
Short-Term Repurchase 8,890,000 Nikko Securities International,
Securities Agreements*** Inc., purchased on 8/29/1997 to
yield 5.55% to 9/02/1997 8,890,000 8,890,000 7.10
Total Short-Term Securities 8,890,000 8,890,000 7.10
Total Investments $131,092,649 131,150,820 104.80
============
Liabilities in Excess of Other
Assets (6,011,792) (4.80)
------------ -------
Net Assets $125,139,028 100.00%
============ =======
Net Asset Value: Class A--Based on net assets of $635,810
and 65,859 shares outstanding $ 9.65
============
Class B--Based on net assets of $98,823,368
and 10,267,837 shares outstanding $ 9.62
============
Class C--Based on net assets of $5,573,481
and 578,847 shares outstanding $ 9.63
============
Class D--Based on net assets of $20,106,369
and 2,090,024 shares outstanding $ 9.62
============
<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>
