MUNIYIELD
MICHIGAN
FUND, INC.
STRATEGIC
Performance
Annual Report
October 31, 1997
<PAGE>
MuniYield Michigan Fund, Inc.
TO OUR SHAREHOLDERS
For the year ended October 31, 1997, the Common Stock of MuniYield Michigan
Fund, Inc. earned $0.896 per share income dividends, which included earned and
unpaid dividends of $0.076. This represents a net annualized yield of 5.75%,
based on a month-end per share net asset value of $15.58. Over the same period,
the total investment return on the Fund's Common Stock was +8.35%, based on a
change in per share net asset value from $15.29 to $15.58, and assuming
reinvestment of $0.897 per share income dividends.
For the six-month period ended October 31, 1997, the total investment return on
the Fund's Common Stock was +6.53%, based on a change in per share net asset
value from $15.07 to $15.58, and assuming reinvestment of $0.450 per share
income dividends.
For the six-month period ended October 31, 1997, the Fund's Auction Market
Preferred Stock had an average yield of 3.68%.
The Municipal Market Environment
Long-term interest rates generally declined during the six-month period ended
October 31, 1997. The general financial environment has remained one of solid
economic growth tempered by few or no inflationary pressures. While economic
growth has been conducive to declining bond yields, it has remained strong
enough to suggest that the Federal Reserve Board (FRB) might find it necessary
to raise short-term interest rates. This would be intended to slow economic
growth and ensure that any incipient inflationary pressures would be curtailed.
There were investor concerns that the FRB would be forced to raise interest
rates prior to year-end, thus preventing an even more dramatic decline in
interest rates. Long-term tax-exempt revenue bonds, as measured by the Bond
Buyer Revenue Bond Index, declined over 50 basis points (0.50%) to end the
six-month period ended October 31, 1997 at 5.60%.
Similarly, long-term US Treasury bond yields generally moved lower during most
of the six-month period ended October 31, 1997. However, the turmoil in the
world's equity markets during the last week in October has resulted in a
significant rally in the Treasury bond market. The US Treasury bond market was
the beneficiary of a flight to quality mainly by foreign investors whose own
domestic markets have continued to be very volatile. Prior to the initial
decline in Asian equity markets, long-term US Treasury bond yields were
essentially unchanged. By the end of October, US Treasury bond yields declined
80 basis points to 6.15%, their lowest level of 1997.
The tax-exempt bond market's continued underperformance as compared to its
taxable counterpart has been largely in response to its ongoing weakening
technical position. As municipal bond yields have declined, municipalities have
hurriedly rushed to refinance outstanding higher-couponed debt with new issues
financed at present low rates. During the last six months, over $118 billion in
new long-term tax-exempt issues were underwritten, an increase of over 25%
versus the comparable period a year ago. As interest rates have continued to
decline, these refinancings have intensified municipal bond issuance. During the
past three months, approximately $60 billion in new long-term municipal
securities were underwritten, an increase of over 34% as compared to the October
31, 1996 quarter. Issuance in Michigan has very closely mirrored national
underwriting trends. During the six months ended October 31, 1997, more than
$3.5 billion in long-term municipal bonds were issued by Michigan
municipalities, an increase of 27% versus the comparable period a year ago.
During the three months ended October 31, 1997, $1.8 billion in Michigan
securities were issued, an increase of 35% as compared to the October 31, 1996
quarter.
The recent trend toward larger and larger bond issues has also continued.
However, issues of such magnitude usually must be attractively priced to ensure
adequate investor interest. Obviously, the yields of other municipal bond issues
are impacted by the yield premiums such large issuers have been required to pay.
Much of the municipal bond
1
<PAGE>
MuniYield Michigan Fund, Inc. October 31, 1997
market's recent underperformance can be traced to market pressures that these
large bond issuances have exerted.
In our opinion, the recent correction in world equity markets has enhanced the
near-term prospects for continued low, if not declining, interest rates in the
United States. It is likely that the recent correction will result in slower US
domestic growth in the coming months. This decline is likely to be generated in
part by reduced US export growth. Additionally, some decline in consumer
spending also can be expected in response to reduced consumer confidence.
Perhaps more importantly, it is likely that barring a dramatic and unexpected
resurgence in domestic growth, the FRB may be unwilling to raise interest rates
until the full impact of the equity market's corrections can be established.
All of these factors suggest that for at least the near term, interest rates,
including tax-exempt bond yields, are unlikely to rise by any appreciable
amount. It is probable that municipal bond yields will remain under some
pressure as a result of continued strong new-issue supply. However, the recent
pace of municipal bond issuance is likely to be unsustainable. Continued
increases in bond issuance will require lower tax-exempt bond yields to generate
the economic savings necessary for additional municipal bond refinancing. With
tax-exempt bond yields at already attractive yield ratios relative to US
Treasury bonds (approximately 90% at the end of October), any further pressure
on the municipal market may represent an attractive investment opportunity.
Portfolio Strategy
During the six months ended October 31, 1997, we largely maintained the
defensive posture we had adopted earlier in the year. Our principal concern was
that economic growth would remain strong enough to force the FRB to raise
interest rates prior to year-end. We believed that as long as the potential for
FRB action remained, it was more likely that interest rates would be raised than
lowered. We believed that the Fund's core position of interest rate-sensitive
securities would allow the Fund to remain competitive should economic growth
weaken and interest rates fall.
However, the turmoil in the world's equity markets during October has removed
almost all concerns regarding any additional action by the FRB in the near term.
Additionally, it is likely that economic growth in the United States will be
slower than expected as a result of the recent stock market correction.
Consequently, we adopted a more neutral position until the full economic impact
of the world equity markets' correction can be determined. Looking ahead, we
expect to remain fully invested going into 1998 in order to seek to enhance
yield for Common Stock shareholders.
Short-term tax-exempt interest rates have continued to trade in a relatively
narrow range, mostly between 3.50% and 3.75%. During the period ended October
31, 1997, the leverage of the Preferred Stock was very favorable and
significantly augmented the yield paid to the Common Stock shareholders.
However, should the spread between short-term and long-term tax-exempt interest
rates narrow, the benefits of the leverage will decline and the yield on the
Common Stock will be reduced. (For a complete explanation of the benefits and
risks of leveraging, see page 4 of this report to shareholders.)
In Conclusion
We appreciate your ongoing interest in MuniYield Michigan Fund, Inc., and we
look forward to assisting you with your financial needs in the months and years
ahead.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Vincent R. Giordano
Vincent R. Giordano
Senior Vice President
/s/ Fred K. Stuebe
Fred K. Stuebe
Vice President and Portfolio Manager
November 28, 1997
2
<PAGE>
MuniYield Michigan Fund, Inc. October 31, 1997
PROXY RESULTS
During the six-month period ended October 31, 1997, MuniYield Michigan Fund,
Inc. Common Stock shareholders voted on the following proposals. The proposals
were approved at a shareholders' meeting on September 18, 1997. The description
of each proposal and number of shares voted are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Shares Voted Shares Withheld
For From Voting
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. To elect the Fund's Board of Directors: James H. Bodurtha 7,355,143 147,862
Herbert I. London 7,350,790 152,215
Robert R. Martin 7,347,015 155,990
Arthur Zeikel 7,347,794 155,211
- ----------------------------------------------------------------------------------------------
<CAPTION>
Shares Voted Shares Voted Shares Voted
For Against Abstain
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2. To select Deloitte & Touche LLP as the Fund's
independent auditors. 7,346,028 37,426 119,551
- ----------------------------------------------------------------------------------------------
</TABLE>
During the six-month period ended October 31, 1997, MuniYield Michigan Fund,
Inc. Preferred Stock shareholders voted on the following proposals. The
proposals were approved at a shareholders' meeting on September 17, 1997. The
description of each proposal and number of shares voted are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Shares Voted Shares Withheld
For From Voting
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. To elect the Fund's Board of Directors: James H. Bodurtha 2,198 0
Herbert I. London 2,198 0
Robert R. Martin 2,198 0
Joseph L. May 2,198 0
Andre F. Perold 2,198 0
Arthur Zeikel 2,198 0
- ----------------------------------------------------------------------------------------------
<CAPTION>
Shares Voted Shares Voted Shares Voted
For Against Abstain
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2. To select Deloitte & Touche LLP as the Fund's
independent auditors. 2,196 2 0
- ------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
MuniYield Michigan Fund, Inc. October 31, 1997
THE BENEFITS AND RISKS OF LEVERAGING
MuniYield Michigan Fund, Inc. utilizes leveraging to seek to enhance the yield
and net asset value of its Common Stock. However, these objectives cannot be
achieved in all interest rate environments. To leverage, the Fund issues
Preferred Stock, which pays dividends at prevailing short-term interest rates,
and invests the proceeds in long-term municipal bonds. The interest earned on
these investments is paid to Common Stock shareholders in the form of dividends,
and the value of these portfolio holdings is reflected in the per share net
asset value of the Fund's Common Stock. However, in order to benefit Common
Stock shareholders, the yield curve must be positively sloped; that is,
short-term interest rates must be lower than long-term interest rates. At the
same time, a period of generally declining interest rates will benefit Common
Stock shareholders. If either of these conditions change, then the risks of
leveraging will begin to outweigh the benefits.
To illustrate these concepts, assume a fund's Common Stock capitalization of
$100 million and the issuance of Preferred Stock for an additional $50 million,
creating a total value of $150 million available for investment in long-term
municipal bonds. If prevailing short-term interest rates are approximately 3%
and long-term interest rates are approximately 6%, the yield curve has a
strongly positive slope. The fund pays dividends on the $50 million of Preferred
Stock based on the lower short-term interest rates. At the same time, the fund's
total portfolio of $150 million earns the income based on long-term interest
rates. Of course, increases in short-term interest rates would reduce (and even
eliminate) the dividends on the Common Stock.
In this case, the dividends paid to Preferred Stock shareholders are
significantly lower than the income earned on the fund's long-term investments,
and therefore the Common Stock shareholders are the beneficiaries of the
incremental yield. However, if short-term interest rates rise, narrowing the
differential between short-term and long-term interest rates, the incremental
yield pickup on the Common Stock will be reduced or eliminated completely. At
the same time, the market value of the fund's Common Stock (that is, its price
as listed on the New York Stock Exchange) may, as a result, decline.
Furthermore, if long-term interest rates rise, the Common Stock's net asset
value will reflect the full decline in the price of the portfolio's investments,
since the value of the fund's Preferred Stock does not fluctuate. In addition to
the decline in net asset value, the market value of the fund's Common Stock may
also decline.
PORTFOLIO ABBREVIATIONS
To simplify the listings of MuniYield Michigan 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)
HDA Housing Development Authority
PCR Pollution Control Revenue Bonds
S/F Single-Family
UT Unlimited Tax
VRDN Variable Rate Demand Notes
4
<PAGE>
MuniYield Michigan Fund, Inc. October 31, 1997
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
- --------------------------------------------------------------------------------
Michigan--98.3%
- --------------------------------------------------------------------------------
Battle Creek, Michigan, Tax Increment Finance
Authority Revenue Bonds (f):
A- NR* $ 1,320 7.10% due 5/01/2004 $ 1,532
A- NR* 1,000 7.40% due 5/01/2004 1,178
- --------------------------------------------------------------------------------
AAA Aaa 3,545 Capital Region Airport Authority, Michigan,
Airport Revenue Bonds, AMT, 6.60% due
7/01/2012 (c) 3,850
- --------------------------------------------------------------------------------
A A3 1,500 Detroit, Michigan, Local Development Finance
Authority, Revenue Refunding Bonds, Senior
Series A, 5.375% due 5/01/2021 1,477
- --------------------------------------------------------------------------------
Detroit, Michigan, Sewage Disposal Revenue
Bonds (d)(f):
AAA Aaa 5,040 6.625% due 7/01/2001 5,541
AAA Aaa 2,005 6.70% due 7/01/2001 2,209
- --------------------------------------------------------------------------------
AAA Aaa 3,125 East Grand Rapids, Michigan, Public School
District (Building and Site), UT, 5% due
5/01/2016 (c) 3,019
- --------------------------------------------------------------------------------
AAA Aaa 2,000 Grand Ledge, Michigan, Public Schools
District, UT, 6.45% due 5/01/2014 (c) 2,209
- --------------------------------------------------------------------------------
Grand Rapids, Michigan, Water Supply System,
Revenue Refunding Bonds (d):
AAA Aaa 5,850 6.50% due 1/01/2015 6,295
A1+ VMIG1+ 300 VRDN, 3.50% due 1/01/2020 (a) 300
- --------------------------------------------------------------------------------
Kalamazoo, Michigan, Hospital Finance
Authority, Hospital Facility, Revenue
Refunding and Improvement Bonds (Bronson
Methodist), Series A:
A A1 2,500 6.25% due 5/15/2012 2,685
A A1 1,750 6.375% due 5/15/2017 1,877
- --------------------------------------------------------------------------------
AAA Aaa 7,100 Kent, Michigan, Hospital Finance Authority,
Health Care Revenue Bonds (Butterworth Health
Systems), Series A, 5.625% due 1/15/2026 (c) 7,174
- --------------------------------------------------------------------------------
AAA Aaa 2,500 Kent, Michigan, Hospital Finance Authority,
Hospital Facility, Revenue Refunding Bonds
(Pine Rest Christian Hospital), 6.50% due
11/01/2010 (d) 2,714
- --------------------------------------------------------------------------------
Michigan Higher Education Student Loan
Authority Revenue Bonds, AMT:
NR* A 1,250 Series XIV-A, 6.75% due 10/01/2006 1,344
A1 VMIG1+ 300 VRDN, Series XII-D, 3.70% due
10/01/2015 (a)(b) 300
- --------------------------------------------------------------------------------
Michigan Municipal Bond Authority Revenue
Bonds:
A NR* 1,100 (Local Government Loan--Revenue Sharing),
Series B, 5.80% due 11/01/2013 1,140
AA Aa2 2,500 Refunding (Local Government--Qualified
School), Series A, 6.50% due 5/01/2016 2,730
AA+ Aa1 4,700 (State Revolving Fund), Series A, 6.55%
due 10/01/2002 (f) 5,238
- --------------------------------------------------------------------------------
AAA Aaa 4,440 Michigan State Building Authority, Facilities
Program Revenue Bonds, Series I, 6.50% due
10/01/2007 (b) 5,079
- --------------------------------------------------------------------------------
Michigan State, HDA, Rental Housing Revenue
Bonds:
A+ NR* 2,915 AMT, Series A, 7.15% due 4/01/2010 3,098
A+ NR* 4,375 Series B, 7.10% due 4/01/2021 4,623
- --------------------------------------------------------------------------------
Michigan State, HDA, S/F Mortgage Revenue
Bonds:
AA+ NR* 2,500 Refunding, Series C, 6.50% due 6/01/2016 2,606
AA+ NR* 1,000 Series A, 6.80% due 12/01/2012 1,060
AA+ NR* 3,325 Series A, 6.875% due 6/01/2023 3,497
- --------------------------------------------------------------------------------
Michigan State Hospital Finance Authority
Revenue Bonds:
AAA Aa2 1,750 (Henry Ford Health System), Series A, 7%
due 7/01/2000 (f) 1,907
AAA Aaa 2,000 (Mercy Health Services), Series R, 5.375%
due 8/15/2026 (b) 1,975
A A1 1,000 (Mid-Michigan Obligation Group), 6.90% due
12/01/2024 1,093
AAA Aaa 2,000 (Oakwood Hospital Obligation Group), 7.10%
due 7/01/2000 (d)(f) 2,185
A A2 5,875 Refunding (Detroit Medical Center Obligation
Group), Series A, 6.50% due 8/15/2018 6,331
AA Aa2 2,500 Refunding (Henry Ford Health System), Series
A, 5.25% due 11/15/2020 2,461
5
<PAGE>
MuniYield Michigan Fund, Inc. October 31, 1997
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
- --------------------------------------------------------------------------------
Michigan (concluded)
- --------------------------------------------------------------------------------
Michigan State Hospital Finance Authority
Revenue Bonds (concluded):
AA Aa2 $ 3,500 Refunding (Henry Ford Health System),
Series A, 5.25% due 11/15/2025 $ 3,429
AA- Aaa 1,250 (Sisters of Mercy Health Corp.), Series
J, 7.50% due 2/15/2001 (f) 1,397
- --------------------------------------------------------------------------------
Michigan State Strategic Fund, Limited
Obligation Revenue Bonds, AMT:
A A1 2,500 (Ford Motor Co. Project), Series A,
6.55% due 10/01/2022 2,682
A- A1 2,500 (Waste Management Inc. Project), 6.625%
due 12/01/2012 2,696
- --------------------------------------------------------------------------------
Michigan State Strategic Fund, Limited
Obligation, Revenue Refunding Bonds:
AAA Aaa 7,500 (Detroit Edison Co. Plantation Project),
6.875% due 12/01/2021 (d) 8,226
AAA Aaa 2,500 (Detroit Edison Co. Project), Series CC,
6.95% due 9/01/2021 (d) 2,738
A A1 8,000 (Ford Motor Co. Project), Series A, 7.10%
due 2/01/2006 9,376
- --------------------------------------------------------------------------------
A- A3 2,500 Michigan State Strategic Fund, PCR,
Refunding (General Motors Corp.), 6.20%
due 9/01/2020 2,641
- --------------------------------------------------------------------------------
Michigan State Trunk Line, Series A:
AA- A1 1,000 5.625% due 11/15/2013 1,032
AA- A1 1,370 5.70% due 11/15/2016 1,402
- --------------------------------------------------------------------------------
Monroe County, Michigan, Economic Development
Corp., Limited Obligation Revenue Refunding
Bonds (Detroit Edison Co. Project):
AAA Aaa 6,500 Series AA, 6.95% due 9/01/2022 (d) 8,003
NR* P1 100 VRDN, Series CC, 3.75% due 10/01/2024 (a) 100
- --------------------------------------------------------------------------------
AAA Aaa 1,960 Muskegon, Michigan, Public Schools, UT,
Series 95, 5.25% due 5/01/2018 (d) 1,917
- --------------------------------------------------------------------------------
AAA Aaa 5,000 Oxford, Michigan, Area Community School
District (Building and Site), UT, 5.40%
due 5/01/2025 (d) 5,000
- --------------------------------------------------------------------------------
AA Aa2 1,370 Plymouth-Canton, Michigan, Community School
District, Refunding, UT, Series A, 6.625%
due 5/01/2016 1,482
- --------------------------------------------------------------------------------
AA Aa2 2,250 Reeths-Puffer, Michigan, Schools Building,
UT, Series Q, 6.625% due 5/01/2002 (f) 2,498
- --------------------------------------------------------------------------------
AAA Aaa 2,000 Romulus, Michigan, Community Schools, UT,
Series I, 6.75% due 5/01/2001 (e)(f) 2,200
- --------------------------------------------------------------------------------
Royal Oak, Michigan, Hospital Finance
Authority, Hospital Revenue Bonds (William
Beaumont Hospital):
AA Aa3 2,250 Refunding, Series G, 5.25% due 11/15/2019 2,212
AA Aaa 6,000 Series D, 6.75% due 1/01/2001 (f) 6,552
AA Aa2 6,250 Series D, 6.75% due 1/01/2001 (f) 6,821
A1+ VMIG1+ 700 VRDN, Series J, 3.70% due 1/01/2003 (a) 700
- --------------------------------------------------------------------------------
AAA Aaa 2,000 South Redford, Michigan, School District,
UT, 5.25% due 5/01/2016 (d) 1,993
- --------------------------------------------------------------------------------
AA Aa1 2,510 University of Michigan, University Housing
Revenue Bonds, Series A, 5.50% due
11/15/2017 2,573
- --------------------------------------------------------------------------------
AAA Aaa 3,500 Western Michigan University, General
Revenue Refunding Bonds, 5.125% due
11/15/2022 (d) 3,401
- --------------------------------------------------------------------------------
AAA Aaa 2,400 Western Michigan University, Revenue
Refunding Bonds, Series B, 6.50% due
7/15/2021 (b) 2,604
- --------------------------------------------------------------------------------
Total Investments (Cost--$159,140)--98.3% 172,402
Other Assets Less Liabilities--1.7% 2,990
--------
Net Assets--100.0% $175,392
========
- --------------------------------------------------------------------------------
(a) The interest rate is subject to change periodically based upon prevailing
market rates. The interest rate shown is the rate in effect at October 31,
1997.
(b) AMBAC Insured.
(c) MBIA Insured.
(d) FGIC Insured.
(e) FSA Insured.
(f) Prerefunded.
* Not Rated.
+ Highest short-term rating by Moody's Investors Service, Inc. Ratings of
issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
6
<PAGE>
MuniYield Michigan Fund, Inc. October 31, 1997
FINANCIAL INFORMATION
Statement of Assets, Liabilities and Capital as of October 31, 1997
<TABLE>
<CAPTION>
<C> <S> <C> <C>
Assets: Investments, at value (identified cost--$159,140,378) (Note 1a) ...... $ 172,402,097
Cash ................................................................. 28,113
Interest receivable .................................................. 3,306,120
Prepaid expenses and other assets .................................... 9,174
-------------
Total assets ......................................................... 175,745,504
- -------------------------------------------------------------------------------------------------------------------
Liabilities: Payables:
Dividends to shareholders (Note 1f) .................................. $ 204,131
Investment adviser (Note 2) .......................................... 78,846 282,977
-------------
Accrued expenses and other liabilities ............................... 70,856
-------------
Total liabilities .................................................... 353,833
-------------
- -------------------------------------------------------------------------------------------------------------------
Net Assets: Net assets ........................................................... $ 175,391,671
=============
- -------------------------------------------------------------------------------------------------------------------
Capital: Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.05 per share (2,200 shares of AMPS*
issued and outstanding at $25,000 per share liquidation preference) $ 55,000,000
Common Stock, par value $.10 per share (7,727,210 shares issued
and outstanding) ................................................. $ 772,721
Paid-in capital in excess of par ................................... 107,755,155
Undistributed investment income--net ............................... 1,294,808
Accumulated realized capital losses on investments--net ............ (2,692,732)
Unrealized appreciation on investments--net ........................ 13,261,719
-------------
Total--Equivalent to $15.58 net asset value per share of Common Stock
(market price--$15.125) ............................................ 120,391,671
-------------
Total capital ...................................................... $ 175,391,671
=============
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
*Auction Market Preferred Stock.
See Notes to Financial Statements.
7
<PAGE>
MuniYield Michigan Fund, Inc. October 31, 1997
FINANCIAL INFORMATION (continued)
Statement of Operations
<TABLE>
<CAPTION>
For the Year Ended
October 31, 1997
- ----------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Investment Income Interest and amortization of premium and discount earned .. $10,285,610
(Note 1d):
- ----------------------------------------------------------------------------------------------------------------------
Expenses: Investment advisory fees (Note 2) ......................... $ 872,678
Commission fees (Note 4) .................................. 139,568
Professional fees ......................................... 75,975
Accounting services (Note 2) .............................. 60,979
Transfer agent fees ....................................... 38,794
Printing and shareholder reports .......................... 32,939
Directors' fees and expenses .............................. 23,055
Listing fees .............................................. 16,197
Custodian fees ............................................ 12,798
Pricing fees .............................................. 6,992
Amortization of organization expenses (Note 1e) ........... 2,525
Other ..................................................... 15,604
-----------
Total expenses ............................................ 1,298,104
-----------
Investment income--net .................................... 8,987,506
-----------
- ----------------------------------------------------------------------------------------------------------------------
Realized & Realized gain on investments--net .................. ....... 541,037
Unrealized Change in unrealized appreciation on investments--net ...... 1,615,126
Gain on -----------
Investments--Net Net Increase in Net Assets Resulting from Operations ....... $11,143,669
(Notes 1b, 1d & 3): ===========
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
MuniYield Michigan Fund, Inc. October 31, 1997
FINANCIAL INFORMATION (continued)
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the Year Ended October 31,
------------------------------
Increase (Decrease) in Net Assets: 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations: Investment income--net ............................................... $ 8,987,506 $ 9,074,635
Realized gain (loss) on investments--net ............................. 541,037 (985,746)
Change in unrealized appreciation/depreciation on investments--net ... 1,615,126 1,836,470
------------- -------------
Net increase in net assets resulting from operations ................. 11,143,669 9,925,359
------------- -------------
- ----------------------------------------------------------------------------------------------------------------------
Dividends & Investment income--net:
Distributions to Common Stock ....................................................... (6,932,397) (7,166,707)
Shareholders Preferred Stock .................................................... (1,965,766) (1,936,440)
(Note 1f): In excess of realized gain on investments--net:
Common Stock ....................................................... -- (315,864)
Preferred Stock .................................................... -- (75,526)
------------- -------------
Net decrease in net assets resulting from dividends and distributions
to shareholders ...................................................... (8,898,163) (9,494,537)
------------- -------------
- ----------------------------------------------------------------------------------------------------------------------
Capital Stock Value of shares issued to Common Stock shareholders in reinvestment of
Transactions dividends and distributions .......................................... -- 115,368
------------- -------------
(Note 4): Net increase in net assets derived from capital stock transactions ... -- 115,368
------------- -------------
- ----------------------------------------------------------------------------------------------------------------------
Net Assets: Total increase in net assets ......................................... 2,245,506 546,190
Beginning of year .................................................... 173,146,165 172,599,975
------------- -------------
End of year* ......................................................... $ 175,391,671 $ 173,146,165
============= =============
- ----------------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net ................................. $ 1,294,808 $ 1,205,465
============= =============
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
MuniYield Michigan Fund, Inc. October 31, 1997
FINANCIAL INFORMATION (concluded)
Financial Highlight
The following per share data and ratios have been derived
from information provided in the financial statements.
<TABLE>
<CAPTION>
For the Year Ended October 31,
--------------------------------------------------------
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year .............. $ 15.29 $ 15.23 $ 14.05 $ 16.59 $ 14.22
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .......................... 1.16 1.18 1.19 1.20 1.21
Realized and unrealized gain (loss) on
investments--net ................................ .28 .11 1.47 (2.44) 2.41
-------- -------- -------- -------- --------
Total from investment operations ................ 1.44 1.29 2.66 (1.24) 3.62
-------- -------- -------- -------- --------
Less dividends and distributions to Common
Stock shareholders:
Investment income--net ....................... (.90) (.93) (.92) (.96) (1.00)
Realized gain on investments--net ............ -- -- (.27) (.10) (.05)
In excess of realized gain on investments--net -- (.04) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions to Common
Stock shareholders .............................. (.90) (.97) (1.19) (1.06) (1.05)
-------- -------- -------- -------- --------
Effect of Preferred Stock activity:
Dividends and distributions to Preferred
Stock shareholders:
Investment income--net ..................... (.25) (.25) (.23) (.22) (.19)
Realized gain on investments--net .......... -- -- (.06) (.02) (.01)
In excess of realized gain on
investments--net ........................... -- (.01) -- -- --
Total effect of Preferred Stock activity ........ (.25) (.26) (.29) (.24) (.20)
-------- -------- -------- -------- --------
Net asset value, end of year .................... $ 15.58 $ 15.29 $ 15.23 $ 14.05 $ 16.59
======== ======== ======== ======== ========
Market price per share, end of year ............. $ 15.125 $ 14.50 $ 13.875 $ 12.625 $ 16.625
======== ======== ======== ======== ========
- ----------------------------------------------------------------------------------------------------------------------------------
Total Investment Based on market price per share ................. 10.92% 11.67% 19.93% (18.40%) 19.54%
Return:* ======== ======== ======== ======== ========
Based on net asset value per share .............. 8.35% 7.28% 18.29% (9.00%) 24.78%
======== ======== ======== ======== ========
- ----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Expenses ........................................ .74% .75% .76% .76% .74%
======== ======== ======== ======== ========
Net Assets:** Investment income--net .......................... 5.15% 5.26% 5.50% 5.25% 5.32%
======== ======== ======== ======== ========
- ----------------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, net of Preferred Stock, end of
Data: year (in thousands) ............................. $120,392 $118,146 $117,600 $108,467 $128,078
======== ======== ======== ======== ========
Preferred Stock outstanding, end of
year (in thousands) ............................. $ 55,000 $ 55,000 $ 55,000 $ 55,000 $ 55,000
======== ======== ======== ======== ========
Portfolio turnover .............................. 16.06% 19.73% 15.47% 18.88% 12.88%
======== ======== ======== ======== ========
- ----------------------------------------------------------------------------------------------------------------------------------
Leverage: Asset coverage per $1,000 ....................... $ 3,189 $ 3,148 $ 3,138 $ 2,972 $ 3,329
======== ======== ======== ======== ========
- ----------------------------------------------------------------------------------------------------------------------------------
Dividends Per Share Investment income--net .......................... $ 894 $ 880 $ 806 $ 765 $ 647
On Preferred Stock ======== ======== ========= ========= ========
Outstanding:+
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns based on market value, which can be significantly
greater or lesser than the net asset value, may result in substantially
different returns. Total investment returns exclude the effects of sales
loads.
** Do not reflect the effect of dividends to Preferred Stock shareholders.
+ Dividends per share have been adjusted to reflect a two-for-one stock
split that occurred on December 1, 1994.
See Notes to Financial Statements.
10
<PAGE>
MuniYield Michigan Fund, Inc. October 31, 1997
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniYield Michigan 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 New York Stock Exchange under the symbol MYM. 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. Financial futures contracts and options thereon,
which are traded on exchanges, are valued at their closing price 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 with remaining maturities of sixty days or
less are valued at amortized cost, which approximates market value. 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, including valuations furnished by a pricing service
retained by the Fund, which may utilize a matrix system for valuations. The
procedures of the pricing service and its valuations are reviewed by the
officers of the Fund under general supervision of the Board of Directors.
(b) Derivative financial instruments--The Fund may engage in various portfolio
strategies to seek to increase its return by hedging its portfolio against
adverse movements in the debt markets. Losses may arise due to changes in the
value of the contract or if the counterparty does not perform under the
contract.
o 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.
o Options--The Fund is authorized to write covered call options and purchase put
options. When the Fund writes an option, an amount equal to the premium received
by the Fund is reflected as an asset and an equivalent liability. The amount of
the liability is subsequently marked to market to reflect the current market
value of the option written.
When a security is purchased or sold through an exercise of an option, the
related premium paid (or received) is added to (or deducted from) the basis of
the security acquired or deducted from (or added to) the proceeds of the
security sold. When an option expires (or the Fund enters into a closing
transaction), the Fund realizes a gain or loss on the option to the extent of
the premiums received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received). Written and purchased
options are non-income producing investments.
(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) Deferred organization expenses--Deferred organization expenses are amortized
on a straight-line basis over a five-year period.
11
<PAGE>
MuniYield Michigan Fund, Inc. October 31, 1997
NOTES TO FINANCIAL STATEMENTS (concluded)
(f) 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"). The general partner of FAM is Princeton Services, Inc.
("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML &
Co."), which is the limited partner.
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 0.50% of the Fund's average weekly net assets.
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, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended October 31, 1997 were $26,861,772 and $27,176,118, respectively.
Net realized and unrealized gains (losses) as of October 31, 1997 were as
follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains
- --------------------------------------------------------------------------------
Long-term investments ................... $ 1,140,925 $13,261,719
Financial futures contracts ............. (599,888) --
----------- -----------
Total ................................... $ 541,037 $13,261,719
=========== ===========
- --------------------------------------------------------------------------------
As of October 31, 1997, net unrealized appreciation for Federal income tax
purposes aggregated $13,261,719, all of which related to appreciated securities.
The aggregate cost of investments at October 31, 1997 for Federal income tax
purposes was $159,140,378.
4. Capital Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock, including
Preferred Stock, par value $.10 per share, all of which were initially
classified as Common Stock. The Board of Directors is authorized, however, to
reclassify any unissued shares of capital stock without approval of the holders
of Common Stock.
Common Stock
Shares issued and outstanding during the year ended October 31, 1997 remained
constant and during the year ended October 31, 1996 increased by 7,779 as a
result of dividend reinvestment.
Preferred Stock
Auction Market Preferred Stock ("AMPS") are shares of Preferred Stock of the
Fund that entitle their holders to receive cash dividends at an annual rate that
may vary for the successive dividend periods. The yield in effect at October 31,
1997 was 3.60%.
As of October 31, 1997, there were 2,200 AMPS shares authorized, issued and
outstanding with a liquidation preference of $25,000 per share.
The Fund pays commissions to certain broker-dealers at the end of each auction
at an annual rate ranging from 0.25% to 0.375%, calculated on the proceeds of
each auction. For the year ended October 31, 1997, Merrill Lynch, Pierce Fenner
& Smith Inc., an affiliate of FAM, earned $111,925 as commissions.
5. Subsequent Event:
On November 6, 1997, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of $.075874 per share,
payable on November 26, 1997 to shareholders of record as of November 17, 1997.
12
<PAGE>
MuniYield Michigan Fund, Inc. October 31, 1997
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of
MuniYield Michigan Fund, Inc.:
We have audited the accompanying statement of assets, liabilities and capital,
including the schedule of investments, of MuniYield Michigan Fund, Inc. as of
October 31, 1997, the related statements of operations for the year then ended
and changes in net assets for each of the years in the two-year period then
ended, and the financial highlights for each of the years in the five-year
period then ended. These financial statements and the financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with gener-ally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at October
31, 1997 by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MuniYield Michigan
Fund, Inc. as of October 31, 1997, the results of its operations, the changes in
its net assets, and the financial highlights for the respective stated periods
in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
December 3, 1997
13
<PAGE>
MuniYield Michigan Fund, Inc. October 31, 1997
IMPORTANT TAX INFORMATION (unaudited)
All of the net investment income distributions paid by MuniYield Michigan Fund,
Inc. during its taxable year ended October 31, 1997 qualify as tax-exempt
interest dividends for Federal income tax purposes.
Additionally, there were no capital gains distributed.
Please retain this information for your records.
14
<PAGE>
MuniYield Michigan Fund, Inc. October 31, 1997
OFFICERS AND DIRECTORS
Arthur Zeikel, President and Director
James H. Bodurtha, Director
Herbert I. London, Director
Robert R. Martin, Director
Joseph L. May, Director
Andre F. Perold, Director
Terry K. Glenn, Executive Vice President
Vincent R. Giordano, Senior Vice President
Donald C. Burke, Vice President
Kenneth A. Jacob, Vice President
Fred K. Stuebe, Vice President
Gerald M. Richard, Treasurer
Philip M. Mandel, Secretary
Custodian
The Bank of New York
90 Washington Street
New York, NY 10286
Transfer Agents
Common Stock:
The Bank of New York
101 Barclay Street
New York, NY 10286
Preferred Stock:
IBJ Schroder Bank & Trust Company
One State Street
New York, NY 10004
NYSE Symbol
MYM
15
<PAGE>
This report, including the financial information herein, is transmitted to the
shareholders of MuniYield Michigan 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. The Fund has leveraged its Common Stock by issuing Preferred Stock
to provide the Common Stock shareholders with a potentially higher rate of
return. Leverage creates risks for Common Stock shareholders, including the
likelihood of greater volatility of net asset value and market price of shares
of the Common Stock, and the risk that fluctuations in the short-term dividend
rates of the Preferred Stock may affect the yield to Common Stock shareholders.
Statements and other information herein are as dated and are subject to change.
MuniYield
Michigan Fund, Inc.
Box 9011
Princeton, NJ
08543-9011 #16152--10/97
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